UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 1-16567

AT&T WIRELESS SERVICES, INC.

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

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

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

Yes [X]     No [  ]

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

Yes [X]     No [  ]

As of April 30, 2004, 2,727,361,012 shares of the registrant’s Common Stock were outstanding.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

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

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

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

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

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

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

(a)

BASIS OF PRESENTATION

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

     The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements and do not include all annual disclosures required by GAAP. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Form 10-K for the fiscal year ended December 31, 2003. These consolidated condensed financial statements, in the opinion of management, include all adjustments necessary for a fair statement of the consolidated results of operations, financial position, and cash flows for each period presented. The results for the three months ended March 31, 2004 are not necessarily indicative of results to be expected for the full fiscal year 2004 or any other future periods.

     Certain reclassifications have been made to prior year amounts to conform to current year presentations.

(b)

MERGER ANNOUNCEMENT

     On February 17, 2004, AT&T Wireless Services entered into a merger agreement with Cingular Wireless LLC (Cingular) and certain of its affiliates. Under the terms of the agreement, which were approved by the boards of directors of AT&T Wireless Services, BellSouth Corporation, SBC Communications Inc., and Cingular, AT&T Wireless Services’ common shareholders will receive $15 cash per common share and AT&T Wireless Services’ preferred shareholders will receive the then applicable liquidation preference of their preferred shares, for an aggregate of approximately $41 billion, upon consummation of the transaction. The transaction is subject to approval by AT&T Wireless Services’ shareholders, approval by regulatory authorities, and other closing conditions. The companies are seeking to close the transaction in the fourth quarter of 2004.

     Although AT&T Wireless Services believes the transaction will be completed, the underlying accounting within the consolidated financial statements and related disclosures assumes AT&T Wireless Services continues as a stand-alone entity as the completion of the merger is uncertain at this time due to the requirements to receive approval by AT&T Wireless Services’ shareholders and regulatory authorities.

(c)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STOCK-BASED COMPENSATION EXPENSE

     As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” AT&T Wireless Services measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by the Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” AT&T Wireless Services has adopted the disclosure-only provisions of SFAS No. 123. The following table illustrates the effect on Net income (loss) available to common shareholders and Earnings (loss) per share if AT&T Wireless Services had elected to recognize compensation costs based on the fair value at the date of grant for AT&T Wireless Services common stock awards granted subsequent to the split-off in 2001, AT&T Wireless Group tracking stock awards granted to AT&T Wireless Services employees prior to the split-off, AT&T common stock awards granted to AT&T Wireless Services employees prior to the split-off, and AT&T Wireless Services shares issued under the Employee Stock Purchase Plan (ESPP) consistent with the provisions of SFAS No. 123:

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     AT&T Wireless Services granted 0.7 million stock options during the three months ended March 31, 2004. The weighted-average fair value at date of grant was $4.74 for all AT&T Wireless Services stock options granted during the three months ended March 31, 2004 and was estimated using the Black-Scholes option-pricing model. Although we have used the Black-Scholes option pricing model in the footnotes to our financial statements, the Black-Scholes option pricing model does not necessarily provide a reliable measure of the fair value of our employee stock options as it was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable, and it is not designed to take into account the impact of our pending merger. The following weighted average assumptions were applied: (i) expected dividend yield of 0 percent, (ii) expected volatility rate of 59 percent, (iii) expected life of five years, and (iv) risk-free annual interest rate of 3.5 percent. As discussed in Note (b), as the completion of the merger is uncertain at this time, the assumptions to calculate the weighted-average fair value of stock options granted during the first quarter of 2004 assume AT&T Wireless Services continues as a stand-alone entity. Under the provisions of AT&T Wireless Services’ Long-Term Incentive Plan (LTIP) and the merger agreement with Cingular, the vesting of all equity-based awards will accelerate upon the closing of the merger between AT&T Wireless Services and Cingular and each option shall be converted into the right to receive the excess, if any, of $15 over the exercise price of each option. As a result, the options granted during the three months ended March 31, 2004, each of which has an exercise price below the $15 per share to be paid in the merger, will be converted into the right to receive an aggregate of approximately $4 million upon consummation of the merger.

     For the three months ended March 31, 2004, 0.7 million shares were purchased under the ESPP. The weighted-average fair value at date of grant was $1.50 for the option value of the shares of AT&T Wireless Services common stock issued during the three months ended March 31, 2004 under the ESPP, and was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were applied: (i) expected dividend yield of 0 percent, (ii) expected volatility rate of 49 percent, (iii) expected life of three months, and (iv) risk-free three-month interest rate of 0.9 percent.

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

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

PROPERTY, PLANT, AND EQUIPMENT

     During the first quarter of 2004, AT&T Wireless Services continued accelerating the depreciation on wireless communications equipment, primarily electronics related to its second generation, or TDMA network, in certain markets. This acceleration resulted from a more aggressive migration from its TDMA network to its next generation, GSM/GPRS/EDGE network, than originally planned in these markets. The impact of this change for the three months ended March 31, 2004, was an increase in depreciation expense of approximately $57 million, an increase to net loss available to common shareholders of approximately $35 million, and an increase to net loss available to common shareholders per basic and diluted share of $0.01.

(d)

GOODWILL AND OTHER INTANGIBLE ASSETS

     Effective January 1, 2002, AT&T Wireless Services adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 established new standards related to how acquired goodwill and other intangible assets are to be recorded upon their acquisition, as well as how they are to be accounted for after they have been initially recognized in the financial statements.

     Effective with the adoption of this standard, AT&T Wireless Services is no longer amortizing acquired goodwill and excess net book value associated with its equity method unconsolidated subsidiaries. Additionally, AT&T Wireless Services was required to reassess the useful lives of its other intangible assets, which consist primarily of FCC licensing costs and the values assigned to

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subscribers acquired. Although FCC licenses are issued with a stated term, generally 10 years, the renewal of FCC licenses is a routine matter involving a nominal fee and AT&T Wireless Services has determined that no legal, regulatory, contractual, competitive, economic, or other factors currently exist that limit the useful life of its FCC licenses. As such, effective with the adoption of SFAS No. 142, AT&T Wireless Services is no longer amortizing licensing costs of U.S. consolidated subsidiaries as these licensing costs are deemed to be intangible assets that have indefinite lives. AT&T Wireless Services periodically reevaluates its determination of an indefinite useful life with regard to FCC licenses. AT&T Wireless Services’ unconsolidated subsidiaries completed a similar assessment for their licensing costs. AT&T Wireless Services’ U.S. and Canadian unconsolidated subsidiaries also determined that their licensing costs have indefinite lives and ceased amortization of those costs.

     On a prospective basis, AT&T Wireless Services is required to test both acquired goodwill and other indefinite-lived intangible assets, consisting of U.S. licensing costs, for impairment on an annual basis based upon a fair value approach. Additionally, goodwill must be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. If AT&T Wireless Services’ market value is less than its book value for an extended period of time, it could trigger the need for impairment tests of acquired goodwill between annual tests. Other indefinite-lived intangible assets must be tested between annual tests if events or changes in circumstances indicate that the asset might be impaired.

     In the absence of a current transaction for the sale of its business enterprise, AT&T Wireless Services believes a discounted cash flow (DCF) model, rather than the market price of its common stock, is the best technique with which to estimate the fair value of its business enterprise. The closing price of AT&T Wireless Services common stock as of the last business day of the month was $6.60, $8.21, $8.18, $7.99, and $13.61 for the quarters ended March 31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, and March 31, 2004, respectively, reflecting market capitalizations, in some cases, that were significantly lower than the fair values as determined using discounted cash flows. If market prices (adjusted for items that may affect the fair value of the reporting unit, such as a control premium) were used to derive the fair value of AT&T Wireless Services’ business enterprise instead of a DCF model, it could result in a lower fair value of the business enterprise. This lower fair value might result in an impairment charge that might not otherwise result from using a DCF model. While AT&T Wireless Services does not use its market price to determine the fair value of its reporting unit, AT&T Wireless Services expects convergence between its market capitalization and DCF valuation to occur over time. This convergence was evidenced during the first quarter of 2004.

     On January 22, 2004, AT&T Wireless Services announced that its board of directors was exploring strategic alternatives. On February 17, 2004, AT&T Wireless Services and Cingular and certain of its affiliates signed an agreement such that, subject to certain conditions, Cingular would acquire AT&T Wireless Services for approximately $41 billion, which AT&T Wireless Services deems to reflect fair value. The announcement in January, along with the agreement signed in February, constituted triggering events under SFAS No. 142 requiring AT&T Wireless Services to perform impairment tests for both its goodwill and strategic licensing costs. AT&T Wireless Services determined the fair value of its business enterprise based upon the purchase price of $41 billion reflected in the agreement. As the business enterprise fair value of $41 billion exceeded its net book value, the first step of the goodwill impairment test was passed and no impairment was recorded. AT&T Wireless Services determined the fair value of its strategic licensing costs using a DCF model that took into consideration its business enterprise fair value. This test resulted in no impairment charges for AT&T Wireless Services’ strategic licensing costs.

     The following table provides information about transactions impacting goodwill for the three months ended March 31, 2004 and 2003, respectively:

     See further discussion of market exchanges, acquisitions and dispositions at Note (h).

     Intangible assets with indefinite lives at March 31, 2004 and December 31, 2003, consisted of U.S. licensing costs of $14,486 million and $14,492 million, respectively. Amortizable intangible assets at March 31, 2004 and December 31, 2003, consisted of values assigned to subscribers acquired of $298 million and $304 million, net of accumulated amortization of $413 million and $378

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million, respectively. Intangible assets related to subscribers acquired are being amortized on a straight-line basis over five years. Pretax amortization expense for the three months ended March 31, 2004 and 2003 totaled $35 million and $30 million, respectively. The aggregate pretax amortization expense for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 are estimated to be $128 million, $107 million, $47 million, $31 million, and $19 million, respectively.

(e)

RESTRUCTURING CHARGES

     During the second quarter of 2003, AT&T Wireless Services launched a company-wide initiative known as “Project Pinnacle” in an effort to improve operating efficiency and margins. During the first quarter of 2004, AT&T Wireless Services recorded $6 million of additional restructuring charges within selling, general and administrative expenses associated with additional employee separations anticipated to occur during 2004, while reversing $12 million, also within selling, general and administrative expenses, for charges taken during 2003 that are no longer required based on a reevaluation of certain restructuring activities.

     During 2003 and the first quarter of 2004, we recorded restructuring charges reflecting our plans to separate approximately 3,600 employees. Approximately 60 percent of these employees would be expected to be exempt employees and 40 percent would be expected to be non-exempt. Approximately 1,500 of the 3,600 employees had left their positions as of March 31, 2004.

     The following table displays the activity and balances of the restructuring reserve, which is reflected in payroll and benefit-related liabilities on the Consolidated Condensed Balance Sheet for the three months ended March 31, 2004:

(f)

EARNINGS PER SHARE (EPS)

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

(1)

The effect of dilutive stock options, restricted stock and performance share units for three months ended March 31, 2003 was determined under the treasury stock method. Due to the loss recognized during the three months ended March 31, 2004, the effect of dilutive stock options, restricted stock and performance share units and warrants issued to NTT DoCoMo, Inc. (DoCoMo) in January 2001 was considered to be anti-dilutive, and therefore were not included in the calculation of diluted earnings per share. As of March 31, 2004 and 2003 there were 213 million and 217 million, respectively, AT&T Wireless Services common stock options, restricted stock and performance stock units, as well as the 41.7 million warrants issued to DoCoMo that were anti-dilutive and therefore were excluded from the calculation of diluted earnings per share.

(g)

VARIABLE INTEREST ENTITIES

     In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” which was further revised in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without

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additional subordinated financial support from other parties. FIN 46 also requires disclosure of significant variable interests in variable interest entities for which a company is not the primary beneficiary.

     AT&T Wireless Services has significant variable interests in several entities for which AT&T Wireless Services is deemed to be the primary beneficiary. These variable interests typically consist of a combination of any or all of voting equity interests, non-voting equity interests, loans, and put options that provide the other owners the right to require AT&T Wireless Services to purchase their ownership interest if and when certain events occur. These entities were formed to acquire licenses that were restricted by FCC rule to businesses with limited assets and revenues, and to provide a means through which AT&T Wireless Services can invest in these licenses. To date, the activity of these entities has consisted primarily of acquiring licenses through acquisitions and FCC auctions, and network construction. Prior to April 1, 2003, AT&T Wireless Services accounted for these ventures under the equity method of accounting as AT&T Wireless Services does not have voting control and AT&T Wireless Services has recognized virtually 100 percent of the entities’ operating losses due to its significant variable interests. AT&T Wireless Services’ maximum loss exposure related to these entities as of March 31, 2004 was approximately $145 million, which represented the value of the put options that provide the other owners the right to require AT&T Wireless Services to purchase their ownership interest under certain circumstances. As a result of the adoption of FIN 46, AT&T Wireless Services consolidated these entities at their carrying values effective April 1, 2003. Additionally, AT&T Wireless Services has determined it has a significant variable interest and is deemed to be the primary beneficiary in an entity that holds assets and liabilities associated with synthetic leases. As a result, upon adoption, AT&T Wireless Services consolidated the assets and liabilities associated with two synthetic leases that were previously disclosed as off-balance sheet arrangements.

     AT&T Wireless Services has no material variable interests for which it is not deemed to be the primary beneficiary.

(h)

ACQUISITIONS AND DISPOSITIONS

     In February 2004, AT&T Wireless Services completed the purchase of U.S. Cellular’s TDMA wireless operations in south central Texas for $95 million in cash. AT&T Wireless Services completed this transaction to expand its TDMA and GSM/GPRS networks. The allocation of the purchase price included $29 million, $20 million, $38 million, and $8 million to Licensing costs, Other acquisition-related intangible assets, Net tangible assets and Goodwill, respectively.

     In March 2004, AT&T Wireless Services completed the sale of its ownership interest in a cost method investment for $26 million in cash and recorded a pretax gain of $26 million within other income (expense).

(i)

LONG-TERM DEBT

Accounts Receivable Securitization Program

     In February 2004, AT&T Wireless Services renewed its $1.6 billion accounts receivable securitization program. As of March 31, 2004, availability under the program was approximately $1.3 billion, based on the accounts receivable balance allowed for under the program. The program allows AT&T Wireless Services to obtain financing collateralized by subscriber trade accounts receivable. Under the program, AT&T Wireless Services can assign subscriber trade accounts receivable on a revolving basis to a special-purpose, wholly owned subsidiary of AT&T Wireless Services. The wholly owned subsidiary of AT&T Wireless Services would then sell an undivided interest in such receivables to an unrelated third-party financing entity upon drawing on the facility. The financing is subject to a program fee of 15 to 25 basis points and a liquidity fee of 22.5 to 50 basis points, both of which are based on AT&T Wireless Services’ Senior Notes rating. This financing arrangement is to be used for general corporate purposes, is subject to customary securitization covenants, and will be recorded as an on-balance sheet transaction. Included in the covenants are provisions for the termination of the program in the event AT&T Wireless Services’ long-term unsecured Senior Notes rating is less than BB+ by Standard & Poor’s or Ba1 by Moody’s. As of March 31, 2004 and December 31, 2003, AT&T Wireless Services had no amounts outstanding under the accounts receivable securitization program and was in compliance with its covenants.

Credit Facilities

     In March 2001, AT&T Wireless Services entered into Competitive Advance and Revolving Credit Facilities in the aggregate amount of $2.5 billion consisting of a $1.25 billion 364-day Competitive Advance and Revolving Credit Facility and a $1.25 billion Five-Year Competitive Advance and Revolving Credit Facility (the Five-Year Facility). The 364-day Credit Facility expired in March 2004. The Five-Year Facility is subject to a facility fee of 10 to 25 basis points, which is based on AT&T Wireless Services’ Senior Notes rating, and is payable quarterly on the total commitment. The Five-Year Facility is also subject to a utilization fee of 25 basis

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points if borrowings exceed certain levels as defined in the agreement. The Five-Year Facility bears interest at variable rates based upon, in various cases, (i) LIBOR plus 65 to 200 basis points depending on AT&T Wireless Services’ Senior Notes rating, or (ii) the greater of the prime rate or the federal funds effective rate plus 50 basis points. The Five-Year Facility is to be used for general corporate purposes and is subject to customary covenants, representations, warranties, and events of default. The Five-Year Facility contains financial covenants requiring AT&T Wireless Services to maintain certain financial ratios. In addition, an obligation by AT&T Wireless Services to repurchase equity interests from DoCoMo may, under certain circumstances, constitute an event of default. Effective March 2003, the Five-Year Facility was guaranteed by TeleCorp Wireless Inc., TeleCorp Communications, Inc., Tritel, Inc., Tritel PCS, Inc. and Tritel Communications, Inc. This guarantee expired in April 2004 with AT&T Wireless Services’ repurchases of certain debt of TeleCorp Wireless, Inc. and Tritel PCS, Inc. As of March 31, 2004 and December 31, 2003, AT&T Wireless Services had no amounts outstanding under the Five-Year Facility, and was in compliance with its covenants.

Commercial Paper Program

     During June 2001, AT&T Wireless Services finalized agreements with a group of commercial paper dealers to issue up to $2.5 billion of private placement commercial paper notes. The notes will be unsecured, ranking pari passu with AT&T Wireless Services’ other unsubordinated and unsecured indebtedness. Maturity of the notes will be up to 365 days from date of issue. AT&T Wireless Services’ commercial paper notes are rated A2 by Standard & Poor’s and P2 by Moody’s. If AT&T Wireless Services decides to issue commercial paper notes, the rates would be reflective of these commercial paper market rates at the time of issuance. The commercial paper program is subject to customary commercial paper program covenants. As of March 31, 2004 and December 31, 2003, AT&T Wireless Services had no notes outstanding under this program.

     AT&T Wireless Services’ accounts receivable securitization program and its credit facility are terminable upon a cha