---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 0-19656

NEXTEL COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(703) 433-4000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

class A common stock, $0.001 par value

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

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

      Based on the closing sales price on June 30, 2004, the aggregate market value of the voting and nonvoting common stock held by nonaffiliates of the registrant was about 27,378,648,906.

      On February 28, 2005, the number of shares outstanding of the registrant’s class A common stock, $0.001 par value, and class B nonvoting common stock, $0.001 par value, was 1,097,064,630 and 29,660,000, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Joint Proxy Statement/ Prospectus relating to the 2005 Annual Meeting of Stockholders of Nextel Communications, Inc., among other things, are incorporated in Part III, Items 10, 11, 12, 13 and 14.

---

---

EXPLANATORY NOTE

      This annual report on Form 10-K for the year ended December 31, 2004 includes our restated consolidated financial statements for the years ended December 31, 2003 and 2002, which we restated to correct an error related to the determination of our lease term in accordance with generally accepted accounting principles and to reflect the impact of the restatements being made by NII Holdings Inc., in which we hold an equity interest, during the period in which we accounted for our investment under the equity method. See note 1 to our audited consolidated financial statements included as part of this annual report for additional information. This annual report also includes restated selected financial data as of and for the years ended December 31, 2000, 2001, 2002 and 2003 to correct these errors.

TABLE OF CONTENTS

See pages 35 and 36 for “Executive Officers of the Registrant.”

PART I

      We are a leading provider of wireless communications services in the United States. We provide a comprehensive suite of advanced wireless services that include: digital wireless mobile telephone service, walkie-talkie features, including our Nextel Direct Connect®, Nextel Nationwide Direct Connect^sm and Nextel International Direct Connect^sm walkie-talkie features, and wireless data transmission services. As of December 31, 2004, we provided service to over 16.2 million subscribers, which consisted of 15.0 million subscribers of Nextel-branded service and 1.2 million subscribers of Boost Mobile^tm — branded pre-paid service. For 2004, we had operating revenues of $13,368 million and income available to common stockholders of $2,991 million. We ended 2004 with over 19,000 employees.

      Our all-digital packet data network is based on integrated Digital Enhanced Network, or iDEN®, wireless technology provided by Motorola, Inc. We, together with Nextel Partners, Inc., currently utilize the iDEN technology to serve 297 of the top 300 U.S. markets where about 260 million people live or work. Nextel Partners provides digital wireless communications services under the Nextel brand name in mid-sized and tertiary U.S. markets, and has the right to operate in 98 of the top 300 metropolitan statistical areas in the United States ranked by population. As of December 31, 2004, we owned about 32% of the outstanding common stock of Nextel Partners. In addition, as of December 31, 2004, we also owned about 18% of the outstanding common stock of NII Holdings, Inc., which provides wireless communications services primarily in selected Latin American markets. We have agreements with NII Holdings that enable our subscribers to use our Direct Connect walkie-talkie features in the Latin American markets that it serves as well as between the United States and those markets.

      On December 15, 2004, we entered into a definitive agreement for a merger of equals with Sprint Corporation pursuant to which we will merge into a wholly-owned subsidiary of Sprint. The new company will be called Sprint Nextel Corporation. This annual report on Form 10-K relates only to Nextel Communications, Inc. and its direct and indirect subsidiaries prior to consummation of the merger. The merger is expected to close in the second half of 2005 and is subject to shareholder and regulatory approvals, as well as other customary closing conditions. As a result, there can be no assurances that the merger will be completed or as to the timing thereof. See “— C. 2004 and Year-to-Date 2005 Significant Developments — 1. Proposed Merger with Sprint.”

      Our principal executive and administrative facility is located at 2001 Edmund Halley Drive, Reston, Virginia 20191, and our telephone number is (703) 433-4000. In addition, we have sales and engineering offices throughout the country.

      Our business strategy is to provide differentiated products and services in order to acquire and retain the most valuable customers in the wireless telecommunications industry. We also seek to drive greater operating efficiencies in our business and optimize the performance of our network while minimizing costs. The wireless communications industry is highly competitive. Although we believe competitive pricing is often an important factor in potential customers’ purchase decisions, we also believe that many users, including businesses, government agencies and individuals who utilize premium mobile communications features and services, base their purchase decisions on quality of service and the availability of differentiated features and services that make it easier for them to get things done quickly and efficiently.

      1. Provide Differentiated Products and Services. We seek to provide the most advanced suite of differentiated products and services in the wireless industry. For over 10 years, our subscribers have been able to communicate instantly within their coverage area using our Nextel Direct Connect walkie-talkie feature. In 2003, we expanded this unique feature with the introduction of our Nationwide Direct Connect^tm walkie-talkie feature, which gives our customers the ability to communicate instantly with about 17.8 million Nextel

and Nextel Partners subscribers on our networks across the continental United States and to and from Hawaii. In September 2003, we expanded our Direct Connect service internationally into the northern region of the Mexican state of Baja California and, in 2004, we further extended its reach into Canada, Latin America and Mexico, through agreements with TELUS Mobility, Inc., which provides wireless communications services in Canada, and NII Holdings. In 2004, we also introduced several new walkie-talkie applications. In June, we introduced a push-to-email application that allows a user to send a streaming voice message from his or her handset to an email recipient using our Direct Connect feature. In October, we introduced Direct Send^sm, which allows a user of an i860 handset to instantly send or receive contact information data to or from another i860 handset using the Direct Connect walkie-talkie feature. In December, we introduced Direct Talk^sm, a service available only for specified handsets that enables off-network walkie-talkie communication.

      Our nationwide, all-packet data network supports a comprehensive suite of services that allows our customers to send and receive wireless email messages and communicate through sophisticated business applications using Nextel wireless phones in addition to laptop computers and handheld computing devices. In the latter half of 2004, we began the deployment of an enhancement to our existing iDEN technology, known as WiDEN^sm, designed to increase the data speeds of our network by up to four times the current speeds. We plan to begin to offer this service during 2005.

      We also believe that we differentiate ourselves from our competition by focusing on the quality of our customer care. We have designed and implemented our customer Touch Point strategy to improve our customer relationships by focusing on eliminating situations that create customer dissatisfaction at each point where we interact with, or “touch”, our customers, including sales, fulfillment, activation, billing, network quality, collections and overall customer care.

      2. Acquire and Retain the Most Valuable Customers in the Wireless Industry. Our differentiated products and services allow us to target the most valuable customer groups in the wireless industry: small, medium and large businesses; government agencies; and individuals who utilize premium mobile communications features and services. We believe that these customers are more likely to base their purchase decisions on quality of service and the availability of differentiated features and services, like our Direct Connect walkie-talkie feature, that make it easier for them to get things done quickly and efficiently, rather than focusing primarily on the price of the service. Our focus on these customer groups has resulted in our acquiring what we believe to be the most valuable customer base, with one of the highest customer loyalty rates, the highest monthly average revenue per customer and the highest lifetime revenue per customer of any national service provider in the wireless industry. To complement our efforts to acquire and retain these valuable customers and to further expand our customer base, in 2004, we embarked on our 10-year title sponsorship of the NASCAR NEXTEL Cup Series^tm, the National Association for Stock Car Auto Racing, or NASCAR®, premier national championship series, providing unique exposure for our products and services to an estimated 75 million loyal NASCAR racing fans throughout the United States.

      We are also exploring other markets and customers that have the potential to support future profitable growth. For example, we offer pre-paid wireless services marketed under our Boost Mobile brand as a means to target the youth and pre-paid wireless service markets. In 2004, we expanded the distribution of Boost Mobile branded products and service into a number of additional markets and are in the process of expanding distribution into nearly all of our remaining markets.

      3. Seek Greater Operating Efficiencies. In 2004, we continued to expand our customer-convenient and cost-efficient distribution channels, primarily by expanding the number of Nextel stores by 141, bringing our total to 777 stores at December 31, 2004. In 2004, we also continued to realize the benefits of earlier cost reduction initiatives, including the outsourcing of our cell site development functions, integration of our customer data bases and outsourcing of significant portions of our information technology and customer care operations.

      4. Optimize the Performance of Our Nationwide Network at a Minimum Cost. We have built the largest guaranteed all-digital wireless network in the United States, which we designed and constructed to support the full complement of our wireless services. In 2004, we continued to implement enhanced processes

and technologies designed to allow us to more efficiently utilize our network and monitor its performance. These efforts have allowed us to maintain sufficient capacity on our network while constructing fewer additional transmitter and receiver sites than otherwise would have been necessary to maintain network quality. We also have installed new software into our network that is designed to allow us to use our spectrum and our existing infrastructure more efficiently. We are realizing the increase in network capacity as our customer base uses handsets that operate using the new software, which now make up nearly all of the handsets that we sell. In 2005, we will seek to continue to improve our network by building additional sites where necessary to expand our network’s geographic coverage and capacity to meet the growing demand of our customers.

      During 2004 and continuing into 2005, we took a number of actions designed to advance our overall business strategy of providing differentiated products and services in order to acquire and retain the most valuable customers in the wireless telecommunications industry, as well as to improve our operations and overall financial condition including the following:

      1. Proposed Merger with Sprint. On December 15, 2004, we entered into a definitive agreement for a merger of equals with Sprint pursuant to which we will merge into a wholly owned subsidiary of Sprint. The new company will be called Sprint Nextel Corporation.

      Under the terms of the merger agreement, existing Sprint shares will remain outstanding and each share of our common stock will be converted into Sprint Nextel shares and a small per share amount in cash, with a total value equal to 1.3 shares of Sprint common stock, subject to adjustment. The precise allocation of cash and stock will be determined at the closing of the merger in order to facilitate the spin-off of the resulting company’s local telecommunications business on a tax-free basis. The aggregate amount of the cash payments will not exceed $2,800 million. All outstanding options to purchase our common stock will be converted into options to purchase an equivalent number of shares of Sprint Nextel common stock, adjusted based on a 1.3 per share exchange ratio.

      The Sprint Nextel Board of Directors will consist of 12 directors, six from each company, including two co-lead independent directors, one from Sprint and one from our board of directors. Sprint Nextel will have its executive headquarters in Reston, Virginia, and its operational headquarters in Overland Park, Kansas. Gary D. Forsee, currently Chairman and Chief Executive Officer of Sprint, will become President and Chief Executive Officer of Sprint Nextel. Timothy M. Donahue, our President and Chief Executive Officer, will become Chairman of Sprint Nextel.

      The merger is expected to close in the second half of 2005 and is subject to shareholder and regulatory approvals, as well as other customary closing conditions. As a result, there can be no assurances that the merger will be completed or as to the timing thereof. We and Sprint expect to spin-off Sprint’s local telecommunications business after the merger is completed. The merger agreement contains certain termination rights for each of us and Sprint and further provides for the payment of a termination fee of $1,000 million upon termination of the merger agreement under specified circumstances involving an alternative transaction.

      2. 800 MHz Band Spectrum Reconfiguration. As part of an ongoing Federal Communications Commission, or FCC, proceeding to eliminate interference with public safety operators in the 800 megahertz, or MHz, band discussed in more detail under “— K. Regulation — 2. 800 MHz band spectrum reconfiguration”, in August 2004, the FCC released a Report and Order, as supplemented by an errata and by a Supplemental Order released on December 22, 2004, which together we refer to as the Report and Order, which provides for the exchange of a portion of our FCC licenses of spectrum, which the FCC is effecting through modifications to these licenses. Related rules would be implemented in order to realign spectrum in the 800 MHz band to resolve the problem of interference with public safety systems operating in that band. The Report and Order calls for a band reconfiguration plan similar to the joint proposals submitted by the leading public safety associations and us during the course of the proceeding. In February 2005, we accepted the Report and Order and the related rights, obligations and responsibilities, which obligates us to surrender all of our holdings in the 700 MHz spectrum band and certain portions of our holdings in the 800 MHz

spectrum band, and to fund the cost to public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band through a 36-month phased transition process. Under the Report and Order, we received licenses for 10 MHz of nationwide spectrum in the 1.9 gigahertz, or GHz, band, but we are required to relocate and reimburse the incumbent licensees in the 1.9 GHz band for their costs of relocation to another band designated by the FCC.

      The Report and Order requires us to make a payment to the United States Department of the Treasury at the conclusion of the band reconfiguration process to the extent that the value of the 1.9 GHz spectrum we received exceeds the total of the value of licenses for spectrum positions in the 700 MHz and 800 MHz bands that we surrendered under the decision, plus the actual costs that we will incur to retune incumbents and our own facilities under the Report and Order. The FCC determined under the Report and Order that, for purposes of calculating that payment amount, the value of this 1.9 GHz spectrum is about $4,860 million and the aggregate value of this 700 MHz spectrum and the 800 MHz spectrum surrendered, net of 800 MHz spectrum received as part of the exchange, is about $2,059 million, which, because of the potential payment to the U.S. Treasury, results in minimum cash expenditures of $2,801 million by us under the Report and Order. We may incur certain costs as part of the reconfiguration process for which we will not receive credit against the potential payment to the U.S. Treasury. In addition, under the Report and Order, we are obligated to pay the full amount of the reconfiguration costs relating to the reconfiguration plan, even if those costs exceed $2,801 million.

      Pursuant to the terms of the Report and Order, to ensure that the band reconfiguration process will be completed, we are required to establish a letter of credit in the amount of $2,500 million to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. We obtained the letter of credit using borrowing capacity under our existing revolving credit facility. See “— K. Regulation — 2. 800 MHz band spectrum reconfiguration.”

      3. Introduction of New Direct Connect Applications. In 2004, we further extended the reach of our Direct Connect service internationally into Canada, Latin America and Mexico, through agreements with TELUS Mobility and NII Holdings. In 2004, we also introduced several new walkie-talkie applications. In June 2004, we introduced a push-to-email application that allows a user to send a streaming voice message from his or her handset to an email recipient using our Direct Connect walkie-talkie feature. In October, we introduced Direct Send^sm, which allows a user of an i860 handset to instantly send or receive contact information data to or from another i860 handset using the Direct Connect walkie-talkie feature. In December, we introduced Direct Talk, a service available only for specified handsets that enables off-network walkie-talkie communication. See “— D. Products and Solutions — 1. Nextel Direct Connect.”

      4. New Handsets. In 2004, we introduced the most advanced handsets and handheld devices that we have ever offered, all of which offer our Direct Connect, Nationwide Direct Connect and International Direct Connect walkie-talkie features, including the i830, the smallest and sleekest handset that we have ever offered, the i860, our first camera phone, and the i315, our first phone to feature “off network” two-way radio service for business and public safety users. In 2004, we also introduced two BlackBerry® wireless handheld devices designed and manufactured by Research In Motion, or RIM, both of which provide integrated access to one or multiple corporate and personal email accounts, feature a built-in cell phone with a speakerphone, personal organizer and web browser, and support Nextel Online® and our Direct Connect walkie-talkie features. The BlackBerry 7520^tm wireless handheld device, introduced in December, also features Bluetooth® technology for hands-free, wireless communications using Bluetooth-enabled equipment and incorporates technology with enhanced 911, or E911, capabilities. See “— D. Products and Solutions — 3. Handsets.”

      5. Brand Strategy and NASCAR Sponsorship. In 2004, we became the title sponsor of one of the most popular sports in the United States, the NASCAR premier national championship series, now known as the NASCAR NEXTEL Cup Series. The sponsorship provides unique exposure for our products and services to an estimated 75 million loyal NASCAR racing fans throughout the United States. See “— G. Marketing.”

      6. Expanded Retail Distribution Channels. In 2004, we expanded the number of Nextel stores by 141, bringing our total to 777 stores at December 31, 2004, to generate new customers and brand awareness and to serve as additional points of contact for existing and new customers. See “— F. Sales and Distribution.”

      7. Boost Mobile. As of December 31, 2004, we had about 1.2 million subscribers of our Boost Mobile-branded pre-paid wireless service, which is designed for the youth and pre-paid wireless service markets and was launched in late 2002 in California and Nevada. In 2004, we expanded the distribution of Boost Mobile branded products and services into a number of additional markets, and are in the process of expanding distribution into nearly all of our remaining markets. See “— F. Sales and Distribution.”

      8. New Data Applications. In 2004, we began the deployment of WiDEN network infrastructure equipment and software that is designed to increase the data speeds of our network by up to four times the current speeds. We plan to begin to offer this service during 2005. In 2004, we began a field trial of Nextel Wireless Broadband^SM, an easy-to-use and secure service that connects customers to the Internet at broadband speeds, with the full mobility of wireless service. We plan to complete this field trial in mid-2005. See “— D. Products and Solutions — 5. Broadband wireless data initiative.”

      9. Debt Retirements and Financing Activities. In 2004, we continued to reduce our financing expenses by reducing both the amount of our overall debt and our borrowing costs while extending our debt maturities. In 2004, we retired or repaid an aggregate of $2,972 million in principal amount of long-term debt, exercised the early buyout option on a $165 million capital lease obligation and issued $1,500 million in aggregate principal amount of long-term debt with lower interest rates and longer maturities than the debt we retired. In addition, in 2004, we issued $1,647 million in aggregate principal amount of our 5.95%, 6.875% and 7.375% senior notes in exchange for $1,513 million in aggregate principal amount of our 9.375% and 9.5% senior notes, which had the effect of reducing our borrowing costs and extending maturities. See note 6 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      10. Spectrum Acquisitions. In the second quarter 2004, we completed both the $144 million purchase of certain FCC licenses, interests in certain FCC licenses and of other network assets from WorldCom, Inc., and the $51 million purchase of certain FCC licenses, interests in certain FCC licenses and other network assets from Nucentrix Broadband Networks, Inc. The WorldCom and Nucentrix licenses are part of the 2.1 GHz and 2.5 GHz spectrum band that we may use in connection with the deployment of certain broadband services. See “— E. Our Network and Technology — 2. Network enhancement.”

      We offer a wide range of wireless communications services and related subscriber equipment designed to meet the needs of our targeted customer groups, including small, medium and large businesses, government workers and individuals who utilize premium mobile communications features and services. These services and equipment have been designed to provide innovative features that meet those customers’ need for fast and reliable voice and data communications that allow them to get things done quickly and efficiently.

      1. Nextel Direct Connect®. One of our key competitive differentiators is Nextel Direct Connect, the long-range walkie-talkie service that allows communication at the touch of one button. The Nextel Direct Connect feature gives customers the ability to instantly set up a conference — either privately (one-to-one) nationwide or with a group (one-to-many) within their local calling area — which allows our customers to initiate and complete communications much more quickly than is possible using a traditional wireless call. Nextel Direct Connect service greatly enhances the instant communication abilities of business users within their organizations and with suppliers, vendors and customers, and provides individuals the ability to contact business colleagues, friends and family instantly.

      In 2003, we significantly expanded our Direct Connect feature by introducing Nationwide Direct Connect, which allows any two Nextel customers to instantly contact one another from anywhere on the Nextel national network, regardless of the sender’s or receiver’s location. In September 2003, we expanded our Direct Connect feature internationally into the northern region of the Mexican state of Baja California and, in 2004, we further extended it into Canada, Latin America and Mexico, through agreements with TELUS Mobility, which provides wireless communications services in Canada, and NII Holdings, which provides wireless communications services in selected markets in Latin America and Mexico.

      In 2004, we also introduced several new walkie-talkie applications. In June, we introduced a push-to-email application that allows a user to send a streaming voice message from his or her handset to an email recipient using our Direct Connect feature. In October, we introduced, Direct Send, which allows a user of an i860 handset to instantly send or receive contact information data to or from another i860 handset using the Direct Connect walkie-talkie feature. In December, we introduced Direct Talk^sm, a service available only for specified handsets that enables off-network walkie-talkie communication with a range of up to six miles under optimal conditions.

      Although a number of our competitors have launched or announced plans to launch services that are designed to compete with Direct Connect, we do not believe that the current versions of these services compare favorably with our service in terms of latency, quality, reliability or ease of use.

      2. Wireless Business Solutions and Nextel Online®. We offer a variety of wireless business solutions that are designed to help companies increase productivity through the delivery of real-time information to mobile workers anytime and anywhere, including remote email access and mobile messaging services using two-way text communications capabilities from their handsets. Accessible via our wireless handsets, in addition to laptop computers and handheld computing devices, Nextel wireless data solutions enable quick response among workers in the field and streamline operations through faster exchanges of information by integrating with corporate intranets and back-office systems, such as sales force automation, order entry, inventory tracking and customer relationship management, to support true workforce mobility. We also design wireless business solutions to meet the needs of specific customers based on their industry and individualized business needs, including a wide array of fleet and workforce management services that utilize the unique capabilities of our data network, such as the ability to accurately and in real time, locate handsets using assisted global positioning system, or A-GPS, technology. In addition, we provide systems to improve in-building and campus wireless coverage and deliver broadband data speeds, including in elevators. Wireless business services are backed by a comprehensive customer support service center and what we believe is the widest range of tools available to help customers build, distribute, and manage wireless applications. In addition, we offer our customers always-on connectivity to the Internet directly from their handset through Nextel Online, which combines the vast resources of the Internet with convenient mobile content services, all from their handset.

      In 2004, we began the deployment of an enhancement to our existing iDEN technology, known as WiDEN, that is designed to increase the data speeds of our network by up to four times the current speeds. We plan to begin to offer this service during 2005. We believe that this enhancement will allow us to meet our customers’ needs for faster wireless data communications.

      We believe that our wireless business solutions will contribute to customer retention and generate incremental revenue by providing companies a comprehensive framework for creating end-to-end wireless value.

      3. Handsets. We offer all of our voice and data communications features and services through handsets we sell that incorporate Motorola’s iDEN technology and offer our unique 4-in-1 service, including digital wireless service, Nextel Direct Connect walkie-talkie service, wireless Internet access and two-way messaging capabilities. All of our handsets are developed and manufactured by Motorola, other than the BlackBerry devices, which are manufactured by RIM. Our handsets range from basic models, like the i205 designed to serve the needs of customers who require basic wireless services without sacrificing the essential features they depend upon to do their jobs, to the recently introduced BlackBerry 7520, which, in addition to digital wireless and Nextel Direct Connect features, provides integrated access to one or multiple corporate and personal email accounts, as well as Bluetooth technology for hands-free, wireless communications using Bluetooth-enabled equipment and incorporates technology with E911 capabilities. Our handsets offer a wide range of features, and many include a built-in speakerphone, additional line service, conference calling, an external screen that lets customers view caller ID, voice-activated dialing for hands-free operation, a voice recorder for calls and memos, an advanced phonebook that manages contacts and datebook tools to manage calendars and alert users of business and personal meetings. All of our current handset offerings have subscriber identification module, or SIM, cards, which carry relevant authentication information and address

book information, thereby greatly easing subscribers’ abilities to upgrade their handsets quickly and easily, particularly in conjunction with our on-line web-based back-up tools. Many of our handsets include pre-installed Java^tm applications and games. Java enables users to create and execute a number of mobile applications, and supports a wide range of downloadable digital media capabilities, such as ring tones and wallpaper that allow customers to personalize their handsets.

      In February 2004, in connection with our sponsorship of the NASCAR NEXTEL Cup Series, we introduced the NASCAR NEXTEL Cup Series Phone and ten NASCAR NEXTEL Cup Series Driver Phones. These handsets include a number of unique NASCAR-related features. The NASCAR NEXTEL Cup Series Phone displays a checkered flag and a NASCAR NEXTEL Cup Series logo, and the NASCAR NEXTEL Cup Series Driver Phones each feature the number and unique design, colors and signature of the particular driver. These handsets also are pre-loaded with content especially designed for NASCAR fans, including: wallpaper of the series logo, photos of cars on the track, and the driver’s car number and a photo of the driver; ring tones of familiar tunes, such as the national anthem, as well as sounds from the track; a digital racing stopwatch; and, for Nextel Online subscribers, access, directly from a special icon on the handset’s main menu, to information such as a live leader board, a race schedule and driver biographies and statistics.

      In 2004, we introduced a number of new handsets designed and manufactured by Motorola. In June, we introduced the i830 handset, the smallest and sleekest handset that we have ever offered, which also features A-GPS capabilities for location-based services and E911 capability. In October, we introduced the i860 handset, the first handset that combines a camera phone with high-performance walkie-talkie features. It also includes our Direct Send contacts feature that allows a user of an i860 handset to send contact information, including names, telephone numbers and email addresses, to another user’s i860 handset using our Direct Connect walkie-talkie feature. We also have introduced the i315 and i325, our first handsets to feature “off network” two-way radio service for business and public safety users.

      In 2004, we introduced two BlackBerry wireless handheld devices designed and manufactured by RIM. In January, we introduced the BlackBerry 7510^tm wireless handheld device, which provides integrated access to one or multiple corporate and personal email accounts and features a built-in cell phone with a speakerphone, personal organizer and web browser, and supports Nextel Online and our Direct Connect services. In December, we introduced the BlackBerry 7520 wireless handheld device, which features Bluetooth technology for hands-free, wireless communications using Bluetooth-enabled equipment and incorporates technology with E911 capabilities.

      We also offer handsets designed specifically for local, state and federal public safety and law enforcement agencies and organizations. These handsets enable us to offer services specifically designed for public safety and law enforcement officials, such as priority access and emergency group connect.

      4. Digital Media Services. We offer subscribers the ability to easily and conveniently personalize selected phones through the purchase and download of digital media such as wallpaper patterns and musical ring tones. Customers can select from a large and growing catalog of digital media and applications through their handsets and our Nextel Online web portal.

      1. Our iDEN Network Technology. Our handsets and network infrastructure employ the iDEN technology developed and designed by Motorola. iDEN technology is able to operate on non-contiguous spectrum frequencies, which previously were usable only for two-way radio calls, such as those used to dispatch taxis and delivery vehicles. We currently are the only national U.S. wireless service provider that utilizes iDEN technology, and the iDEN handsets that we offer are not currently designed to roam onto non-iDEN domestic national wireless networks. Although iDEN offers a number of advantages in relation to other technology platforms, including the ability to operate on non-contiguous spectrum and to offer the Nextel Direct Connect walkie-talkie feature, unlike other wireless technologies, it is a proprietary technology that relies solely on the efforts of Motorola and any future licensees of this technology for further research and continuing technology and product development and innovation. We also rely on Motorola to provide us

with technology improvements designed to expand our wireless voice capacity and improve our services. Motorola is and is expected to continue to be our sole source supplier of iDEN infrastructure and all of our handsets except BlackBerry devices, which are manufactured by RIM. See “— M. Risk Factors — 6. If Motorola is unable or unwilling to provide us with equipment and handsets, as well as anticipated handset and infrastructure improvements, our operations will be adversely affected.”

      The iDEN technology shares many common components with the global system for mobile communications, or GSM, technology that has been established as the digital cellular communications standard in Europe and with a variation of that GSM technology being deployed by certain personal communications services, or PCS, operators in the United States. The design of our network currently is premised on dividing a service area into multiple sites having varying coverage areas depending on the terrain and the power setting. Each site contains a low-power transmitter/ receiver and control equipment referred to as the base station. The base station in each site is connected by microwave, fiber optic cable or digital telephone line to a computer controlled switching center. The switching center controls the automatic hand-off of cellular calls from site to site as a subscriber travels, coordinates calls to and from a handset and connects wireless calls to the public switched telephone network. Nortel Networks Corporation has supplied most of the mobile telephone switches for our network through Motorola. In the case of Nextel Direct Connect, a piece of equipment called a dispatch application processor provides a fast call setup, identifies the target radio and connects the customers initiating the call to other targeted customers utilizing a highly efficient, packet-based air interface between the base station and the subscriber equipment.

      Currently, there are three principal digital technology formats used by providers of cellular telephone service or PCS in the United States:

      An emerging fourth technology, orthogonal frequency division multiplexing, or OFDM, which is based on a wireless access method that combines the attributes of TDMA and CDMA and is being utilized in our wireless broadband trial discussed below, is being developed by a number of wireless equipment manufactures.

      Although TDMA, CDMA and GSM-PCS are digital transmission technologies that share certain basic characteristics and areas of contrast to analog transmission technology, they are not compatible or interchangeable with each other. Although Motorola’s proprietary iDEN technology is based on the TDMA technology format and shares many common features and components of GSM technology, it differs in a number of significant respects from the versions of TDMA and GSM technology used by other wireless service providers in the United States.

      The iDEN technology significantly increases the capacity of our existing channels and permits us to utilize our current holdings of spectrum more efficiently. This increase in capacity is accomplished in two ways:

      Motorola provides the iDEN infrastructure equipment and substantially all of the handsets throughout our markets under agreements that set the prices we must pay to purchase and license this equipment, as well as a structure to develop new features and make long-term improvements to our network. Motorola also provides integration services in connection with the deployment of our iDEN network elements. Motorola and we have also agreed to warranty and maintenance programs and specified indemnity arrangements.

      In addition to the extensive domestic coverage provided on our network and the network operated by Nextel Partners, our customers are able to travel outside the United States and still receive the benefits of their Nextel service where we have roaming or interoperability agreements. We have entered into interoperability agreements with NII Holdings’ Latin American affiliates to provide for coordination of customer identification and validation necessary to facilitate roaming between our domestic markets and NII Holdings’ Latin American markets. We also have roaming agreements in effect with TELUS Mobility in Canadian market areas where it offers iDEN-based services. Furthermore, our iDEN SIM cards can be placed in standard GSM handsets, such as the Motorola T720 GSM handset that we offer, to enable international roaming capabilities.

      2. Network Enhancement. During 2004, we expanded the geographic coverage of our network by adding nearly 2,300 transmitter and receiver sites to our network, bringing the total number of sites as of December 31, 2004 to 19,800. We increased the number of additional sites built in 2004 as compared to 2003, as we embarked on a long-term plan to expand our network’s geographic coverage and capacity where necessary to meet the growing demand of our customers and competition. In 2005, we plan to continue to pursue this goal by building over 3,000 additional transmitter and receiver sites to improve both our geographic coverage and to meet the capacity needs of our growing customer base and to accommodate the reconfiguration process contemplated by the Report and Order, and by implementing the technological advancements discussed below under “— 3. Our technology plans.” This effort will position us to better serve our customers in areas where we expect to have less spectrum available during the spectrum reconfiguration process contemplated by the Report and Order.

      We determine where to build new sites on the basis of the site’s proximity to targeted customers, our ability to acquire and build the site and frequency propagation characteristics. Site procurement efforts include obtaining leases and permits, and in many cases, zoning approvals. Before a new site can be completed, we must complete equipment installation, including construction of equipment shelters, towers and power systems, testing and pre-operational systems optimization.

      In an effort to improve our network and expedite network deployment, we have entered into agreements to outsource our site development functions. Currently, we lease a majority of our communications towers and other transmitter and receiver sites.

      Another key component in our effort to improve the coverage and capacity of our network and the quality of our services is ensuring that we have sufficient radio spectrum in the geographic areas in which we operate. Under the FCC’s Report and Order, we now have licenses for about 18 MHz of spectrum in the 800 and 900 MHz bands in most of the top 100 U.S. markets and licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band, which will be available for our use only after we satisfy certain conditions in the Report and Order, including relocation of the incumbent licensees in the 1.9 GHz band to another band designated by the FCC. In addition, in the second quarter 2004, we purchased certain FCC licenses, interests in certain FCC licenses and other network assets from WorldCom, and certain FCC licenses, interests in certain FCC licenses and other network assets from Nucentrix. The licenses acquired from WorldCom and Nucentrix relate to spectrum in the 2.1 GHz and 2.5 GHz bands that we believe can be adapted to provide broadband

wireless data and other services. At December 31, 2004, we held licenses or interests in licenses to a portion of this spectrum in 71 of the top 100 markets in the United States.

      Another goal of our network enhancement efforts is to continue to optimize our network to increase the efficiency of our existing network equipment. We have implemented a number of initiatives to achieve this goal and improve the capital efficiency of our network, including a network software upgrade that redirects traffic from more heavily burdened cell sites to other available sites and a software application that enables us to better manage our use of frequency in the network.

      3. Our Technology Plans. In October 2003, we began deploying in our network a significant upgrade to the iDEN technology, the 6:1 voice coder, which is designed to significantly increase the overall capacity of our network and specifically our network’s capacity to carry mobile telephone calls. This voice coder is designed to allow us to use our spectrum and our existing infrastructure more efficiently when compared to our current 3:1 voice coder that is used for mobile telephone service and to reduce capital expenditures that otherwise would be necessary to increase the capacity of our network. The increase in network capacity will be realized as handsets that operate using the 6:1 voice coder for both wireless interconnection and Direct Connect services are introduced into our customer base.

      In the third quarter 2004, we began selling new handset models that operate in both the 6:1 and current 3:1 modes. Handsets that operate in both modes now make up almost all of the handsets that we sell. In the third quarter 2004 we activated 6:1 voice coder software in our network in several of our markets, which allows handsets to shift between 3:1 and 6:1 modes, and is designed to provide us with the increased network capacity made available by the 6:1 voice coder. We since have activated the network software in all of our other markets. Because any capacity increase and the related financial benefits will be realized gradually as these handsets are deployed and used by our customers, it is our expectation that most of these benefits will not begin to be realized until some time in 2005. Unless a sufficient number of handsets operating in both modes are deployed, those benefits would be delayed or reduced, and we could be required to invest additional capital in our infrastructure to satisfy our network capacity needs.

      In 2004, we began the deployment of an enhancement to our existing iDEN technology, known as WiDEN, which is designed to increase the data speeds of our network by up to four times the current speeds. We plan to begin to offer this service during 2005. We believe that this enhancement will allow us to meet our customers’ needs for faster wireless data communications.

      We continuously review alternate technologies as they are developed, but currently do not believe that it is necessary to migrate to a next generation technology platform either to provide competitive features or services or to meet our voice capacity needs given the capacity enhancements expected for the existing iDEN technology, as discussed above. Nevertheless, we continue to evaluate new technologies and their ability to meet our customers’ requirements. We will deploy a new technology only when it is warranted by expected customer demand and when the anticipated benefits of services requiring next generation technology outweigh the costs of providing those services. We currently are working with several vendors, as part of a request for proposal process in order to provide us with a better understanding of the technical performance and service capabilities of certain broadband wireless technologies and the related costs and returns of a nationwide wireless broadband network. Our consideration of alternative technologies would likely be materially affected by a number of factors, including our need to continue to provide iDEN-based services for our existing customer base and whether the proposed merger with Sprint is completed.

      We have a development agreement with QUALCOMM, Inc. pursuant to which we and QUALCOMM have been developing technology that will support Direct Connect walkie-talkie service on various CDMA platforms. We and QUALCOMM are beginning to test and trial this technology, which also has been marketed to wireless operators that have deployed advanced CDMA platforms outside the United States. We will continue to develop this technology so that it can be deployed on a CDMA network, if we elect such a network as our next generation technology platform, or if we complete the merger with Sprint, in order to deploy it on Sprint’s CDMA network. We may enter into additional development agreements of this nature with other infrastructure or handset vendors. Several of our wireless competitors, some with the support of large infrastructure vendors, including Motorola, have introduced features and services that are designed to

compete with our Direct Connect walkie-talkie service on other technology platforms including CDMA and GSM. See “— I. Competition.” Although these services could ultimately prove to be competitive alternatives to Direct Connect, their development also has the potential to broaden the technology alternatives available to us for future deployment if those services are capable of meeting our customers’ expectations. We have developed with Motorola and are beginning to deploy a “gateway” that would permit a variety of data communications, including walkie-talkie style communications, between devices based on iDEN technology and those based on other technologies.

      4. Broadband Wireless Data Initiative. In 2004, we began a field trial of Nextel Wireless Broadband, an easy-to-use and secure service that connects customers to the Internet at broadband speeds, with the full mobility of wireless service. The trial has included more than 3,000 users. Nextel Wireless Broadband offers downlink speeds of 900 kilobits per second and uplink speeds of 300 kilobits per second, which made the service comparable to digital subscriber line, or DSL, and cable broadband services and 50 times faster than dial-up connections, with the added benefit of the freedom to connect without the constraints of being tethered to the home or office or needing to search for wireless fidelity, or WiFi, hot spots. This mobile broadband technology is Internet-protocol-friendly, which allowed trial participants to easily connect to their main databases and run applications. We have used this field trial, which is expected to be completed in 2005, both to evaluate the quality and performance of the technology being used to provide the service and to assess customer demand, preferences and feature requirements associated with the service. We may conduct other field trials in 2005 to evaluate other broadband technologies.

      5. 800 MHz Band Spectrum Reconfiguration. The Report and Order, which was issued in the ongoing FCC proceeding to eliminate interference with public safety operators in the 800 MHz band discussed in more detail under “— K. Regulation — 2. 800 MHz band spectrum reconfiguration”, provides for the exchange of a number of FCC licenses in the 800 MHz band, including some of our licenses, which the FCC is effecting through modifications to these licenses. The Report and Order also implemented rules in order to reconfigure spectrum in the 800 MHz band in a 36-month phased transition process.

      The Report and Order requires that we complete the first phase of reconfiguration of the 800 MHz band in certain of our markets, including many of our larger markets, within an 18-month period. Completion of the reconfiguration process in any particular market, however, involves reaching agreement and coordinating numerous processes with the incumbent licensees in that market and vendors and contractors that will be performing much of the reconfiguration.

      For the spectrum in the 800 MHz band that we surrendered under the Report and Order, we are permitted to continue to use that spectrum during the reconfiguration process, but we may be required to discontinue use of a portion of this spectrum upon commencement of reconfiguration within the applicable market. As part of the reconfiguration process in most markets, we will cease use of a portion of the 800 MHz spectrum that we currently use before we are able to commence use of replacement 800 MHz spectrum in that market. To mitigate the temporary loss of the use of this spectrum, in many markets we will need to construct additional transmitter and receiver sites or acquire additional spectrum in the 800 MHz or 900 MHz bands. In markets where we are unable to construct additional sites or acquire additional spectrum as needed, the decrease in capacity may adversely affect the performance of our network. See “— M. Risk Factors — 4. The reconfiguration process contemplated by the Report and Order may adversely affect our business and operations, which could adversely affect our future growth and operating results.” Because we only recently accepted the Report and Order and are just beginning the reconfiguration process, we currently are not able to assess the potential impact that this process will have on our network capacity. See “— K. Regulation — 2. Public safety spectrum reconfiguration.”

      Our differentiated products and services allow us to target the most valuable customers in the wireless industry: small, medium and large businesses; government agencies; and individuals who utilize premium mobile communications features and services. Our focus on these customers has resulted in our acquiring what we believe to be the most valuable customer base in the wireless industry, with one of the highest customer

loyalty rates, the highest monthly average revenue per customer and the highest lifetime revenue per customer of any national service provider in the wireless industry. We use a variety of sales channels as part of our strategy to increase our customer base: direct sales representatives; indirect sales agents; and customer-convenient channels, including web sales, telesales and Nextel stores.

      We employ direct sales representatives who market our services directly to potential and existing customers. The focus of our direct sales force is primarily on mid-to-large businesses and government agencies that value our industry expertise and extensive product portfolio, as well as our ability to develop custom communications capabilities that meet the specific needs of these larger customers.

      We also utilize indirect sales agents, which mainly consist of local and national non-affiliated dealers. These indirect dealers represent our largest channel of distribution. Dealers are independent contractors that solicit customers for our service and are generally paid through commissions and residual commissions. Dealers participate with us in all of the markets we serve including corporate, government, general business and individual sales. We have established a direct handset fulfillment system in which dealers may order handsets directly from Motorola and Motorola delivers them directly to the customer.

      In 2004, we continued to expand distribution through customer-convenient channels, including web sales, telesales and sales through our Nextel stores. These channels generally allow us to acquire customers at a lower cost than our traditional direct and indirect sales. Together, these channels accounted for over one-third of our new subscribers in 2004. We have expanded the number of new subscribers garnered through our web sales and telesales, and our customers’ willingness to buy through these customer-convenient channels has driven significant growth for us. On the web, customers are able to compare our various rate plans and access the full suite of our products and services, including handsets, accessories, and special promotions. Our website allows customers to make account inquiries and encourages handset and accessory sales directly over the Internet. We also provide our customers with a toll-free number (1-800-NEXTEL9) to purchase our products and services. In 2004, we expanded the number of Nextel stores by 141, bringing our total to 777 stores at December 31, 2004. These stores not only generate new customers and brand awareness, but also serve as additional points of contact for existing and new customers. As we increase brand awareness through our expanded advertising and marketing efforts, we believe our Nextel stores, web sales and telesales will be increasingly useful distribution channels for all of our services.

      We have also been exploring other markets that have the potential to support future profitable growth, including through our Boost Mobile-branded pre-paid service, which targets the youth and pre-paid wireless service markets. Through Boost Mobile, we offer pay-as-you-go wireless service and products including our Direct Connect walkie-talkie service, marketed as Boost Walkie-Talkie service, as well as a wide range of accessories, Java games for wireless phones, ring tones and other mobile services, all of which have been designed for today’s youth. We offer Boost Mobile-branded handsets and services at locations where we believe that the youth market prefers to shop, including Best Buy, Wherehouse, Target, Wal-Mart, Nextel Retail Stores, and other youth-oriented retailers. Boost Mobile subscribers can renew their airtime minutes by purchasing Re-Boost^tm cards on the Boost Mobile web site or at various convenience and retail stores. In 2004, we expanded the distribution of Boost Mobile branded products and service into a number of additional markets, and are in the process of expanding distribution into nearly all of our remaining markets.

      Our marketing strategy focuses principally on:

      To complement these efforts and to further expand our customer base, in 2003, we introduced our new logo and the “Nextel. Done.” branding and related advertising programs, which are designed to focus attention on productivity, speed, and getting things done. In 2004, we embarked on our 10-year title sponsorship of the NASCAR NEXTEL Cup Series, the NASCAR premier national championship series, which provides unique exposure for our products and services to an estimated 75 million loyal NASCAR fans throughout the United States. Under this sponsorship, we are NASCAR’s Official Telecommunications Sponsor, which entitles us to a variety of branding, advertising, merchandising and technology-related opportunities, many of which are exclusive with NASCAR, its drivers and teams, and the racetrack facilities, subject to specified existing relationships. The goal of these initiatives, together with our other marketing initiatives that include affiliations with most major sports leagues, is not only to increase brand awareness in our targeted customer base, but also to expand the use of our customer-convenient distribution channels: web sales, telesales and Nextel stores.

      We offer pricing options that we also believe differentiate our services from those of many of our competitors. Our pricing packages offer our customers simplicity and predictability in their wireless telecommunications billing by combining Nextel Direct Connect walkie-talkie service minutes with a mix of cellular and long-distance minutes. We also offer special pricing plans that allow some customers to aggregate the total number of minutes for all handsets on their account and reallocate the aggregate minutes among those handsets.

      We believe that we are able to differentiate ourselves from our competition by focusing on the quality of our customer care. In late 2002, we completed the implementation of our new billing and customer management system called “Ensemble”. The Ensemble system is a world class activation, billing, and customer management system that provides increased reliability and functionality for our customer care representatives, system scalability to allow services to be provided to an estimated 25 million subscribers, one common database and integration of all platform software modules included in the system. Through the Ensemble system, we have been able to better interact with our customers while reducing our costs.

      In 2002, we retained International Business Machines Corporation, or IBM, and Teletech Holdings, Inc. to manage our customer care centers. Transferring the day-to-day operations of the call centers has afforded us the ability to significantly refine our business processes and procedures, resulting in a higher customer satisfaction rating with respect to customer care and an improved first call resolution rate, while minimizing costs. We believe these improvements in systems, organizational alignment, process and cost structure have positioned us to continue to make customer care a competitive advantage.

      In 2003, we designed and implemented our customer Touch Point strategy to improve our customer relationships by focusing on eliminating situations that create customer dissatisfaction at each point where we interact with, or “touch,” our customers, including sales, fulfillment, activation, billing, network quality, collections and overall customer care.

      Since the introduction of mobile communications technology, growth in the industry has been rapid. As of June 2004, the Cellular Telecommunications and Internet Association, or CTIA, estimated that there were over 169 million wireless handsets in service in the United States, providing analog cellular, digital cellular, enhanced SMR service and PCS. We believe that the wireless communications industry has been and will continue to be characterized by intense competition on the basis of price, the types of services offered and quality of service.

      We compete principally with four other national providers of mobile wireless voice communications: Cingular Wireless (which acquired AT&T Wireless Services, Inc. in 2004), Verizon Wireless, Sprint Corporation (with which we have agreed to merge, as discussed above) and Deutsche Telecom/T-Mobile. We also compete with regional providers of mobile wireless voice communications, such as Southern LINC and Alltel Corporation, which recently announced plans to acquire Western Wireless Corporation, another

regional operator. Additional licensees may enter our markets by operating systems utilizing frequencies obtained in FCC auction proceedings. Some of the competitors listed above have financial resources, subscriber bases, coverage areas and/or name recognition greater than we do. In addition, several of these competitors have more extensive channels of distribution than ours, a more expansive spectrum position than ours, or are able to acquire customers at a lower cost. Additionally, we expect our current and future competitors will continue to upgrade their systems to provide digital wireless communications services competitive with those available on our network. Because some of our competitors are affiliated with wireline telecommunications service providers, they are able to offer bundled sets of wireline and wireless services, which we currently are not able to offer.

      Although pricing is often an important factor in potential customers’ purchase decisions, we believe that our targeted customer base of business users, government agencies and individuals who utilize premium mobile communications features and services are also likely to base their purchase decisions on quality of service and the availability of differentiated features and services that make it easier for them to get things done quickly and efficiently. In particular, we believe we compete based on our differentiated service offerings and products, including our Direct Connect walkie-talkie feature. Several of our competitors have introduced walkie-talkie type features that are designed to compete with our walkie-talkie feature, and others have announced plans to introduce similar services. Although we do not believe that the current versions of these competing features compare favorably with our Direct Connect walkie-talkie feature in terms of latency, quality, reliability or ease of use, in the event that our competitors are able to provide walkie-talkie features comparable to ours, one of our key competitive advantages would be reduced. Because the wireless industry often has competed based on price, to the extent that the competitive environment requires us to decrease prices or increase service and product offerings, our revenue could decline or our costs could increase. Competition in pricing and service and product offerings may also adversely impact customer retention.

      Consolidation has created and may continue to create additional large, well-capitalized competitors with substantial financial, technical, marketing and other resources. In addition to our proposed merger with Sprint, AT&T Wireless merged with Cingular Wireless in 2004, which created the largest wireless services provider based on the number of subscribers. Our larger competitors, like Verizon Wireless, Cingular and Deutsche Telecom/T-Mobile, have the additional potential advantages of size and scale in their respective domestic operations and, in the case of Deutsche Telecom/T-Mobile, international operations that could allow them to deliver services in a more cost efficient manner. Some of our competitors are also creating joint ventures that will fund and construct a shared infrastructure that the venture participants will use to provide advanced services and entering into roaming arrangements that provide similar benefits. By using joint ventures and roaming arrangements, these competitors may lower their cost of providing advanced services to their customers. In addition, we expect that in the future, providers of wireless communications services may compete more directly with providers of traditional wireline telephone services and, potentially, energy companies, utility companies and cable operators that expand their services to offer communications services. We also expect that we will face competition from other technologies and services developed and introduced in the future, including potentially those using unlicensed spectrum, including WiFi.

      We have a number of strategic and commercial relationships with third parties that have had a significant impact on our business, operations and financial results in 2004 and prior years and have the potential to have a similar impact in the future. Of these, we believe that our most significant relationships are with Motorola and Nextel Partners and, historically but to a lesser extent currently, NII Holdings. See Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —E. Related Party Transactions.”

      1. Motorola. We have a number of important strategic and commercial relationships with Motorola. Motorola is the sole supplier of the iDEN infrastructure equipment and substantially all of the handsets used throughout our network. As discussed above, we also work closely with Motorola to improve existing products and develop new technologies and enhancements to existing technologies for use in our network. We also rely on Motorola for network maintenance and enhancement. In addition, we will rely extensively on

Motorola’s cooperation and support in connection with the reconfiguration process contemplated by the Report and Order. See “— E. Our Network and Technology.” In December 2004, we entered into agreements with Motorola to extend for three years the terms of the agreements under which we purchase iDEN network infrastructure, including base station and core network equipment, related software and hardware maintenance and support services, and current and proposed new iDEN handset models.

      In July 1995, we acquired all of Motorola’s 800 MHz SMR FCC licenses in the continental United States in exchange for shares of our class A common stock and shares of our nonvoting class B common stock. In 2004, we purchased 6 million shares of our class B common stock from Motorola at a price that was based on the then-current market price. As of February 28, 2005, Motorola owned 47.5 million shares of our class A common stock and 29.7 million shares of our nonvoting class B common stock, all of which can be converted into shares of class A common stock at Motorola’s election, representing collectively about 7% of our outstanding class A common stock assuming that conversion. In 2004, we also purchased about 5.6 million shares of Nextel Partners common stock from Motorola at a price that was based on the then-current market price.

      On December 14, 2004, in contemplation of our merger agreement with Sprint, and to help facilitate a tax-free spin off of Sprint’s local wireline business following the merger, we entered into an agreement with Motorola under which Motorola agreed, subject to the terms and conditions of the agreement, not to enter into a transaction that constitutes a disposition of its class B common stock of Nextel or shares of non-voting common stock issued to Motorola in connection with the transactions contemplated by the merger agreement. In consideration of Motorola’s compliance with the terms of this agreement, upon the occurrence of certain events, we have agreed to pay Motorola a consent fee of $50 million, which Motorola must return to us upon the occurrence of certain events, including specifically, if the merger with Sprint is not completed.

      2. Nextel Partners. Nextel Partners provides digital wireless communications services under the Nextel brand name in mid-sized and tertiary U.S. markets. Nextel Partners has the right to operate in 98 of the top 300 metropolitan statistical areas in the United States ranked by population. In January 1999, we entered into agreements with Nextel Partners and other parties, including Motorola, relating to the formation, capitalization, governance, financing and operation of Nextel Partners. As part of those transactions in 1999, we sold assets and transferred specified FCC licenses to Nextel Partners in exchange for equity interests in Nextel Partners.

      As a result of Nextel Partners’ initial public offering in February 2000, our equity interest was converted into voting class B common stock and our total ownership interest was diluted. As a result of the initial public offering and subsequent transactions, including our purchase from Motorola in 2004 of about 5.6 million shares of Nextel Partners common stock, we owned about 32% of the outstanding common stock of Nextel Partners as of December 31, 2004.

      We entered into the relationships with Nextel Partners principally to accelerate the build-out of our network outside the largest metropolitan market areas that initially were the main focus of our network coverage. As an inducement to obtain Nextel Partners’ commitment to undertake and complete the anticipated network expansion, we agreed that we would not offer wireless communications services under the Nextel brand name, iDEN services on 800 MHz frequencies, or wireless communications services that allow interconnect with landline telecommunications in Nextel Partners’ territory. We believe that the proposed merger with Sprint will not breach these provisions; however, continued compliance with these provisions may limit the new company’s ability to achieve synergies and fully integrate operations of us and Sprint. We also have roaming agreements with Nextel Partners covering all of the U.S. market areas in which Nextel Partners currently provides, or will in the future provide, iDEN-based services.

      The certificate of incorporation of Nextel Partners establishes circumstances in which we will have the right or obligation to purchase the outstanding shares of class A common stock of Nextel Partners at specified prices. We may pay the consideration of any such purchase in cash, shares of our class A common stock, or a combination of both.

      Specifically, under the terms of the certificate of incorporation of Nextel Partners, during the 18 month period following completion of the proposed merger with Sprint, the holders of a majority of the Nextel Partners class A common stock can vote to require us to purchase all of the outstanding shares of Nextel Partners that we do not already own for the appraised fair market value of those shares. The Nextel Partners stockholders will not be entitled to take action if the proposed merger with Sprint is not completed. We do not know if the stockholders of Nextel Partners will elect to require us to purchase the Nextel Partners class A shares if the proposed merger with Sprint is completed.

      There are also a number of other circumstances in which we may be required to purchase the outstanding shares of Nextel Partners’ class A common stock, which would continue to apply following completion of the proposed merger with Sprint. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations —D. Future Capital Needs and Resources —Future Contractual Obligations.”

      Subject to various limitations and conditions, including possible deferrals by Nextel Partners, we will have the right to purchase the outstanding shares of Nextel Partners’ class A common stock on January 29, 2008. We may not transfer our interest in Nextel Partners to a third party before January 29, 2011, and Nextel Partners’ class A common stockholders have the right, and in specified instances the obligation, to participate in any sale of our interest.

      As of December 31, 2004, Timothy M. Donahue, a member of our board of directors and our President and Chief Executive Officer, was a director of Nextel Partners.

      3. NII Holdings. NII Holdings provides wireless communications services using iDEN technology primarily in selected Latin American markets. In November 2002, NII Holdings, which prior to that time was our substantially wholly-owned subsidiary, completed its reorganization under Chapter 11 of the U.S. Bankruptcy Code, having filed a voluntary petition for reorganization in May 2002 in the United States Bankruptcy Court for the District of Delaware, after it and one of its subsidiaries defaulted on credit and vendor finance facilities. Under the plan of reorganization, we received 1.4 million shares of NII Holdings’ new class A common stock in settlement of claims held by us. In addition, as part of the plan of reorganization, we contributed about $51 million in cash and received in exchange about $66 million in aggregate principal amount at maturity of NII Holdings’ 13% senior secured notes and 5.7 million additional shares of NII Holdings’ class A common stock. As part of the reorganization, we also provided NII Holdings with an additional $50 million in connection with a U.S.-Mexico cross border spectrum sharing arrangement between them and us.

      In February 2004, we tendered the NII Holdings 13% notes that we owned to NII Holdings in exchange for $77 million in cash representing a tender price of $1,165 for each $1,000 in principal amount at maturity of the tendered notes. As of December 31, 2004, we owned about 18% of the outstanding common stock of NII Holdings.

      Mr. Donahue was a director of NII Holdings until March 2004.

      We are an SMR licensee regulated by the FCC. The FCC also regulates the licensing, construction, operation and acquisition of all other wireless telecommunications systems in the United States, including cellular and PCS operators. SMR regulations have undergone significant changes during the last decade, and we now are generally subject to the same FCC rules and regulations as cellular and PCS operators, known collectively with SMR operators as commercial mobile radio service, or CMRS, providers.

      Within the limitations of available spectrum and technology, SMR operators are authorized by the FCC to provide mobile communications services, including mobile telephone, two-way radio dispatch (referred to as walkie-talkie), paging and mobile data and Internet services. We use iDEN technology developed and manufactured by Motorola to deliver these services. Unlike some other digital transmission technologies, iDEN can be deployed on non-contiguous frequency holdings, which has benefited us because, prior to the time that we accepted the FCC’s Report and Order, much of our 800 MHz channel holdings were non-

contiguous. We will continue to operate on non-contiguous spectrum until the reconfiguration of the 800 MHz band contemplated by the Report and Order is complete.

      In addition to being subject to FCC regulation, we are subject to certain state requirements. The Communications Act of 1934, as amended, preempts state and local regulation of the entry of, or the rates charged by, any CMRS provider, but it permits states to regulate the “other terms and conditions” of CMRS. The FCC has not clearly defined what is meant by the “other terms and conditions” of CMRS, but has upheld the legality of states assessing universal service payment requirements on CMRS carriers. The FCC also has held that most private lawsuits based on state law claims of unfair or deceptive practices concerning how wireless services are promoted or disclosed are not preempted by the Communications Act.

      State and local governments are permitted to manage public rights of way and can require fair and reasonable compensation from telecommunications providers for use of those rights of way so long as the compensation required is publicly disclosed by the government. The siting of cell sites and base stations also remains subject to state and local jurisdiction. States also may impose competitively neutral requirements that, among other things, are necessary for universal service or to defray the costs of state E911 services programs, to protect the public safety and welfare, and to safeguard the rights of customers. Our business also is subject to certain Federal Aviation Administration regulations governing the location, lighting, and construction of transmitter towers and antennas and may be subject to regulation under federal environmental laws and the FCC’s environmental regulations.

      1. Licensing. Following our acceptance of the Report and Order, we now hold spectrum licenses for an average of about 18 MHz of spectrum in the 800 and 900 MHz bands in our geographic markets. We primarily utilize 800 MHz spectrum, and to a lesser extent 900 MHz spectrum, to provide service to our customers using our existing iDEN network. Under the Report and Order, we also received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band, but that spectrum cannot be fully utilized until we help relocate incumbent licensees in the 1.9 GHz band, and reimburse them for the costs of relocation, to another band designated by the FCC, a process expected to take about three years. We also hold licenses or have interests in licenses to a portion of spectrum in the 2.1 GHz and 2.5 GHz band in 71 of the top 100 U.S. markets.

      The FCC regulates the licensing, construction, operation, acquisition and sale of our business and wireless spectrum holdings. FCC requirements impose operating and other restrictions on our business that increase our costs. The FCC does not currently regulate CMRS rates, and states are legally preempted from regulating CMRS rates and entry. The Communications Act and FCC rules also require the FCC’s prior approval of the assignment or transfer of control of an FCC license although the FCC’s rules permit spectrum lease arrangements for a range of wireless radio service licenses, including our licenses, with minimal FCC oversight. Approval from the Federal Trade Commission and the Department of Justice, as well as state or local regulatory authorities, also may be required if we sell or acquire spectrum interests.

      We hold several kinds of licenses to deploy our services in the 800 MHz band. Because spectrum in the 800 MHz band was originally licensed in small groups of channels, we hold thousands of these licenses, which together allow us to provide coverage across much of the continental U.S. Our 800 and 900 MHz licenses are subject to requirements that we meet population coverage benchmarks tied to the initial license grant dates. To date, we have met all of the construction milestones applicable to our licenses, except in the case of licenses that are not material to our business. Our 800 and 900 MHz licenses have a 10-year term, at the end of which each must be renewed. The FCC allows “renewal expectancies,” which are presumptions that the licenses will be renewed to any 800 or 900 MHz licensee that has provided substantial service during its past license term and has substantially complied with applicable FCC rules and policies and with the Communications Act. The licenses for spectrum in the 1.9 GHz band that we received as part of the Report and Order have a 10-year term and are subject to similar requirements. The specific construction requirements for our recently acquired 2.1 GHz and 2.5 GHz spectrum have yet to be determined by the FCC because the band is subject to an ongoing regulatory proceeding.

      In some cases we use common carrier point-to-point microwave facilities to connect the transmitter, receiver and signaling equipment for cell sites to the main switching office. The FCC licenses these facilities separately and they are subject to regulation as to technical parameters and service requirements.

      2. 800 MHz band spectrum reconfiguration. In recent years, a number of public safety communications systems operating on high-site systems in the 800 MHz block of spectrum have experienced interference that is believed to be a result of the low-site operations of CMRS providers operating on adjacent frequencies in the same geographic area.

      In November 2001, we filed a proposal with the FCC that would result in a more efficient use of spectrum through the reconfiguration of spectrum licenses and spectrum allocations in the 700, 800 and 900 MHz bands and, thereby, resolve many of these interference problems. In March 2002, the FCC issued a Notice of Proposed Rulemaking to consider proposals to solve the public safety interference issue and we actively participated in that proceeding to arrive at a solution to the interference problem. In July 2004, the FCC adopted a Report and Order that included new rules regarding interference in the 800 MHz band and a comprehensive plan to reconfigure the 800 MHz band. In August 2004, the FCC released the text of the Report and Order, which was supplemented by an errata and by a Supplemental Order released on December 22, 2004, which together we refer to as the Report and Order. In February 2005, we accepted the Report and Order. Under the terms of the Report and Order, our acceptance was necessary before it became effective because the Report and Order required us to undertake a number of obligations and accept modifications that have the effect of exchanges to some of our FCC licenses.

      The Report and Order provides for the exchange of a portion of our FCC licenses of spectrum, which the FCC is effecting through modifications to these licenses. Specifically, the Report and Order modified a number of FCC licenses in the 800 MHz band, including many of our licenses, and implemented rules in order to reconfigure spectrum in the 800 MHz band in a 36-month phased transition process. It also obligates us to surrender all of our holdings in the 700 MHz spectrum band and certain portions of our holdings in the 800 MHz spectrum band, and to fund the cost to public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band. Under the Report and Order, we have received licenses for 10 MHz of nationwide spectrum in the 1.9 GHz band, but we are required to relocate and reimburse the incumbent licensees in the 1.9 GHz band for their costs of relocation to another band designated by the FCC.

      The Report and Order requires that we complete the first phase of reconfiguration of the 800 MHz band in certain of our markets, including many of our larger markets, within an 18-month period. Completion of the reconfiguration process in any particular market, however, involves reaching agreement and coordinating numerous processes with the incumbent licensees in that market and vendors and contractors that will be performing much of the reconfiguration.

      For the spectrum in the 800 MHz band that was surrendered under the Report and Order, we are permitted to continue to use that spectrum during the reconfiguration process, but we may be required to discontinue use of a portion of this spectrum upon commencement of reconfiguration within the applicable market. As part of the reconfiguration process in most markets, we will cease use of a portion of the 800 MHz spectrum that we currently use before we are able to commence use of replacement 800 MHz spectrum in that market. To mitigate the temporary loss of the use of this spectrum, in many markets we will need to construct additional transmitter and receiver sites or acquire additional spectrum in the 800 MHz or 900 MHz bands. In markets where we are unable to construct additional sites or acquire additional spectrum as needed, the decrease in capacity may adversely affect the performance of our network, require us to curtail subscriber additions in that market until the capacity limitation can be corrected, or a combination of the two. Degradation in network performance in any market could result in increased subscriber churn in that market, the effect of which could be exacerbated if we are forced to curtail subscriber additions in that market. See “— M. Risk Factors –4. The reconfiguration process contemplated by the Report and Order may adversely affect our business and operations, which could adversely affect our future growth and operating results.” Because we only recently accepted the Report and Order and are just beginning the reconfiguration process, we currently are not able to assess the potential effect that this process will have on our network capacity.

      The Report and Order requires us to make a payment to the United States Department of the Treasury at the conclusion of the band reconfiguration process to the extent that the value of the 1.9 GHz spectrum we received exceeds the total of the value of licenses for spectrum positions in the 700 MHz and 800 MHz bands that we surrendered under the decision, plus the actual costs that we will incur to retune incumbents and our own facilities under the Report and Order. The FCC determined under the Report and Order that, for purposes of calculating that payment amount, the value of this 1.9 GHz spectrum is about $4,860 million and the aggregate value of this 700 MHz spectrum and the 800 MHz spectrum surrendered, net of 800 MHz spectrum received as part of the exchange, is about $2,059 million, which, because of the potential payment to the U.S. Treasury, results in minimum cash expenditures of about $2,801 million by us under the Report and Order. We may incur certain costs as part of the reconfiguration process for which we will not receive credit against the potential payment to the U.S. Treasury. In addition, under the Report and Order, we are obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed $2,801 million.

      Pursuant to the terms of the Report and Order, to ensure that the band reconfiguration process will be completed, we are required to establish a letter of credit in the amount of $2,500 million to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. We obtained the letter of credit using borrowing capacity under our existing revolving credit facility.

      3. New spectrum opportunities, spectrum auctions, and next generation wireless services. Several FCC proceedings and initiatives are underway that may affect the availability of spectrum used or useful in the provision of commercial wireless services. We cannot predict when or whether the FCC will conduct any of the other spectrum auctions or if it will release additional spectrum that might be useful to the wireless industry or us in the future.

      In November 2002, the FCC allocated 90MHz of spectrum in the 1710-1755 MHz and 2110-2155 MHz bands, suitable for advanced wireless services. In November 2003, the FCC adopted the service rules for advanced wireless services in these bands, including provisions for application, licensing, operating and technical rules, and for competitive bidding, which will give licensees in these bands the flexibility to provide any fixed or mobile service that is consistent with the allocations for this spectrum. The Commercial Spectrum Enhancement Act, or CSEA, enacted in December 2004, provides for the establishment of a trust fund mechanism to accelerate the process of making spectrum currently encumbered by government operations, including the 1710-1755 MHz band, available for commercial use. The FCC has indicated that it plans to begin auctioning commercial spectrum in the 1432-1435 MHz and 1710-1755 MHz bands as early as June 2006, but a definitive auction date for the 1710-1755 MHz and other spectrum that is subject of the CSEA has not yet been established.

      In January 2003, the FCC reallocated 30 MHz of spectrum, including the 1990-2000 MHz band, the 2020-2025 MHz band, and the 2175-2180 MHz band, to fixed and mobile terrestrial services. The reallocated spectrum includes 5 MHz that has been assigned to us under the 800 MHz Report and Order. In September 2004, the FCC adopted an order that paired the 1915-1920 MHz band with the 1995-2000 MHz band, known now as the H Block, and paired the 2020-2025 MHz band with the 2175-2180 MHz band, known now as the J Block, but has yet to establish service rules for licensed fixed and mobile services, including advanced wireless services, in the H or J Blocks.

      In April 2003, the FCC proposed a comprehensive overhaul of the 2496-2690 MHz, referred to as the 2.1 GHz and 2.5 GHz band, and 2150-2162 MHz bands, which includes the Multipoint Distribution Service, or MDS, and the Multichannel Multipoint Distribution Service, or MMDS, spectrum that we acquired from WorldCom and Nucentrix in 2004. In 2004, the FCC adopted a series of rules and policies for reforming the 2.1 GHz and 2.5 GHz band with the goal of enhancing the ability of licensees to provide services, including wireless interactive multimedia services, to consumers. In 2005, the FCC authorized the commencement of a nearly five-year-long restructuring period into upper- and lower-band segments for low-power operations, and a mid-band segment for higher-power operations. The FCC has reaffirmed its longstanding prohibition of commercial ownership on approximately 62% of the 2.1 GHz and 2.5 GHz spectrum held primarily by educational and non-profit institutions, but these institutions are authorized to lease a portion of their licensed

spectrum to commercial operators, subject to certain restrictions. Petitions for reconsideration of the restructuring of the 2.1 GHz and 2.5 GHz band and a notice of proposed rulemaking concerning additional 2.1 GHz and 2.5 GHz transition and licensing issues remain pending at the FCC.

      The FCC has previously announced that it will auction additional spectrum in the 700 MHz band, but those additional auctions have not been scheduled. There are numerous television operators that currently occupy ultra-high frequency, or UHF, television channels in this band. These operators have the right to continue operation on the current channel through at least 2006, and potentially longer if various conditions are not met. Unless federal legislation or rules are adopted to clear the 700 MHz band earlier than the current law requires, this spectrum would be of limited use for wireless services in the near term.

      The FCC has proposed to modify the licensing framework of the private Business and Industrial/Land Transportation, or B/ILT, spectrum within the 900 MHz band to make it consistent with the 900 MHz SMR commercial services band, on which we currently operate. The FCC has also proposed an auction of the available B/ILT spectrum, in which we believe we would be eligible to participate, but it has yet to be scheduled. This proposal is subject to public comment and further proceedings.

      4. Spectrum caps and secondary spectrum markets. Prior to 2003, the FCC imposed specified limits, known as spectrum caps, on the amount of spectrum that a single licensee could hold in a market. These limits have largely been eliminated. Although there is no longer a specified limit on the amount of spectrum a single licensee may hold in a market, the FCC has retained a rural market cross-ownership restriction and will continue to evaluate, on a case-by-case basis, spectrum aggregation caused by CMRS carriers’ mergers and acquisitions to determine whether a particular transaction will result in too much concentration in the affected wireless markets. In the FCC’s review of the Cingular-AT&T Wireless merger last year, it concluded that, generally, one wireless provider should not have more than 70 MHz of spectrum designated for CMRS in any one market. That conclusion, however, was based on the amount of CMRS spectrum currently available to carriers at that time, whether there was available spectrum in the particular local market and whether existing competitors in the market had access to that additional capacity. The FCC’s findings in the Cingular-AT&T Wireless merger order may be used in its review of the pending Nextel-Sprint merger application.

      In October 2003, the FCC released new rules that provide additional flexibility for licensees to engage in various forms of spectrum leasing arrangements. In September 2004, the FCC released an order that takes additional steps to further facilitate the growth of secondary markets for spectrum, including the extension of flexible leasing policies to additional spectrum. It is not known whether any spectrum initiatives adopted by the FCC will facilitate secondary markets for spectrum trading or leasing.

      The FCC has initiated a number of spectrum-related inquiries and proposed rulemaking proceedings. The FCC has a task force to recommend changes in spectrum policy to increase spectrum efficiency, which task force is considering interference issues, use of unlicensed spectrum by frequency agile radios and spectrum swaps. The FCC continues to make spectrum available for use by unlicensed devices, including WiFi devices.

      5. 911 services. Pursuant to a 1996 FCC order, CMRS providers, including us, are required to provide E911 services to their customers. Phase I E911, which we began deploying in 1998, requires wireless carriers to transmit both (a) the 911 caller’s telephone number and (b) the location of the transmitter and receiver site from which the call is being made to the designated public safety answering point, or PSAP, which is the 911 dispatch center. Phase II E911 requires the transmission of more accurate location information to the PSAP. Pursuant to an October 2001 FCC order, we launched Phase II service in October 2002 by deploying Phase II service to our first PSAP and by beginning the sale and activation of handsets equipped with A-GPS capabilities.

      Phase II E911 requires that we deploy the infrastructure, facilities and interconnectivity necessary to enable the transmission of latitude and longitude information from the A-GPS handset to a PSAP. Successful transmission of this location information to a PSAP requires substantial cooperation with the local exchange carrier and the PSAP, as well as third party database providers, all of which must have the necessary infrastructure and compatible software in place to connect with our network.

      Because our Phase II E911 services can be accessed only with an A-GPS capable handset, the FCC also required that a certain percentage of our new handset activations be A-GPS capable pursuant to interim benchmarks between January 1, 2003 and December 31, 2005, when we are required to have 95% of our total subscriber base using A-GPS capable handsets. Beginning at the end of the first quarter 2004, substantially all of the handsets that we offer new subscribers, other than the BlackBerry 7510, were A-GPS capable. With the introduction of a new A-GPS capable Blackberry 7520 in December 2004, our entire portfolio of new handsets is A-GPS capable.

      In July 2004, we discovered a latent software design defect that impaired capabilities related to both A-GPS location and certain E911 services of a number of recently introduced handsets manufactured by Motorola that incorporate A-GPS technology. Emergency E911 calls from these handsets generally continued to meet FCC E911 requirements, and the handsets were, and continue to be, fully operational with regard to all other services, including cellular phone, Direct Connect walkie-talkie, and wireless data services. Motorola, as the manufacturer of the handsets, has taken and continues to take corrective actions in response to this issue. The effect of this matter on our operations or financial condition was not material, and we do not expect it to materially impact our results of operations or financial conditions in future periods.

      We have described the effect of the software design defect in our periodic reports to the FCC that have summarized our progress to date with regard to meeting the FCC’s E911 requirements. Based on our assessment of the effect of the design defect and our estimates regarding the rate at which our customer base is expected to transition to handsets equipped with A-GPS technology, we have notified the FCC that we may be unable to satisfy by December 31, 2005 the requirement that 95% of our total subscriber base use handsets that enable us to transmit location information that meets the Phase II requirements of the E911 regulations. The A-GPS software design defect has exacerbated the situation.

      Our ability to meet the Phase II requirements on the schedule currently contemplated by the E911 regulations and the costs we may incur in an effort to accelerate our customers’ transition to A-GPS capable handsets to meet these requirements could be significant, and will be dependent on a number of factors, including the number of new subscribers added to our network who purchase A-GPS capable handsets, the number of existing subscribers who upgrade from non-A-GPS capable handsets to A-GPS capable handsets, the rate of our customer churn and the cost of A-GPS capable handsets.

      Motorola is our sole supplier for all of our handsets except the BlackBerry 7520, and we are dependent on Motorola to provide A-GPS capable handsets in sufficient quantities. Nonetheless, the FCC appears to have held us responsible for meeting the Phase II deadlines, even in the event Motorola is unable to produce the necessary handsets and infrastructure on a timely basis.

      6. Truth in Billing and consumer protection. The FCC’s Truth in Billing rules generally require CMRS licensees such as us to provide full and fair disclosure of all charges on their wireless bills, display a toll-free phone number to call for billing questions, and identify any third-party service providers whose charges appear on the bill. In response to a petition from the National Association of State Utility Consumer Advocates, the FCC is now considering possible revisions to its Truth in Billing rules. If the Truth in Billing rules are revised substantially, it could increase our billing and customer service costs. In addition, over twenty states have commenced inquiries to examine the billing and advertising practices of certain nationwide wireless carriers and we have been requested to provide, and have provided, information relating to billing and advertising practices in connection with some of these inquiries.

      In May 2004, the California Public Utilities Commission, or CPUC, adopted various consumer protection rules and privacy regulations for all telecommunications carriers. We received an extension of time to comply with those rules for which it otherwise could not have implemented by the December 2004 effective date. Otherwise, we have implemented the necessary systems, processes and policy changes necessary to comply with the rules. In January 2005, the CPUC stayed these rules and regulations until further action by the CPUC. The CPUC also is considering imposing service quality standards and reporting requirements for wireless carriers. The State of Minnesota has also enacted legislation imposing certain customer service and billing requirements on wireless carriers. These requirements, along with customer service legislation proposed in other states, could significantly increase the cost of providing wireless service.

In addition, federal legislation has been proposed that calls for a wireless subscriber “bill of rights”, which, if enacted, could significantly increase the cost to us and other wireless providers of providing wireless services, and would, among other things, authorize the FCC to monitor cell phone service quality.

      7. Accessibility. The Communications Act requires telecommunications carriers, such as us, and manufacturers of telecommunications equipment, such as Motorola, to make their products and services accessible to and usable by persons with disabilities, if readily achievable. Pursuant to this mandate, Motorola and we are continuing to develop and market a variety of products and services to facilitate access to our wireless network by persons with disabilities. If the FCC requires the wireless industry to improve accessibility on a unilateral basis by redesigning digital phones, technological changes to iDEN handsets could add significantly to the cost of production.

      The FCC has modified the statutory exemption for wireless phones under the Hearing Aid Compatibility Act of 1988 and established rules applicable to both wireless service providers and handset manufacturers. Wireless manufacturers and service providers are required to make digital wireless phones accessible to hearing aid users. Specifically, by September 2005, twenty-five percent of our handset models are required to receive an acceptable rating for hearing aid compatibility. Motorola, our primary handset supplier, and we continue to participate in various industry efforts to help meet the policy goals of the FCC. Any such solution could result in significant costs to us.

      8. Motor vehicle restrictions. A number of states and localities have banned or are considering banning or restricting the use of wireless phones while driving a motor vehicle. New York and New Jersey have enacted statewide bans on handheld phone use while operating a motor vehicle, and the District of Columbia has passed a similar ban. Similar legislation is pending in other states. Several localities also have enacted ordinances banning or restricting the use of handheld wireless phones by drivers. Such bans could cause a decline in the number of minutes of use by subscribers.

      9. Local number portability. In 2004, wireless providers implemented nationwide telephone number portability, which enables customers to keep their telephone numbers when they change carriers within established geographic markets. We have implemented the operational and technical changes necessary to facilitate porting in and out of our network. Given the interdependence of other carrier operations and processes required to effectuate a port, the wireless number portability process was initially subject to certain errors, and ports required more time to complete than had been predicted. The wireless industry since has greatly improved the porting process and continues to work cooperatively to further reduce the time required to complete most ports. Some wireline carriers, however, have sought and received certain exemptions to the telephone number portability requirements from state public utility commissions, which limits our ability to port numbers between wireline carriers and our network. The United States Court of Appeals for the District of Columbia Circuit is considering the question of whether wireline carriers are entitled to these exemptions from intermodal porting.

      10. Electronic surveillance. Telecommunications carriers, including us, are required by law to provide certain surveillance capabilities to law enforcement agencies. We deliver the requisite surveillance capabilities to law enforcement with respect to traditional voice communications, as well as our push-to-talk service.

      In August 2004, the FCC proposed that broadband Internet and voice over Internet protocol, or VoIP, services be subject to the same surveillance requirements as traditional interconnected voice services provided by carriers. The FCC also tentatively concluded that telecommunications carriers would be responsible for all costs related to implementation of surveillance capabilities, which could place a substantial burden on carriers, like us. The FCC is expected to release a final order in the proceeding this year.

      11. Voice over Internet protocol. In February 2004, the FCC began examining the appropriate regulatory treatment for voice services provided using VoIP. The rapid growth in VoIP-based services has caused concern regarding the appropriate extent of regulation applicable to those services as carriers, including wireless carriers, begin to migrate their networks towards Internet protocol, or IP, platforms. Currently, VoIP services are exempt from many federal regulatory fee and tax requirements, such as Universal Service Fund contributions, that most wireline and wireless telecommunications providers are required to pay. The FCC’s

rulemaking recognizes that IP-based services should continue to be subject to minimal regulation, but is examining means by which social polices supported by regulation, such as the Universal Service Fund, can be maintained. In November 2004, the FCC issued an order stating that Vonage’s DigitalVoice service, which provides VoIP service, is an interstate service and not subject to state public utility commission requirements governing traditional telephone service, and noted its general intention to preempt state public utility regulation of similarly-situated VoIP services. The Vonage order did not address whether VoIP services should be subject to those fees and regulatory assessments. If VoIP services remain exempt from federal regulatory fee and tax requirements, such as Universal Service Fund contributions, it could place carriers that continue to be subject to those fee and tax obligations, such as us, at a competitive disadvantage.

      12. Health concerns. FCC rules limit the permissible human exposure to radio frequency emissions from wireless telecommunications equipment, including handsets. Over the past several years, various studies have been undertaken to determine whether certain wireless handsets may be linked to health problems, including cancer. Although some studies have found a link between the radio frequency energy emitted by mobile phones and cancer, the National Cancer Institute has cautioned that these studies have limitations, given the relatively short amount of time cellular phones have been widely available. Other studies have found no evidence that cell phones cause cancer. In January 2005, a British government science advisory board reiterated that the evidence suggests exposure to radiofrequency energy below established guidelines does not cause health risks to the general population, but urged limited use of mobile phones by children as a precautionary measure. The U.S. Food and Drug Administration does not share the same concern, but continues to work with the World Health Organization, other federal agencies, including the FCC, and the wireless industry in conducting further research into possible health effects. In addition, several class-action lawsuits remain pending against several wireless carriers, including us, and manufacturers to force wireless carriers to supply hands-free devices with phones and to compensate customers who have purchased radiation-reducing devices. See “— Item 3. Legal Proceedings.” Concerns over radio frequency emissions may have the effect of discouraging the use of wireless handsets, which would decrease demand for our services.

      13. Universal Service. Under the FCC’s rules, wireless providers are potentially eligible to receive universal service subsidies; however, they are also required to contribute to both federal and state universal service funds. The rules adopted by the FCC in its universal service orders require telecommunications carriers generally (subject to limited exemptions) to fund universal service programs for high cost carriers, low income customers, services to schools and libraries, and rural health care providers. Currently, we are required to fund these federal programs based on our interstate end-user telecommunications revenue and we also are required to contribute to some state universal service programs.

      In December 2002, the FCC released an order that changed the formula used to assess universal service contributions on wireless carriers. In addition, the order included a restriction on the amount that carriers can include on a customer’s bill to recover their costs of contributing to the universal service fund. The FCC is considering further changes to the contribution and recovery formulas. Possible options include moving from the current system, which is based on interstate end-user telecommunications revenue, to a system that assesses universal service fund fees based on the amount of telephone numbers or end-user connections that a customer uses. These changes could result in an increase in our universal service fund payment obligations.

      In February 2004, the FCC’s Federal-State Joint Board on Universal Service proposed a number of changes to the rules governing fund distributions to carriers eligible for high cost support. If the FCC adopts some, or all, of the Joint Board’s recommendations, it could both limit our eligibility to receive high cost universal service funds in the future, as well as impact our universal service fund contribution responsibilities.

      14. Intercarrier Compensation. Currently, interconnection arrangements between telecommunications carriers consist of a complex set of intercarrier compensation mechanisms, which generally can be divided into the following categories:

      In February 2005, the FCC adopted proposed rulemaking to consider various proposals to change intercarrier compensation arrangements, all of which could affect a carrier’s cost to interconnect and terminate traffic between networks. If the FCC adopts a plan that increases universal service funding requirements or allows rural carriers to impose higher intercarrier charges, it could increase our intercarrier compensation costs.

      In addition, certain incumbent local exchange carriers, or ILECs, in rural areas have started to impose on wireless carriers, including us, non-cost-based charges to terminate the traffic that we send to them. These new charges, imposed via state tariffs, feature high termination rates that are not based on the rural ILECs’ cost of terminating the traffic we send to them, and are not reciprocal. The rural ILECs generally justify these tariffs as a legitimate means of recovering their costs for transport and termination of wireless traffic. In February 2005, the FCC prohibited rural ILECs from enforcing these tariffs on a going forward basis, requiring that wireless carriers and rural ILECs instead directly negotiate the terms for reciprocal compensation with respect to local traffic each exchanges with the other. The FCC nevertheless denied the petition, finding that, in the absence of a negotiated compensation agreement, the rural ILEC tariffs were not prescribed under specific terms of existing FCC rules. While this ruling may result in additional state interconnection negotiation and potential state arbitration proceedings for us and for other wireless carriers, it should, over time, moderate the cost of terminating wireless calls to customers of rural ILECs.

      15. Privacy-related regulations. The FCC has initiated a proceeding on customer proprietary network information, or CPNI, to deal with the issue of subscriber privacy. CPNI is essentially information about with whom, where, when, and for how long a subscriber makes calls. In July 2002, the FCC implemented rules that (a) limit how carriers may use CPNI for marketing purposes, and (b) specify what carriers must do to safeguard CPNI held by their joint venture partners and contractors. We are subject to and currently comply with these rules. The FCC also sought comment on whether it should regulate foreign storage of and access to domestic CPNI. Because we contract with vendors that provide some offshore call and customer-service center services, any regulation that would restrict or limit such offshore centers from having access to domestically stored CPNI could increase our operating costs. It is not known at this time if, when, or the extent to which the FCC will regulate in this area.

      16. Tower siting. The FCC has adopted new rules that are designed to streamline the procedures for review of tower site construction and construction of other communications facilities under the existing Federal statutes and FCC rules, which are effective in March 2005. These new rules may result in complicating the review process due to required reviews by state governments, Native American tribes and other interested parties, as well as the FCC, which could adversely affect our ability to, or the location in which we may construct new towers. The FCC also is conducting an inquiry into the effect that communications towers may have on migratory birds.

      17. Outage reporting. In August 2004, the FCC adopted new regulations that will require all telecommunications carriers, including us, to report outages to the FCC. This requirement may affect the manner in which we track and gather data regarding system outages and repair outages.

      As of February 28, 2005, we had over 19,000 employees. None of our employees are covered by a collective bargaining agreement, and we believe that our relationship with our employees is good.

      There are currently five national wireless communications services providers, including us. Our ability to compete effectively with these providers and other prospective wireless communications service providers depends on the factors below, among others.

      Customer acceptance of the services we offer is and will continue to be affected by technology-based differences and by the operational performance and reliability of our network as compared to the networks of our competitors. The 800 MHz reconfiguration process contemplated by the Report and Order could adversely affect operational performance and the reliability of our network. See “— 4. The reconfiguration process contemplated by the Report and Order may adversely affect our business and operations, which could adversely affect our future growth and operating results.” We may have difficulty attracting and retaining customers if we are unable to resolve quality issues related to our network as they arise or if those issues:

      Our subscriber base continues to grow rapidly. To continue to successfully increase our number of subscribers and pursue our business plan, we must economically:

      If we are unable to achieve the increased network capacity benefits of the 6:1 voice coder, or there are substantial delays in doing so, we could be required to invest additional capital in our infrastructure to satisfy our network capacity needs, and otherwise may not be able to successfully increase our number of subscribers or complete the 800 Mhz reconfiguration process contemplated by the Report and Order without adversely affecting operational performance and the reliability of our network. See “— 4. The reconfiguration process contemplated by the Report and Order may adversely affect our business and operations, which could adversely affect our future growth and operating results.”

      Our operating performance and ability to retain these new customers may be adversely affected unless we are able to timely and efficiently meet the demands for our services and address any increased demands on our customer service, billing and other back-office functions. We have outsourced many aspects of our customer care and billing and functions to third parties and cannot be sure that this outsourcing will not heighten these risks. An adverse change in the ability of any such party to provide services to us could adversely affect our operations.

      Most of our competitors are affiliated with incumbent local exchange carriers, including the former Regional Bell Operating Companies that offer bundled telecommunications services that include local, long distance and data services. Because we do not have such an affiliation, in order to replicate these bundled

service offerings, we would have to enter into arrangements with other parties. This ability to bundle services, as well as the financial strength and the benefits of scale enjoyed by certain of our competitors, may enable them to offer services at prices that are below the prices at which we can offer comparable services. If we cannot compete effectively with these service providers, our revenues and growth may be adversely affected.

      Over time, as the intensity of competition among wireless communications providers has increased, we and our competitors have decreased prices or increased service and product offerings, resulting in both declining average monthly revenue per subscriber in the wireless industry overall, and in declining average revenue per minute of use. These trends may continue. Competition in pricing and service and product offerings may also adversely impact customer retention. To the extent we continue to offer more competitive pricing packages, our average monthly revenue per subscriber may decrease, which would adversely affect our results of operations. If this trend continues, it may be increasingly difficult for us to remain competitive. We may encounter further market pressures to:

      One of the primary ways in which we differentiate ourselves is through our two-way walkie-talkie feature, marketed as Nextel Direct Connect. Until the latter half of 2003, traditional cellular or personal communication services providers did not offer walkie-talkie features. A number of wireless equipment vendors, including Motorola, have begun to offer, or announced plans to offer, wireless equipment that is capable of providing walkie-talkie features that are designed to compete with our Direct Connect walkie-talkie feature. Several of our competitors have introduced, or have announced plans to introduce, these walkie-talkie features. If these features are perceived to be or become, or if any such services introduced in the future are, comparable to our Direct Connect walkie-talkie feature, our competitive advantage would be reduced, which in turn could adversely affect our business.

      With the exception of BlackBerry devices, which are available only from RIM, we currently market multi-function digital handsets available from only one supplier, Motorola. Although our handset supply agreement with Motorola is structured to provide competitively priced handsets, the cost of our handsets may nonetheless be higher than analog handsets and digital handsets that do not incorporate a similar multi-function capability, which may make it more difficult or less profitable for us to attract customers. In addition, the higher cost of our handsets requires us to absorb part of the cost of offering handsets to new and existing customers. These increased costs and handset subsidy expenses may reduce our growth and profitability.

      Our network currently uses non-contiguous spectrum frequencies, which traditionally were usable only for two-way radio calls, such as those used to dispatch taxis and delivery vehicles. We became able to use these frequencies to provide a wireless telephone service competitive with cellular carriers only when Motorola developed the iDEN technology. We are currently the only national U.S. wireless service provider utilizing iDEN technology, and iDEN handsets are not currently designed to roam onto other domestic wireless

networks that utilize other technologies. Because iDEN technology is a proprietary technology that is not standards-based, it is not as widely adopted as, and currently has fewer subscribers on a worldwide basis than, other wireless technologies. Accordingly, it is less likely that manufacturers other than Motorola will be willing to make the significant financial commitment required to license, develop and manufacture iDEN infrastructure equipment and handsets.

      The wireless telecommunications industry is experiencing significant technological change, including the deployment of unlicensed spectrum devices. Future technological advancements may enable other wireless technologies to equal or exceed our current levels of service and render iDEN technology obsolete. If we are unable to meet future advances in competing technologies on a timely basis, or at an acceptable cost, we may not be able to compete effectively and could lose customers to our competitors. In addition, competition among the differing wireless communications technologies could:

      We offer our subscribers access to wireless data and Internet services, marketed under the brand name Nextel Online. Unless these services perform satisfactorily, are utilized by a sufficient number of our subscribers and produce sufficient levels of customer satisfaction, our future results may be adversely affected. Because we have less spectrum than some of our competitors, and because we have elected to defer the deployment of any next generation technology, the wireless data and Internet services that we currently offer are significantly limited compared to those services offered by some other wireless communications providers.

      Our wireless data and Internet capabilities may not allow us to perform fulfillment and other customer support services more economically or to realize a source of future incremental revenue. Further, our wireless data and Internet capabilities may not counter the effect of increasing competition in our markets and the related pricing pressure on basic wireless voice services or incrementally differentiate us from our competitors. We also may not successfully realize our goals if:

      Any resulting customer dissatisfaction, or failure to realize cost reductions or incremental revenue, could have an adverse effect on our results of operations, growth prospects and perceived value.

      If we were to deploy next generation digital technologies that would allow high capacity wireless voice and higher speed data transmission, significant capital expenditures would be required, and could increase in the event of unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes, network or systems compatibility, equipment unavailability and technological or other complications, such as our inability to successfully coordinate this change with our customer care, billing, order fulfillment and other back-office operations. As there are several types of next generation technologies that may not be fully compatible with each other or with other currently deployed digital technologies, if the type of technology that we were to choose to deploy did not gain widespread acceptance or perform as expected, our

business may be adversely affected. In addition to the costs associated with a change in technology, we could also incur specified obligations with respect to Nextel Partners if we elect to deploy new technologies, including the obligation to purchase the outstanding shares of Nextel Partners’ class A common stock at its then-current fair value. Finally, there can be no guarantee that any such technology will provide the advantages that we expect.

      Nextel Partners operates a network compatible with ours in numerous mid-sized and tertiary markets in the United States. We offer cellular and walkie-talkie services internationally in Canada, Latin America and Mexico through agreements with TELUS Mobility and NII Holdings. If Nextel Partners, NII Holdings or TELUS Mobility experiences financial or operational difficulties, the ability of our customers to roam on their respective networks may be impaired. In that event, our ability to attract and retain customers who want to access those networks may be adversely affected.

      As of December 31, 2004, we had $8,657 million of outstanding obligations, including $5,365 million of senior notes, $3,178 million of indebtedness under our secured bank credit facility and $108 million in mandatorily redeemable preferred stock obligations and $6 million of other obligations.

      The level of our outstanding indebtedness greatly exceeds our cash on hand and our annual cash flows from operating activities. At December 31, 2004, we had $1,814 million of cash, cash equivalents and short-term investments on hand, and we had $2,992 million in revolving credit borrowings available under our secured credit facility, $2,500 million of which will be utilized in connection with the letter of credit required by the FCC under its Report and Order. During 2004, our operating activities provided $4,288 million of cash, and we used $1,946 million in investing activities (i.e., capital expenditures relating to expansion of network coverage and capacity and strategic acquisitions), and, during 2003, our operating activities provided $3,312 million of cash, and we used $2,061 million in investing activities. Prior to 2002, our operating activities did not provide sufficient cash flow to fund our investing activities. Unless our operating activities continue to generate sufficient cash, we may not be able to continue to expand our business and satisfy our long-term obligations.

      In addition, the indentures under which $4,854 million in principal amount of our senior notes have been issued and our secured bank credit facility contain covenants that restrict, among other things, our ability to borrow money, grant additional liens on our assets, make particular types of investments or other restricted payments, sell assets or merge or consolidate. Although these restrictions do not limit our ability to merge with Sprint, under our senior note indentures, as a result of the merger, the resulting company will be required to make an offer to repurchase our outstanding senior notes at a price equal to 101% of the then-outstanding principal amount, plus accrued and unpaid interest, unless Sprint Nextel’s long-term debt is rated investment grade by either Standard & Poor’s Rating Services or Moody’s Investor’s Services, Inc. for at least 90 consecutive days from the completion of the merger, or with respect to three series of our notes, both S&P and Moody’s reaffirm or increase the rating of all of our senior notes after completion of the merger or, with respect to any one of the three series, that series is rated investment grade by both S&P and Moody’s. These restrictions, however, could limit or interfere with our ability to take advantage of various business opportunities or otherwise effectively compete by restricting our ability to:

      Our bank credit facility also requires us to maintain specified financial ratios and satisfy financial tests. If we are not able to meet these ratios and satisfy other tests, we will be in default of the bank credit facility, which in turn would result in defaults under our indentures, and would give our banks and note holders the right to require us to repay all amounts then outstanding.

      Uncertainty about whether and when the merger will be completed and how the business of Sprint Nextel will be operated after the merger could adversely affect our business, including due to attempts by other communication providers to persuade our customers to change service providers, which could increase the rate of our subscriber churn and have a negative impact on our subscriber growth, revenue and results of operations. Such uncertainty also could make it difficult for us to preserve employee morale, and retain and hire key employees.

      In order to accomplish the reconfiguration of the 800 MHz spectrum band that is contemplated by the Report and Order, in most cases we will need to cease our use of a portion of the 800 MHz spectrum in a particular market before we are able to commence use of replacement 800 MHz spectrum in that market. Consequently, to mitigate the temporary loss of the use of this spectrum, in many markets we will need to construct additional transmitter and receiver sites or acquire additional spectrum in the 800 MHz or 900 MHz bands, which spectrum may not be available to us on acceptable terms. In markets where we are unable to construct additional sites or acquire additional spectrum as needed, the decrease in capacity may adversely affect the performance of our network, require us to curtail subscriber additions in that market until the capacity limitation can be corrected, or a combination of the two. Degradation in network performance in any market could result in subscriber churn in that market, the effect of which could be exacerbated if we are forced to curtail subscriber additions in that market. A resulting loss of a significant number of subscribers could adversely affect our results of operations. Because we only recently accepted the Report and Order and are just beginning the reconfiguration process, we currently are not able to assess the potential impact that this process will have on our network capacity.

      Certain next generation technologies that we may deploy in the future would require that we have the use of the 1.9 GHz spectrum that we acquired under the Report and Order. The Report and Order, however, specifies that we may not use the 1.9 GHz spectrum until we have relocated the incumbent licensees in the 1.9 GHz band to another band designated by the FCC, a process that could take several years to complete. In addition, the Report and Order gives the FCC the authority to suspend our use of the 1.9 GHz spectrum if we do not comply with our obligations under the Report and Order. Our inability to relocate the incumbent licensees, or a suspension in our use of the spectrum, could prevent us from deploying new network technologies and providing next generation wireless services.

      The FCC regulates the licensing, operation, acquisition and sale of the licensed spectrum that is essential to our business. Future changes in regulation or legislation and Congress’ and the FCC’s continued allocation of additional spectrum for commercial mobile radio services, which include specialized mobile radio, cellular and personal communication services, could impose significant additional costs on us either in the form of direct out of pocket costs or additional compliance obligations. For example, compliance with regulations requiring us to provide public safety organizations with caller location information will materially increase our cost of doing business to the extent that we are unable to recover some or all of these costs from our customers. Further, if we fail to comply with applicable regulations, we may be subject to sanctions, which

may have a material adverse effect on our business. For example, while the Communications Act requires that we make products and services accessible to persons with disabilities, Motorola has advised us that these requirements may not be technologically feasible. These regulations also can have the effect of introducing additional competitive entrants to the already crowded wireless communications marketplace.

      We are required to have 95% of our total subscriber base using A-GPS capable handsets by December 31, 2005, and we have notified the FCC that we may be unable to satisfy this requirement by December 31, 2005. We may incur significant additional costs in order to satisfy the Phase II E911 requirement because our compliance requires that the non-A-GPS capable handsets in our subscriber base be replaced with A-GPS capable handsets. Our ability to meet the Phase II requirements on the schedule currently contemplated by the E911 regulations and the costs we may incur in an effort to accelerate our customers’ transition to A-GPS capable handsets to meet these requirements could be significant, and will be dependent on a number of factors, including the number of new subscribers added to our network who purchase A-GPS capable handsets, the number of existing subscribers who upgrade from non-A-GPS capable handsets to A-GPS capable handsets, the rate of our customer churn and the cost of A-GPS capable handsets.

      It is possible that we may face additional regulatory prohibitions or limitations on our services. For example, the California Public Utilities Commission, or CPUC, enacted extensive consumer protection and privacy regulations for all telecommunications carriers, and other states have or are considering similar regulations or legislation. Although the CPUC recently stayed the effectiveness of these regulations, if the stay is lifted, the rules will significantly alter our business practices in California with respect to nearly every aspect of the carrier-customer relationship, including solicitations, marketing, activations, billing and customer care. If similar regulations are adopted in other states, they could impose significant additional costs on us as well as other wireless carriers. If any new regulations prohibit us from providing planned services, it could be more difficult for us to compete.

      Further, some state and local jurisdictions have adopted legislation that could affect our costs and operations in those areas. For example, some jurisdictions, such as the States of New York and New Jersey have laws restricting or prohibiting the use of portable communications devices while driving motor vehicles, and the District of Columbia has passed a similar ban. Federal legislation has been proposed that would affect funding available to states that do not adopt similar legislation. If similar laws are enacted in other jurisdictions, we may experience reduced subscriber usage and demand for our services, which could have a material adverse effect on our results of operations.

      Finally, we cannot be certain that we or the wireless industry in general may not be subject to litigation should a situation arise in which damage or harm occurs as a result of interference between a commercial licensee like us and a public safety licensee.

      Motorola is currently our sole source for most of the network equipment and all of the handsets we offer except BlackBerry devices. Accordingly, we must rely on Motorola to develop handsets and equipment capable of supporting the features and services we plan to offer to our customers. In addition, because we are one of a limited number of wireless carriers that have deployed iDEN technology, we bear a substantially greater portion of the costs associated with the development of new equipment and features than would be the case if our network utilized a more widely adopted technology platform. If factors affecting our relationship with Motorola were to result in a significant adverse change in Motorola’s ability or willingness to provide handsets and related equipment and software applications, or to develop new technologies or features for us, or in Motorola’s ability or willingness to do so on a timely, cost-effective basis, we may not be able to adequately service our existing subscribers, add new subscribers or offer competitive services. Accordingly, a decision by Motorola to discontinue manufacturing, supporting or enhancing our iDEN-based infrastructure and handsets would have a material adverse effect on us.

      Motorola is also a significant supplier of wireless communications equipment to each of our competitors. Consequently, Motorola may elect to focus a greater amount of its financial and other resources on the development of enhanced features functionality of standards-based wireless equipment used by our competitors rather than the proprietary iDEN equipment due to the larger potential market for that equipment. In such event, we would be materially adversely affected unless alternative sources are licensed by Motorola to manufacture iDEN-based equipment or we have the ability to transition to a different technology. Because iDEN technology is not as widely adopted and currently has fewer subscribers on a worldwide basis than other wireless technologies, it is less likely that manufacturers other than Motorola will be willing to make the significant financial commitment required to license, develop and manufacture iDEN infrastructure equipment and handsets.

      We expect to continue to rely principally on Motorola or its licensees for the manufacture of a substantial portion of the equipment necessary to construct, enhance and maintain our iDEN network and handset equipment at least for the next several years. For instance, we rely on Motorola to provide us with technology improvements designed to expand our wireless voice capacity and improve our services, such as the 6:1 voice coder software upgrade, and the handset-based A-GPS location technology solution necessary for us to comply with the FCC’s E911 requirements. The failure by Motorola to deliver these improvements and solutions or to do so within our anticipated timeframe, or the failure of those improvements or solutions to perform as expected, could impose significant additional costs on us. With respect to the FCC’s E911 requirements, we are responsible for timely meeting these requirements, whether or not Motorola is able to produce the necessary handsets and infrastructure. We also will rely extensively on Motorola’s cooperation and support in connection with the reconfiguration process contemplated by the Report and Order, and a lack of cooperation or support by Motorola would adversely affect our ability to satisfy our obligations under the Report and Order.

      Motorola provides the iDEN infrastructure equipment and substantially all of the handsets throughout our markets under agreements that set the prices we must pay to purchase and license this equipment, as well as a structure to develop new features and make long-term improvements to our network. In 2004, we and Motorola extended through December 31, 2007 the terms of the supply agreements for infrastructure equipment, services and handsets. Our arrangements with Motorola, together with the fact that our existing customer base is utilizing iDEN technology, may delay or prevent us from employing new or different technologies that perform better or are available at a lower cost because of the additional economic costs and other impediments to change generally as well as those that arise under the Motorola agreements. For example, our current agreements with Motorola require us to provide Motorola with notice of our determination that Motorola’s technology is no longer suited to our needs at least six months before publicly announcing or entering into a contract to purchase equipment utilizing an alternate technology. In addition, in specified circumstances, these agreements give Motorola an opportunity to supply a portion of our infrastructure requirements for the alternate technology. To the extent that we are subject to these or similar obligations in the future, our ability to negotiate with or obtain an alternate equipment supplier may be limited.

      Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. Purported class actions and other lawsuits have been filed against numerous wireless carriers, including us, seeking not only damages but also remedies that could increase our cost of doing business. While the current lawsuits against us have been dismissed, the plaintiffs have appealed, and we cannot be sure of the outcome or if additional lawsuits will not be filed. We cannot be sure that our business and financial condition will not be adversely affected by litigation of this nature or public perception about health risks. The actual or perceived risk of mobile communications devices could

adversely affect us through a reduction in subscribers, reduced network usage per subscriber or reduced financing available to the mobile communications industry. Further research and studies are ongoing, and we cannot be sure that additional studies will not demonstrate a link between radio frequency emissions and health concerns.

      The certificate of incorporation of Nextel Partners sets forth various circumstances in which we will have the right or obligation to purchase the outstanding shares of class A common stock of Nextel Partners at specified prices. Specifically, under the terms of the certificate of incorporation of Nextel Partners, during the 18 month period following completion of the merger with Sprint, the holders of a majority of the Nextel Partners class A common stock can vote to require us to purchase all of the outstanding shares of Nextel Partners that we do not already own for the appraised fair market value of those shares. We do not know if the stockholders of Nextel Partners will elect to require us to purchase the Nextel Partners class A shares after the merger. In addition, we may not transfer our interest in Nextel Partners to a third party before January 29, 2011.

      We currently have arrangements in various forms, including options and convertible securities, under which we will issue a substantial number of new shares of our class A common stock. As of December 31, 2004, we had commitments to issue 29.7 million shares upon conversion of our class B nonvoting common stock, 12.9 million shares upon conversion of our convertible senior notes and zero coupon convertible preferred stock and 92.3 million shares upon exercise of options or in connection with other awards outstanding under our incentive and other equity plans. In the aggregate, these obligations represent 134.9 million shares, or 11% of our class A common stock outstanding on December 31, 2004 assuming these shares issuable had been outstanding on that date. An additional $1,000 million in aggregate dollar amount of shares of our class A common stock is available for issuance and sale under our direct stock purchase plan. In addition, we may elect in some circumstances to issue equity to satisfy obligations otherwise payable in cash or to make acquisitions, and we have issued and may continue to issue common stock in exchange for some of our outstanding securities. An increase in the number of shares of our common stock that are or will become available for sale in the public market may adversely affect the market price of our common stock and, as a result, could impair our ability to raise additional capital through the sale of our common stock or convertible securities. Some of the shares subject to issuance are, or may become, freely tradable, without regard to the volume limitations of Rule 144 under the Securities Act of 1933.

      “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: A number of the statements made in this annual report on Form 10-K are not historical or current facts, but deal with potential future circumstances and developments. They can be identified by the use of forward-looking words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy that may involve risks and uncertainties. We caution you that these forward-looking statements are only predictions, which are subject to risks and uncertainties including technological uncertainty, financial variations, changes in the regulatory environment, industry growth and trend predictions. The operation and results of our wireless communications business may be subject to the

effect of other risks and uncertainties in addition to those outlined in the above “Risk Factors” section and elsewhere in this document including, but not limited to:

N.     Available Information

      We make available free of charge on or through our Internet website at www.nextel.com, 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 furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission.

      We currently lease our principal executive and administrative offices, which are located at 2001 Edmund Halley Drive, in Reston, Virginia. This facility is about 164,000 square feet, and the lease has an initial term expiring July 31, 2009, with four five-year renewal options. A summary of our major leased facilities as of December 31, 2004 is as follows:

      None of the expiration dates for the leases disclosed above includes potential extensions related to the exercise of renewal options. We also lease smaller office facilities for sales, maintenance and administrative operations in our markets. We have over 200 of these leases in effect at December 31, 2004, generally with terms ranging from 5 to 10 years, not including extensions related to the exercise of renewal options.

      As of December 31, 2004, we also leased facilities for about 50 mobile switching offices. These leases generally have five to ten-year initial terms, typically with renewal options, and range between 5,000 and 58,000 square feet. In 2004, we expanded the number of Nextel stores by 141, bringing our total to 777 stores at December 31, 2004. These kiosks and small store locations typically have lease terms of five years and range between 100 and 5,200 square feet.

      We lease transmitter and receiver sites for the transmission of our radio service under various individual site leases as well as master site lease agreements. The terms of these leases generally range from month-to-month to 10 years. As of December 31, 2004, we had 19,800 constructed sites at leased locations in the United States for our network. We also own properties and a limited number of transmission towers where management considers it advisable. For more information regarding our leases see note 10 to the consolidated financial statements appearing at the end of this annual report of Form 10-K.

      In April 2001, a purported class action lawsuit was filed in the Circuit Court in Baltimore, Maryland by the Law Offices of Peter Angelos, and subsequently in other state courts in Pennsylvania, New York and Georgia by Mr. Angelos and other firms, alleging that wireless telephones pose a health risk to users of those telephones and that the defendants failed to disclose these risks. We, along with numerous other companies, were named as defendants in these cases. The cases, together with a similar case filed earlier in Louisiana state court, were ultimately transferred to federal court in Baltimore, Maryland. In March 2003, the court granted the defendants’ motions to dismiss. The plaintiffs have appealed this decision.

      A number of lawsuits have been filed against us in several state and federal courts around the United States, challenging the manner by which we recover the costs to us of federally mandated universal service, Telecommunications Relay Service payment requirements imposed by the FCC, and the costs (including costs to implement changes to our network) to comply with federal regulatory requirements to provide E911,

telephone number pooling and telephone number portability. In general, these plaintiffs claim that our rate structure that breaks out and assesses federal program cost recovery fees on monthly customer bills is misleading and unlawful. The plaintiffs generally seek injunctive relief and damages on behalf of a class of customers, including a refund of amounts collected under these regulatory line item assessments. We reached a settlement with the plaintiff, who purports to represent a nationwide class of affected customers, in one lawsuit that challenges the manner by which we recover the costs to comply with federal regulatory requirements to provide E911, telephone number pooling and telephone number portability. The settlement was found to be fair and was approved by the court, which approval recently was affirmed by the appellate court, and a motion for rehearing was filed by one of the objectors. Assuming no further appeal is sought, the settlement would render moot a majority of these lawsuits, and would not have a material effect on our business or results of operations.

      See Part II, “Item 6. Selected Financial Data” for a discussion of NII Holdings’ voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.

      We are subject to other claims and legal actions that arise in the ordinary course of business. We do not believe that any of these other pending claims or legal actions will have a material effect on our business or results of operation.

      No matters were submitted to a vote of our security holders during the fourth quarter 2004.

Executive Officers of the Registrant

      The following people are serving as our executive officers as of February  28, 2005. These executive officers were elected to serve until their successors have been elected. There is no family relationship between any of our executive officers or between any of these officers and any of our directors.

      Timothy M. Donahue. Mr. Donahue is 56 years old and has served as our Chief Executive Officer since July 1999. Mr. Donahue also has served as President since joining us in February 1996 and also served as Chief Operating Officer from February 1996 until July 1999. Mr. Donahue has served as one of our directors since June 1996. From 1986 to January 1996, Mr. Donahue held various senior management positions with AT&T Wireless Services, Inc., including Regional President for the Northeast. Mr. Donahue serves as a director of Nextel Partners and Eastman Kodak Company.

      Paul N. Saleh. Mr. Saleh is 48 years old and has served as Executive Vice President and Chief Financial Officer since September 2001. From June 1999 to August 2001, Mr. Saleh served as Senior Vice President and Chief Financial Officer of Disney International, a subsidiary of The Walt Disney Company. From April 1997 to June 1999, Mr. Saleh served as Senior Vice President and Treasurer of The Walt Disney Company. Prior to joining The Walt Disney Company, Mr. Saleh worked for twelve years with Honeywell Inc., where he was most recently Vice President and Treasurer.

      Thomas N. Kelly, Jr. Mr. Kelly is 57 years old, joined us in April 1996 and has served as Executive Vice President and Chief Operating Officer since February 2003. From 1996 to February 2003, Mr. Kelly served as our Executive Vice President and Chief Marketing Officer. Between 1993 and 1996, Mr. Kelly was Regional Vice President of Marketing for AT&T Wireless. Prior to joining AT&T Wireless, Mr. Kelly worked for twelve years with the marketing consulting firm of Howard Bedford Nolan, where he was most recently an Executive Vice President.

      Barry J. West. Mr. West is 59 years old, joined us in March 1996 and serves as Executive Vice President and Chief Technology Officer. Previously, Mr. West served in various senior positions with British Telecom plc for more than five years, most recently as Director of Value-Added Services and Corporate Marketing at Cellnet, which was a cellular communications subsidiary of British Telecom.

      Leonard J. Kennedy. Mr. Kennedy is 53 years old and since January 2001 has served as Senior Vice President and General Counsel. From 1995 until January 2001, Mr. Kennedy was a member of the law firm Dow, Lohnes & Albertson, specializing in telecommunications law and regulatory policy.

      William G. Arendt. Mr. Arendt is 47 years old and has served as our Senior Vice President since February 2004 and as our Controller since May 1997. From May 1997 to February 2004, he also served as our Vice President. From June 1996 until May 1997, Mr. Arendt was Vice President and Controller for Pocket Communications, Inc., a PCS company. From September 1992 until June 1996, he was Controller for American Mobile Satellite Corporation. Previously, Mr. Arendt worked for thirteen years at Ernst & Young LLP.

      Richard S. Lindahl. Mr. Lindahl is 41 years old and has served as our Vice President and Treasurer since May 2002. From August 1997 to May 2002, Mr. Lindahl served us in various capacities, including Assistant Treasurer and Director, Financial Planning & Analysis. Prior to joining us in August 1997, Mr. Lindahl held the position of Vice President, Financial Planning with Pocket Communications.

PART II

      Our class A common stock is traded on the Nasdaq National Market under the trading symbol “NXTL.” The following table lists, on a per share basis, the high and low closing sales prices for the common stock as reported by the Nasdaq National Market for the periods indicated:

      As of February 28, 2005, there were about 4,000 holders of record of our class A common stock. We have the authority to issue shares of nonvoting common stock, which are convertible on a share-for-share basis into shares of class A common stock. As of February 28, 2005, Motorola was the sole stockholder of record of the 29,660,000 outstanding shares of nonvoting common stock.

      We have not paid any dividends on our common stock and do not plan to pay dividends on our common stock for the foreseeable future. The indentures governing our public notes and our bank credit agreement and other financing documents prohibit us from paying dividends, except in compliance with specified financial covenants, and limit our ability to dividend cash from the subsidiaries that operate our network to Nextel Communications, Inc. While these restrictions are in place, any profits generated by these subsidiaries may not be available to us for payment of dividends.

      We anticipate that for the foreseeable future any cash flow generated from our operations will be used to develop and expand our business and operations and fund other financing initiatives including the repayment of existing debt obligations. Any future determination as to the payment of dividends on our common stock will be at the discretion of our board of directors and will depend upon our operating results, financial condition and capital requirements, contractual restrictions, general business conditions and other factors that our board of directors deems relevant. There can be no assurance that we will pay dividends on our common stock at any time in the future.

      The following selected financial data are derived from our consolidated financial statements and have been restated to reflect adjustments that are further discussed in “Explanatory Note” in the forepart of this annual report on Form 10-K and note 1 to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data of this annual report on Form 10-K.

      The tables above set forth selected consolidated financial data for the periods or as of the dates indicated and should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing at the end of this annual report on Form 10-K. Highlighted below are certain transactions and factors that may be significant to an understanding of our financial condition and comparability of results of operations.

      NII Holdings. The information presented above that is derived from our consolidated financial statements includes the consolidated results of NII Holdings through December 31, 2001. During 2001, NII Holdings recorded a non-cash pre-tax restructuring and impairment charge of $1,747 million in connection with its decision to discontinue funding one of its operating companies and the implementation of its revised business plan.

      In November 2002, NII Holdings, which prior to that time had been our substantially wholly-owned subsidiary, completed its reorganization under Chapter 11 of the U.S. Bankruptcy Code, having filed a voluntary petition for reorganization in May 2002 in the United States Bankruptcy Court for the District of Delaware after it and one of its subsidiaries defaulted on credit and vendor finance facilities. Prior to its bankruptcy filing, NII Holdings was accounted for as one of our consolidated subsidiaries. As a result of NII Holdings’ bankruptcy filing in May 2002, we began accounting for our investment in NII Holdings using the equity method. In accordance with the equity method of accounting, we did not recognize equity losses of NII Holdings after May 2002 as we had already recognized $1,408 million of losses in excess of our investment in NII Holdings through that date. NII Holdings’ net operating results through May 2002 have been presented as equity in losses of unconsolidated affiliates, as permitted under the accounting rules governing a mid-year change from consolidating a subsidiary to accounting for the investment using the equity method. However, the presentation of NII Holdings in the financial statements as a consolidated subsidiary in 2001 has not changed from prior presentation. The following table provides the operating revenues and net loss of NII Holdings included in our consolidated results for 2001 and 2000, excluding the impact of intercompany eliminations:

      Upon NII Holdings’ emergence from bankruptcy in November 2002, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings, partially offset by charges recorded when we consolidated NII Holdings, including, among other items, $185 million of cumulative

foreign currency translation losses. At the same time, we began accounting for our new ownership interest in NII Holdings using the equity method, under which we recorded our proportionate share of NII Holdings’ results of operations. In November 2003, we sold 3.0 million shares of NII Holdings common stock, which generated $209 million in net proceeds and a gain of $184 million.

      In 2004, NII Holdings completed the redemption of its 13% senior notes that we held, in exchange for $77 million in cash resulting in a $28 million realized gain in other (expense) income in the accompanying condensed consolidated statements of operations. As of December 31, 2004, we accounted for the shares of NII Holdings common stock that we hold as an available-for-sale investment, recorded in short-term investments and investments on our condensed consolidated balance sheet at the current market value of that common stock. Additional information regarding our investment in NII Holdings can be found in note 3 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Operating Revenues and Cost of Revenues. Effective July 1, 2003, we adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. Accordingly, for all handset sale arrangements entered into beginning in the third quarter 2003, we recognize revenue and the related cost of revenue when title to the handset passes to the customer. Prior to July 1, 2003, in accordance with Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” we recognized revenue from handset sales and an equal amount of the related cost of revenue on a straight-line basis over the then expected customer relationship period of 3.5 years, beginning when title to the handset passed to the customer. Therefore, the adoption of EITF Issue No. 00-21 resulted in increased handset revenues and cost of handset revenues in 2003 as compared to 2002.

      We elected to apply the provisions of EITF Issue No. 00-21 to our existing customer arrangements. Accordingly, on July 1, 2003, we reduced our current assets and liabilities by about $563 million and our noncurrent assets and liabilities by about $783 million, representing substantially all of the revenues and costs associated with the original sale of handsets that were deferred under SAB No. 101. Additional information regarding our adoption of EITF Issue No. 00-21 can be found in note 1 to the consolidated financial statements appearing in this annual report on Form 10-K.

      Adoption of SFAS No. 142. Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, we are no longer required to amortize goodwill and intangible assets with indefinite useful lives, which consist of our FCC licenses. In the first quarter 2002, we incurred a one-time cumulative non-cash charge to the income tax provision of $335 million to increase the valuation allowance related to our net operating losses. This cumulative charge was required since we have significant deferred tax liabilities related to our FCC licenses that have a significantly lower tax basis than book basis. Additional information regarding the adoption of SFAS No. 142 can be found in note 5 to the consolidated financial statements appearing in this annual report on Form 10-K.

      Long-Term Debt, Preferred Stock and Finance Obligation. During the second quarter 2002 and continuing throughout 2003 and 2004, we reduced our outstanding debt obligations through the redemption, purchase and retirement of some of our long-term debt and preferred stock. We used some of the proceeds from newly issued senior notes and a new term loan under the bank credit facility, together with our existing cash resources, to redeem and retire certain senior notes, then-existing term loans under the facility and preferred stock. These newly issued senior notes and the new term loan have lower interest rates and longer maturity periods than the notes and loans that were retired. We also issued shares of our class A common stock in exchange for some of our outstanding debt securities. Additional information can be found in note 6 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Income Tax Benefit (Provision). We maintain a valuation allowance that includes reserves against certain of our deferred tax asset amounts in instances where we determine that it is more likely than not that a tax benefit will not be realized. Our valuation allowance has historically included reserves primarily for the tax benefit of net operating loss carryforwards, as well as for capital loss carryforwards, separate return net

operating loss carryforwards and the tax benefit of stock option deductions relating to employee compensation. Prior to June 30, 2004, we had recorded a full reserve against the tax benefits relating to our net operating loss carryforwards because, at that time, we did not have a sufficient history of taxable income to conclude that it was more likely than not that we would be able to realize the tax benefits of the net operating loss carryforwards. Accordingly, we recorded in our income statement only a small provision for income taxes, as our net operating loss carryforwards resulting from losses generated in prior years offset virtually all of the taxes that we would have otherwise incurred.

      During 2004, based on our cumulative operating results and an assessment of our expected future operations, we concluded that it was more likely than not that we would be able to realize the tax benefits of our net operating loss carryforwards. Therefore, we decreased the valuation allowance attributable to our net operating loss carryforwards by $901 million as a credit to tax expense. Additionally, we decreased the valuation allowance attributable to the tax benefit of stock option deductions related to employee compensation and credited paid-in capital by $389 million. Also during 2004, we determined that it was more likely than not that we would utilize a portion of our capital loss carryforwards before their expiration. Accordingly, we decreased the valuation allowance primarily attributable to capital loss carryforwards by $212 million as a credit to tax expense. Additional information can be found in note 9 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Other Income (Expense), Net. As discussed in note 3 to the consolidated financial statements appearing at the end of this annual report on Form 10-K, other income (expense), net in 2003 includes a $184 million gain on our sale of common stock of NII Holdings and a $39 million gain related to the redemption of the redeemable preferred stock that we held in Nextel Partners. Other income (expense), net in 2001 includes a $188 million other-than-temporary reduction in the fair value of NII Holdings’ investment in TELUS. Other income (expense), net in 2000 includes a $275 million gain realized when NII Holdings exchanged its stock in Clearnet Communications, Inc. for stock in TELUS as a result of the acquisition of Clearnet by TELUS.

      Like other companies, we have reviewed our accounting practices with respect to leasing transactions. We have concluded that there was an error in our practices related to the determination of the lease term under certain leases that relate primarily to our cell sites. We have historically used the initial non-cancelable portion of the lease as the lease term, excluding any renewal periods. We have determined that SFAS No. 13, “Accounting for Leases”, requires consideration of renewal periods when the existence of a “penalty”, as defined in SFAS No. 13, would require us to conclude at the inception of the lease that there was reasonable assurance that one or more of the renewal options would be exercised. We considered a number of factors in determining whether a penalty, as defined in SFAS No. 13, existed such that the exercise of one or more of the renewal options would be reasonably assured at the inception of the lease. The primary factor that we considered is that a significant dollar amount of leasehold improvements at a lease site would be impaired by non-renewal after the initial non-cancelable portion of the lease. The result of our assessment was to increase the lease term as defined in SFAS No. 13 for most of our operating leases. As we recognize rent expense on our operating leases on a straight-line basis and many of our leases contain escalating rent payments over the term of the lease, the impact of this change in lease term was to increase deferred rent liability at December 31, 2003 by approximately $92 million.

      NII Holdings, Inc., in which we hold an equity interest, has advised us that it will restate certain financial results for the year ended December 31, 2003 and for the two months ended December 31, 2002. During the period November 2002 through October 2003, we owned on average 33% of the common stock of NII Holdings and accounted for our investment under the equity method. Accordingly, we have restated our consolidated statement of operations for the years ended December 31, 2003 and December 31, 2002 to reflect our percentage share of these adjustments. Although this adjustment did not impact our operating income for 2003 or 2002, it increased our losses on the line item “Equity in losses of unconsolidated affiliates, net” by

$18 million in 2003 and by $7 million in 2002 and decreased our “Income available to common stockholders” by $8 million in 2003 and by $7 million in 2002 in our consolidated statement of operations.

      The combined effect of these two changes were increases to accumulated deficit of $107 million and $81 million as of December 31, 2003 and 2002, respectively, and an increase to accumulated deficit of $55 million as of January 1, 2002. See note 1 to our consolidated financial statements included in this annual report on Form 10-K for a summary of the effects of these changes on our consolidated balance sheet as of December 31, 2003, as well as on our consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2003 and 2002. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to these corrections and adjustments.

      The following is a discussion and analysis of our consolidated financial condition and results of operations for each of the three years in the period ended December 31, 2004, and significant factors that could affect our prospective financial condition and results of operations. Historical results may not be indicative of future performance. For a complete listing of all of our risk factors, please see Part I, “Item 1. Business — M. Risk Factors” and “— Forward-Looking Statements.”

      We are a leading provider of wireless communications services in the United States. We provide a comprehensive suite of advanced wireless services that include: digital wireless mobile telephone service, walkie-talkie features including our Nextel Nationwide Direct Connect^sm and Nextel International Direct Connect^sm walkie-talkie features, and wireless data transmission services. As of December 31, 2004, we provided service to about 16.2 million subscribers, which consisted of 15.0 million subscribers of Nextel-branded service and 1.2 million subscribers of Boost Mobile^tm — branded pre-paid service. For 2004, we had operating revenues of $13,368 million and income available to common stockholders of $2,991 million, which included a net tax benefit of $355 million that was primarily the result of the reversal of a significant portion of the valuation allowance attributable to our net operating loss and capital loss carryforwards in excess of our tax provision for the period. We ended 2004 with over 19,000 employees.

      Our all-digital packet data network is based on integrated Digital Enhanced Network, or iDEN®, wireless technology provided by Motorola, Inc. We, together with Nextel Partners, Inc., currently utilize the iDEN technology to serve 297 of the top 300 United States markets where about 260 million people live or work. Nextel Partners provides digital wireless communications services under the Nextel brand name in mid-sized and tertiary U.S. markets, and has the right to operate in 98 of the top 300 metropolitan statistical areas in the United States ranked by population. As of December 31, 2004, we owned about 32% of the outstanding common stock of Nextel Partners. In addition, as of December 31, 2004, we also owned about 18% of the outstanding common stock of NII Holdings, Inc., which provides wireless communications services primarily in selected Latin American markets. We have agreements with NII Holdings that enable our subscribers to use our Direct Connect walkie-talkie features in the Latin American markets that it serves as well as between the United States and those markets.

      The FCC regulates the licensing, operation, acquisition and sale of the licensed spectrum that is essential to our business. Future changes in FCC regulation or congressional legislation related to spectrum licensing or other matters related to our business could impose significant additional costs on us either in the form of direct out-of-pocket costs or additional compliance obligations.

      On December 15, 2004, we entered into a definitive agreement for a merger of equals with Sprint Corporation pursuant to which we would merge into a wholly owned subsidiary of Sprint. The new company will be called Sprint Nextel Corporation.

      Under the terms of the merger agreement, existing Sprint shares will remain outstanding and each share of our common stock will be converted into Sprint Nextel shares and a small per share amount in cash, with a total value equal to 1.3 shares of Sprint common stock, subject to adjustment. The precise allocation of cash and stock will be determined at the closing of the merger in order to facilitate the spin-off of the resulting

company’s local telecommunications business on a tax-free basis. The aggregate amount of the cash payments will not exceed $2,800 million. All outstanding options to purchase our common stock will be converted into options to purchase an equivalent number of shares of Sprint Nextel common stock, adjusted based on a 1.3 per share exchange ratio.

      The Sprint Nextel Board of Directors will consist of 12 directors, six from each company, including two co-lead independent directors, one from Sprint and one from our board of directors. Sprint Nextel will have its executive headquarters in Reston, Virginia, and its operational headquarters in Overland Park, Kansas. Gary D. Forsee, currently Chairman and Chief Executive Officer of Sprint, will become President and Chief Executive Officer of Sprint Nextel. Timothy M. Donahue, our President and Chief Executive Officer, will become Chairman of Sprint Nextel.

      This annual report on Form 10-K relates only to Nextel Communications, Inc. and its direct and indirect subsidiaries prior to consummation of the merger. The merger is expected to close in the second half of 2005 and is subject to shareholder and regulatory approvals, as well as other customary closing conditions. As a result, there can be no assurances that the merger will be completed or as to the timing thereof. The merger agreement contains certain termination rights for each of us and Sprint and further provides for the payment of a termination fee of $1,000 million upon termination of the merger agreement under specified circumstances involving an alternative transaction.

      Our business strategy is to provide differentiated products and services in order to acquire and retain the most valuable customers in the wireless telecommunications industry. Our services include:

      We offer a variety of handsets that support all of our services and that are designed to meet the particular needs of various target customer groups. We believe that we also differentiate ourselves from our competition by focusing on the quality of our customer care, in large part through our customer Touch Point strategy designed to improve our customer relationship by focusing on eliminating situations that create customer dissatisfaction at each point where we interact with, or “touch”, our customers.

      We believe that the wireless communications industry has been and will continue to be highly competitive on the basis of price, the types of services offered and quality of service. Consolidation within the industry involving other carriers has created and may continue to create large, well-capitalized competitors, many of which are affiliated with incumbent local exchange carriers, including the former Regional Bell Operating Companies, that offer bundled telecommunications services that include local, long distance and data services, with substantial financial and other resources, thereby increasing the level of competition. Although competitive pricing is often an important factor in potential customers’ purchase decisions, we believe that our targeted customer base of business users, government agencies and individuals who utilize premium mobile communications features and services are also likely to base their purchase decisions on quality of service and the availability of differentiated features and services, like our Direct Connect walkie-talkie features, that make it easier for them to get things done quickly and efficiently. A number of our competitors have launched or announced plans to launch services that are designed to compete with our Direct Connect services. Although we do not believe that the current versions of these services compare favorably with our service in terms of latency, quality, reliability or ease of use, in the event that our competitors are able to provide walkie-talkie service comparable to ours, one of our key competitive

advantages would be reduced. Consequently, in an effort to continue to provide differentiated products and services that are attractive to this targeted customer base, and to enhance the quality of our service:

      We continually seek the appropriate balance between our cost to acquire a new customer and the lifetime value for that customer. We focus our marketing efforts principally on identifying and targeting high-value customers that recognize the value of our unique service offerings, and focus our advertising efforts on communicating the benefits of our services to those targeted groups. We are the title sponsor of the NASCAR NEXTEL Cup Series^tm, the premier national championship series of the National Association for Stock Car Auto Racing, or NASCAR®, and one of the most popular sports in the United States. Our marketing and advertising initiatives associated with this 10-year sponsorship provide unique exposure for our products and services to an estimated 75 million loyal NASCAR racing fans throughout the United States, many of whom fall within our targeted customer groups. We continue to build upon our “Nextel. Done.^tm” branding and related advertising initiatives launched in 2003, which focus attention on productivity, speed, and getting things done. We are also exploring other markets and customers that have the potential to support future profitable growth. For example, we offer pre-paid wireless services marketed under our Boost Mobile brand as a means to target the youth and pre-paid calling wireless markets. In 2004, we expanded the distribution of Boost Mobile-branded products and services into a number of additional markets, and are in the process of expanding distribution into nearly all of our remaining markets. In addition, we are currently conducting a request for proposal process with several vendors that is designed to provide us with a better understanding of the technical performance and service capabilities of certain broadband wireless technologies and the related costs and returns that would be expected to be generated if we were to deploy those technologies in a nationwide wireless broadband network. Our consideration of alternative technologies would likely be materially affected by a number of factors, including our need to continue to provide iDEN-based services for our existing customer base and whether the proposed merger with Sprint is completed.

      Our focus on offering innovative and differentiated services requires that we continue to invest in, evaluate and, if appropriate, deploy new services and enhancements to our existing services as well as, in some cases, to acquire spectrum licenses to deploy these services. If we were to determine that any of these services, enhancements or spectrum licenses will not provide sufficient returns to support continued investment of financial or other resources, we would have to write-off the assets associated with them. We have expended, and will continue to expend, significant amounts of capital resources on the development and evaluation of these services and enhancements. In addition, we have acquired, and will continue to acquire,

licenses for spectrum that we may use to deploy some of these new services and enhancements. For instance, in the second quarter 2004, we completed the purchase of spectrum licenses from WorldCom, Inc. and Nucentrix Broadband Networks, Inc. that we may use in connection with the deployment of broadband or other wireless services, for a total purchase price of $195 million.

      Because the wireless communications industry continues to be highly competitive, particularly with regard to customer pricing plans, we are continually seeking new ways to create or improve capital and operating efficiencies in our business in order to maintain our operating margins. In 2004, we continued to expand our customer convenient, and cost-efficient, distribution channels by opening additional retail stores. We owned and operated 777 Nextel stores as of December 31, 2004.

      We continually seek to cost-efficiently optimize the performance of our nationwide network. As described in more detail in Part I, “Item 1. Business — E. Our Network and Technology — 3. Our technology plans”, we have implemented modifications to our handsets and network infrastructure software necessary to support deployment of the 6:1 voice coder that is designed to more efficiently utilize radio spectrum and, thereby, significantly increase the capacity of our network. We will realize the benefits of this upgrade as handsets that operate using the 6:1 voice coder for wireless interconnection are introduced into our customer base and the related network infrastructure software is activated. In the third quarter 2004, we began selling new handset models that operate in both the 6:1 and current 3:1 modes. Handsets that operate in both modes now make up nearly all of the handsets that we sell. We have activated 6:1 voice coder network software in all of our markets. We rely on Motorola to provide us with handsets and the infrastructure and software enhancements discussed above and others that are designed to improve the capacity and quality of our network. Motorola is and is expected to continue to be our sole source supplier of iDEN infrastructure and all of our handsets except the BlackBerry devices, which are manufactured by Research In Motion. See “— Forward-Looking Statements.”

      We also continue to focus on reducing our financing expenses by taking steps to reduce both the amount of our overall debt and our borrowing costs while extending our debt maturities and maintaining or increasing our overall liquidity. The first quarter 2004 was the first full quarter in which we realized the benefit of our 2003 long-term debt and preferred stock retirement and financing activities, which consisted of retirements of an aggregate of $7,755 million in principal amount of long-term debt and preferred stock and issuances of $4,700 million in principal amount of long-term debt with lower interest rates and longer maturities. During 2004, we retired or repaid an aggregate of $2,972 million in principal amount of long-term debt, exercised the early buyout option on a $165 million capital lease obligation and issued $1,500 million in aggregate principal amount of long-term debt with lower interest rates and longer maturities than the debt we retired. In addition, during 2004, we issued $1,647 million in aggregate principal amount of our 5.95%, 6.875% and 7.375% senior notes in exchange for $1,513 million in aggregate principal amount of our 9.375% and 9.5% senior notes, which had the effect of reducing our borrowing costs and extending maturities. We may, from time to time, as we deem appropriate, enter into additional refinancing and similar transactions, including exchanges of our common stock or other securities for our debt and other long-term obligations, and redemption, repurchase or retirement transactions involving our outstanding debt and equity securities, that in the aggregate may be material.

      As part of an ongoing Federal Communications Commission, or FCC, proceeding to eliminate interference with public safety operators in the 800 megahertz, or MHz, band discussed in more detail in Item 1. “Business — K. Regulation — 2. 800 MHz band spectrum reconfiguration”, in August 2004, the FCC released a Report and Order, as supplemented by an errata and by a Supplemental Order released on December 22, 2004, which together we refer to as the Report and Order, which provides for the exchange of a portion of our FCC licenses of spectrum, which the FCC is effecting through modifications to these licenses. Related rules would be implemented in order to realign spectrum in the 800 MHz band to resolve the problem of interference with public safety systems operating in that band. The Report and Order calls for a band reconfiguration plan similar to the joint proposals submitted by the leading public safety associations and us during the course of the proceeding. In February 2005, we accepted the Report and Order and the related rights, obligations and responsibilities, which obligate us to surrender all of our holdings in the 700 MHz spectrum band and certain portions of our holdings in the 800 MHz spectrum band, and to fund the cost to

public safety systems and other incumbent licensees to reconfigure the 800 MHz spectrum band through a 36-month phased transition process. Under the Report and Order, we received licenses for 10 MHz of nationwide spectrum in the 1.9 gigahertz, or GHz, band, but we are required to relocate and reimburse incumbent licensees in the 1.9 GHz band to another band designated by the FCC.

      The Report and Order requires us to make a payment to the United States Department of the Treasury at the conclusion of the band reconfiguration process to the extent that the value of the 1.9 GHz spectrum we received exceeds the total of the value of licenses for spectrum positions in the 700 MHz and 800 MHz bands that we surrendered under the decision, plus the actual costs that we will incur to retune incumbents and our own facilities under the Report and Order. The FCC determined under the Report and Order that for purposes of calculating that payment amount, the value of this 1.9 GHz spectrum is about $4,860 million and the aggregate value of this 700 MHz spectrum and the 800 MHz spectrum surrendered, net of 800 MHz spectrum received as part of the exchange, is about $2,059 million, which, because of the potential payment to the U.S. Treasury, results in minimum cash expenditures of $2,801 million by us under the Report and Order. We may incur certain costs as part of the reconfiguration process for which we will not receive credit against the potential payment to the U.S. Treasury. In addition, under the Report and Order, we are obligated to pay the full amount of the costs relating to the reconfiguration plan, even if those costs exceed $2,801 million.

      Pursuant to the terms of the Report and Order, to ensure that the band reconfiguration process will be completed, we are required to establish a letter of credit in the amount of $2,500 million to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. We obtained the letter of credit using borrowing capacity under our existing revolving credit facility. See “— K. Regulation — 2. 800 MHz band spectrum reconfiguration.”

      In July 2004, we discovered a latent software design defect that impaired capabilities related to both assisted global positioning system, or A-GPS, location and certain enhanced 911, or E911, services of a number of recently introduced handsets manufactured by Motorola that incorporate the A-GPS technology. Emergency 911 calls from these handsets generally continued to meet current E911 FCC requirements, and the handsets were and continue to be fully operational with regard to all other services, including cellular phone, Direct Connect walkie-talkie, and wireless data services. Motorola, as the manufacturer of the handsets, has taken and continues to take all appropriate actions in response to this issue. Motorola has indicated in discussions with our senior management that it is assuming responsibility for, and will reimburse our costs to remedy, the A-GPS software issue and to date, Motorola has been reimbursing us for those costs. Consequently, the effect of this matter on our results of operations for the year ended, or our financial condition as of, December 31, 2004 was not material, and we do not expect it to materially impact our results of operations or financial condition in future periods.

      We have described the impact of the software design defect in our periodic reports to the FCC that have summarized our progress to date with regard to meeting the FCC’s E911 requirements. Based on our assessment of the impact of the design defect and our estimates regarding the rate at which our customer base is expected to transition to handsets equipped with A-GPS technology, we have notified the FCC that we may be unable to satisfy by December 31, 2005 the requirement that 95% of our total subscriber base use handsets that enable us to transmit location information that meets the Phase II requirements of the E911 regulations, and that the A-GPS software design defect has exacerbated the situation.

      Our ability to meet the Phase II requirements on the schedule currently contemplated by the E911 regulations and the costs we may incur in an effort to accelerate our customers’ transition to A-GPS capable handsets to meet these requirements could be significant, and will be dependent on a number of factors, including the number of new subscribers added to our network who purchase A-GPS capable handsets, the number of existing subscribers who upgrade from non-A-GPS capable handsets to A-GPS capable handsets, the rate of our customer churn and the cost of A-GPS capable handsets.

      We consider the following accounting policies and estimates to be the most important to our financial position and results of operations, either because of the significance of the financial statement item or because they require the exercise of significant judgment and/or use of significant estimates. While we believe that the estimates we use are reasonable, actual results could differ from those estimates.

      Revenue Recognition. Operating revenues primarily consist of wireless service revenues and revenues generated from handset and accessory sales. Service revenues primarily include fixed monthly access charges for mobile telephone, Nextel Direct Connect and other wireless services, variable charges for mobile telephone and Nextel Direct Connect usage in excess of plan minutes, long-distance charges derived from calls placed by our customers and activation fees. We recognize revenue for access charges and other services charged at fixed amounts ratably over the service period, net of credits and adjustments for service discounts, billing disputes and fraud or unauthorized usage. We recognize excess usage and long distance revenue at contractual rates per minute as minutes are used. As a result of the cutoff times of our multiple billing cycles each month, we are required to estimate the amount of subscriber revenues earned but not billed from the end of each billing cycle to the end of each reporting period. These estimates are based primarily on rate plans in effect and historical minutes and represented less than 10% of our accounts receivable balance as of December 31, 2004. Our estimates have been consistent with our actual results.

      Cost of Handsets. Under our handset supply agreement with Motorola accounted for under the provisions of EITF 02-16, we receive various discounts based on purchases of specified numbers and models of handsets and specified expenditures for the purchase of handsets. In addition, we have made purchase advances to Motorola that are recoverable based on future purchases of certain handset models. If we do not achieve specified minimum purchases, a portion of the advances may not be recovered. Historically, we have successfully recovered all purchase advances made to Motorola. Each month, we estimate future handset purchases and related discounts. To the extent that such estimates change period to period, adjustments would be made to our estimates of discounts earned and could impact our cost of handset revenues. The amount of these discounts recorded for the year ended December 31, 2004 approximated less than 5% of our cost of handset and accessory revenues recorded for the year.

      Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts receivable sufficient to cover probable and reasonably estimable losses. Because we have over seven million accounts, it is not practical to review the collectibility of each account individually when we determine the amount of our allowance for doubtful accounts receivable each period. Therefore, we consider a number of factors in establishing the allowance for our portfolio of customers, including historical collection experience, current economic trends, estimates of forecasted write-offs, agings of the accounts receivable portfolio and other factors. When collection efforts on individual accounts have been exhausted, the account is written off by reducing the allowance for doubtful accounts. Our allowance for doubtful accounts was $64 million as of December 31, 2004. Since 2003, we have experienced increased collections, an improvement in our accounts receivable aging, and a reduction in write-offs. As a result, our allowance for doubtful accounts as of December 31, 2004 was lower than it was at December 31, 2003. Write-offs in the future could be impacted by general economic and business conditions that are difficult to predict.

      Valuation and Recoverability of Long-lived Assets. Long-lived assets such as property, plant, and equipment represented $9,613 million of our $22,744 million in total assets as of December 31, 2004. We calculate depreciation on these assets using the straight-line method based on estimated economic useful lives as follows:

      The substantial majority of our property, plant, and equipment is comprised of iDEN network equipment and software. Our iDEN nationwide network is highly complex and, due to constant innovation and enhancements, some network assets may lose their utility more rapidly than initially anticipated. We periodically review the estimated useful lives and salvage values of these assets and make adjustments to our estimates after considering historical experience and capacity requirements, consulting with our vendors, and assessing new product and market demands. While the remaining useful lives for iDEN network equipment and software represent our best estimate at this time, at some point in the future we may migrate to a next generation technology, which could impact the remaining economic lives of our iDEN network equipment and software. Further, our acceptance of the Report and Order will require us to assess the lives of certain network components, including assets that are frequency dependent and that may no longer operate in bands of spectrum in which we will begin to operate as we reconfigure the 800 MHz band. These factors, among others, could increase depreciation expense in future periods if we determine to shorten the lives of these assets. A reduction or increase of 3 months in the weighted average depreciable lives of all our depreciable assets would impact recorded depreciation expense by approximately $80 million per year.

      As of December 31, 2004, we had $956 million of costs associated with construction in progress activities and communication assets in warehouses not yet deployed into our network. About 23% of this amount represents costs for activities incurred in connection with the early phase of cell site construction. Such activities include, among others, engineering studies, design layout and zoning. Because we need to be able to respond quickly to business needs, we incur these costs well in advance of when the cell site asset is placed into service. Our current plan is to use all of these cell sites for expansion and quality improvements, future capacity demands and other strategic reasons; however, to the extent there are changes in economic conditions, technology or the regulatory environment, our plans could change and some of these assets could be abandoned and written off.

      We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of our assets, a loss, if any, is recognized for the difference between the fair value and carrying value of the assets. Impairment analyses, when performed, are based on our current business and technology strategy, our views of growth rates for our business, anticipated future economic and regulatory conditions and expected technological availability. For purposes of recognition and measurement of impairment losses, we group our domestic long-lived assets with other assets and liabilities at the domestic enterprise level, which for us is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We did not perform an impairment analysis for our domestic long-lived assets in any of the periods presented as there were no indicators of impairment; however, we may have to perform such analyses in the future to the extent there are changes in our industry, economic conditions, technology or the regulatory environment.

      Valuation and Recoverability of Intangible Assets. Intangible assets with indefinite useful lives represented $7,168 million of our $22,744 million in total assets as of December 31, 2004. Intangible assets with indefinite useful lives primarily consist of our FCC licenses. We performed our annual impairment test of FCC licenses as of October 1, 2004 and concluded that there was no impairment as the fair values of these intangible assets were greater than their carrying values. Using a residual value approach, we measured the fair value of our 800 and 900 MHz licenses in our national footprint by deducting the fair values of our net assets as well as the fair values of certain unrecorded identified intangible assets, other than these FCC licenses, from our reporting unit’s, that is, our company’s fair value, which was determined using a discounted cash flow analysis. The analysis was based on our long-term cash flow projections, discounted at our corporate weighted average cost of capital. The residual value approach yielded a value substantially in excess of the recorded balance of our 800 and 900 MHz licenses as of December 31, 2004. Under new accounting guidance announced by the Securities and Exchange Commission, or SEC, staff at the September 2004 EITF meeting, we must perform an impairment test to measure the fair value of our 800 and 900 MHz licenses in the first quarter 2005 using the direct value method. As we have not yet completed an impairment test using the direct value method, we are unable to assess the impact on our financial statements of adopting

this requirement. We will reflect an impairment charge, if any, resulting from the change to a direct value method as a cumulative effect of a change in accounting principle in our first quarter 2005 results.

      We have invested about $350 million in 700 MHz licenses that are currently not used in our network. The FCC, as part of its resolution of the problem of interference with public safety systems operating in the 800 MHz band, gave us minimal credit for our 700 MHz licenses against our total obligation under the Report and Order. In the third quarter, we performed a direct method valuation of our 700 MHz licenses and determined that the 700 MHz licenses were not impaired. See “— Management’s Summary.”

      Recoverability of Capitalized Software. As of December 31, 2004, we had $93 million in net unamortized costs for software accounted for under SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” Our current plans indicate that we will recover the value of the assets; however, to the extent there are changes in economic conditions, technology or the regulatory environment, or demand for the software, our plans could change and some or all of these assets could become impaired.

      Income Tax Valuation Allowance. We maintain a valuation allowance that includes reserves against certain of our deferred tax asset amounts in instances where we determine that it is more likely than not that a tax benefit will not be realized. Our valuation allowance has historically included reserves primarily for the tax benefit of net operating loss carryforwards, as well as for capital loss carryforwards, separate return net operating loss carryforwards and the tax benefit of stock option deductions relating to employee compensation. Prior to June 30, 2004, we had recorded a full reserve against the tax benefits relating to our net operating loss carryforwards because, at that time, we did not have a sufficient history of taxable income to conclude that it was more likely than not that we would be able to realize the tax benefits of the net operating loss carryforwards. Accordingly, we recorded in our income statement only a small provision for income taxes, as our net operating loss carryforwards resulting from losses generated in prior years offset virtually all of the taxes that we would have otherwise incurred.

      Based on our cumulative operating results and an assessment of our expected future operations, we concluded that it was more likely than not that we would be able to realize the tax benefits of our net operating loss carryforwards. Therefore in 2004, we decreased the valuation allowance attributable to our net operating loss carryforwards by $901 million as a credit to tax expense. Additionally, we decreased the valuation allowance attributable to the tax benefit of stock option deductions related to employee compensation and credited paid-in capital by $389 million.

      In 2004, we also determined that it was more likely than not that we would utilize a portion of our capital loss carryforwards before their expiration. Accordingly, we decreased the valuation allowance primarily attributable to capital loss carryforwards by about $212 million as a credit to tax expense. Significant changes in our assessment of the future realization of our deferred tax assets would require us to reconsider the need for a valuation allowance associated with the deferred tax assets in amounts that could be material. The valuation allowance balance as of December 31, 2004 of $658 million is comprised primarily of the tax effect of capital losses incurred in prior years for which an allowance is still required.

      Income tax expense varies from federal statutory rates primarily because of state taxes and the release of the valuation allowance in 2004.

      SFAS No. 123R. In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123R (revised 2004), “Share-Based Payment.” The statement is a revision of FASB Statement No. 123, “Accounting for Stock Based Compensation” and supercedes Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees.” The statement focuses primarily on accounting for transactions in which we obtain employee services in share-based payment transactions. This statement requires a public company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This standard is scheduled to become effective in the first interim reporting period beginning after June 15, 2005. Assuming that the

effective date is not delayed, we will apply this new standard to our interim reporting period beginning July 1, 2005. We have not yet determined the amount of impact on the consolidated statements of operations following adoption and subsequent to 2005 or the transition method we will use.

      Operating revenues primarily consist of wireless service revenues and revenues generated from handset and accessory sales. Service revenues primarily include fixed monthly access charges for mobile telephone, Nextel Direct Connect and other wireless services, variable charges for mobile telephone and Nextel Direct Connect usage in excess of plan minutes, long-distance charges derived from calls placed by our customers and activation fees. We recognize revenue for access charges and other services charged at fixed amounts ratably over the service period, net of credits and adjustments for service discounts, billing disputes and fraud or unauthorized usage. We recognize excess usage and long distance revenue at contractual rates per minute as minutes are used.

      We recognize revenues from handset sales when title to the handset passes to the customer pursuant to EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” However, prior to July 1, 2003, in accordance with SAB No. 101, “Revenue Recognition in Financial Statements,” we recognized revenue from handset sales on a straight-line basis over the expected customer relationship period, beginning when title to the handset passed to the customer. Therefore, handset revenues, prior to July 1, 2003, largely reflected the recognition of handset sales that occurred and were deferred in prior periods. We recognize revenue from accessory sales when title to the accessory passes to the customer.

      Cost of providing wireless service consists primarily of:

      Cost of handset and accessory revenues consists primarily of the cost of the handsets and accessories sold, order fulfillment related expenses and write-downs of handset and related accessory inventory for shrinkage. Consistent with the related handset revenue recognition policy described above, we recognize the cost of handset revenues, including the handset costs in excess of the revenues generated from handset sales, when title to the handset passes to the customer, pursuant to EITF Issue No. 00-21. Prior to July 1, 2003, in accordance with SAB No. 101, we recognized cost of handset revenues, in amounts equivalent to revenues recognized from handset sales, on a straight-line basis over the expected customer relationship period and handset costs in excess of the revenues generated from handset sales, or subsidies, were expensed at the time of sale. We recognize cost of accessory revenues, other than costs related to write-downs of handset and related accessory inventory for shrinkage, when title to the accessory passes to the customer.

      Selling and marketing costs primarily consist of customer acquisition costs, including commissions earned by our indirect dealers, distributors and our direct sales force for new handset activations, residual payments to our indirect dealers, payroll and facilities costs associated with our direct sales force, Nextel stores and marketing employees, telemarketing, advertising, media programs and sponsorships, including costs related to branding.

      General and administrative costs primarily consist of fees paid for billing, customer care and information technology operations, bad debt expense and back office support activities, including customer retention, collections, legal, finance, human resources, strategic planning and technology and product development, along with the related payroll and facilities costs. Also included in general and administrative costs are research and development costs associated with certain wireless broadband initiatives.

      An additional measurement we use to manage our business is the rate of customer churn, which is an indicator of customer retention and represents the monthly percentage of the customer base that disconnects from service. The churn rate consists of both involuntary churn and voluntary churn. Involuntary churn occurs when we have taken action to disconnect the handset from service, usually due to lack of payment. Voluntary churn occurs when a customer elects to disconnect service. Customer churn is calculated by dividing the number of handsets disconnected from commercial service during the period by the average number of handsets in commercial service during the period. We focus our efforts on retaining customers, and keeping our churn rate low, because the cost to acquire new customers generally is higher than the cost to retain existing customers.

      Our average monthly customer churn rate, excluding handsets sold under our Boost Mobile brand, was about 1.6% during 2004 and 2003. We believe that the relative stability in our churn rate is attributable to our ongoing focus on customer retention efforts through our Touch Point strategy, acquiring high quality subscribers, including add-on subscribers from existing customer accounts, and the attractiveness of our differentiated products and services. These customer retention initiatives include such programs as strategic care provided to customers with certain attributes and efforts to migrate customers to more optimal service pricing plans, as well as targeted handset upgrade programs. Our churn also reflects the strength of our credit policies and procedures and the ongoing optimization of our integrated billing, customer care and collections system, which allow us to better manage our customer relationships.

      If general economic conditions worsen, if our products or services are not well received by prospective or existing customers or if competitive conditions in the wireless telecommunications industry intensify, including, for example, the introduction of competitive services, demand for our products and services may decline, which could adversely affect our ability to attract and retain customers and our results of operations. See “— Forward-Looking Statements.”

      Service revenues. Service revenues increased 21% from 2003 to 2004. This increase was primarily attributable to the increase in the number of handsets in service.

      The number of handsets in service, including Boost Mobile-branded handsets in service, increased 22% from December 31, 2003 to December 31, 2004. We believe that the growth in the number of handsets in service is the result of a number of factors, principally:

      Cost of service. Cost of service increased 15% from 2003 to 2004, primarily due to increased minutes of use resulting from the combined effect of the increase in handsets in service and an increase in the average monthly minutes of use per handset. Specifically, we experienced:

      Costs related to the operation and maintenance of our network and fixed interconnection fees increased primarily due to:

      The increase in costs to operate our handset service and repair program was primarily due to the result of growth in the subscriber base, partially offset by the reduction in the cost of replacement handsets used in the service and repair program during 2004.

      The decrease in variable interconnection fees was principally due to a lower cost per minute of use, partially offset by an increase in total system minutes of use. Our lower variable interconnection cost per minute of use was primarily the result of rate savings achieved through efforts to move long distance traffic to lower cost carriers in addition to renegotiated lower rates with existing vendors. Total system minutes of use increased 29% from 2003 to 2004, principally due to an increase in the number of handsets in service as well as an increase in the average monthly minutes of use per handset between the periods.

      We expect the aggregate amount of cost of service to increase as customer usage of our network increases and as we add more sites and other equipment to expand the coverage and capacity of our network. See “— Forward-Looking Statements “— C. Liquidity and Capital Resources” and “— D. Future Capital Needs and Resources — Capital Needs — Capital Expenditures.”

      Service gross margin. Service gross margin, exclusive of depreciation expense, as a percentage of service revenues increased from 83% for 2003 to 84% for 2004 primarily due to the combination of increased service revenues from subscriber growth and achievement of economies of scale, such as our interconnection fee rate savings.

      During 2004, we recorded $1,443 million of handset and accessory revenues, an increase of $515 million over 2003. During 2004, we recorded $2,077 million of cost of handset and accessory revenues, an increase of $582 million over 2003. These results are summarized in the table below.

      Handset and accessory revenues. The number of handsets sold and the sales prices of the handsets sold influence handset and accessory revenues. Current period handset and accessory sales increased $345 million or 31% for 2004 compared to 2003, excluding the impact of SAB No. 101. This increase reflects an increase of about 44% in the number of handsets sold and, to a lesser extent, an increase in revenues from accessory sales due to the larger subscriber base, partially offset by about a 9% decrease in the average sales price of the handsets. Additional information regarding SAB No. 101 and our adoption of EITF Issue No. 00-21 can be found in note 1 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Cost of handset and accessory revenues. The number of handsets sold and the cost of the handsets sold influence cost of handset and accessory revenues. Current period cost of handset and accessory sales increased $412 million or 25% for 2004 compared to 2003, excluding the impact of SAB No. 101. This increase reflects an increase of about 44% in the number of handsets sold, partially offset by about a 13% decrease in the average cost of handsets.

      Handset and accessory net subsidy. The handset and accessory net subsidy primarily consists of handset subsidies, as we generally sell our handsets at prices below cost in response to competition, to attract new customers and as retention inducements for existing customers, and gross margin on accessory sales, which are generally higher margin products.

      Handset and accessory net subsidy as a percentage of handset and accessory revenues improved from 52% for 2003 to 44% for 2004 even as the number of handsets sold increased about 44%. This improvement was due to a decrease in the average subsidy per handset of about 20% and an increase in the gross margin on accessory sales.

      We expect to continue the industry practice of selling handsets at prices below cost. Our retention efforts may cause our handset subsidies to increase as our customer base continues to grow. In addition, we may

increase handset subsidies in response to the competitive environment. See “— Forward-Looking Statements.”

      Selling and marketing. The increase in selling and marketing expenses reflects:

      General and administrative. The increase in general and administrative expenses reflects:

      Our selling, general and administrative expenses as a percentage of operating revenues remained flat from 2003 to 2004.

      We expect the aggregate amount of selling, general and administrative expenses to continue increasing in absolute terms in the future as a result of a number of factors, including but not limited to:

      Depreciation expense increased $164 million from 2003 to 2004. Depreciation increased as a result of a 13% increase in transmitter and receiver sites in service, as well as costs to modify existing switches and transmitter and receiver sites in existing markets primarily to enhance the capacity of our network. We periodically review the estimated useful lives of our property, plant and equipment assets as circumstances warrant. Events that would likely cause us to review the useful lives of our property, plant and equipment assets include decisions made by regulatory agencies and our decisions surrounding strategic or technology matters. It is possible that depreciation expense may increase in future periods as a result of one or a combination of these decisions. Variances in depreciation expense recorded between periods can also be impacted by several factors, including the effect of fully depreciated assets, the timing between when capital assets are purchased and when they are deployed into service, which is when depreciation commences, company-wide decisions surrounding levels of capital spending and the level of spending on non-network assets that generally have much shorter depreciable lives as compared to network assets.

      Amortization expense decreased $17 million from 2003 to 2004 related to intangible assets, primarily customer lists, which became fully amortized in 2004.

NM — Not Meaningful

      Interest Expense. The $250 million decrease in interest expense from 2003 to 2004 primarily relates to:

      From the beginning of 2003 through December 31, 2004, we purchased and retired or redeemed $6,908 million in aggregate principal amount at maturity of our senior notes. During that period, we issued an additional $4,647 million in aggregate principal amount of new senior notes with lower interest rates and longer maturity periods than the retired senior notes, resulting in a net reduction of $2,261 million in the aggregate principal amount of our senior notes. In December 2003, we reduced the principal amount of outstanding term loans under our credit facility by $574 million by repaying $2,774 million of term loans under that facility with cash on hand and the proceeds from the syndication of a new $2,200 million term loan under that facility that matures in December 2010. During the third quarter 2004, we also amended our bank credit facility to create a new $4,000 million revolving credit facility and concurrently borrowed $1,000 million of this new facility and used $476 million of cash on hand to repay the entire outstanding balance of one of our then-existing term loans in the amount of $1,360 million and our then-outstanding revolving loan in the amount of $116 million. The other term loan that was outstanding under the credit facility at the time of the amendment remained outstanding, with a balance of $2,178 million as of December 31, 2004. We expect our interest expense to decrease in 2005 as we continue to realize the benefit of the debt retirements and exchanges in 2003 as well as the full year benefits of transactions consummated in 2004. See “— Forward-Looking Statements.”

      Interest Income. The $13 million decrease in interest income is due to the redemption of our Nextel Partners’ preferred stock during the fourth quarter 2003, the redemption of our NII Holdings’ senior notes in the first quarter 2004, and a decrease in the average investment balance during 2004 as compared to 2003.

      Loss on Retirement of Debt and Mandatorily Redeemable Preferred Stock. For 2004, we recognized a loss of $117 million on the retirement of some of our senior notes, convertible senior notes and a portion of our bank credit facility, representing the redemption premium paid and the write-off of the respective unamortized debt financing costs. For 2003, we recognized a loss of $252 million on the retirement of some of our senior notes and preferred stock, representing the redemption premium paid and the write-off of the unamortized debt financing costs.

      Equity in Earnings (Losses) of Unconsolidated Affiliates. The $15 million in equity in earnings of unconsolidated affiliates for 2004 was primarily due to earnings attributable to our equity method investment in Nextel Partners. The $58 million in equity in losses of unconsolidated affiliates for 2003, was primarily due to losses attributable to our equity method investment in Nextel Partners of $71 million through June 2003 partially offset by our equity in earnings of NII Holdings of $13 million during the portion of 2003 that we accounted for NII Holdings using the equity method of accounting.

      In the second quarter 2003, our investments in Nextel Partners’ common stock and 12% nonvoting mandatorily redeemable preferred stock were written down to zero through the application of the equity method of accounting. During the third quarter 2004, Nextel Partners began reporting net income, thereby allowing us to recover our unrecorded losses and begin recognizing equity in earnings on our investment.

      During the fourth quarter 2003, we sold shares of NII Holdings’ common stock, thereby decreasing our ownership percentage such that we no longer exercise significant influence over the operating and financial policies of NII Holdings. We now account for our interest in NII Holdings as an available-for-sale investment.

      Realized Gain on Investments. In the first quarter 2004, we tendered our NII Holdings’ senior notes in exchange for $77 million, resulting in a $28 million gain.

      In November 2003, we sold 3.0 million shares of NII Holdings common stock, which generated $209 million in net proceeds and a gain of $184 million. In November 2003, Nextel Partners redeemed its 12% nonvoting mandatorily redeemable preferred stock that we held for $39 million. Because we had written down our investment in Nextel Partners to zero during the second quarter 2003 through the application of the equity method of accounting, we recorded a gain equal to the entire $39 million of net proceeds received in connection with this redemption.

      Income tax provision. The decrease in the income tax provision of $468 million from 2003 to 2004 is primarily attributable to the release of a portion of our tax valuation allowance and an increase in the income tax provision subsequent to the tax valuation allowance release. We provided a full tax valuation allowance against our net operating and capital loss carryforwards as of December 31, 2003. This reserve was established because, at the time, we did not have a sufficient history of taxable income to conclude that it was more likely than not that the net operating losses would be realized. In 2004 we concluded that it was more likely than not that we would realize the tax benefit of our net operating loss carryforwards and a portion of our capital loss carry-forwards. Therefore, in the second quarter 2004, we decreased the tax valuation allowance by $1,113 million through a credit to income tax expense. To the extent that we continue to have taxable income in future periods, we would expect to realize at least a portion of the benefits of our remaining net operating loss carryforwards. We recorded a full tax provision at an estimated effective rate of approximately 39% for the second half of 2004.

      Service revenues. Service revenues increased 21% from 2002 to 2003. This increase was attributable to the increase in the number of handsets in service (volume), partially offset by the decline in the average monthly revenue per handset in service (rate) in 2003.

      From a volume perspective, our service revenues increased principally as a result of a 21% increase in handsets in service at the end of 2003 compared to 2002. We believe that the growth in the number of handsets in service is the result of a number of factors, principally:

      From a rate perspective, our average monthly service revenue per handset decreased slightly from 2002 to 2003. We attribute the slight decrease in average monthly service revenue per handset to the introduction of more competitive pricing plans in the latter half of 2002, partially offset by:

      Cost of service. Cost of service increased 13% from 2002 to 2003, primarily due to increased minutes of use resulting from the combined effect of the increase in handsets in service and an increase in the average monthly minutes of use per handset. Specifically, we experienced:

      Costs related to the operation and maintenance of our network and fixed interconnection fees increased $216 million primarily due to:

      These increased costs were partially offset by $58 million of cost benefits consisting of:

      The increase in variable interconnection fees in 2003 was principally due to an increase in total system minutes of use, partially offset by a lower cost per minute of use. Total system minutes of use increased 37% from 2002 to 2003, principally due to a 21% increase in the number of handsets in service, as well as a 13%

increase in the average monthly billable minutes of use per handset over the same period. Our lower variable interconnection cost per minute of use was primarily the result of rate savings achieved through efforts implemented beginning in the second quarter 2002 to move long distance traffic to lower cost carriers.

      Service gross margin. Service gross margin, exclusive of depreciation expense, as a percentage of service revenues increased from 82% for 2002 to 83% for 2003. Our service gross margin percentage improved primarily due to the combination of increased service revenues due to subscriber growth and achievement of economies of scale, such as our interconnection fee rate savings and network operating efficiencies.

      During 2003, we recorded $928 million of handset and accessory revenues, an increase of $393 million over 2002. During 2003, we recorded $1,495 million of cost of handset and accessory revenues, an increase of $448 million over 2002. These results are summarized in the table below.

      Handset and accessory revenues. Reported handset and accessory revenues are influenced by the number of handsets sold, the sales prices of the handsets sold and the effects of SAB No. 101 and EITF Issue No. 00-21. Prior to July 1, 2003, in accordance with SAB No. 101, we recognized revenue from handset sales on a straight-line basis over the expected customer relationship period of 3.5 years, rather than when title to the handset passed to the customer. Therefore, the effect of SAB No. 101 in the table above is the net effect of current period sales being deferred to future periods, offset by the benefit of handset sales deferred in previous periods that are being recognized as revenue. With the adoption of EITF Issue No. 00-21, effective July 1, 2003, we recognize revenues from handset sales when title to the handset passes to the customer. Therefore, the adoption of EITF Issue No. 00-21 resulted in increased handset revenues in 2003 as compared to 2002.

      Current period handset and accessory sales increased $206 million or 23% for 2003 compared to 2002. This increase reflects an increase of about 23% in the number of handsets sold and, to a lesser extent, an increase in revenues from accessory sales due to the larger subscriber base, partially offset by about a 3% decrease in the average sales price of the handsets.

      Cost of handset and accessory revenues. Reported cost of handset and accessory revenues are primarily influenced by the number of handsets sold, the cost of the handsets sold and the effects of SAB No. 101 and EITF Issue No. 00-21. Prior to July 1, 2003, we recognized the cost of handset revenues on a straight-line basis over the expected customer relationship period of 3.5 years in amounts equivalent to the revenues recognized from handset sales. With the adoption of EITF Issue No. 00-21, effective July 1, 2003, we

recognize the cost of handset revenues when title to the handset passes to the customer. Therefore, the adoption of EITF Issue No. 00-21 resulted in increased cost of handset revenues in 2003 as compared to 2002.

      Current period cost of handset and accessory sales increased $261 million or 19% for 2003 compared to 2002. This increase primarily reflects an increase of about 23% in the number of handsets sold, partially offset by about a 4% decrease in the average cost we paid for handsets.

      Handset and accessory net subsidy. The handset and accessory net subsidy consists of handset subsidy as we generally sell our handsets at prices below cost in response to competition, to attract new customers and as retention inducements for existing customers; and gross margin on accessory sales, which are generally higher margin products.

      Handset and accessory net subsidy increased 11% for 2003 compared to 2002. We attribute the increase in handset and accessory net subsidy to:

      Selling and marketing. The increase in selling and marketing expenses from 2002 to 2003 reflects:

      General and administrative. The increase in general and administrative expenses from 2002 to 2003, reflects:

      Depreciation expense increased $102 million from 2002 to 2003. During 2003, we recorded $79 million, or $0.08 per common share, in depreciation expense as a result of shortening the estimated useful lives of some of our network assets in the first quarter 2003. Further, depreciation increased primarily as a result of a 7% increase in transmitter and receiver sites in service and costs to modify existing switches and transmitter and receiver sites in existing markets primarily to enhance the capacity of our network. Variances in depreciation expense recorded between periods can be impacted by several factors, including the effect of fully depreciated assets, the timing between when capital assets are purchased and when they are deployed into service which is when depreciation commences, company-wide decisions surrounding levels of capital spending and the level of spending on non-network assets, which generally have much shorter depreciable lives as compared to network assets.

      Restructuring and impairment charge. In January 2002, we announced outsourcing agreements for our information technology and customer care functions. In connection with these outsourcing agreements, we

recorded a $35 million restructuring and impairment charge in the first quarter 2002, which primarily represented the future lease payments related to facilities we planned to vacate net of estimated sublease income.

      Interest expense. The $204 million decrease in interest expense from 2002 to 2003 relates to:

      Interest expense related to our senior notes decreased in 2003 primarily due to the purchase and retirement of $5,977 million in aggregate principal amount at maturity of our senior notes and convertible senior notes since the beginning of the second quarter 2002. This decrease was partially offset by the interest expense associated with the additional $2,500 million in aggregate principal amount of new senior notes issued during 2003. In December 2003, we reduced the principal amount of outstanding term loans under our credit facility by $574 million by repaying $2,774 million of term loans under that facility with cash on hand and the proceeds from the syndication of a new $2,200 million term loan under that facility that matures in December 2010.

      Interest income. The $16 million decrease in interest income from 2002 to 2003 is due to a decrease in the average cash and short-term investments balances and lower average interest rates during 2003 as compared to 2002.

      (Loss) gain on retirement of debt and mandatorily redeemable preferred stock. For 2003, we recognized a loss of $252 million on the retirement of some of our senior notes, convertible senior notes and preferred stock representing the redemption premium paid and the write-off of the related unamortized debt financing costs. For 2002, we recognized a gain of $839 million on the retirement of some of our senior notes, convertible senior notes and preferred stock representing the excess of the carrying value over the purchase price of the purchased and retired notes and preferred stock and the write-off of the unamortized debt financing costs.

      Equity in losses of unconsolidated affiliates, net. The $58 million in equity in losses of unconsolidated affiliates for 2003 is primarily due to losses attributable to our equity method investment in Nextel Partners of $71 million partially offset by our equity in earnings of NII Holdings of $13 million during the portion of the year that we accounted for NII Holdings using the equity method of accounting. During the second quarter 2003, our investments in Nextel Partners’ common stock and 12% nonvoting mandatorily redeemable preferred stock were written down to zero through the application of the equity method of accounting. During the fourth quarter 2003, we sold 3.0 million shares of NII Holdings common stock, thereby decreasing our ownership percentage to about 18% of the outstanding common stock and now account for our interest as an available-for-sale cost method investment.

      The $309 million equity in losses of unconsolidated affiliates for 2002 includes:

      Realized gain on investments. In November 2003, we sold 3.0 million shares of NII Holdings common stock, which generated $209 million in net proceeds and a gain of $184 million. In November 2003, Nextel Partners redeemed its 12% nonvoting mandatorily redeemable preferred stock that we held for $39 million. Because we had written down our investment in Nextel Partners to zero during the second quarter 2003 through the application of the equity method of accounting, we recorded a gain equal to the entire $39 million of net proceeds received in connection with this redemption.

      Reduction in fair value of investments. The decrease of $35 million in the reduction in fair value of investments from 2002 to 2003 is primarily due to the $37 million charge recognized in June 2002 when we determined the decline in fair value of our investment in SpectraSite to be other-than-temporary.

      Income tax provision. The decrease in the income tax provision of $278 million from 2002 to 2003 is primarily attributable to the adoption of SFAS No. 142 in the first quarter 2002. As a result of this adoption, we incurred a one-time cumulative non-cash charge to the income tax provision of $335 million to increase the valuation allowance related to our net operating losses. This cumulative charge was required since we have significant deferred tax liabilities related to our FCC licenses that have a significantly lower tax basis than book basis. We provided a full reserve against our net operating loss carryforwards as of December 31, 2003. This reserve was established because, as of December 31, 2003, we did not have, at that time, a sufficient history of taxable income to conclude that it was more likely than not that the net operating losses would be realized.

      As of December 31, 2004, we had total liquidity of $4,806 million available to fund our operating, investing and financing activities, including $1,814 million of cash, cash equivalents and short-term investments and $2,992 million in undrawn revolving loan commitments under our credit facility, the availability of which is subject to the terms and conditions of that facility. Our liquidity has increased from December 31, 2003, when we had total liquidity of $3,168 million comprised of $1,971 million of cash, cash equivalents and short-term investments and $1,197 million available under the revolving loan commitment of our bank credit facility, primarily as a result of our increased borrowing capacity under our amended bank credit facility. In February 2005, we accepted the terms of the Report and Order, which requires us to establish a letter of credit in the amount of $2,500 million to provide assurance that funds will be available to pay the relocation costs of the incumbent users of the 800 MHz spectrum. The issuance of that letter of credit under our credit facility reduces the available revolving loan commitments by an amount equal to the letter of credit.

      As of December 31, 2004, we had working capital of $2,598 million compared to $871 million as of December 31, 2003. In addition to cash, cash equivalents and short-term investments, a significant portion of our working capital consists of accounts receivable, handset inventory, prepaid expenses, deferred tax assets and other current assets, net of accounts payable, accrued expenses and the current portion of long-term debt and capital lease obligation. Our deferred tax assets increased $882 million due to the release of our net operating loss valuation allowance, and a portion of the capital loss carryforward valuation allowance. Accounts receivable increased $176 million or 14% primarily due to the increase in the subscriber base since December 31, 2003. The $457 million increase in prepaid expenses and other current assets is primarily the result of the reclassification of a portion of our investment in NII Holdings from an investment to a current asset, and prepayments made to Motorola for the future purchase of handsets, network infrastructure or other services. The current portion of long-term debt and capital lease obligations decreased $465 million due to the repayment of our term loan and the early buy out of our remaining capital lease. Accounts payable and accrued expenses, including amounts due to related parties, increased $257 million due to the timing of payments and increased levels of handset purchases as described above.

      During 2004, we raised $494 million from the issuance of our 5.95% senior notes due 2014. We also amended our bank credit facility to provide for a new $4,000 million revolving credit facility that replaced our then-existing revolving credit facility and one of our then-existing term loans. We immediately borrowed $1,000 million of this new facility and used $476 million of cash on hand to repay the entire outstanding balance of one of our then-existing term loans in the amount of $1,360 million and our outstanding revolving loan in the amount of $116 million. In addition, we used $1,762 million of cash to reduce our long-term debt and capital lease obligations by a total of $1,661 million, retiring $1,346 million of our senior notes, exercising the early buyout option on a $165 million capital lease obligation and paying $150 million of scheduled maturities on our bank credit facility that were payable prior to the amendment of that facility.

      For 2004, total cash provided by operating activities exceeded cash flows used in investing activities by $2,342 million as compared to $1,251 million for the same period in 2003. Prior to 2003, we had used external sources of funds, primarily from issuances of debt and equity securities, to fund capital expenditures, acquisitions and other nonoperating needs.