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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

OR

Commission File Number: 000-51023

INPHONIC, INC.

(Exact name of Registrant as specified in its Charter)

(202) 333-0001

(Registrant’s telephone number, including area code)

None

(Former name, former address and former

fiscal year—if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share

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

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

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

As of February 28, 2005, 32,864,798 shares of the registrant’s common stock were outstanding. As of February 28, 2005, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $379,656,750. The registrant’s common stock was not publicly traded on June 30, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of InPhonic, Inc.’s Notice of Annual Stockholder’s Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report.

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INPHONIC, INC.

INDEX

FORM 10-K

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PART I

This annual report on Form 10-K contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, that involve risks and uncertainties. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in the section titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this report, and those detailed from time to time in our filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect our future results.

Overview

We operate our business in three business segments: wireless activation and services; mobile virtual network operator, or MVNO, services; and data services.

Wireless Activation and Services. We sell wireless services and devices to consumers through websites that we create and manage for third parties under their own brands. These third parties include online businesses, member-based organizations and associations and national retailers, whom we refer to collectively as marketers. We also sell services and devices through our own branded websites, including Wirefly.com.

MVNO Services. We also provide wireless services and devices to consumers through wireless airtime service that we purchase wholesale from Sprint. We provide such services as an MVNO under our Liberty Wireless brand. This service utilizes the same e-commerce platform, operational infrastructure and marketing relationships we have developed for our wireless activation and services segment to sell wireless services and devices, resulting in what we believe is a cost-effective means of acquiring customers. We also offer marketers the ability to sell MVNO services to their customers under their own brands using our e-commerce platform and operational infrastructure and wholesale wireless airtime that we purchase. We have also recently entered into an agreement pursuant to which we will provide a subscriber management system to support a marketer’s providing of wireless voice and data services to its wireless customers.

Data Services. We leverage the relationships we have established with customers through the sale of wireless services from carriers, as well as our MVNO service, to sell a variety of wireless data services such as unified communications, wireless email and mobile marketing. Our unified communications services allow carriers and us to provide customers with the ability to organize personal communications by providing access to e-mail, voicemail, faxes, contacts, scheduling, calendar and conference calling functionality through a website or telephone. Our mobile marketing services allow carriers and us to deliver wireless advertising and subscription-based content services to the wireless devices of customers to strengthen both marketing efforts and brand awareness.

We have developed a proprietary e-commerce information technology platform that integrates merchandising, provisioning, procurement, customer care and billing operations into a single system for the online sale of wireless services and devices. This platform, which uses a combination of internally developed and licensed technologies, has been designed to serve as a foundation for us to build upon, offer additional products and services and to maximize performance, scalability, reliability and security. For example, this platform supports both the websites that we create and manage for third-party marketers as well as our own branded websites and allows us to manage the sale of wireless services offered from wireless carriers, our Liberty Wireless MVNO service and MVNO services offered by marketers under their own brands.

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We believe our online business model connects wireless carriers, marketers and consumers of wireless services and devices more effectively and efficiently than traditional retail channels. Wireless carriers benefit from broader access to consumers who purchase wireless services and devices on the Internet, which is considered a lower cost distribution channel, through our marketing relationships with highly-trafficked websites as well as through our own branded websites. Marketers benefit by generating additional revenue from the marketing fees that we pay them for selling wireless services and devices through websites that we create and manage for them, using their brands. Marketers also benefit from our broad carrier relationships and selection of service plans and devices. Consumers benefit from competitive pricing, broad selection and the convenience of using the websites we create and manage for our marketers as well as our own branded websites for purchasing wireless services and devices. Through agreements we have with the six largest U.S. wireless carriers as well as with several regional wireless carriers, we offer consumers a selection of at least four carriers in each of the top 100 U.S. metropolitan markets. Collectively, these carriers’ networks cover 99.8% of the U.S. population.

Our principal executive offices are located at 1010 Wisconsin Avenue, Suite 600, Washington, D.C. We maintain our technology and operations centers in Largo, Maryland, Long Island City, New York and Reston, Virginia. Since we began operations in 1999, we have grown our business, expanded our services and broadened our customer base through internal growth and acquisitions. We generate revenues from wireless carriers through commissions and bonuses that we receive for activating wireless subscribers on their networks. We also generate revenues from customers who purchase wireless service plans and devices from our Liberty Wireless service and from customers who subscribe to our wireless data services. For 2004, we reported revenues of $204.2 million and a net loss of $10.2 million.

Industry Overview

The Internet and Online Commerce

Online shopping has grown substantially, providing businesses with a lower cost sales channel. This growth is primarily a result of the convenience, broader selection and breadth of product information available on the Internet. In addition, continued improvements in payment security and growing access to high-speed Internet connections have made online shopping increasingly efficient and attractive to consumers. According to Forrester Research, Inc., an independent research company, online retail sales were estimated to reach $144.6 billion in 2004 and expected to grow at a compound annual growth rate of 15% to $331.6 billion in 2010, or approximately six times faster than overall retail sales (U.S. eCommerce Overview: 2004 to 2010, Forrester Research, Inc., August 2004).

Online businesses have a number of competitive advantages over traditional businesses, including lower infrastructure costs, broader consumer reach and the potential for personalized low-cost customer interaction. In addition, online businesses may quickly and efficiently react to changing consumer tastes and preferences by adjusting content, shopping interfaces, the product and service offerings they feature on their websites and the pricing of those product and service offerings. Furthermore, online businesses can more easily compile demographic and behavioral data about consumers in order to increase opportunities for direct marketing and personalized services.

The Wireless Services Industry

Consumers increasingly understand that wireless communications provide enhanced convenience, mobility and personal safety. As a result, over the past few years wireless services have achieved widespread adoption. This widespread adoption has been aided in part by the increasing availability and affordability of cellular and other mobile communications products. According to The Yankee Group, an independent research company, the estimated number of wireless subscribers in the United States has more than doubled from 68.7 million in 1998 to 181.6 million in 2004, representing 63% of the U.S. population in 2004. The Yankee Group expects the number of wireless subscribers to exceed 73% of the U.S. population by 2008. As a result, according to The

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Yankee Group, revenues from wireless services in the United States are expected to grow from an estimated $108.0 billion in 2004 to $129.7 billion in 2008.

To date, most wireless services in the United States have been offered on a post-paid basis, where subscribers are billed and pay for services after the services have been delivered and used. Much of the future growth of wireless services, however, is expected to be driven by the growth of pre-paid and other non-post-paid service plan offerings, which require wireless subscribers to pay for all or a portion of their airtime usage in advance of the actual use. According to The Yankee Group, the number of prepaid and other non-post-paid service plan subscribers is expected to more than double, from 26.3 million subscribers in 2004 to 55.0 million subscribers by the end of 2008, representing a compound annual growth rate of 22.0%.

The Opportunity

The Internet represents a fast growing and cost-effective distribution channel for wireless carriers, as well as a convenient way for consumers to shop for and purchase wireless services and devices at a lower price. We believe the proportion of wireless services and devices sold on the Internet will grow, creating a significant market opportunity for us.

The increased pressures and competition have resulted in ongoing consolidation among wireless carriers. As a result, carriers are under pressure to reduce their costs while remaining competitive. Wireless carriers face increased competition, excess network capacity as well as new challenges resulting from wireless local number portability. To combat these challenges, the wireless carriers are turning to the Internet as a cost-effective and growing channel to acquire customers, allowing them to boost profitability and increase their return on investment. Additionally, in order to optimize network utilization, carriers are seeking to increase their subscriber base through new product offerings, such as pre-paid services, and new distribution channels such as mobile virtual network operators.

Consumers are faced with an increasingly complex and constantly changing selection of wireless service plans and devices. As the number of service plans offered by wireless carriers has increased, traditional retail channels have been unable to adequately satisfy customers’ needs for real-time information regarding wireless services and devices. Retail stores typically feature wireless services and devices from only a limited number of wireless carriers, resulting in fewer options at any given store for consumers. As a result, consumers must either visit multiple stores or select from a limited choice of wireless offerings. In addition, traditional wireless retail stores typically have high cost structures due to the costs of maintaining, managing and staffing a physical storefront, often resulting in higher wireless device prices to customers. In contrast to the physical retail environment, the Internet offers consumers a number of advantages for purchasing wireless services and devices, including lower prices, broader selection, convenience and the ability to research and comparison shop for the best prices.

Our Value Proposition

We are a leading online seller of wireless services and devices. We have developed a proprietary e-commerce platform to sell these services and devices through private-labeled websites that we create and manage for marketers, as well as through our own branded websites. We have relationships with the six largest U.S. wireless carriers, allowing us to provide our customers with a broad selection of wireless services and devices. Our online business model provides a new and cost-effective customer acquisition channel for the wireless carriers and affords new revenue opportunities for marketers, while offering consumers competitive prices, broad selection and convenience.

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Value to Wireless Carriers

We provide wireless carriers with new subscribers to their networks. Key advantages for wireless carriers include:

Value to Marketers

We provide our marketers with websites, branded to their specifications, which allow them to sell wireless services and devices to consumers. Key advantages for marketers include:

Value to Consumers

We offer consumers competitive prices, broad selection and the convenience of comparing and purchasing wireless services and devices on the Internet. Key advantages for consumers include:

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Our Strategy

Our objective is to become the leading seller of wireless services and devices in the United States. Key elements of our strategy to achieve this objective include:

Expand Our Wireless Carrier Relationships. As the wireless industry continues to consolidate, we intend to continue to improve the automation interface between our e-commerce platform and the wireless carriers’ systems as well as cooperate further with wireless carriers on marketing efforts. We also intend to expand our existing relationships with wireless carriers by entering into additional wholesale agreements for excess network capacity.

Increase Our Customer Base. We plan to target additional marketers in order to expand our sources of customers. We also plan to build consumer and market awareness by expanding the direct marketing of our wireless products and services. Our plans include expanding our use of the “Powered by InPhonic” brand on the websites that we create and manage for marketers, purchasing online advertising to support our existing brands, such as Wirefly.com, Liberty Wireless and Viva Liberty, and creating additional brands.

Cross-Sell Our Full Range of Products and Services to Existing Customers. Most customers initially purchase a single product or service from us. We plan to increase our revenue opportunities by offering additional products and services to these customers at the point of sale or through follow-up communications such as opt-in emails, outbound calls and direct mail. These offerings may include accessories, wireless content and other communications services. We also plan to begin customer retention programs that offer existing customers incentives to buy additional products and services from us.

Develop New Products and Services to Address Underserved Market Segments. We believe that much of the future subscriber growth within the wireless services industry will be driven by consumer segments that are underserved by the products and services currently offered by the wireless carriers. We plan to continue to develop new products and services, including pre-paid and spending control services, to address underserved consumer segments, such as the youth and ethnic markets.

Focus on the Customer Shopping Experience. We intend to continue to refine our operations to provide a superior customer experience. The customer experience is important in retaining our customers and expanding relationships we have developed with marketers who use their brands to market our products and services on their websites.

Our Services

Wireless Activation and Services

We sell wireless service plans and devices through websites that we create and manage for marketers. These private-labeled websites allow marketers to leverage their brands to sell wireless products and services to their customers. We use our proprietary e-commerce platform to activate, configure and ship wireless services and devices to customers on behalf of these marketers. For each marketer for which we create and manage a website, we use that marketer’s brand on the website and throughout the sales and customer support process. For example, our customer service representatives answer customer calls with each particular marketer’s name, and we ship devices with marketer-specific promotional materials and information.

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We also offer customers the ability to purchase wireless services and devices directly from websites that we operate under our own brands, such as Wirefly.com. We leverage the same e-commerce platform, operational infrastructure and wireless carrier relationships that we use for marketer-branded websites to acquire customers through our own branded websites.

MVNO Services

In August 2002, we launched Liberty Wireless, our MVNO service, to market and sell wireless services directly to consumers. We purchase wireless airtime minutes wholesale from Sprint, which owns and operates the underlying wireless network. Liberty Wireless is primarily marketed to those customers who order wireless and service plans devices through our websites, but do not accept traditional post-paid service on the security deposit terms required by the wireless carriers. We also sell Liberty Wireless indirectly through retail stores. Liberty Wireless offers a service plan that enables a subscriber to purchase bundles of airtime minutes for a specific monthly price and charges the subscriber in advance of the usage. We also offer Liberty Wireless to certain customers on a traditional post-paid basis. We collect fees from customers for device purchases and airtime usage.

We have begun to utilize the e-commerce platform, operational infrastructure and wireless carrier agreement we have in place for Liberty Wireless to extend our MVNO capabilities to marketers who want to offer branded wireless services to their customers without having to own or operate a wireless network or operational infrastructure. The MVNO services we offer include:

We recently announced a new version of the Liberty Wireless service that is directed to the Hispanic community under the Viva Liberty brand.

Data Services

To further leverage the relationships we have established with customers, we sell the following set of wireless data services.

Relationships With Wireless Carriers

We have agreements with the six largest U.S. wireless carriers, as well as with several regional carriers, to sell their wireless service plans. Through our agreements with these wireless carriers, we offer consumers a

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selection of at least four carriers in each of the top 100 U.S. metropolitan markets. Collectively, these carriers’ networks cover 99.8% of the U.S. population. We also purchase wireless devices directly from these carriers and their designated distributors for sale to customers. We sell devices in conjunction with wireless service plans from the leading wireless device manufacturers including Audiovox, Kyocera, LG Electronics, Motorola, Nokia, palmOne, Research in Motion (RIM), Samsung, Sanyo and Sony Ericsson.

We provide wireless carriers with a cost-effective online channel to acquire subscribers for their service plans. The wireless carriers pay us commissions and bonuses for activating wireless subscribers onto their networks. We also receive additional financial benefits from the wireless carriers through market development funds, wireless device discounts and other marketing incentives. For 2003, revenues from T-Mobile represented 28% and Nextel represented 12% of our total revenues. For 2004, revenues from T-Mobile, Cingular/AT&T Wireless and Sprint represented 21%, 17% and 11% of our total revenues, respectively. For 2003 and 2004, revenues from our top three wireless carriers represented 49% and 50% of our total revenues, respectively. One of these carriers, AT&T Wireless, was recently acquired by Cingular.

We also have an agreement with Sprint to purchase wireless airtime minutes on a wholesale basis. We package airtime minutes purchased from Sprint with wireless devices and other services to sell under our Liberty Wireless brand directly to customers and indirectly through retail stores. We pay Sprint fees for airtime minutes and network management services.

Marketing

We have developed a marketing strategy designed to use our marketers’ brands to generate sales through their private-labeled websites that we create and manage for marketers as well as to use our own branded websites. Our marketing and advertising efforts include online and offline initiatives, which primarily consist of the following:

Operations and Technology

Our operations leverage a common, proprietary e-commerce information technology platform, which we have built using a combination of internally developed and licensed technologies. Our e-commerce platform integrates our merchandising, provisioning, procurement, customer care and billing operations into a single system for the online sale of wireless services and devices. Our e-commerce platform has been designed to serve as a foundation for us to build and offer additional products and services and to maximize performance, scalability, reliability and security.

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Merchandising

We sell wireless services and devices through private-labeled websites that we create and manage for marketers as well as through our own branded websites. Since we manage all these websites using the same e-commerce platform, we can update device and service plan pricing information across all the websites in real time. Additionally, we can tailor the wireless service and device offerings presented on any particular website in order to better target each marketer’s customer base. The websites we create and manage contain user-friendly search functions and navigation tools to help customers quickly and conveniently identify the wireless service plans and devices that match their selection criteria.

Provisioning

We process orders using a combination of our own proprietary software and commercially available software that we license from third parties. We believe that one of our key competitive advantages is our automated order processing system. Orders from customers are delivered in a common data format that permits us to exchange data with wireless carriers through our automated credit risk assessment and activation interfaces. We have customized these interfaces to integrate with each of our wireless carriers’ networks for a fast, seamless exchange of data. Once the customer’s risk profile has been determined, the order status management process system either activates the customer on the wireless carrier of their choice or automatically suggests an alternative service plan from another wireless carrier for which the customer is eligible. For customers who elect not to accept the security deposit terms sometimes required by a carrier, our system then offers an alternative service plan from Liberty Wireless.

We have designed systems we believe to be secure to protect our corporate data and the information we collect from consumers. Our websites operate on hardware and software co-located in Sterling, Virginia at a service provider offering redundant and reliable network connections, power, security and other essential services. To minimize downtime, we manage and monitor our websites 24 hours a day and maintain redundant systems with an additional service provider at a back-up hosting facility located in Dulles, Virginia. Our operations center located in our Largo, Maryland facility has back-up power, including batteries and diesel-fueled generators. We have implemented a disaster recovery plan that documents the necessary steps to recover critical systems if such a disaster were to occur.

Procurement

All customer orders are processed at our operations centers located in Largo, Maryland and Long Island City, New York. When an order is approved for service by the wireless carrier, our automated order processing system assigns a wireless device to the order, activates the selected service plan and configures the device to the customer’s specifications. We ship orders from our Largo, Maryland facility, generally within 24 hours of approval.

We track orders in real-time throughout the procurement process allowing us to maintain the appropriate levels of inventory. We use rigorous quality control processes and dedicated quality assurance personnel to minimize errors.

Customer Care and Billing

We are focused on providing a high quality customer shopping experience. As part of these efforts, we monitor and track every interaction with each customer through our proprietary customer relationship management system. We deliver customer care through self-service websites, call center representatives, email correspondence and our interactive voice response system.

Our easy-to-navigate, self-service websites enable our customers to check order, rebate, return and exchange status in addition to reviewing service plan information. We also offer our Liberty Wireless customers the ability

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to purchase airtime minutes, review account status and pay outstanding balances through our website. We operate call center facilities in Largo, Maryland and Long Island City, New York offering customer service, direct sales support and technical assistance by telephone or email. Using our call management system, our call center representatives can respond to inbound calls using scripts tailored to each marketers’ specifications. To further improve efficiency, we employ an integrated voice response system to provide self-service capabilities to consumers for pre-sale and post-sale activities. Additionally, we have also entered into outsourcing agreements with vendors in the Philippines, Canada and India to provide service after regular business hours and to support our call center personnel during peak calling periods.

Real-Time Measurement and Reporting Systems

We have developed software applications to monitor the effectiveness of our marketing campaigns on a real-time basis. These applications produce reports that we share with marketers. These reports provide us with the number of unique visitors to our marketers’ websites, numbers of orders taken, number of orders approved or pending approval and orders shipped. These reports are accessible from desktop computers and wireless devices and allow us to measure the effectiveness of our marketing efforts and respond quickly to changes in market demand.

Competition

The wireless services industry continues to evolve rapidly and, despite increasing consolidation among carriers, remains highly fragmented and competitive. We believe we compete on the basis of selection of wireless carriers and devices and service plans; convenience; price; customer service; network coverage; and website features and functionality. We believe we compete favorably on all of these terms.

Companies that compete with our wireless activation and services business include:

We believe we compete favorably against competitors in the wireless activation and services business because we have agreements with the six largest U.S. wireless carriers. These agreements enable us to provide consumers with a comprehensive selection of wireless services and devices that our competitors in the wireless activation and services business do not provide.

Companies that currently or potentially compete with our Liberty Wireless and potential private-labeled MVNO business include:

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We believe our ability to provide a single vendor solution for MVNO services that includes wireless carrier network integration, billing, customer care and distribution services compares favorably to our competitors.

In our data services business, we compete against a variety of companies, including CallWave and j2 Global Communications. Our unified communications service bundles voicemail, email and fax services with additional services, including our wireless activation and MVNO services. Our competitors provide voicemail, email and fax services, but we believe our ability to bundle these data services with additional services enables us to compete favorably because we can present an expanded service offering to potential customers.

Many of our existing and potential competitors have substantially greater financial, technical and marketing resources than we do. Additionally, many of these companies have greater name recognition and more established relationships in many of our market segments. These competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. We may face increasing price pressure from the wireless carriers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to compete more effectively.

Intellectual Property Rights

We rely on general intellectual property law and contractual restrictions and to a limited extent, copyrights and patents to protect our proprietary rights and technology. These contractual restrictions include confidentiality agreements, invention assignment agreements and nondisclosure agreements with employees, contractors, suppliers and marketers. In addition, we pursue the registration of our trademarks and service marks in the United States and certain other countries. In the United States, we have registered “InPhonic,” “Wirefly,” “Welcome to our Wireless World,” “Powered by InPhonic” and “Liberty Wireless” and other service marks. We also have unregistered copyrights with respect to images and information set forth on our website and the computer code incorporated into our website. To date, we have obtained registration of one U.S. patent.

We cannot assure you that any of our service marks, patents or copyrights will not be challenged or invalidated. Despite the protection of general intellectual property law and our contractual restrictions, steps we have taken to protect our intellectual property may not prove sufficient to prevent misappropriation of our technology or to deter third-parties from copying or otherwise obtaining and using our intellectual property without our authorization.

Government Regulation

We are not currently subject to direct federal, state or local government regulation, other than regulations that apply to businesses generally. The wireless network carriers we contract with are subject to regulation by the Federal Communications Commission, or FCC. Changes in FCC regulations could affect the availability of wireless coverage these wireless network carriers are willing or able to sell. Also, changes in these regulations could create uncertainty in the marketplace that could reduce demand for our services or increase the cost of doing business as a result of costs of litigation or increased service delivery cost or could in some other manner have a material adverse effect on our business, financial condition or results of operations.

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

Employees

As of March 1, 2005, we had a total of 458 employees. None of our employees is covered by a collective bargaining agreement. We believe that our relations with our employees are good.

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RISK FACTORS

There are a number of important factors that could cause our actual results to differ materially from those that are indicated by forward-looking statements. Those factors include, without limitation, those listed below and elsewhere herein.

Risks Related to Our Business

Our limited operating history makes it difficult for us to accurately forecast future revenues and appropriately plan our expenses.

We commenced operations in 1999 and have a limited operating history. As a result, it is difficult for us to predict future revenues and operating expenses. Many of our expenses, such as compensation for employees and lease payments for facilities and equipment, are relatively fixed. We base these expense levels, in part, on our expectations of future revenues. A softening in demand for our wireless services and devices, whether caused by changes in consumer spending, consumer preferences, weakness in the U.S. or global economies or other factors, may result in decreased revenues and significant changes in our operating results from period to period and may cause our stock price to decline.

We have historically incurred significant losses and may not be profitable in the future.

We have experienced significant net losses each year since our inception. For 2003 and 2004, we had net losses of $20.2 million and $10.2 million, respectively. As of December 31, 2004, we had an accumulated deficit of $126.5 million. We may continue to incur losses, and we cannot assure you that we will be profitable in future periods. We may not be able to adequately control costs and expenses or achieve or maintain adequate operating margins. Our financial results may also be impacted by stock-based compensation charges and possible limitations on the amount of net operating loss carryforwards that we can utilize annually in the future to offset any taxable income. We are subject to Securities and Exchange Comission, or SEC, reporting obligations and incur significant legal and regulatory expenses associated with compliance with the Sarbanes-Oxley Act of 2002. As a result, our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenues while maintaining reasonable cost and expense levels. If we fail to generate sufficient revenues or achieve profitability, we will continue to incur significant losses. We may then be forced to reduce operating expenses by taking actions not contemplated in our business plan, such as discontinuing sales of certain of our wireless services and devices, curtailing our marketing efforts or reducing the size of our workforce.

We expect our quarterly financial results to fluctuate, which may lead to volatility in our stock price.

Our business is affected by seasonal fluctuations in both Internet usage and purchases of wireless services and devices, which generally decline during the summer months and increase in the fourth quarter of the calendar year, correlating with traditional retail seasonality. We experience seasonal changes in the fourth quarter that reflect an increase in wireless service activations due to the holiday season. Consistent with this seasonality, we expect our revenues for the first quarter of 2005 to be lower than our revenues for the fourth quarter of 2004. Therefore, quarter-to-quarter comparisons of our operating results may not be good indicators of our future performance.

Additionally, our revenues and operating results may vary significantly from quarter-to-quarter due to a number of factors, including:

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If we are unable to maintain strong relationships with wireless carriers, our business would be adversely affected.

We depend upon a small number of wireless carriers for a substantial portion of our revenues and the loss of any one of these relationships could cause our revenues to decline substantially. In addition, the increasing consolidation in the wireless industry, as evidenced recently by Cingular’s acquisition of AT&T Wireless and the announcement that Nextel and Sprint will merge, will cause the number of wireless carriers to continue to decline and result in further revenue and pricing pressure. For 2003, revenues from T-Mobile represented 28% and Nextel represented 12% of our total revenues. For 2004, revenues from T-Mobile, Cingular/AT&T Wireless and Sprint represented 21%, 17% and 11% of our total revenues, respectively. For 2003 and 2004, revenues from our top three wireless carriers, which included AT&T Wireless, represented 49% and 50% of our total revenues, respectively. Our wireless carriers could terminate their agreements with us without penalty and with little notice. Our agreements with these carriers are non-exclusive, and they have entered into similar agreements with our competitors, which may be on more favorable terms. Our revenues may decline if:

In addition, if the wireless carriers were to discontinue allowing us to sell and activate wireless service plans on their networks and instead were to provide these activation services exclusively themselves, this would have an adverse effect on our revenues.

Ongoing consolidation among wireless carriers could result in revenue and pricing pressure and adversely impact our results of operations.

In recent years, there has been a trend in the wireless industry toward consolidation of wireless carriers. For example, in October 2004, Cingular Wireless acquired AT&T Wireless, and Sprint and Nextel recently announced that they have entered into an agreement to merge. Ongoing consolidation among the wireless carriers would reduce the number of companies whose wireless services we offer, which could adversely affect our results of operations. We rely on the leading wireless carriers for a substantial portion of our revenues, and we expect this to continue for the foreseeable future. We may be subject to pricing pressures that may result from a further consolidation among wireless carriers, which could have an adverse effect on our operations. If consolidation continues, the commissions and bonuses paid to us by wireless carriers could decrease or the prices charged to us for the supply of wireless devices and wireless airtime minutes could increase, resulting in a decrease in our gross margin.

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A decrease in the growth rate of our wireless service activations could adversely affect our operating results.

A substantial portion of our revenues consists of commissions we earn from the wireless carriers for the activation of new customer accounts. We may also receive bonuses for meeting volume and other performance-based targets. If the growth rate in the number of new activations declines, we may not earn these additional bonuses and our revenues could decline going forward. In addition, we would be required to reduce our revenues by the amount of any previously recognized bonus in the current period.

The market for our services is becoming increasingly competitive with the emergence of additional retail and online distributors of wireless services and devices and new MVNOs, which could adversely affect our business.

We face substantial competition in the wireless services industry. We expect competition to intensify as a result of the entrance of new competitors and the development of new technologies, products and services. We compete with wireless carriers’ retail stores and online websites, as well as other retail stores and online businesses that provide similar products and services in competition with us. All of our agreements with wireless carriers and wireless device suppliers are non-exclusive, and these parties may provide the same or similar devices and services to our competitors on terms more favorable than ours. Due to the low barriers to entry in this industry, with sufficient time and capital, it would be possible for additional competitors to replicate our services.

Companies that compete with our wireless activation and services business include:

We currently or potentially compete with several different types of companies in our Liberty Wireless and potential private-labeled MVNO business:

Our data services business competes against a variety of companies including CallWave and j2 Global Communications.

Many of our existing and potential competitors have substantially greater financial, technical and marketing resources than we do. Additionally, many of these companies have greater name recognition and more established relationships in many of our market segments. These competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. We may face increasing price pressure from the wireless carriers. In addition, current and potential competitors have established, or may establish, cooperative relationships among themselves or with third parties to compete more effectively.

We may face competition from additional MVNO service providers, adversely affecting our ability to expand our MVNO business.

We believe that there will be increased competition from additional MVNO service providers. Existing telecommunications companies, media companies and retailers may be able to use their established branding,

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customer base, service knowledge and supplier relationships to compete against independent MVNO service providers, including Liberty Wireless, and any private-labeled customers we develop. Other MVNO service providers may also have greater financial resources or more favorable agreements with wireless carriers to provide better service coverage in competition with us. Additionally, well-diversified MVNO service providers may be able to offer a broader product mix that we may not be able to match.

Any unanticipated increase in our rate of deactivation of active accounts could result in a decrease in our revenues.

Under our agreements with wireless carriers, commissions are not earned if the customer’s service is deactivated with the carrier before a pre-determined period of time, usually between 120 and 210 calendar days. We maintain a reserve to cover the commissions lost through deactivations based upon our historical experience. We monitor a number of factors in determining this reserve. For example, our experience has been that customers who participate in a promotion that allows them to obtain a phone and activate an account with no up-front payment have a higher deactivation rate than customers who pay amounts in advance. If the rate of our deactivations increases in excess of our historical experience, we would have to increase our deactivation reserve, which, in turn, would cause our revenues to decline. Further, if our estimates vary materially for a future period or periods in relation to revenue and/or net income so that we conclude that our method of determining estimates is not sufficiently accurate, we may be required to change our method of accounting for these estimates. While a change in accounting for deactivations would have no impact on our cash flow, any such change may negatively impact our net income for particular periods and cause a decline in stock price. An increase in our deactivation rate could also cause carriers to modify the commission terms with us or even terminate our agreements.

We depend on Internet search engines to attract a substantial portion of the customers who use our websites, and losing these customers would adversely affect our revenues and financial results.

Many consumers access our services by clicking through on search results displayed by an Internet search engine. Internet search engines typically provide two types of search results, algorithmic listings and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract and direct consumers to our websites. Search engines revise their algorithms from time to time in an attempt to optimize their search results. If one or more search engines which we rely on for algorithmic listings modifies its algorithms, resulting in fewer consumers clicking through to our websites, we would need to increase our marketing expenditures, which would adversely affect our financial results, or we would experience a reduction in our revenues, and our business would be harmed. If one or more of the search engines which we rely on for purchased listings modifies or terminates its relationship with us, our expenses could rise and our business may suffer.

Our revenues and operating results are dependent on our ability to collect additional airtime usage payments from our Liberty Wireless customers.

Liberty Wireless, our MVNO service, markets and sells wireless airtime minutes that we purchase wholesale from Sprint, which owns and operates the underlying wireless network. Liberty Wireless is marketed to those customers who order wireless service plans and devices through our websites but do not accept traditional post-paid service on the security deposit terms required by the wireless carriers. These customers generally have lower credit quality and present a greater non-payment risk than customers who are approved for post-paid service plans. Liberty Wireless offers a service plan that enables a subscriber to purchase bundles of minutes for a specific monthly price and charges the subscriber in advance of the usage. While we continually monitor our Liberty Wireless customers’ usage of pre-paid airtime minutes, these customers may, under certain