S-1/A 1 v31615a1sv1za.htm AMENDMENT TO FORM S-1 sv1za
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As filed with the Securities and Exchange Commission on August 17, 2007
SEC File No. 333-144357
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form S-1/A
 
Amendment No. 1 to
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Clearwire Corporation
(Exact name of registrant as specified in its charter)
 
         
Delaware   4899   56-2408571
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
4400 Carillon Point
Kirkland, Washington 98033
(425) 216-7600
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Broady R. Hodder
Vice President and General Counsel
Clearwire Corporation
4400 Carillon Point
Kirkland, Washington 98033
(425) 216-7600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies of all communications, including communications sent to agent for service, should be sent to:
Marcus J. Williams
Ryan J. York
Davis Wright Tremaine LLP
1201 Third Avenue
Suite 2200
Seattle, Washington 98101
Tel. (206) 622-3150
Fax (206) 757-7700
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  þ
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
     
Title of Each Class of Securities
    Aggregate
    Amount of
to be Registered     Offering Price(1)(2)     Registration Fee(4)
Class A common stock, par value $0.0001(3)
    $369,683,963     $11,349.26
             
(1) All 14,973,024 shares of Class A common stock issuable on exercise of warrants registered pursuant to this registration statement are to be offered by the selling stockholders. Pursuant to Rule 416 under the Securities Act, this registration statement also covers such number of additional shares of Class A common stock to prevent dilution resulting from stock splits, stock dividends and similar transactions pursuant to the terms of the warrants referenced below
(2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) on the basis of the average of the high and low prices per share of our common stock, as reported on the Nasdaq Global Select Market, on July 2, 2007 ($24.69).
(3) Represents shares of Class A common stock issuable upon the exercise of warrants held by the selling stockholders.
(4) Pursuant to Rule 457(a) under the Securities Exchange Act of 1934, the registration fee is offset by the registration fee previously paid by Clearwire in the amount of $11,014.36 with respect to unsold shares of common stock registered under the Registration Statement on Form S-1 (Registration No. 333-144357) filed on July 5, 2007.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
 
Subject to Completion, dated August 17, 2007
 
PROSPECTUS
 
 14,973,024 Shares
Clearwire Corporation
 
Class A Common Stock
 
This prospectus relates to the resale of an aggregate of up to 14,973,024 shares of our Class A common stock issuable upon exercise of warrants that we issued to the selling stockholders in connection with debt financing transactions in August 2005 and February 2006. The selling stockholders are prohibited from selling, offering to sell, contracting or agreeing to sell, hypothecating, hedging, pledging, granting options to purchase or otherwise disposing or agreeing to dispose, directly or indirectly, of any shares issuable upon exercise of the warrants until the expiration of contractual holdback arrangements on September 3, 2007 or as may be extended under the terms of the registration rights agreement. After such expiration, the selling stockholders identified in this prospectus may, upon exercise of the warrants, sell for their own account the shares of Class A common stock underlying the warrants. We are required to file this registration statement, of which this prospectus is a part, under the terms of a Registration Rights Agreement dated August 5, 2005 with the selling stockholders to register for resale the shares of Class A common stock underlying the warrants.
 
We will not receive any proceeds from the sale of the shares of Class A common stock by the selling stockholders. We will receive proceeds equal to the exercise price of any warrants held by the selling stockholders which are exercised for cash, but will receive no cash to the extent such warrants are exercised using applicable net issue exercise provisions.
 
Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “CLWR.” On August 15, 2007, the closing price of our Class A common stock as reported on the Nasdaq Global Select Market was $23.52 per share.
 
Investing in our Class A common stock involves risks that are described in “Risk Factors” beginning on page 6 of this prospectus.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
 
The date of this prospectus is          , 2007.


 

 
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 EXHIBIT 23.1
 
You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
No action is being taken in any jurisdiction outside the United States to permit a public offering of the Class A common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.


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SUMMARY
 
The following summary highlights information contained elsewhere in this prospectus. It may not contain all the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless the context requires otherwise, references to “Clearwire, “the Company,” “we,” “our,” or “us” refer to Clearwire Corporation and its consolidated subsidiaries.
 
Our Company
 
We build and operate next generation wireless broadband networks that enable fast, simple, portable, reliable and affordable Internet communications. Our wireless broadband networks cover entire communities and deliver a high-speed Internet connection that not only creates a new communications path into the home or office, but also provides a broadband connection anytime and anywhere within our coverage area. We intend to evolve our network and the services we provide to facilitate a greater range of mobile communications services than we currently offer.
 
Our current service is both competitive with and complementary to existing wireline and wireless networks. Our subscribers may access the same rich content, applications and services as subscribers of wireline broadband services, while also experiencing much of the freedom and flexibility that large scale wireless networks enable. We believe our network combines some of the best features of cellular, cable modem, digital subscriber line, or DSL, and wireless fidelity, or WiFi, networks into a single service offering that legacy networks do not currently match. As our capabilities evolve, we also expect to develop and offer additional innovative and differentiated products and services. Our recently introduced voice over Internet protocol, or VoIP, telephony service is one example of a service that complements our current wireless broadband offering. Our current wireless broadband Internet access service is:
 
  •  Fast.  We offer connectivity speeds that typically exceed cellular networks and are competitive with wireline broadband offerings.
 
  •  Simple.  Our services are easy to acquire and use, with no software or professional installation typically required.
 
  •  Portable.  Unlike wired networks, our customers can access our network from anywhere within our coverage area.
 
  •  Reliable.  We use licensed radio frequencies, or spectrum, which enables us to minimize interference common on certain wireless networks that use unlicensed or shared radio frequencies.
 
  •  Affordable.  We offer a value proposition that is competitive while recognizing the unique benefits of our service offerings.
 
We were founded by telecommunications pioneer Craig O. McCaw, our Chairman, in October 2003, and we launched our first market in August 2004. By June 30, 2007, we offered our services to more than 11.6 million people in the United States and Europe. As of June 30, 2007, our network in the United States is deployed in 40 markets across more than 425 municipalities and covers an estimated 10.0 million people. Our markets range from major metropolitan areas to small, rural communities, and all sizes in between. As of June 30, 2007, we also offered our wireless broadband services in Ghent and Brussels, Belgium and Dublin, Ireland, where our network covers approximately 1.6 million people.


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Subscribers have rapidly adopted our services as we have grown from approximately 1,000 wireless broadband Internet subscribers as of September 30, 2004 to approximately 299,000 as of June 30, 2007. We believe that substantially all of the households we cover have access to cable modem and/or DSL Internet services, leading us to conclude that our rapid subscriber growth rates reflect the mass market appeal and robust customer demand for our differentiated services, even in the presence of highly competitive wireline broadband alternatives.
 
Our advanced wireless broadband network currently relies on network infrastructure equipment that is based on proprietary non-line-of-sight, or NLOS, Orthogonal Frequency Division Multiplexing, or OFDM, technologies. We have committed to deploy networks based on the IEEE mobile Worldwide Interoperability of Microwave Access 802.16e-2005, or mobile WiMAX, standard once mobile WiMAX equipment is commercially available and meets our requirements. As with our current network infrastructure equipment, we expect mobile WiMAX to support fixed, portable and mobile service offerings using a single network architecture. In addition, as mobile WiMAX is a standards-based technology, we expect manufacturers eventually to offer a number of handheld communications and consumer electronic devices that will be enabled to communicate using our mobile WiMAX network, including notebook computers, ultramobile personal computers, or PCs, personal data assistants, or PDAs, gaming consoles, MP3 players, and other handheld devices. However, because mobile WiMAX technologies have not yet become commercially available, we cannot assure you that we will be able to deploy mobile WiMAX technologies in our network or that mobile WiMAX will be competitive with other available technologies.
 
In addition, we and Intel Corporation, or Intel, have agreed to jointly develop, promote and market a mobile WiMAX service offering as a co-branded service available only over Clearwire’s mobile WiMAX network in the United States. This service will target users of notebook computers, ultramobile PCs, and other mobile computing devices containing Intel microprocessors.
 
We are an early stage company, and as such we are investing heavily in building our network and acquiring other assets necessary to expand our business. As a result, we have a history of operating losses and expect to have significant losses in the future. As of June 30, 2007, our accumulated deficit was approximately $669.3 million, and our total indebtedness was approximately $754.8 million. We believe our cash and short-term investments afford us adequate liquidity for at least the next 12 months, although we may raise additional capital or refinance existing indebtedness during this period if acceptable terms are available. We expect to require substantial additional capital in the long-term to fund our business and our success and viability will depend on our ability to raise additional capital on reasonable terms.
 
Industry
 
We believe the U.S. broadband market offers significant long-term growth potential. According to IDC’s U.S. Broadband Services 2006-2010 Forecast (September 2006), the U.S. residential broadband market is expected to grow at a 14.3% compound annual growth rate between 2006 and 2010. According to that same report and IDC’s June 2006 Internet Commerce Market Model, Version 10.2, broadband penetration is expected to exceed 68% of U.S. households by 2010, up from 36% in 2005, as dial-up subscribers migrate to broadband connectivity and people with no Internet access become broadband subscribers. Based on those same reports, the worldwide broadband market is expected to experience similar growth trends. In its November 2006 Worldwide WiMAX Forecast, Gartner Dataquest estimates that the size of the North American WiMAX market will increase from approximately 30,000 connection installed bases in 2006 to 21.2 million in 2011, and the worldwide market will increase from 180,000 connection installed bases in 2006 to 84.8 million in 2011. In addition to growing broadband demand, the rapid growth of mobile email products, as well as sales of notebook computers and ultramobile PCs, leads us to believe that subscribers will increasingly favor Internet access that provides for the portability offered by our existing network and, once commercially deployable, the mobility offered by WiMAX.
 
As wireless broadband becomes more widely available, we believe demand for mobile applications will dramatically increase, including demand for email, web browsing, VoIP telephony, streaming audio and video, video conferencing, gaming, e-commerce, music and video downloading and file transfers. For instance, the


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U.S. VoIP-based broadband telephony market is expected to grow from 4.3 million households in 2005 to 22.5 million households by 2010, according to Jupiter Research’s Broadband/Voice Over IP (September 2006) report, representing approximately a 39% compound annual growth rate. The worldwide VoIP telephony market is expected to experience similar growth trends, according to iSuppli’s August 2006 Wired Communications Topical Report.
 
Competitive Strengths
 
Our business is characterized by the following competitive strengths:
 
  •  Differentiated Services.  We offer our subscribers competitively priced services that combine speed, simplicity, portability and reliability. We believe that DSL, cable and cellular networks do not deliver all of these characteristics in a single service offering. While many companies around the world have announced their intention to test and/or deploy WiMAX or mobile WiMAX networks, including some companies that currently operate PCS or cellular networks, we believe our business model is unique. Nevertheless, we may compete with companies in certain of our markets that adopt technologies and/or business models that are substantially similar to ours, and some of these competitors may be better established and have greater resources than we do.
 
  •  Attractive Spectrum Position.  We use licensed spectrum, which allows us to minimize the interference common to many networks that use unlicensed spectrum, including WiFi networks. The supply of licensed spectrum is limited, creating significant barriers to entry for competing wireless services. We believe that we have the second largest spectrum position in the 2.5 GHz (2495-2690 MHz) band in the United States. As of June 30, 2007, assuming we complete all pending spectrum acquisitions and leases, our spectrum portfolio in the United States included approximately 14.2 billion MHz-POPs, an industry metric that represents the amount of spectrum in a given area, measured in MHz, multiplied by the estimated population of that areas. In Europe, as of June 30, 2007, we held approximately 8.7 billion MHz-POPs of spectrum, predominantly in the 3.5 GHz band. We plan to continue acquiring spectrum in markets that we believe are attractive for our service offerings. If demand increases for spectrum rights, our spectrum acquisition costs may increase, which may place competitors with greater capital resources at an advantage over us.
 
  •  Efficient Economic Model.  We believe our economic model for deploying our services is based on replicable and scalable individual market builds, allowing us to repeat our build-out processes as we expand. Once our network is deployed, we are typically able to leverage our fixed costs over an increasing number of subscribers. We believe our model requires lower fixed capital and operating expenditures relative to other wireless and wireline broadband service providers.
 
  •  World-Class Management Team.  Regarded as a pioneer and leader in the wireless communications industry, Mr. McCaw has been an active entrepreneur, operator and investor in the industry for more than 35 years. In addition to Mr. McCaw, our senior management team consists of a core group of eight senior executives, who together average almost 23 years of experience in or serving the communications and technology industries with companies such as McCaw Cellular, AT&T Wireless, Nextel Communications, Nextel Partners, Intel and others.
 
  •  Strong Strategic Relationships.  We have key strategic relationships with three industry leaders, Intel, Motorola and Bell Canada, which, directly or through their affiliates, have invested a total of approximately $1.1 billion in our equity securities. We believe our strategic relationships with Intel, Motorola and Bell Canada place us in an advantageous position with respect to access to equipment, deployment of mobile WiMAX and development of other value added services, such as VoIP telephony. We currently depend on these strategic relationships to provide equipment that meets our requirements on a timely basis. If the equipment is not available on a timely basis, our ability to execute our business strategy and operate our business may be impaired.


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Business Strategy
 
We intend to continue to grow our business by pursuing the following strategies:
 
  •  Deploy our service broadly and increase our subscriber base rapidly.  We intend to deploy our network throughout the United States and internationally in markets that we find attractive. We believe that this broad deployment will enable us to rapidly increase our subscriber base. We are contractually committed to use commercially reasonable efforts to deploy mobile WiMAX networks in the United States if and when that technology meets certain requirements. If this occurs, we expect to deploy mobile WiMAX networks in our new markets in the United States and in other countries and, over time, migrate our existing markets to the same technology.
 
  •  Build our spectrum position.  We intend to continue acquiring spectrum in the United States and in other countries, thereby increasing the number of markets in which we are able to offer our services.
 
  •  Enhance portability and mobile service offerings.  We will continue to focus on enhancing the portability of subscriber equipment and to work with vendors to introduce devices that will allow us to offer fully mobile services, whether based on our existing Expedience network or on our planned mobile WiMAX network. Following FCC approval, which we received in May 2007, we intend to introduce a PC Card for our Expedience network in the second half of 2007 that will facilitate greater mobile access to our services. We further believe that commercial deployment of mobile WiMAX will lead to the development and availability of mobile products that are compatible with our planned mobile WiMAX network.
 
  •  Offer premium value added services.  We intend to generate incremental revenues, leverage our cost structure and improve subscriber retention by offering a variety of premium services. As of June 30, 2007, we offered VoIP telephony services in 28 markets, and plan to expand this offering to other markets in the future. We also plan to offer other premium services and applications, which may include WiFi hotspots, public safety services, security services, and subscription-based technical support. We believe that our planned mobile WiMAX deployment will enable us to offer additional premium services that take advantage of the capabilities of this technology.
 
Recent Developments
 
On March 13, 2007, we sold 24,000,000 shares of our Class A common stock in an initial public offering at a gross price of $25.00 per share. The net proceeds of the initial public offering were approximately $555.2 million, which are being used for market and network expansion, spectrum acquisitions and general corporate purposes. These shares trade on the Nasdaq Global Select Market under the symbol “CLWR.”
 
On May 29, 2007, we acquired all of the 2.5GHz spectrum held by AT&T for an aggregate purchase price of $300 million, increasing our spectrum holdings by over 1.7 billion MHz-POPs in the southeastern United States.
 
On July 3, 2007, we entered into a senior term loan facility providing for loans of up to $1.0 billion. We borrowed $379.3 million under the senior term loan facility on the date of closing and repaid our obligations under our $125.0 million term loan, the fees and costs attributable to the senior term loan facility and the remainder will be used for general working capital purposes. The new senior term loan facility provides for quarterly principal payments, with the remaining balance due on July 3, 2012. In general, borrowings under the new senior term loan facility bear interest based, at our option, at either the Eurodollar rate or an alternate base rate, in each case plus a margin. The initial rate of interest for borrowings under the new senior term loan facility is the Eurodollar rate plus 6.00% or the alternate base rate plus 5.00%, with interest payable quarterly with respect to alternate base rate loans, and with respect to Eurodollar loans, interest is payable in arrears at the end of each applicable period, but at least every three months. We borrowed the remaining amount of approximately $620.7 million under the senior term loan facility on August 15, 2007, to retire our senior secured notes due 2010. On August 15, 2007 we redeemed the senior secured notes due 2010 for a price of 102.5% of the aggregate principal amount outstanding of approximately $620.7 million plus accrued and unpaid interest to the date of redemption and the remaining portion of the interest escrow.


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In connection with the repayment of our prior term loan and the retirement of our senior secured notes due 2010, we expect to record charges from debt restructuring that may be material in the third quarter of 2007.
 
On July 19, 2007 we entered into a letter of intent with Sprint Nextel Corporation, or Sprint, under which the parties agreed to jointly construct a nationwide broadband network using WiMAX technology and promote development of WiMAX-based services. We and Sprint expect to build our respective portions of the nationwide network and enable roaming between the respective territories. We will also work jointly on product and service evolution, shared infrastructure, branding, marketing and distribution. The arrangement involves an exchange of selected 2.5 GHz spectrums in various markets. The arrangement is subject to the execution of definitive agreements. It is also subject to review by the Department of Justice, approval of spectrum license assignments and transfers by the Federal Communications Commission, and other closing conditions.
 
General Information About This Prospectus
 
Clearwire®, ClearBusiness®, ClearPremium®, ClearClassic® and ClearValue® are registered trademarks of Clearwire. NextNet® and Expedience® are registered trademarks of NextNet Wireless, Inc., a wholly-owned subsidiary of Motorola, Inc. All other trademarks, service marks and trade names referred to in this prospectus are the property of their respective owners.
 
Our Corporate Information
 
We are a Delaware corporation. Our principal executive offices are located at 4400 Carillon Point, Kirkland, Washington 98033, and our telephone number is (425) 216-7600. Our website address is http://www.clearwire.com. Information on or accessed through our website is not incorporated into this prospectus and is not a part of this prospectus.
 
Unless otherwise indicated, all of the share numbers and per share prices in this prospectus give effect to a reverse stock split that became effective on March 1, 2007. Upon the effectiveness of the reverse split, every three shares of our Class A common stock were combined into one share of Class A common stock and every three shares of our Class B common stock were combined into one share of Class B common stock. The shares of Class A common stock issuable on exercise of the warrants and the exercise price were subject to a proportionate adjustment. As used in this prospectus, the term “common stock” means our Class A common stock and the term “capital stock” means our Class A and Class B common stock, unless otherwise specified.


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RISK FACTORS
 
Investing in shares of our common stock involves a high degree of risk. Before investing in our common stock you should consider carefully the following risks, together with the financial and other information contained in this prospectus. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be adversely affected. In that case, the trading price of our common stock would likely decline and you may lose all or a part of your investment.
 
Risks Relating to Our Company
 
We are an early stage company, we have a history of operating losses and we expect to continue to realize significant net losses for the foreseeable future.
 
We have only recently begun to implement our business strategy, and we amended that strategy significantly in connection with our sale of NextNet and our entry into commercial agreements with Intel and Motorola in August 2006. We have recorded a net loss in each reporting period since our inception. Our net loss for the six months ended June 30, 2007 and 2006, was approximately $210.7 million and $132.1 million, respectively. Our accumulated deficit at June 30, 2007 was approximately $669.3 million. In addition, we entered into a $1.0 billion senior term loan facility on July 3, 2007 which permitted the repayment of our $125.0 million term loan and the redemption of our $620.7 million in senior secured notes. In connection with the repayment of our prior term loan and the retirement of our senior secured notes due 2010, we expect to record charges from debt restructuring that may be material in the third quarter of 2007. As Clearwire is at an early stage of development, we cannot anticipate with certainty what our earnings, if any, will be in any future period. However, we expect to incur significant net losses as we develop and deploy our network in new and existing markets, expand our services and pursue our business strategy. We intend to invest significantly in our business before we expect cash flow from operations will be adequate to cover our anticipated expenses. In addition, at this stage of our development we are subject to the following risks:
 
  •  our results of operations may fluctuate significantly, which may adversely affect the value of an investment in our common stock;
 
  •  we may be unable to develop and deploy our network, expand our services, meet the objectives we have established for our business strategy or grow our business profitably, if at all;
 
  •  it may be difficult to predict accurately our key operating and performance metrics because of our limited operating history; and
 
  •  our network and related technologies may fail or the quality and number of services we are able to provide may decline if our network operates at maximum capacity for an extended period of time.
 
If we are unable to execute our business strategy and grow our business, either as a result of the risks identified in this section or for any other reason, our business, prospects, financial condition and results of operations will be materially and adversely affected.
 
If we do not obtain additional financing, our business prospects, financial condition and results of operations will be adversely affected.
 
We believe our cash, cash equivalents and marketable securities together with the incremental cash provided by our new senior term loan facility, afford us adequate liquidity for at least the next 12 months, although we may raise additional capital during this period if acceptable terms are available. As of June 30, 2007 we had pending contracts to acquire additional spectrum requiring future payments of approximately $29.5 million. We expect to enter into additional spectrum acquisition agreements in the future. We also expect to require substantial additional capital in the long-term to fund our business, and our success and viability will depend on our ability to raise additional capital on reasonable terms.
 
The amount and timing of our long-term capital needs will depend on the extent of our network deployment, which we may adjust based on available capital and, to a lesser degree, based on the schedule on which mobile WiMAX technologies become available, which factors are difficult to estimate at this time. We


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may not be able to secure adequate additional financing when needed on acceptable terms or at all. To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than the market price of our common stock at the time of such issuance. We may seek additional debt financing, in the short-term and the long-term, and, as a result, will likely incur significant interest expense. Our existing level of debt may make it more difficult for us to obtain this debt financing, may reduce the amount of money available to finance our operations and other business activities, may expose us to the risk of increasing interest rates, may make us more vulnerable to general economic downturns and adverse industry conditions, and may reduce our flexibility in planning for, or responding to, changing business and economic conditions. We also may decide to sell additional debt or equity securities in our domestic or international subsidiaries, which may dilute our ownership interest in or reduce or eliminate our income, if any, from those entities. If we cannot secure sufficient additional funding we may forego strategic opportunities or delay, scale back and eliminate network deployments, operations, spectrum acquisitions and investments.
 
We have committed to deploy a wireless broadband network using mobile WiMAX technologies under certain circumstances, even if there are alternative technologies available in the future that would be technologically superior or more cost effective.
 
Under the terms of our strategic collaboration agreement with Intel, we have committed to use commercially reasonable efforts to deploy a mobile WiMAX based network once mobile WiMAX equipment is commercially available and satisfies certain technical performance criteria. While vendors currently expect mobile WiMAX equipment to be commercially available in the fourth quarter of 2007, we cannot assure you that commercial quantities of mobile WiMAX equipment meeting our requirements will be available on this schedule or that they will be successfully developed at all. Other competing technologies may be developed that have advantages over mobile WiMAX, and operators of other networks based on these competing technologies may be able to deploy their networks at a lower cost than that incurred in deploying a mobile WiMAX network, which may allow those operators to compete more effectively. Additionally, if other network operators do not adopt and deploy mobile WiMAX, equipment manufacturers may be unwilling to invest the time and money necessary to develop infrastructure equipment and end user devices that meet our business needs. Furthermore, we are depending on the widescale deployment of mobile WiMAX networks to drive an adequate volume of demand which we expect will support reasonably priced equipment. As a result, our commitment to deploy mobile WiMAX technology on our network may lead to problems acquiring new subscribers and dissatisfaction among our existing subscribers, either of which would harm our prospects, financial condition and results of operations.
 
Additionally, mobile WiMAX may not perform as we expect, or as well as our existing Expedience technology, and therefore we may not be able to deliver the quality or types of service we expect. We also may discover unanticipated costs associated with deploying and maintaining our network or delivering services we must offer in order to remain competitive. These risks could reduce our subscriber growth, increase our costs of providing services or increase our churn. Churn is an industry term we use to measure the rate at which subscribers terminate service. We calculate this metric by dividing the number of subscribers who terminate their service in a given month by the average number of subscribers during that month, in each case excluding those who subscribe for and terminate our service within 30 days for any reason or in the first 90 days of service under certain circumstances.
 
We face risks from entering into a letter of intent with Sprint to commit to jointly constructing and operating a nationwide WiMAX network.
 
On July 19, 2007, we entered into a letter of intent with Sprint Nextel Corporation, or Sprint to jointly construct the first nationwide mobile broadband network using mobile WiMAX technology, which remains subject to the execution of definitive agreements. We can offer no assurance that definitive agreements will be executed on acceptable final terms to both parties, or at all. If the parties enter into definitive agreements, such agreements will be subject to a number of closing conditions, including FCC approval and the expiration of any applicable HSR waiting period. Thus, even if definitive agreements are signed, we can offer no assurance that the transactions contemplated by such agreements will ever be completed. Finally, if the transactions


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contemplated by such agreements are completed, the expected benefits from the transactions and the resulting changes to our business plan may not be fully realized, or may take longer to realize than expected.
 
If third parties fail to develop and deliver the equipment that we need for both our existing and future networks, we may be unable to execute our business strategy or operate our business.
 
We currently depend on third parties to develop and deliver complex systems, software and hardware products and components for our network in a timely manner, at a high level of quality. Motorola is our sole supplier of equipment and software for the Expedience system currently deployed on our network, which was developed by NextNet. The Expedience system consists of network components used by us and subscriber equipment used by our subscribers. To successfully execute our business strategy, Motorola must not only continue to produce the Expedience system, including the software and hardware components, and deliver it when needed by us, but must also continue to further upgrade and evolve the technology for our business to remain competitive until we deploy mobile WiMAX technologies. Any failure by Motorola to meet these needs may impair our ability to execute our business strategy and our ability to operate our business.
 
For our planned mobile WiMAX deployment, we are relying on third parties, including Motorola and Intel, to develop the network components and subscriber equipment necessary to build and operate our mobile WiMAX networks. As mobile WiMAX is a new and highly sophisticated technology, we cannot be certain that these third parties will be successful in their development efforts. Even if these parties are successful, the development process for mobile WiMAX network components and subscriber equipment may be lengthy and subject to significant delays. If these third parties are unable to develop mobile WiMAX network components and subscriber equipment on a timely basis that perform according to our expectations, we may be unable to deploy mobile WiMAX on our networks when we expect, or at all. If we are unable to deploy mobile WiMAX in a timely manner, we may be unable to execute our business strategy and our prospects and results of operations would be harmed.
 
Many of our competitors are better established and have significantly greater resources than we have, which may make it difficult to attract and retain subscribers.
 
The market for broadband, voice and related services is highly competitive, and we compete with several other companies within each of our markets. Many of our competitors are well established with larger and better developed networks and support systems, longer-standing relationships with customers and suppliers, greater name recognition and greater financial, technical and marketing resources than we have. Our competitors may subsidize competing services with revenue from other sources and, thus, may offer their products and services at prices lower than ours. Our competitors may also reduce the prices of their services significantly or may offer broadband connectivity packaged with other products or services. We may not be able to reduce our prices or otherwise combine our services with other products or services, which may make it more difficult to attract and retain subscribers.
 
Many of our competitors are better established or have greater financial resources than we have. Our competitors include:
 
  •  cable operators offering high-speed Internet connectivity services and voice communications;
 
  •  incumbent and competitive local exchange carriers providing DSL services over their existing wide, metropolitan and local area networks;
 
  •  3G cellular, PCS and other wireless providers offering wireless broadband services and capabilities, including developments in existing cellular and PCS technology that may increase network speeds or have other advantages over our services;
 
  •  Internet service providers offering dial-up Internet connectivity;
 
  •  municipalities and other entities operating WiFi networks, some of which are free or subsidized;
 
  •  providers of VoIP and other telephony services;


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  •  wireless Internet service providers using licensed or unlicensed spectrum;
 
  •  satellite and fixed wireless service providers offering or developing broadband Internet connectivity and VoIP telephony;
 
  •  electric utilities and other providers offering or planning to offer broadband Internet connectivity over power lines; and
 
  •  resellers providing wireless Internet or other wireless services using infrastructure developed and operated by others.
 
We expect other existing and prospective competitors to adopt technologies or business plans similar to ours, or seek other means to develop services competitive with ours, particularly if our services prove to be attractive in our target markets. For example, Sprint has announced its intention to deploy a mobile WiMAX network covering 100 million people in the United States by the end of 2008. Sprint has substantially greater resources than we do, giving them certain advantages over us. If our agreements with Sprint regarding the joint construction of a nationwide WiMAX network are not completed for any reason (as discussed in a prior Risk Factor), Sprint may deploy their network in some of the same markets in which we have deployed or plan to deploy our network. Additionally, even if we do finalize our agreements with Sprint, Sprint may become enabled to deploy their network in some of the same markets in which we plan to deploy our network if we fail to meet certain requirements. In either case, Sprint or other operators may deploy their network faster or more broadly than we do, thereby obtaining a time to market advantage over us. There can be no assurances that there will be sufficient customer demand for services offered over mobile WiMAX networks in the same markets to allow multiple operators, if any, to succeed.
 
Our substantial indebtedness and restrictive debt covenants could limit our financing options and liquidity position and may limit our ability to grow our business.
 
On July 3, 2007, we entered into a senior term loan facility providing for loans of up to $1.0 billion. We borrowed $379.3 million under the senior term loan facility on the date of closing and repaid our obligations under our $125.0 million term loan, the fees and costs attributable to the senior term loan facility and the remainder will be used for general working capital purposes. We borrowed the remaining amount of approximately $620.7 million under the new senior term loan facility on August 15, 2007, to retire our senior secured notes due 2010. The new senior term loan facility provides for quarterly principal payments, with the remaining balance due on the final maturity date. In general, borrowings under the new senior term loan facility bear interest based, at our option, at either the Euro dollar rate or on an alternate base rate, in each case plus margin. We also borrowed $10.0 million from BCE Nexxia, an affiliate of Bell Canada, in June 2006 in connection with the build-out and deployment of our VoIP infrastructure.
 
Our substantial indebtedness could have important consequences to the holders of our common stock, such as:
 
  •  we may not be able to obtain additional financing to fund working capital, operating losses, capital expenditures or acquisitions on terms acceptable to us or at all;
 
  •  we may be unable to refinance our indebtedness on terms acceptable to us, or at all;
 
  •  our substantial indebtedness may make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures; and
 
  •  cash flows from operations and investing activities have been negative since inception and will continue to be so for some time, and our remaining cash, if any, may be insufficient to operate our business.
 
Additionally, covenants in the credit agreement governing our term loan facility impose operating and financial restrictions on us. These restrictions prohibit or limit our ability, and the ability of our subsidiaries, to, among other things:
 
  •  pay dividends to our stockholders;
 
  •  incur, or cause certain of our subsidiaries to incur, additional indebtedness;
 
  •  permit liens on or conduct sales of any assets pledged as collateral;


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  •  sell all or substantially all of our assets or consolidate or merge with or into other companies;
 
  •  repay existing indebtedness; and
 
  •  engage in transactions with affiliates.
 
A breach of any of these covenants could result in a default under our senior term loan facility. If a default causes our debt repayment obligations to be accelerated, our assets may be insufficient to repay the amount due in full. If we are unable to repay or refinance those amounts, the collateral agent for our senior term loan facility, could proceed against the assets pledged to secure these obligations, which include substantially all of our assets.
 
These restrictions may limit our ability to obtain additional financing, withstand downturns in our business and take advantage of business opportunities. Moreover, we may seek additional debt financing on terms that include more restrictive covenants, may require repayment on an accelerated schedule or may impose other obligations that limit our ability to grow our business, acquire needed assets, or take other actions we might otherwise consider appropriate or desirable.
 
We and our independent public accountants have both identified material weaknesses and other significant deficiencies in our internal control over financial reporting during 2005 and 2006. If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results in an accurate and timely manner could harm our business and adversely impact the trading price of our Class A common stock.
 
Prior to our initial public offering in March 2007, we were a private company and had not filed reports with the SEC. As a public reporting company we are required, among other things, to maintain a system of effective control over financial reporting. We produce our consolidated financial statements in accordance with the requirements of generally accepted accounting principles in the United States (“U.S. GAAP”), but our internal control may not currently meet all of the standards applicable to companies with publicly traded securities.
 
Effective internal controls are necessary to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business, brand and reputation with investors may be harmed. As a result, our current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have in the past discovered, and may in the future discover, areas of our internal control that need improvement.
 
We and our independent public accountants have identified material weaknesses in our internal controls during 2005 and 2006. A material weakness is a significant deficiency that, by itself or in combination with other control deficiencies, results in more than a remote likelihood that a material misstatement in our annual or interim financial statements will not be prevented or detected.
 
In 2005, we determined that there were material weaknesses related to our lack of sufficient review of our accounting for nonroutine and complex transactions and a lack of proper cutoff of accounts payable and accrued expenses. The weakness for nonroutine and complex transactions specifically included accounting for equity-method investments and issuance of debt with detachable warrants. During 2006, we determined that a material weakness in internal controls existed because of a lack of properly designed internal control over the preparation and review of the financial statements. We have also identified other significant deficiencies in our internal controls.
 
If we do not establish and maintain an effective system of internal control and address and remediate our material weaknesses and other significant deficiencies, the reliability of our periodic reports on Form 10-Q and annual report on Form 10-K may be compromised. This may result in a restatement of our financial statements, such as past restatements of our financial statements for the nine months ended September 30, 2005 and 2006 and for the years ended December 31, 2004 and 2005. In addition, reporting any material weakness may negatively impact investors’ perception of us. We have allocated, and will continue to allocate, significant additional resources to remediating any deficiencies in our internal control. We are in the process of addressing


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and remedying the identified material weaknesses in internal control over financial reporting, as well as all other identified significant deficiencies. However, elements of our remediation plan can only be accomplished over time, and our initiatives ultimately may not result in an effective internal control environment.
 
Acquisitions, investments and other strategic transactions could result in operating difficulties, dilution and distractions from our core business.
 
We have entered, and may in the future enter, into strategic transactions, including strategic supply and service agreements and acquisitions of other assets and businesses. Any such transactions can be risky, may require a disproportionate amount of our management and financial resources and may create unforeseen operating difficulties or expenditures, including:
 
  •  difficulties in integrating acquired technologies and operations into our business while maintaining uniform standards, controls, policies and procedures;
 
  •  obligations imposed on us by counterparties in such transactions that limit our ability to obtain additional financing, our ability to compete in geographic areas or specific lines of business, or other aspects of our operational flexibility;
 
  •  increasing cost and complexity of assuring the implementation and maintenance of adequate internal control and disclosure controls and procedures, and of obtaining the reports and attestations required under the Securities Exchange Act of 1934;
 
  •  difficulties in consolidating and preparing our financial statements due to poor accounting records, weak financial controls and, in some cases, procedures at acquired entities not based on U.S. GAAP particularly those entities in which we lack control; and
 
  •  inability to predict or anticipate market developments and capital commitments relating to the acquired company, business or technology.
 
In the past, some of our business acquisitions have given rise to significant deficiencies in financial reporting controls in certain areas such as cash, inventory, fixed assets, prepaid site rentals, value-added tax receivables and depreciation expense, as well as inconsistent preparation of monthly routine elimination entries that resulted in intercompany transactions not properly eliminated in consolidation at year end.
 
In addition, acquisitions of, and investments in, businesses organized outside the United States often can involve additional risks, including:
 
  •  difficulties, as a result of distance, language, legal or culture differences, in developing, staffing and managing foreign operations;
 
  •  lack of control over our equity investees and other business relationships;
 
  •  currency exchange rate fluctuations;
 
  •  longer payment cycles;
 
  •  credit risk and higher levels of payment fraud;
 
  •  foreign exchange controls that might limit our control over, or prevent us from repatriating, cash generated outside the United States;
 
  •  potentially adverse tax consequences;
 
  •  expropriation or nationalization of assets;
 
  •  differences in regulatory requirements that may make it difficult to offer all of our services;
 
  •  unexpected changes in regulatory requirements;
 
  •  difficulties in foreign corporate law that have and may create additional administrative burdens and legal risks;


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  •  increased management time and resources to manage overseas operations;
 
  •  trade barriers and import and export restrictions; and
 
  •  political or social unrest and economic instability.
 
The anticipated benefit of any of our strategic transactions may never materialize. Future investments, acquisitions or dispositions, or similar arrangements could result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. Any such transactions may require us to obtain additional equity or debt financing, which may not be available on favorable terms, or at all. We have experienced certain of these risks in connection with our acquisitions and investments in the past, and the occurrence of any of these risks in the future may have a material effect on our business.
 
We may experience difficulties in constructing, upgrading and maintaining our network, which could adversely affect customer satisfaction, increase subscriber churn and reduce our revenues.
 
Our success depends on developing and providing services that give subscribers a high quality experience. We expect to expend significant resources in constructing, maintaining and improving our network. Additionally, as the number of subscribers using our network increases, as the usage habits of our subscribers change and as we increase our service offerings, we may need to upgrade our network to maintain or improve the quality of our services. If we do not successfully implement upgrades to our network, the quality of our services may decline and the rate of our subscriber churn may increase.
 
We may experience quality deficiencies, cost overruns and delays with our construction, maintenance and upgrade projects including the portions of those projects not within our control. The construction of our network requires permits and approvals from numerous governmental bodies, including municipalities and zoning boards. Such entities often limit the expansion of transmission towers and other construction necessary for our network. Failure to receive approvals in a timely fashion can delay system rollouts and raise the cost of completing construction projects. In addition, we typically are required to obtain rights from land, building and tower owners to install the antennas and other equipment that provide our service to our subscribers. We may not be able to obtain, on terms acceptable to us or at all, the rights necessary to construct our network and expand our services.
 
We also may face challenges in managing and operating our network. These challenges include ensuring the availability of subscriber equipment that is compatible with our network and managing sales, advertising, customer support, billing and collection functions of our business while providing reliable network service that meets our subscribers’ expectations. For example, our billing system was designed by, and is currently serviced by, a vendor for whom we believe we are the largest customer and, if this vendor were to experience operational or financial distress, we may be required to replace our billing provider or implement a new billing system which could disrupt our operations and cause us to incur expenses we do not currently anticipate. Our failure in any of these areas could adversely affect customer satisfaction, increase subscriber churn, increase our costs, decrease our revenues and otherwise have a material adverse effect on our business, prospects, financial condition and results of operations.
 
If we do not obtain and maintain rights to use licensed spectrum in one or more markets, we may be unable to operate in these markets, which could adversely affect our ability to execute our business strategy.
 
To offer our services using licensed spectrum both in the United States and internationally, we depend on our ability to acquire and maintain sufficient rights to use spectrum through ownership or long-term leases in each of the markets in which we operate or intend to operate. Obtaining the necessary amount of licensed spectrum can be a long and difficult process that can be costly and require a disproportionate amount of our resources. We may not be able to acquire, lease or maintain the spectrum necessary to execute our business strategy. In addition, we may spend significant resources to acquire spectrum, even if the amount of spectrum actually acquired in certain markets is not adequate to deploy our network on a commercial basis in all such markets.


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Using licensed spectrum, whether owned or leased, poses additional risks to us, including:
 
  •  inability to satisfy build-out or service deployment requirements upon which our spectrum licenses or leases are, or may be, conditioned;
 
  •  adverse changes to regulations governing our spectrum rights;
 
  •  inability to use the spectrum we have acquired or leased due to interference from licensed or unlicensed operators in our band or in adjacent bands;
 
  •  refusal by the FCC or one or more foreign licensing authorities to recognize our acquisition or lease of spectrum licenses from others or our investments in other license holders;
 
  •  inability to offer new services or to expand existing services to take advantage of new capabilities of our network resulting from advancements in technology due to regulations governing our spectrum rights;
 
  •  inability to control or maintain rights in leased spectrum due to contractual disputes with, or the bankruptcy or other reorganization of, the license holders;
 
  •  failure of the FCC or other regulators to renew our spectrum licenses as they expire and our failure to obtain extensions or renewals of spectrum leases on acceptable terms or at all before they expire;
 
  •  potentially significant increases in spectrum prices, because of increased competition for the limited supply of licensed spectrum both in the United States and internationally; and
 
  •  invalidation of our authorization to use all or a significant portion of our spectrum, resulting in, among other things, impairment charges related to assets recorded for such spectrum.
 
We expect the FCC to make additional spectrum available from time to time, including 60 MHz of spectrum in the 700 MHz band. Congress has directed that the FCC conduct an auction for the 700 MHz band spectrum no later than January 28, 2008. Additionally, other companies hold spectrum rights that could be made available for lease or sale. The availability of additional spectrum in the marketplace could change the market value of spectrum rights generally and, as a result, may adversely affect the value of our spectrum assets.
 
Interruption or failure of our information technology and communications systems could impair our ability to provide our services, which could damage our reputation and harm our operating results.
 
We have experienced service interruptions in some markets in the past and may experience service interruptions or system failures in the future. Any service interruption adversely affects our ability to operate our business and could result in an immediate loss of revenues. If we experience frequent or persistent system or network failures, our reputation and brand could be permanently harmed. We may make significant capital expenditures to increase the reliability of our systems, but these capital expenditures may not achieve the results we expect.
 
Our services depend on the continuing operation of our information technology and communications systems. Any damage to or failure of these systems could result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand could be damaged if people believe our network is unreliable. Our systems are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant, and our disaster recovery planning may not be adequate. The occurrence of a natural disaster or unanticipated problems at our network centers could result in lengthy interruptions in our service and adversely affect our operating results.
 
A number of our significant business arrangements are between us and parties that have an investment in or a fiduciary duty to our company, and the terms of those arrangements may not be beneficial to us.
 
We are party to a number of services, development, supply and licensing agreements with parties that have an ownership or fiduciary relationship with us, including agreements between us and Intel, Motorola, and


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Bell Canada as well as agreements with Eagle River Holdings, LLC, or ERH and Eagle River, Inc., or ERI, each of which are controlled by Mr. McCaw. These relationships may create actual or potential conflicts of interest, and may cause the parties to these arrangements to make decisions or take actions that do not reflect your best interests.
 
We pay Mr. McCaw, in his capacity as our Chairman, annual compensation of $300,000 per year plus expense reimbursements. In addition, Mr. McCaw and his affiliates face only limited restrictions on their ability to compete with us. Because these limitations are not universal, there may arise conflicts of interest that restrict or inhibit our ability to operate our business, make acquisitions and obtain financing. Furthermore, in addition to Mr. McCaw, certain members of our management team are also employed by, or have interests in, ERH or its affiliates or one of Mr. McCaw’s other investments, including Mr. Wolff, our Chief Executive Officer, who serves as President of ERH.
 
Our commercial agreements with Motorola, Intel and Bell Canada were entered into concurrently with purchases of our shares of capital stock by each of these entities or their affiliates. None of these agreements restricts these parties from entering into similar arrangements with other parties. None of Mr. McCaw, ERH, Intel, Motorola or any of our other debt or equity security holders, nor any of their respective affiliates, are obligated to purchase equity from, or contribute or lend funds to, us or any of our subsidiaries or equity investees.
 
The industries in which we operate are continually evolving, which makes it difficult to evaluate our future prospects and increases the risk of your investment. Our products and services may become obsolete, and we may not be able to develop competitive products or services on a timely basis or at all.
 
The broadband services industry is characterized by rapid technological change, competitive pricing, frequent new service introductions, evolving industry standards and changing regulatory requirements. For example, we plan to introduce a PC Card compatible with our current Expedience technology in the second half of 2007. Additionally, our planned deployment of mobile WiMAX depends on the development of network equipment and subscriber devices based on the mobile WiMAX standard. Each of these development efforts faces a number of continuing technological and operational challenges. We believe that our success depends on our ability to anticipate and adapt to these and other challenges and to offer competitive services on a timely basis. We face a number of difficulties and uncertainties associated with our reliance on future technological development, such as:
 
  •  existing service providers may use more traditional and commercially proven means to deliver similar or alternative services;
 
  •  new service providers may use more efficient, less expensive technologies, including products not yet invented or developed;
 
  •  consumers may not subscribe to our services;
 
  •  we may not be able to realize economies of scale;
 
  •  we may be unable to respond successfully to advances in competing technologies in a timely and cost-effective manner;
 
  •  we may lack the financial and operational resources necessary to enable migration toward mobile WiMAX technology and the development and deployment of network components and software that do not currently exist and that may require substantial upgrades to or replacements of existing infrastructure; and
 
  •  existing, proposed or undeveloped technologies may render our existing or planned services less profitable or obsolete.
 
As our services and those offered by our competitors develop, businesses and consumers may not accept our services as an attractive alternative to other means of receiving wireless broadband services.


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We rely on highly skilled executives and other personnel. If we cannot retain and motivate key personnel, we may be unable to implement our business strategy.
 
Our future success depends largely on the expertise and reputation of Mr. McCaw and the members of our senior management team, including Benjamin G. Wolff, Chief Executive Officer, Perry S. Satterlee, President and Chief Executive Officer of our operations in the United States, John Saw, our Chief Technology Officer, R. Gerard Salemme, our Executive Vice President for Strategy, Policy and External Affairs, John A. Butler, our Chief Financial Officer, and Scott Richardson, our Chief Strategy Officer. In addition, we intend to hire additional highly skilled individuals to staff our operations in the United States and internationally. Loss of any of our key personnel or the inability to recruit and retain qualified individuals for our domestic and international operations could adversely affect our ability to implement our business strategy and operate our business.
 
In addition, to successfully introduce our services in new markets and grow our business in existing markets, we rely on the skills of our general managers in these markets. If we cannot hire, train and retain motivated and well-qualified individuals to serve as general managers in our markets, we may face difficulties in attracting, recruiting and retaining various sales and support personnel in those markets, which may lead to difficulties in growing our subscriber base.
 
Certain aspects of our VoIP telephony services differ from traditional telephone service, which may limit the attractiveness of our services.
 
We intend to continue to offer VoIP telephony as a value added service with our wireless broadband Internet service. Our VoIP telephony services differ from traditional phone service in several respects, including:
 
  •  our subscribers may experience lower call quality than they experience with traditional wireline telephone companies, including static, echoes and transmission delays;
 
  •  our subscribers may experience higher dropped-call rates than they experience with traditional wireline telephone companies;
 
  •  a power loss or Internet access interruption may cause our service to be interrupted; and
 
  •  we do not offer local number portability to our subscribers in all our VoIP markets.
 
If our subscribers do not accept the differences between our VoIP telephony services and traditional telephone service, they may not adopt or keep our VoIP telephony services or our other services, or may choose to retain or return to service provided by traditional telephone companies.
 
Additionally, although we are compliant with the Federal Communication Commission’s, or FCC, November 28, 2005 mandate that all VoIP providers transmit all 911 calls to the appropriate public safety answering point, or PSAP, our VoIP emergency calling service is significantly more limited than the emergency calling services offered by traditional telephone companies. Our VoIP emergency calling service can transmit to a dispatcher at a PSAP only the location information that the subscriber has registered with us, which may at times be different from the actual location at the time of the call due to the portability of our services. As a result, if our subscribers fail to properly register or update their registered locations, our emergency calling systems may not assure that the appropriate PSAP is reached and may cause significant delays, or even failures, in callers’ receipt of emergency assistance. Our failure to develop or operate an adequate emergency calling service could subject us to substantial liabilities and may result in delays in subscriber adoption of our VoIP services or our other services, abandonment of our services by subscribers, and litigation costs, damage awards and negative publicity, any of which could harm our business, prospects, financial condition or results of operations. Furthermore, potential changes by the FCC to current intercarrier compensation mechanisms could result in significant changes to our costs of providing VoIP telephony, thereby eliminating pricing benefits between VoIP telephony services and traditional telephone services and our potential profitability.


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Our activities outside the United States operate in a competitive environment different than the environment within the United States. Any difficulties in managing these businesses could occupy a disproportionate amount of our management’s attention and disrupt our operations.
 
We operate or hold spectrum outside of the United States through our subsidiaries in Belgium, Ireland, Germany, Poland, Romania and Spain and through equity investees in Denmark and Mexico. We intend to continue to pursue opportunities in certain international markets through acquisitions and strategic alliances. Our activities outside the United States operate in different environments than we face in the United States, particularly with respect to competition. In addition, we have only recently begun to assemble a management team dedicated to addressing our international business operations. Due to these differences, our activities outside the United States may require a disproportionate amount of our management and financial resources, which could disrupt our operations and adversely affect our business.
 
In a number of international markets, we face substantial competition from local service providers that offer or may offer their own wireless broadband or VoIP telephony services and from other companies that provide Internet connectivity services. We may face heightened challenges in gaining market share, particularly in certain European countries, where a large portion of the population already has broadband Internet connectivity and incumbent companies already have a dominant market share in their service areas. Furthermore, foreign providers of competing services may have a substantial advantage over us in attracting subscribers due to a more established brand, greater knowledge of local subscribers’ preferences and access to significant financial or strategic resources.
 
In addition, in some international markets, foreign governmental authorities may own or control the incumbent telecommunications companies operating under their jurisdiction. Established relationships between government-owned or government-controlled telecommunications companies and their traditional local telecommunications providers often limit access of third parties to these markets. The successful expansion of our international operations in some markets may depend on our ability to locate, form and maintain strong relationships with established local communication services and equipment providers. Failure to establish these relationships or to market or sell our products and services successfully could limit our ability to attract subscribers to our services.
 
We may be unable to protect our intellectual property, which could reduce the value of our services and our brand.
 
Our ability to compete effectively depends on our ability to protect our proprietary network and system designs. We may not be able to safeguard and maintain our proprietary rights. We rely on patents, trademarks and policies and procedures related to confidentiality to protect our intellectual property. Some of our intellectual property, however, is not covered by any of these protections.
 
Our pending patent applications may not be granted or, in the case of patents issued or to be issued, the claims allowed may not be sufficiently broad to protect our intellectual property. Even if all of our patent applications were issued and were sufficiently broad, our patents may be challenged or invalidated. In addition, the United States Patent and Trademark Office may not grant federal registrations based on our pending trademark applications. Even if federal registrations are granted, these trademark rights may be challenged. Moreover, patent and trademark applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any foreign patents may be difficult and expensive to obtain and enforce. We could, therefore, incur substantial costs in prosecuting patent and trademark infringement suits or otherwise protecting our intellectual property rights.
 
We could be subject to claims that we have infringed on the proprietary rights of others, which claims would likely be costly to defend, could require us to pay damages and could limit our ability to use necessary technologies in the future.
 
Competitors or other persons may independently develop or patent technologies or processes that are substantially equivalent or superior to ours or that are necessary to permit us to deploy and operate our network, whether based on Expedience, or mobile WiMAX technology, or to offer additional services such as


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VoIP telephony services. These persons may claim that our services and products infringe on these patents or other proprietary rights. For instance, certain third parties claim that they hold patents relating to certain aspects of mobile WiMAX technology. These third parties may seek to enforce these patent rights against the operators of mobile WiMAX networks, such as us. Defending against infringement claims, even meritless ones, would be time consuming, distracting and costly. If we are found to be infringing the proprietary rights of a third party, we could be enjoined from using such third party’s rights, may be required to pay substantial royalties and damages, and may no longer be able to use the intellectual property subject to such rights on acceptable terms or at all. Failure to obtain licenses to intellectual property held by third parties on reasonable terms, or at all, could delay or prevent the development or deployment of our services and could cause us to expend significant resources to develop or acquire non-infringing intellectual property.
 
If our data security measures are breached, subscribers may perceive our network and services as not secure.
 
Our network security and the authentication of our subscriber credentials are designed to protect unauthorized access to data on our network. Because techniques used to obtain unauthorized access to or to sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome our network security and obtain access to data on our network, including on a device connected to our network. In addition, because we operate and control our network and our subscribers’ Internet connectivity, unauthorized access or sabotage of our network could result in damage to our network and to the computers or other devices used by our subscribers. An actual or perceived breach of network security, regardless of our responsibility, could harm public perception of the effectiveness of our security measures, adversely affect our ability to attract and retain subscribers, expose us to significant liability and adversely affect our business prospects.
 
Our business depends on a strong brand, and if we do not maintain and enhance our brand, our ability to attract and retain subscribers may be impaired and our business and operating results harmed.
 
We believe that our brand is a critical part of our business. Maintaining and enhancing our brand may require us to make substantial investments with no assurance that these investments will be successful. If we fail to promote and maintain the “Clearwire” brand, or if we incur significant expenses in this effort, our business, prospects, operating results and financial condition may be harmed. We anticipate that maintaining and enhancing our brand will become increasingly important, difficult and expensive.
 
We are subject to extensive regulation that could limit or restrict our activities and adversely affect our ability to achieve our business objectives. If we fail to comply with these regulations, we may be subject to penalties, including fines and suspensions, which may adversely affect our financial condition and results of operations.
 
Our acquisition, lease, maintenance and use of spectrum licenses are extensively regulated by federal, state, local and foreign governmental entities. These regulations are subject to change over time. In addition, a number of other federal, state, local and foreign privacy, security and consumer laws also apply to our business, including our interconnected VoIP telephony service. These regulations and their application are subject to continual change as new legislation, regulations or amendments to existing regulations are adopted from time to time by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. For example, it is possible that the FCC could subject our capital stock to foreign ownership limitations. If our capital stock were to become subject to such limitations, owners of our capital stock may become subject to obligatory redemption provisions, such as those in our certificate of incorporation. Such restrictions may also decrease the value of our stock by reducing the pool of potential investors in our company and making the acquisition of control of us by potential foreign investors more difficult. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services, such as cable and DSL providers and incumbent telecommunications carriers, also affects our business indirectly.


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In order to provide “interconnected” VoIP service we need to obtain, on behalf of our customers, North American Numbering Plan telephone numbers, the availability of which may be limited in certain geographic areas of the United States and subject to other regulatory restrictions. As an “interconnected” VoIP and facilities-based wireless broadband provider, we are required under FCC rules, to comply with the Communications Assistance for Law Enforcement Act (“CALEA”), which requires service providers to build certain capabilities into their networks and to accommodate wiretap requests from law enforcement agencies.
 
In addition, the FCC or other regulatory authorities may in the future restrict our ability to manage subscribers’ use of our network, thereby limiting our ability to prevent or manage subscribers’ excessive bandwidth demands. To maintain the quality of our network and user experience, we manage the bandwidth used by our subscribers’ applications, in part by limiting the types of applications that may be used over our network. Some providers and users of these applications have objected to this practice. If the FCC or other regulatory authorities were to adopt regulations that constrain our ability to employ bandwidth management practices, excessive use of bandwidth-intensive applications would likely reduce the quality of our services for all subscribers. A decline in the quality of our services could harm our business.
 
In certain of our international markets, we may require a license for the use of regulated radio frequencies from national, provincial or local regulatory authorities before providing our services. Where required, regulatory authorities may have significant discretion in granting the licenses and in determining the conditions for use of the frequencies covered by the licenses, and are often under no obligation to renew the licenses when they expire. Additionally, even where we currently hold a license or successfully obtain a license in the future, we may be required to seek modifications to the license or the regulations applicable to the license to implement our business strategy. For example, in certain international markets, the licenses we hold, and the applicable rules and regulations, currently do not specifically permit us to provide mobile services such as mobile WiMAX. Thus, prior to offering mobile services to our subscribers in those markets, absent action by the regulatory authorities to modify the licenses and applicable rules, we may need to obtain the approval of the proper regulatory authorities.
 
The breach of a license or applicable law, even if inadvertent, can result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where we already have rights to licensed spectrum. In order to promote competition, licenses may also require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. We may not be able to obtain or retain any required license, and we may not be able to renew our licenses on favorable terms, or at all.
 
Our wireless broadband and VoIP telephony services are becoming increasingly subject to greater state or federal regulation, particularly VoIP. For instance, the FCC has recently adopted a requirement that innerconnected VoIP providers contribute to the Telecommunications Relay Service fund and is also proposing to impose an autolocation requirement for E911 on our type of portable interconnected VoIP service. The full scope of the additional regulations that may apply to wireless broadband and VoIP telephony services providers and the impact of such regulations on providers’ competitive position are presently unknown.
 
We are a “controlled company” within the meaning of the Nasdaq Marketplace Rules and, as a result, rely on, exemptions from certain corporate governance requirements.
 
As of July 31, 2007, Mr. McCaw and Intel Capital Corporation, a wholly owned subsidiary of Intel Corporation, and their respective affiliates together beneficially own approximately 79% of the voting power of our outstanding capital stock. Affiliates of Mr. McCaw and Intel Capital are parties to a voting agreement that effectively permits Mr. McCaw, through ERH, to designate four of our directors and Intel Capital to designate two of our directors as long as Intel Capital and its affiliates hold at least 15% of our outstanding capital stock and one of our directors as long as Intel Capital and its affiliates hold at least 7.5% of our outstanding capital stock. Because of the voting agreement and their aggregate voting power, Mr. McCaw and Intel Capital share the ability to elect a majority of our directors.
 
As a result of the combined voting power of Mr. McCaw and Intel Capital and their voting agreement, we rely on exemptions from certain Nasdaq corporate governance standards. Under the Nasdaq Marketplace


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Rules, a company of which more than 50% of the voting power is held by a single person or a group of people is a “controlled company” and may elect not to comply with certain Nasdaq Global Select Market corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the compensation of officers be determined, or recommended to the board of directors for determination, by a majority of the independent directors or a compensation committee comprised solely of independent directors, and (3) the requirement that director nominees be selected, or recommended for the board of directors’ selection, by a majority of the independent directors or a nominating committee comprised solely of independent directors with a written charter or board resolution addressing the nomination process. Unless we cease to rely on these exemptions, you will not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq Global Select Market corporate governance requirements.
 
Mr. McCaw and Intel Capital are our largest stockholders, and as a result they can exert control over us and may have actual or potential interests that may diverge from yours.
 
As of July 31, 2007, Mr. McCaw and his affiliates own Class A common stock and Class B common stock representing approximately 49% of our combined voting power. Intel Capital and its affiliates own Class A common stock and Class B common stock representing approximately 30% of our combined voting power as of that date. By virtue of a voting agreement, Mr. McCaw, and Intel Capital, along with their respective affiliates, collectively own Class A common stock and Class B common stock representing approximately 79% of our combined voting power. Mr. McCaw and Intel Capital may have interests that diverge from those of other holders of our capital stock. As a result, ERH and Intel Capital may vote their shares of capital stock to cause us to take actions that may conflict with your best interests as a stockholder, which could adversely affect our results of operations and the trading price of our Class A common stock. Further, under the provisions of our fourth amended and restated certificate of incorporation, Mr. McCaw and Intel Capital, along with their respective affiliates, may, without causing conversion to Class A common stock, transfer their shares of Class B common stock to certain affiliated parties or to any unaffiliated party that provides a voting proxy over the transferred shares of Class B common stock. This would allow Mr. McCaw and Intel Capital, along with their respective affiliates, to retain the right to exercise the voting power attributed to any shares of Class B common stock which they sell or transfer so long as they have been granted a proxy associated with such shares. Moreover, subject to their fiduciary duty obligations, the directors appointed by Mr. McCaw, Intel Capital and Bell Canada, so long as they represent a majority of directors present at any meeting at which an action is taken, acting together could cause us to issue shares of Class B common stock or other classes of common or preferred stock to persons or in a manner that would further concentrate the voting control of or, in the case of preferred stock, that could convey economic preferences over, our Class A common stock.
 
Through his control of ERH, Mr. McCaw can currently effectively control our management, affairs and all matters requiring stockholder approval, including the approval of significant corporate transactions, a sale of our company, decisions about our capital structure and, subject to our agreements with Bell Canada and Intel Capital, the composition of our board of directors. Under the voting agreement between Intel Capital and ERH, each party has agreed to vote its shares in favor of four directors designated by ERH and for two directors designated by Intel Capital, for so long as Intel Capital holds at least 15% of our outstanding capital stock, and for one director designated by Intel Capital, for so long as Intel Capital holds at least 7.5% of our outstanding capital stock. ERH’s right to cause Intel to vote its shares in favor of four individuals designated by ERH is not subject to any minimum share ownership requirement. Under the voting agreement, ERH will retain these rights even if ERH no longer holds any shares of our capital stock. In addition, if all of ERH’s shares of our Class B common stock were to convert into Class A common stock and Intel Capital did not convert any of their shares of our Class B common stock to Class A common stock, Intel Capital would beneficially own shares of common stock representing approximately 50% of our voting power. As a result, Intel Capital would be able to exercise effective control over our company, subject to Intel Capital’s voting agreement with ERH.


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Certain holders of our warrants are entitled to pre-emptive rights in connection with certain unregistered security offerings which, if triggered, would lead to additional dilution to our stockholders and may make it more difficult to raise additional financing.
 
The holders of the warrants underlying our senior secured notes are entitled to pre-emptive rights in unregistered equity offerings completed within one year after the date of our initial public offering, which was completed on March 13, 2007. In the event that we issue equity securities in an unregistered offering prior to March 13, 2008, we are required to offer each holder of these warrants the opportunity to purchase their pro rata percentage of the new equity securities. The grant of pre-emptive rights may delay or otherwise adversely affect our ability to raise additional funds.
 
Since our initial public offering in March 2007, the market price of our common stock has been and may continue to be volatile.
 
The trading price of our common stock following our initial public offering has been volatile and could be subject to further significant fluctuations in price in response to various factors, some of which are beyond our control. These factors include:
 
  •  quarterly variations in our results of operations, or those of our competitors, either alone or in comparison to analyst’s expectation;
 
  •  announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
 
  •  disruption to our operations or those of other companies critical to our network operations;
 
  •  the emergence of new competitors or new technologies;
 
  •  our ability to develop and market new and enhanced products on a timely basis;
 
  •  seasonal or other variations in our subscriber base;
 
  •  commencement of, or our involvement in, litigation;
 
  •  availability of additional spectrum;
 
  •  dilutive issuances of our stock or the stock of our subsidiaries, or the incurrence of additional debt;
 
  •  expiration of lockup agreements entered into by certain of our stockholders in connection with our initial public offering;
 
  •  changes in our board or management;
 
  •  adoption of new accounting standards;
 
  •  changes in governmental regulations or the status of our regulatory approvals;
 
  •  changes in earnings estimates or recommendations by securities analysts;
 
  •  announcements regarding mobile WiMAX and other technical standards; and
 
  •  general economic conditions and slow or negative growth of related markets.
 
In addition, the stock market in general, and the market for shares of technology companies in particular, has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. We expect the price of our common stock will be subject to continued volatility. In addition, in the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation or shareholder derivative suits have often been instituted against those companies. Such litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievement described in or implied by such statements. Actual results may differ materially from the expected results described in our forward-looking statements, including with respect to the correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of publicly available information relating to the factors upon which our business strategy is based or the success of our business.
 
Some of the risks investors should consider in connection with this offering are:
 
  •  We are an early stage company with a history of operating losses and we expect to continue to realize significant net losses for the foreseeable future. As of June 30, 2007, our accumulated deficit was approximately $669.3 million.
 
  •  Our business plan will require us to raise substantial additional financing both in the near term and over the next five years or more. As with other businesses that require a substantial investment in physical infrastructure prior to generating revenue, we intend to invest significantly in our business before we expect to generate cash flow from operations adequate to cover our anticipated expenses. If we do not obtain additional debt or equity financing, our business, prospects, financial condition and results of operations will be adversely affected.
 
  •  We are committed to using commercially reasonable efforts to deploy wireless broadband networks based solely on mobile WiMAX technology once that technology meets certain specified performance criteria, even if there are alternative technologies available in the future that are technologically superior or more cost effective.
 
  •  Our business plan contemplates migration of our current network to a mobile WiMAX network. Mobile WiMAX technology is not yet commercially available, and may never be developed to our satisfaction or at all. If mobile WiMAX is not successfully developed and integrated into our network, our business prospects and results of operations may be adversely affected.
 
  •  We currently depend on our commercial partners to develop and deliver the equipment for our existing and planned networks. If our partners fail to provide equipment that meets our requirements on a timely basis, our business prospects and results of operations may be adversely affected.
 
  •  Many of our competitors are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain subscribers.
 
  •  At June 30, 2007, we had total indebtedness of approximately $754.8 million. On July 3, 2007, we entered into a senior term loan facility to borrow up to an additional $1.0 billion. We borrowed $379.3 million under the senior term loan facility on the date of closing and repaid our obligations under our $125.0 million term loan, the fees and costs attributable to the senior term loan facility and the remainder will be used for general working capital purposes. We borrowed the remaining amount of approximately $620.7 million under the senior term loan facility on August 15, 2007, to retire our senior secured notes due 2010. Our substantial indebtedness and restrictive debt covenants could limit our financing options and liquidity position and may limit our ability to grow our business.
 
  •  Mr. McCaw and Intel Capital collectively control a majority of our combined voting power, and may have, or may develop in the future, interests that may diverge from yours.
 
  •  Future sales of large blocks of our common stock may adversely impact our stock price.
 
  •  Since our initial public offering, the market price of our common stock has been volatile and we expect continued volatility in the market price of our common stock.
 
You should review carefully the section entitled “Risk Factors” for a discussion of these and other risks that relate to our business and investing in shares of our common stock.


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USE OF PROCEEDS
 
This prospectus relates to 14,973,024 shares of our common stock, issuable upon exercise of outstanding warrants, which may be sold from time to time by the selling stockholders. We will not receive any part of the proceeds from the sale of common stock by the selling stockholders. If all 14,973,024 shares of our common are issued on exercise of outstanding warrants without using any applicable cashless exercise provisions, we will receive $224,595,360 million in cash from the warrant holders, assuming that the exercise price of the warrants is not adjusted. Any proceeds received by us from the exercise of the warrants will be used by us for general corporate purposes. Readers should be aware that all such warrants include net issue exercise provisions that may reduce or eliminate the cash proceeds we receive upon exercise of such warrants; however, any such reduction also will have the effect of reducing the number of shares of Class A common stock issued in net issue exercise transactions.


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MARKET FOR COMMON STOCK
 
Our common stock is listed on the Nasdaq Global Select Market under the symbol CLWR. The following table sets forth for the periods indicated the range of high and low sales prices per share of our common stock as reported on the Nasdaq Global Select Market. Our initial public offering was completed on March 13, 2007 and prior to that date our common stock was not listed on any exchange. We have not declared any cash dividends on our common stock for the periods indicated.
 
                 
    High     Low  
 
Quarter Ended March 31, 2007 (beginning on March 8, 2007)
  $ 24.61     $ 19.98  
Quarter Ended June 30, 2007
  $ 24.96     $ 16.41  
 
On July 31, 2007, there were approximately 287 holders of record of our common stock.
 
DIVIDEND POLICY
 
We have not declared or paid any dividends on our capital stock since our inception. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying any cash dividends in the foreseeable future. In addition, covenants in the indenture governing our senior secured notes and the loan documents governing our senior term loan facility impose significant restrictions on our ability to pay dividends to our stockholders.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The following table sets forth selected consolidated financial data for our company. The selected financial information set forth below under the captions “Statement of Operations Data,” and “Other Financial Data” for the years ended December 31, 2004, 2005 and 2006 and the “Balance Sheet Data” as of December 31, 2005 and 2006 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected financial information set forth below under the captions “Statement of Operations Data,” and “Other Financial Data” for the six months ended June 30, 2007 and 2006 and the “Balance Sheet Data” as of June 30, 2007 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The “Statement of Operations Data,” and “Other Financial Data,” for the period from October 27, 2003 (inception) to December 31, 2003 and the “Balance Sheet Data” as of December 31, 2003 and 2004 are derived from our audited consolidated financial statements not included in this prospectus. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary to state fairly our results of operations as of and for the periods presented. Historical results are not necessarily indicative of results to be expected for future periods.
 
The selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
                                                 
    October 27, 2003
                               
    (Inception) to
    Year Ended December 31,     Six Months Ended June 30,  
    December 31, 2003     2004(1)     2005(1)     2006(1)     2006     2007  
    (In thousands, except per share data)  
                            (Unaudited)  
 
Statement of Operations Data:
                                               
Service revenues
  $ 25     $ 243     $ 8,451     $ 67,598     $ 24,893     $ 64,759  
Equipment and other revenues (including related party sales)
          15,035       25,003       32,583       24,646        
                                                 
Total revenues
    25       15,278       33,454       100,181       49,539       64,759  
Cost of goods and services (exclusive of items shown separately below)
                                               
Cost of service
    110       3,031       13,086       50,438       20,612       40,048  
Cost of equipment (including related party costs)
          9,816       10,483       19,674       14,358        
Selling, general, and administrative
    1,074       24,201       106,211       214,669       90,366       156,032  
Research and development
    22       5,805       9,639       8,890       5,867       1,023  
Depreciation and amortization
    27       2,552       11,913       40,902       16,834       35,899  
Spectrum lease expense
    163       2,987       9,356       23,516       7,988       28,265  
Gain on sale of NextNet
                      (19,793 )            
                                                 
Total operating expenses
    1,396       48,392       160,688       338,296       156,025       261,267  
                                                 
Operating loss
    (1,371 )     (33,114 )     (127,234 )     (238,115 )     (106,486 )     (196,508 )
Interest income (expense) — net
          1,160       (8,018 )     (41,851 )     (23,543 )     (12,319 )
Foreign currency transaction gains (losses) — net
          172       20       235             (68 )
Other (expense) income — net
          (292 )     300       2,150       2,247       1,744  
Income tax provision
                (1,459 )     (2,981 )     (1,227 )     (2,729 )
Losses from equity investees — net
          (988 )     (3,946 )     (5,144 )     (3,715 )     (2,807 )
Minority interest in net loss of consolidated subsidiaries
          20       387       1,503       636       1,967  
                                                 
Net loss
  $ (1,371 )   $ (33,042 )   $ (139,950 )   $ (284,203 )   $ (132,088 )   $ (210,720 )
                                                 
Net loss per common share
  $ (0.88 )   $ (0.90 )   $ (1.97 )   $ (2.93 )   $ (1.74 )   $ (1.37 )
                                                 
Other Financial Data:
                                               
Capital expenditures
  $ 64     $ 12,815     $ 132,724     $ 191,747     $ 83,230     $ 164,604  


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(1) A significant portion of our historical revenues were generated from equipment sales through our former NextNet subsidiary, including 98.4%, 74.7% and 32.5% of our total revenues for the years ended December 31, 2004, 2005 and 2006, respectively. All of our cost of equipment for the years ended December 31, 2004, 2005 and 2006 were attributable to these revenues generated by NextNet. The net loss for the year ended December 31, 2006 includes $7.9 million in direct selling, general and administrative expense, $7.2 million in direct research and development expense, and $1.4 million in direct depreciation and amortization that we expect to be non- recurring following the NextNet sale. Our net loss for the year ended December 31, 2006 also includes the recognition of a $19.8 million gain upon the sale of NextNet.
 
                                                 
    As of December 31,     As of June 30,  
    2003     2004     2005     2006     2006     2007  
    (In thousands)  
 
Operating Data:
                                               
Network covered population:
                                               
United States(1)
          480       3,788       8,551       4,863       10,005  
International(2)
                765       995       995       1,553  
Network covered households(3)
                                               
United States
          192       1,515       3,447       1,945       4,002  
International(2)
                326       409       407       649  
Subscribers(4)
                                               
United States
          3.5       56.2       184.4       115       270  
International
                6.1       21.8       15       29  
 
 
(1) Represents our estimate of the number of natural persons resident in the geographic areas in which our wireless broadband service is commercially available. Our calculation of covered population is based on our estimate of covered households multiplied by 2.5 persons per household.
 
(2) Represents our estimate of the number of natural persons resident in the geographic areas in which our wireless broadband service is commercially available for our consolidated subsidiaries only, and excludes data regarding our equity investees. Our calculation of covered population is based on estimates from the Economist Intelligence Unit database covered households multiplied by 2.3 and 3.0 persons per household, respectively for Ghent and Brussels, Belgium and Dublin, Ireland.
 
(3) Represents our estimate of the number of single residence homes, apartments and condominium units in the geographic areas in which our wireless broadband service is commercially available. Our estimate is based on information extrapolated from 2000 U.S. census data and other market information.
 
(4) Represents the number of individuals and business or governmental entities receiving wireless broadband connectivity through our network.
 
                                         
    As of December 31,     As of June 30,  
    2003     2004     2005     2006     2007  
    (In thousands)  
 
Balance Sheet Data:
                                       
Cash, cash equivalents and short-term investments
  $ 2,721     $ 91,438     $ 125,648     $ 1,101,674     $ 1,056,303  
Property, plant and equipment — net
    892       13,126       145,584       302,798       427,618  
Total assets
    29,229       263,305       627,918       2,068,373       2,518,728  
Long-term debt (net of discount of $0, $0, $50,385, $110,007 and $98,855)
                209,961       644,438       654,653  
Total stockholders’ equity
    27,841       241,370       318,692       1,257,609       1,647,011  


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”
 
Overview and Recent Developments
 
We build and operate wireless broadband networks that enable fast, simple, portable, reliable and affordable communications. Our networks cover entire communities, delivering a wireless high-speed Internet connection and enabling other services and features that create a new communications path into the home or office. We provide a portable broadband connection that delivers Internet access and enables premium services, such as VoIP telephony, anytime and anywhere within our coverage area. Our service is at once competitive with and complementary to existing wireline and wireless networks.
 
We are investing heavily in building networks and growing our subscriber base. Our efforts include offering premium services and applications in order to make our service more attractive. This expansion will require significant capital expenditures as well as sales and marketing expenses, and will likely be accompanied by significant operating losses over the next five years or more as we expand the area covered by our network and invest to build our brand and develop subscriber loyalty.
 
Our network currently relies on network infrastructure equipment that is based on proprietary non-line-of-sight, or NLOS, Orthogonal Frequency Division Multiplexing, or OFDM, Expedience technologies from Motorola, Inc. We have committed to deploy networks based on the IEEE mobile Worldwide Interoperability of Microwave Access 802.16e-2005, or mobile WiMAX, standard once mobile WiMAX equipment is commercially available and meets our requirements. As with our current Expedience network infrastructure equipment, we expect mobile WiMAX technology, once it becomes commercially available and meets certain standards, to support fixed, portable and mobile service offerings using a single network architecture. In addition, as mobile WiMAX is a standards-based technology, we expect manufacturers to eventually offer a number of handheld communications and consumer electronic devices that will be enabled to communicate using our mobile WiMAX network, including notebook computers, ultramobile personal computers, or PCs, personal data assistants, or PDAs, gaming consoles, MP3 players, and other handheld devices. However, because mobile WiMAX technologies are not yet commercially available, we can not provide any assurance that we will be able to deploy mobile WiMAX technologies in our network or that mobile WiMAX will be competitive with other available technologies.
 
As part of our strategy, we have committed to adopt mobile WiMAX technology. In June 2006, we entered into a mobile WiMAX network collaboration agreement with Intel, which provides, among other things, that we will use commercially reasonable efforts to develop and deploy mobile WiMAX networks in the United States, and Intel has agreed to develop and market certain integrated circuits, modules and other platforms for use in certain notebook computers, ultramobile PCs and other mobile computing devices that would enable these devices to connect to our mobile WiMAX networks. We and Intel will also work together to develop, deploy and market a co-branded mobile WiMAX service offering in the United States, to be available only on our network, which will target users of certain WiMAX enabled notebook computers, ultramobile PCs, and other mobile computing devices containing Intel microprocessors. Both parties are obligated to contribute to the development, promotion and marketing of this service, with Intel committing to spend a specific amount on the marketing of the service and/or mobile WiMAX enabled devices as we achieve certain network deployment milestones. We have agreed to share with Intel a portion of the revenues received from subscribers using mobile computing devices containing microprocessors based on the x86 instruction set or its successors sold by Intel, referred to as Intel mobile computing devices, on our domestic mobile WiMAX network.


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We entered into our commercial agreements with Intel because we believe Intel is the world’s premier chipset manufacturer and one of the most significant supporters of mobile WiMAX technology. As a result, we expect that Intel’s influential relationships with key original equipment manufacturers, or OEMs, and with other participants in the development of mobile WiMAX technology, will accelerate our mobile WiMAX deployment capabilities, enhance our customer penetration and increase demand for our service. Additionally, we expect to develop a co-branded service offering that will allow us to leverage one of the world’s most recognized brands.
 
In August 2006, we sold our NextNet subsidiary to Motorola and entered into a wireless broadband system infrastructure agreement, a wireless broadband customer premises equipment, or CPE, supply agreement and a wireless broadband system services agreement with Motorola. This transaction makes Motorola our exclusive provider for NextNet Expedience network infrastructure products and CPE. In selling NextNet to Motorola, we intend to utilize Motorola’s manufacturing and research and development capabilities to enhance Expedience technology and to increase the likelihood of our successful migration to mobile WiMAX technologies. We believe Motorola is uniquely positioned as a vendor of mobile WiMAX technologies because of its ability to develop and manufacture both network infrastructure equipment and end user devices. In addition, we believe Motorola’s ability to deliver an end-to-end solution is particularly important when deploying a new technology such as mobile WiMAX. We believe, by selecting Motorola as our vendor, we have increased the relative speed and the likelihood of success of our migration from Expedience to mobile WiMAX. We sold NextNet to Motorola in order to permit us to focus more closely on our wireless network services business, which we believe is our core business. Our relationships with Intel and Motorola are further described in “Certain Relationships and Related Transactions.”
 
As a result of our current buildout and marketing plans, we expect to require significant additional capital, which we intend to raise through subsequent equity offerings, by increasing our debt, or a combination of the two. As of June 30, 2007, our total assets were $2.5 billion and our stockholders’ equity was $1.6 billion, which compares to total assets of $2.1 billion and stockholders’ equity of $1.3 billion at December 31, 2006. Our cash and cash equivalents and short-term unrestricted investments at June 30, 2007 totaled $1.1 billion. We also have spectrum purchase obligations amounting to $29.5 million for transactions pending as of June 30, 2007 including the purchase of spectrum from AT&T, which closed in May 2007. We cannot offer assurances that the necessary capital will be available on attractive terms or at all, and we plan to manage our uses of capital by adjusting the rate at which we build our network, acquire spectrum and deploy our services.
 
As we have concentrated our financial and management resources on expanding the geographic footprint of our network and the availability of our services, we have incurred net losses of $33.0 million, $140.0 million and $284.2 million for the years ended December 31, 2004, 2005 and 2006 and a net loss of $210.7 million for the six months ended June 30, 2007. Moreover, a significant portion of our historical revenues were generated from equipment sales through our former NextNet subsidiary, including 98.4%, 74.7%, and 32.5% of our total revenues for the years ended December 31, 2004, 2005 and 2006, respectively. All of our cost of equipment for the years ended December 31, 2004, 2005 and 2006 were attributable to these revenues generated by NextNet. Following the sale of this subsidiary we anticipate that most of our future revenues will be generated by delivering wireless broadband services. We believe the sale of NextNet affects our prospective results of operations, by reducing equipment revenue and related cost of equipment, selling, general and administrative expense, research and development expense, and depreciation and amortization expense associated with NextNet’s operations, and by increasing our expenses and capital expenditures for equipment acquisition. We have not classified NextNet as a discontinued operation in our statement of operations because of our ongoing involvement with NextNet under our exclusive supply and infrastructure development agreements. However, our net loss for the year ended December 31, 2006 includes $7.9 million in direct selling, general and administrative expense, $7.2 million in direct research and development expense, and $1.4 million in direct depreciation and amortization that we expect to be non-recurring following the NextNet sale. Our net loss for the year ended December 31, 2006 also includes the recognition of a $19.8 million gain upon the sale of NextNet.


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As of June 30, 2007, we offered service in Ghent and Brussels, Belgium and Dublin, Ireland, which together included approximately 29,000 subscribers and 1.6 million people covered by our network. In addition, we have been acquiring spectrum in markets outside the United States, so that we have the capacity to deploy our networks in other additional markets in Europe and elsewhere. We hold spectrum covering an estimated 82.5 million people in Germany, 45.1 million people in Spain, 38.1 million people in Poland and 21.6 million people in Romania. Of this spectrum, we believe we currently have enough depth to launch our services in each of the countries except for Poland. We also hold minority interests in companies that are deploying similar services in Denmark and Mexico.
 
On May 29, 2007, we closed an agreement with BellSouth Corporation to acquire for an aggregate price of $300.0 million all interests in SFT Spectrum, LLC and BWC Spectrum, LLC, which collectively held all of AT&T Inc.’s leases and licenses for 2.5 GHz spectrum, increasing our spectrum holdings by over 1.7 billion MHz-POPs located in the southeastern United States. These entities were wholly-owned subsidiaries of BellSouth Corporation, which is wholly-owned by AT&T, Inc. as a result of a merger that closed in December 2006.
 
On July 3, 2007 we entered into a $1.0 billion senior term loan facility which grants the lenders a security interest in substantially all of the assets of our business in the United States, including a pledge of all our domestic subsidiaries. Upon closing the transaction we drew $379.3 million, in part to repay in full our prior term loan, which we entered into in August 2006. We drew an additional $620.7 million against our new senior term loan facility on August 15, 2007 to redeem all of our outstanding senior secured notes due 2010.
 
In connection with the repayment of the $125.0 million term loan and the retirement of our senior secured notes due 2010, we expect to record charges from debt restructuring that may be material in the third quarter of 2007.
 
On July 19, 2007 we entered into a letter of intent with Sprint Nextel Corporation, or Sprint, under which the parties agreed to jointly construct a nationwide broadband network using WiMAX technology and promote development of WiMAX-based services. We and Sprint expect to build our respective portions of the nationwide network and enable roaming between the respective territories. We will also work jointly on product and service evolution, shared infrastructure, branding, marketing and distribution. The arrangement involves an exchange of selected 2.5 GHz spectrums in various markets. The arrangement is subject to the execution of definitive agreements. It is also subject to review by the Department of Justice, approval of spectrum license assignments and transfers by the Federal Communications Commission, and other closing conditions.


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Results of Operations
 
The following table sets forth certain operating data for the periods presented.
 
                                         
    Year Ended December 31,     Six Months Ended June 30,  
    2004     2005     2006     2006     2007  
    (In thousands)     (In thousands)  
 
Revenue
                                       
Service
  $ 243     $ 8,451     $ 67,598     $ 24,893     $ 64,759  
Equipment and other (includes related party sales)
    15,035       25,003       32,583       24,646        
                                         
Total revenues
    15,278       33,454       100,181       49,539       64,759  
Cost of goods and services (exclusive of items shown separately below):
                                       
Cost of service (includes related party costs)
    3,031       13,086       50,438       20,612       40,048  
Cost of equipment (includes related party costs)
    9,816       10,483       19,674       14,358        
Selling, general and administrative expense
    24,201       106,211       214,669       90,366       156,032  
Research and development
    5,805       9,639       8,890       5,867       1,023  
Depreciation and amortization
    2,552       11,913       40,902       16,834       35,899  
Spectrum lease expense
    2,987       9,356       23,516       7,988       28,265  
Gain on sale of NextNet
                (19,793 )                
                                         
Total operating expenses
    48,392       160,688       338,296       156,025       261,267  
                                         
Operating loss
    (33,114 )     (127,234 )     (238,115 )     (106,486 )     (196,508 )
Other income (expense):
                                       
Interest income
    1,160       6,605       30,429       6,886       35,410  
Interest expense
          (14,623 )     (72,280 )     (30,429 )     (47,729 )
Foreign currency transaction gains (losses) — net
    172       20       235             (68 )
Other income (expense) — net
    (292 )     300       2,150       2,247       1,744  
                                         
Total other income (expense) — net
    1,040       (7,698 )     (39,466 )     (21,296 )     (10,643 )
                                         
Loss from continuing operations before income taxes, minority interest and losses from equity investees
    (32,074 )     (134,932 )     (277,581 )     (127,782 )     (207,151 )
Income tax provision
          (1,459 )     (2,981 )     (1,227 )     (2,729 )
                                         
Loss from continuing operations before minority interest and losses from equity investees
    (32,074 )     (136,391 )     (280,562 )     (129,009 )     (209,880 )
Losses from equity investees — net
    (988 )     (3,946 )     (5,144 )     (3,715 )     (2,807 )
Minority interest in net loss of consolidated subsidiaries
    20       387       1,503       636       1,967  
                                         
Net loss
  $ (33,042 )   $ (139,950 )   $ (284,203 )   $ (132,088 )     (210,720 )
                                         
 
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 
Revenue.  Service revenue is primarily generated from subscription and modem lease fees for our wireless broadband service. Revenue from our acquired businesses, activation fees and fees for other services such as email, VoIP, and web hosting services are also included in service revenue. Our equipment and other revenue includes sales of NextNet equipment through the date of sale of NextNet in August 2006.


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Service revenues for the six months ended June 30, 2007 and 2006 was $64.8 million and $24.9 million, respectively. This increase was primarily due to the increase in our subscriber base. As of June 30, 2007, we operated in 40 U.S. markets and three international markets covering a geographic area containing approximately 11.6 million people. This is compared to 27 U.S. and two international markets covering approximately 5.8 million people as of June 30, 2006. Total subscribers in all markets grew from approximately 130,000 as of June 30, 2006 to approximately 299,000 as of June 30, 2007, primarily due to continued subscriber growth in existing markets and the addition of seven markets launched during the first six months of 2007. Equipment and other revenue in the first six months of 2007 decreased from the first six months of 2006, due to the sale of NextNet in August 2006. Service revenue from our acquired businesses was approximately $6.9 million in the first six months of 2007 compared to $5.1 million in the first six months of 2006.
 
Cost of goods and services.  Service costs primarily include costs associated with tower rents, network costs and traffic back haul, which is the transporting of data traffic between distributed sites and a central point in the market or Point of Presence, or POP. Our cost of equipment consists of costs incurred for equipment manufactured by NextNet through August 2006.
 
Cost of services were $40.0 million and $20.6 million for the six months ended June 30, 2007 and 2006, respectively. This increase was primarily due to an increase in the number of towers leased and related traffic back haul costs, the number of subscribers using our service, and additional markets served. Service gross margin increased to 38.2% for the six months ending June 30, 2007 from 17.2% for the six months ending 2006, primarily as a result of our costs rising at a slower rate as compared to our revenues generated from our increased subscriber base.
 
Overall gross profit increased to $24.7 million for the six months ended June 30, 2007 from $14.6 million for the six months ended June 30, 2006. Overall gross margin was 38.2% for the first six months of 2007 compared to 29.4% for the first six months of 2006. These increases were primarily due to growth in our subscriber base. We anticipate that gross margin will fluctuate due to new market launches, while our cost of service in absolute dollars will increase as we continue to expand our network. There were no costs related to equipment in the first six months of 2007 due to the sale of NextNet in August 2006.
 
Selling, general and administrative expense.  Selling, general and administrative expense includes primarily salaries and benefits, sales commissions, travel expenses and related facilities costs for our sales, marketing, network deployment, executive, finance, information technology, human resource and legal personnel. It also includes costs associated with advertising, trade shows, public relations and other market development programs and third-party professional service fees.
 
Selling, general and administrative expense was $156.0 million for the six months ended June 30, 2007 as compared to $90.4 million for the six months ended June 30, 2006. The increase of $65.6 was due primarily to a $46.8 million increase in employee compensation and related costs, including facilities costs, resulting from higher employee headcount of 1,680 employees at June 30, 2007 compared to 830 employees at June 30, 2006. The additional employees were hired to support the overall growth of our business. In addition, third party commissions increased $4.3 million, advertising expense increased $4.1 million, costs related to credit card processing, collections and bad debt increased $3.3 million, a $2.5 million increase in the loss on site and inventory assets, a $2.3 million increase in professional fees, and other miscellaneous expenses increased $2.3 million.
 
We expect that our selling, general, and administrative expenses will continue to increase in future periods. We expect that these increases will primarily be related to wages and related employment costs, facility costs and marketing expenses necessary to support our growth and our efforts to build brand awareness through advertising and promotional activities, and network expansion.
 
Research and development.  Research and development expenses consist of salaries and related benefits for our development personnel. Research and development expense was $1.0 million for the six months ended June 30, 2007 compared to $5.9 million for the six months ended June 30, 2006. This decrease was due to prior period expenses related to NextNet product research that were not recurring in 2007 due to the sale of NextNet in August 2006.


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Depreciation and amortization.  Depreciation and amortization expense increased to $35.9 million for the six months ended June 30, 2007 from $16.8 million for the six months ended June 30, 2006. This increase was primarily due to the additional network build-out and deployed customer premise equipment, or CPE costs related to our expansion into new markets and associated subscriber growth. Capital expenditures for depreciable property, plant and equipment increased to $164.6 million for the six months ended June 30, 2007 from $83.2 million for the six months ended June 30, 2006. The majority of these expenditures relate to the construction of our network and purchases of base station equipment.
 
Changes in technology used in our business, such as a transition to mobile WiMAX, may result in an impairment in the value or a change in the estimated useful life of our Expedience network equipment already placed in service. If such a change occurs, we may be required to record an impairment charge to reduce the carrying amount of equipment in service to its fair value, and/or to accelerate the useful life of the respective equipment, resulting in an increase in periodic depreciation expense over the remaining useful life of the equipment, or, in appropriate instances, to write off the entire net book value.
 
Spectrum lease expense.  Spectrum lease expense increased to $28.3 million for the six months ended June 30, 2007 from $8.0 million for the six months ended June 30, 2006. As certain of our leases include escalation clauses, we are required to record expense on a straight-line basis over the term of these leases, including renewal periods where appropriate. Total spectrum lease expense increased as a direct result of an increase in the number of spectrum licenses leased as part of the deployment of our wireless broadband network. We expect spectrum lease expense to continue to increase as we acquire additional spectrum and the costs of acquiring such spectrum become higher.
 
Interest income.  We recognized $35.4 million of interest income for the six months ended June 30, 2007 compared to $6.9 million for the three and six months ended June 30, 2006. These increases were primarily due to the $509.7 million increase in our short-term investments to $676.3 million at June 30, 2007 from $166.6 million at June 30, 2006.
 
Interest expense.  We incurred $47.7 million of interest expense in the first six months of 2007 compared to $30.4 million in the first six months of 2006. This increase in interest expense was primarily due to the issuance in February 2006 of additional senior secured notes, due 2010, in an aggregate principal amount of $360.4 million, as well as a term loan of $125 million and an additional loan totaling $10.0 million.
 
We recorded interest expense totaling $42.0 million and $29.2 million for the six months ended June 30, 2007 and 2006, respectively, related to our secured notes. We recorded amortization of original issuance discount of $11.2 million and $11.5 million, respectively. We recorded amortization of original deferred financing costs related to our secured notes of $3.3 million and $2.5 million for the six months ended June 30, 2007 and 2006, respectively. These amounts were partially offset by capitalized interest of $8.9 million and $5.3 million for the six months ended June 30, 2007 and 2006, respectively.
 
Other income (expense), net.  We had approximately $1.7 million in net other income during the first six months of 2007 as compared to $2.2 million in net other income during the first six months of 2006. This decrease was primarily due to the losses incurred from the early termination of lease of the Company’s former headquarters in the second quarter of 2007.
 
Losses from equity investees, net.  Losses from equity investees, net, decreased $1.0 million in the six months ended June 30, 2007 compared to the six months ended June 30, 2006 primarily due to the growth in the aggregate subscriber base of the equity investees.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Total revenues.  Total revenues increased $66.7 million to $100.2 million in 2006 from $33.5 million in 2005. This result includes a $59.1 million increase in service revenue as we increased our subscriber base, as well as a $7.6 million increase in equipment revenue derived from NextNet operations.
 
Service revenue.  As of December 31, 2006, we operated in 34 U.S. markets and two international markets covering a geographic area containing approximately 9.6 million people. Total subscribers in all


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markets grew from approximately 62,300 as of December 31, 2005 to approximately 206,200 as of December 31, 2006, generating service revenue of approximately $67.6 million in 2006 as compared to $8.5 million in 2005. This $59.1 million increase reflects net increases of 84,800 subscribers in markets launched prior to January 1, 2006, and 59,100 subscribers in the nine markets launched during 2006. Of these nine new markets, seven were launched in the second half of 2006.
 
For the year ended December 31, 2006, we experienced an average monthly churn of approximately 1.9%, with approximately 1.4% of this amount resulting from subscriber relocations or non-payment, based upon exit interviews. Given our limited operating history, and that our current subscriber contracts are generally for a term of one to two years, our current rate of churn may not be representative of the churn we may experience in the future.
 
Equipment and other revenue.  Equipment and other revenue increased approximately $7.6 million, to $32.6 million for the eight-month period ending on the date of sale from $25.0 million for the full year of 2005. This increase is primarily due to an increase in the volume of sales of CPE and other units to Inukshuk, Inc., a joint venture between Rogers Cable Enterprises and Bell Canada, through an arrangement with Flux Fixed Wireless, LLC, an entity controlled by Mr. McCaw. Total related party sales increased $5.8 million to $15.5 million in 2006 from $9.7 million in 2005. The remainder of the increase is a result of an increase in overall sales volume across our customer base.
 
Total cost of goods and services.  Total cost of goods and services increased $46.5 million to $70.1 million in 2006, from $23.6 million in 2005.
 
Cost of service.  As a result of the expansion in 2006 of our wireless broadband network and related subscriber growth, cost of service increased to $50.4 million in 2006 as compared to $13.1 million in 2005. The increase is due to an increase in costs for towers leased and related back haul costs, the number of subscribers using our service, and additional markets served. As a percentage of service revenue, cost of service decreased to 74.6% in 2006 from 154.8% in 2005, primarily as a result of the revenue generated from our increased subscriber base. We anticipate that our costs as a percentage of revenue will fluctuate due to new market launches, while our cost of service in absolute dollars will increase as we continue to expand our network.
 
Cost of equipment.  Our cost of equipment consists of costs incurred for equipment manufactured by NextNet through August 29, 2006. Following the increase in the number of CPE units sold in 2006, cost of equipment increased $9.2 million to $19.7 million for the eight months we owned NextNet in 2006, as compared to $10.5 million in 2005. As a percentage of equipment and other revenue, cost of equipment increased to 60.4% in 2006 from 41.9% in 2005, as a result of a full year of sales in 2005 to Flux Fixed Wireless, a related party, which had higher overall margins, as compared to eight months in 2006, due to the sale of NextNet. As a result of our sale of NextNet, we do not currently expect to incur any future material cost of equipment.
 
Selling, general and administrative expense.  Selling, general and administrative expense increased $108.5 million, or 102.1%, to $214.7 million in 2006 from $106.2 million in 2005. The overall increase is due primarily to employee compensation and related costs, including facilities costs due to higher employee headcount, additional marketing and advertising expenses related to the expansion of our business, increases in third party commission expenses; and higher professional fee expenses. Employee and related compensation expense increased $63.4 million due to headcount increases to support the overall growth of our business. Our total employee headcount increased from 622 at December 31, 2005 to 1,241 at December 31, 2006. Marketing and advertising expense increased $20.5 million as we expanded our number of markets from 27 to 36 and increased our subscriber base from 62,300 at December 31, 2005 to 206,200 at December 31, 2006. Facilities expenses increased $6.2 million in connection with the headcount increase and market expansion. Third party commission expenses increased $5.5 million as we sold more services through third party providers. Professional fees, which include legal, accounting and other costs related to regulatory compliance, increased $5.3 million to $20.9 million in 2006 from $15.6 million in 2005 resulting primarily from costs associated with our prior withdrawn registration statement and general growth in our legal, accounting and


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regulatory needs caused by our growth. Other costs increased $7.5 million and included expenses related to our new call center.
 
We expect that our selling, general, and administrative expenses will continue to increase in future periods. We expect that these increases will primarily be related to marketing expenses necessary to support our growth and our efforts to build brand awareness through national advertising and promotional activities, personnel and related facility costs, network expansion, costs related to an additional call center in 2007, and expenses for professional fees associated with Securities Exchange Act of 1934 reporting and compliance.
 
Research and development expense.  Research and development expense decreased $749,000, or 7.8%, to $8.9 million in 2006 from $9.6 million in 2005. The decrease was due primarily from the sale of NextNet in August 2006.
 
Depreciation and amortization expense.  Depreciation and amortization expense increased $29.0 million to $40.9 million in 2006 from $11.9 million in 2005, primarily due to increased network build-out and deployed CPE costs related to our expansion into new markets and associated subscriber growth. Capital expenditures for depreciable property, plant and equipment increased $59.0 million to $191.7 million in 2006 from $132.7 million in 2005. The majority of these expenditures relate to the construction of our network and purchases of base station equipment.
 
Changes in technology customarily used in our business, such as a transition to mobile WiMAX, may result in an impairment in the value or a change in the estimated useful life of our Expedience network equipment already placed in service. If such a change occurs, we may be required to record an impairment charge to reduce the carrying amount of equipment in service to its fair value, and to accelerate the useful life of the respective equipment, resulting in an increase in periodic depreciation expense over the remaining useful life of the equipment, or, in appropriate instances, to write off the entire unamortized value.
 
Spectrum lease expense.  Spectrum lease expense increased $14.1 million to $23.5 million in 2006 from $9.4 million in 2005. As certain of our leases include escalation clauses, we are required to record expense on a straight-line basis over the term of these leases, including renewal periods where appropriate. Total spectrum lease expense increased as a direct result of an increase in the number of spectrum licenses leased as part of the deployment of our wireless broadband network. We expect spectrum lease expense to continue to increase as we acquire additional spectrum and the costs of acquiring such spectrum become higher.
 
Gain on sale of NextNet.  The sale of NextNet in August 2006 resulted in a gain of $19.8 million, comprised of net proceeds from the sale of $47.1 million less the book value of net assets sold of $26.1 million and transaction related costs of $1.2 million.
 
Operating loss.  As a result of the above, operating loss increased from $127.2 million in 2005 to $238.1 million in 2006.
 
Interest income.  We recognized $30.4 million of interest income in 2006 compared to $6.6 million in 2005. This increase is due to an increase in our total short-term investments.
 
Interest expense — net.  We incurred $72.3 million of net interest expense in 2006 compared to $14.6 million in 2005. This increase in net interest expense is due to the issuance in August 2005 of senior secured notes, due 2010, in an aggregate principal amount of $260.3 million, and the issuance in February 2006 of additional senior secured notes, due 2010, in an aggregate principal amount of $360.4 million, as well as additional loans totaling $135.0 million. We recorded interest expense totaling $69.1 million, including $63.2 million related to our senior secured notes in 2006. We also recorded amortization of original issuance discount of $15.8 million and deferred financing costs of $3.9 million related to our senior secured notes. These amounts were partially offset by capitalized interest of $16.6 million in 2006. In the year ended December 31, 2005, we recorded interest expense totaling $11.6 million related to our notes, $4.4 million of amortization of original issuance discount, and deferred financing costs of $898,000, partially offset by $2.3 million of capitalized interest.
 
Other income (expense) — net.  We recognized $2.2 million of other income in 2006 as compared to $300,000 of other income in 2005. This increase was due primarily to the sale of spectrum assets in 2006.


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Income tax provision.  We incurred $3.0 million of income tax expense in 2006 as compared to $1.5 million in 2005. The expense represents the recognition of a deferred tax liability related to the accounting for FCC licenses we own. Owned FCC licenses are amortized over 15 years for U.S. tax purposes but, since these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. The ongoing difference between the financial statements and tax amortization treatment resulted in our recording a deferred income tax expense of $3.0 million 2006.
 
Losses from equity investees — net.  Losses from equity investees — net increased $1.2 million to $5.1 million in 2006 from $3.9 million in 2005. The increase is due to continued losses from our equity investee MVS Net S.A. de C.V. in Mexico, as well as losses from our equity investee Danske Telecom A/S in Denmark that we invested in during June 2005.
 
Net loss.  As a result of the above, our net loss increased to $284.2 million in 2006 as compared to $140.0 million in 2005.
 
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 
Total revenues.  Total revenues increased $18.2 million to $33.5 million in 2005 from $15.3 million in 2004, due to a $10.0 million increase in equipment revenue and an $8.2 million increase in service revenue as we began commercial deployment of our network.
 
Service revenue.  In August 2004 we launched our first market for wireless broadband services. We had three markets covering approximately 480,000 people in commercial operation by December 31, 2004. As of December 31, 2005 we operated in a total of 25 U.S. markets and two international markets covering approximately 4.6 million people. Of the 24 new markets launched in 2005, 17 were launched in the second half of the year. Total subscribers in all markets grew from approximately 3,500 as of December 31, 2004 to approximately 62,300 as of December 31, 2005, generating service revenues of approximately $8.5 million in 2005 as compared to $200,000 in 2004.
 
Equipment and other revenue.  Equipment and other revenue increased approximately $10.0 million, or 66.7%, to $25.0 million in 2005 from $15.0 million in 2004. This increase was due to an increase in the volume of base station, CPE and other units sold from approximately 13,500 to approximately 19,500. Sales of equipment to related parties increased $2.8 million to $9.7 million in 2005 from $6.9 million in 2004. The majority of this increase was attributable to sales of base station equipment in the fourth quarter to Inukshuk, Inc., a joint venture of Bell Canada and Rogers Communications, through an arrangement with Flux Fixed Wireless, LLC, an entity controlled by Mr. McCaw.
 
Total cost of goods and services.  Total cost of goods and services increased $10.7 million, or 83.5%, to $23.6 million in 2005 from $12.8 million in 2004.
 
Cost of service.  The deployment of our wireless broadband network to support the expansion of our services resulted in cost of service increasing by $10.1 million to $13.1 million in 2005 compared to $3.0 million in 2004. Tower costs represented the majority of the increase, growing to $6.0 million in 2005 from approximately $500,000 in 2004.
 
Cost of equipment.  Following the increase in the number of base station units and CPE sold in 2005, cost of equipment increased $700,000, or 7.1%, to $10.5 million in 2005 from $9.8 million in 2004. As a percentage of equipment and other revenue, cost of equipment decreased to 41.9% of equipment and other revenue in 2005 from 65.3% in 2004 as a result of an improvement in our product design, and production efficiencies and the impact of the fourth quarter base station equipment sales to Inukshuk. We recognize significantly higher margins on sales of base station equipment as compared to sales of CPE.
 
Selling, general and administrative expense.  Selling, general and administrative expense increased $82.0 million to $106.2 million in 2005 from $24.2 million in 2004. The increase was primarily due to a significant increase in employee compensation and benefit costs, marketing and advertising costs, professional fees, and facilities costs to support the expansion of our business. Employee compensation, benefits and other related expenses (including travel and entertainment) included in selling, general, and administrative expense


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increased $45.9 million to $59.2 million in 2005 from $13.3 million in 2004, as we increased total headcount to support the overall growth of our business. Marketing and advertising costs increased $16.1 million to $17.9 million in 2005 from $1.8 million in 2004, as we launched or expanded our marketing and sales efforts in 24 markets. Professional fees are included in selling, general, and administrative expense, including legal, accounting and other costs related to regulatory compliance, increased $11.8 million to $15.6 million in 2005 from $3.8 million in 2004. Facilities costs included in selling, general, and administrative expense increased $6.0 million to $6.8 million in 2005 from $800,000 in 2004, as we expanded our administrative office space in Kirkland, Washington and opened various locations in our new markets.
 
Research and development expense.  Research and development expense increased $3.8 million, or 66.0%, to $9.6 million in 2005 from $5.8 million in 2004. The increase was primarily due to the additional research and development expenditure to support the expansion of our wireless broadband network and the development of new technologies, including PC cards and chipsets installed directly in consumer devices. Additionally, we acquired NextNet in March 2004, which resulted in a full year of research and development expense in 2005 as compared to only ten months of such expense in 2004.
 
Depreciation and amortization expense.  Depreciation and amortization expense increased $9.4 million to $11.9 million in 2005 from $2.6 million in 2004, primarily due to increased network build-out and deployed CPE following our expansion into new markets and related subscriber growth. Capital expenditure for purchases of depreciable property, plant and equipment increased $119.9 million to $132.7 million in 2005 from $12.8 million in 2004.
 
Spectrum lease expense.  Spectrum lease expense increased $6.4 million to $9.4 million in 2005 from $3.0 million in 2004. Total spectrum lease expense increased as a direct result of the increasing number of spectrum licenses we leased as part of the deployment of our wireless broadband network. We entered into or assumed lease arrangements for approximately 200 spectrum licenses in 2005, increasing the total number held to approximately 285 as of December 31, 2005 as compared to approximately 85 as of December 31, 2004.
 
Operating loss.  As a result of the above, operating loss increased from $33.1 million in 2004 to $127.2 million in 2005.
 
Interest income.  We recognized $6.6 million of interest income in 2005 as compared to $1.2 million in 2004. The increase in interest income is primarily due to an increase in our total short-term investments and the fact that we earned income on short-term investments acquired mid-year in 2004 for a full year in 2005.
 
Interest expense — net.  We incurred $14.6 million of net interest expense in 2005, compared to none in 2004. This difference is due to the issuance in August 2005 of senior secured notes due 2010, in an aggregate principal amount of $260.3 million. We recorded interest expense totaling $11.6 million and amortization of original issue discount of $4.4 million in 2005 related to these senior secured notes. These amounts were partially offset by capitalized interest of $2.3 million in 2005.
 
Other income (expense) — net.  We recognized $300,000 of other income in 2005 as compared to $292,000 of other expense in 2004.
 
Income tax provision.  We recorded a $1.5 million income tax provision in 2005 as compared to $0 in 2004. The expense represents the recognition of a deferred tax liability related to the accounting for FCC licenses we own. Owned FCC licenses are amortized over 15 years for U.S. tax purposes but, since these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. The ongoing difference between the financial statements and tax amortization treatment resulted in our recording a deferred income tax expense of $1.5 million in 2005.
 
Losses from equity investees — net.  Losses from equity investees — net increased $3.0 million to $3.9 million from $988,000 in 2004. The increase in losses from equity investees was due to the inclusion of a full year of losses from MVS Net S.A. de C.V. in Mexico, as compared to six months of losses in 2004, and the addition in June 2005 of a new equity investee, Danske Telecom A/S in Denmark.
 
Net loss.  As a result of the above, our net loss increased to $140.0 million in 2005 as compared to $33.0 million in 2004.


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Liquidity and Capital Resources
 
Since inception, our activities have consisted principally of developing, deploying and operating our network and acquiring spectrum and other assets for the delivery of wireless broadband services. Until the sale of NextNet in August 2006, we also developed and sold network equipment and CPE. We have relied on the proceeds from equity and debt financing, rather than cash generated from operations, as our primary source of capital to fund this development. Specifically, we raised $207.0 million in capital through the issuance of 30,000,000 shares of Class A common stock and 9,000,000 shares of Class B common stock in 2004. We raised $139.6 million in capital through the issuance of 11,635,687 shares of Class A common stock in 2005, and $1.0 billion through sales of 47,475,161 shares of Class A common stock and 9,905,732 shares of Class B common stock to Intel Capital, Motorola and others in 2006. We also raised capital through debt financing, including issuance of debt securities and warrants, totaling $260.3 million in 2005 and $495.4 million in 2006. In the first six months of 2007, we received $556.0 million, net of expenses, from the issuance of 24,000,000 shares of Class A common stock in our Initial Public Offering, or IPO and $2.2 million from the proceeds of option and warrant exercises.
 
On July 3, 2007 we entered into a $1.0 billion senior term loan facility which grants the lenders a security interest in substantially all of the assets of our business in the United States, including a pledge of all of our domestic subsidiaries. Upon closing the transaction we drew $379.3 million, in part to repay in full our prior term loan, which we entered into in August 2006. We drew an additional $620.7 million against our new senior term loan facility on August 15, 2007 to redeem all of our outstanding senior secured notes due 2010. Please see “Description of Indebtedness” for a more detailed description of our indebtedness.
 
Based upon our current plans, we believe that our existing cash, cash equivalents and marketable securities together with the incremental cash provided by our new senior term loan facility, will be sufficient to cover our estimated liquidity needs for at least the next twelve months, although we may seek to raise additional capital during that period, if available, on terms we believe are attractive. If the selling stockholders avail themselves of applicable net issue exercise provisions associated with the warrants exercisable for the Class A common stock described in this registration statement, we will not receive any proceeds from sales of common stock in connection with this offering.
 
Our long-term economic model is designed to allow replicable, scalable individual market builds so that we can increase or decrease our market deployment schedule based on available funds. As a result, the amount and timing of our long-term capital needs will depend on the extent of our network deployment and, to a lesser degree, on the schedule on which mobile WiMAX technologies become available, which factors are difficult to estimate at this time. As our business is in its early stages, we regularly evaluate our plans and strategy, and these evaluations may result in changes, some of which may be material and significantly modify our cash requirements. These changes in our plans or strategy may include the introduction of new features or services, significant or enhanced distribution arrangements, joint ventures, asset swaps, investments in infrastructure, acquisition of other companies, or any combination of the foregoing. We will likely seek significant additional debt financing in the short-term and the long-term, to continue to fund our liquidity needs and capital resource requirements.


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Cash Flow Analysis
 
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 
The following table presents a summary of our cash flows and beginning and ending cash balances for the six months ended June 30, 2007 and 2006:
 
                 
    Six Months Ended June 30,  
    2007     2006  
 
Cash used in operating activities
  $ (280,639 )   $ (79,237 )
Cash used in investing activities
    (349,553 )     (291,504 )
Cash provided by financing activities
    572,250       354,250  
Effect of foreign currency exchange rates on cash and cash equivalents
    (50 )     2,309  
                 
Net decrease in cash and cash equivalents
    (57,992 )     (14,182 )
Cash and cash equivalents at beginning of period
    438,030       29,188  
                 
Cash and cash equivalents at end of period
  $ 380,038     $ 15,006  
                 
 
Operating Activities
 
Net cash used in operating activities increased by $201.4 million to $280.6 million in the six months ended June 30, 2007, from $79.2 million in the six months ended June 30, 2006. Cash received from customers was $36.1 million in the first six months of 2007 compared to $27.2 million in the first six months of 2006, which was primarily from our NextNet operations, resulting in an $8.9 million increase in cash provided. This increase was due to an increase in the number of our subscribers as we continued to increase our subscriber base in our existing markets as well as we added seven new markets in the first six months of 2007. This addition to cash was offset by increases in all operating expenses, most significantly general and administrative, and sales and marketing expenses. These increases included employee compensation, professional fees and facilities and advertising expense, due to the expansion of our wireless broadband network as well as an increase in the number of markets served.
 
Investing Activities
 
During the six months ended June 30, 2007, cash used in investing activities was $349.6 million compared to $291.5 million during the six months ended June 30, 2006, resulting in an increase of $58.1 million. This increase was due primarily to a $248.5 million increase in use of cash invested in deploying our wireless broadband network and acquiring additional spectrum licenses in the first six months of 2007 as compared to the first six months of 2006 as we launched seven new markets in the first six months of 2007, as well as an increase in investments in equity investees of $3.1 million to $5.3 million in the first six months of 2007 compared to $2.2 million in the first six months of 2006. The increase was partially offset by sales of short-term and restricted investments, net of purchases, which decreased by $151.6 million to $20.0 million in proceeds from investments for the first six months ended June 30, 2007 from $131.6 million in cash used for investments in the first six months ended June 30, 2006. The increase was also offset by a $37.7 million decrease in cash used for business acquisitions from $44.8 million in the first six months of 2006 to $7.1 million in the first six months of 2007, $2.2 million in cash received in 2007 from the sale of an equity investment, and an issuance of related party notes of $2.0 million in the first months of 2006.
 
Financing Activities
 
Net cash provided by financing activities increased by $218.0 million to $572.3 million for the six months ended June 30, 2007 from $354.3 million for the six months ended June 30, 2006. In the first six months of 2007, we received $556.0 million, net of expenses, from the IPO, $2.2 million from the proceeds of option and warrant exercises, $15.0 million received from a minority partner, each of which was partially offset by a $937,000 principal payment made on our $125.0 million loan. In the first six months of 2006, we


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received $360.4 million from the issuance of our senior secured notes, due 2010, as well $10.0 million from an additional loan, partially offset by the payment of $16.1 million in related financing fees.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
The following table presents a summary of our cash flows and beginning and ending cash balances for the years ended December 31, 2005 and 2006:
 
                 
    Year Ended December 31,  
    2005     2006  
    (In thousands)  
 
Cash used in operating activities
  $ (96,655 )   $ (233,154 )
Cash used in investing activities
    (275,300 )     (867,557 )
Cash provided by financing activities
    389,181       1,504,213  
Effects of foreign exchange rate or cash and cash equivalents
    (636 )     5,340  
                 
Net increase in cash and cash equivalents, including the effect of foreign exchange rate changes
    16,590       408,842  
Cash and cash equivalents at beginning of period
    12,598       29,188  
                 
Cash and cash equivalents at end of period
  $ 29,188     $ 438,030  
                 
 
Operating Activities
 
Net cash used in operating activities increased by $136.5 million to $233.2 million in 2006, from $96.7 million in 2005. Cash received from customers was $104.9 million in 2006 compared to $31.6 million in 2005. This increase was due to an increase in the number of our subscribers as we launched our service in nine new markets in 2006. This increase was offset by increases in all operating expenses, most significantly general and administrative and sales and marketing expenses, including employee compensation, professional fees and facilities and advertising expense, due to the expansion of our wireless broadband network as well as a significant increase in the number of markets served.
 
Investing Activities
 
Net cash used in investing activities increased by $592.3 million to $867.6 million in 2006 from $275.3 million in 2005. We launched nine new markets in 2006, and, as a result, invested $259.4 million in deploying our wireless broadband network and acquiring additional spectrum licenses in 2006, as compared to $157.0 million in 2005, an increase of $102.4 million. Purchases of short-term and restricted investments, net of sales or maturities, increased by $522.6 million to $599.4 million in 2006 from $76.8 million in 2005. Also contributing to this increase was an increase in cash paid to acquire businesses which totaled $49.6 million in 2006 compared to $27.8 million in 2005, an increase of $21.8 million due to an increase in spectrum acquisitions, as well as the issuance of $4.1 million in notes receivable in 2006, while we did no such issuance in 2005. These expenditures were partially offset by the net proceeds received on the sale of NextNet totaling $47.1 million and a reduction of $11.5 million in cash invested on our equity investees.
 
Financing Activities
 
Net cash provided by financing activities increased $1.1 billion to $1.5 billion in 2006 from $389.2 million in 2006. In 2006 we received $1.0 billion of net proceeds from the issuance of common stock, $360.4 million from the issuance of our senior secured notes, due 2010, and $135.0 million in connection with our commercial loan and other indebtedness.


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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 
The following table presents a summary of our cash flows and beginning and ending cash balances for the years ended December 31, 2004 and 2005:
 
                 
    As of December 31,  
    2004     2005  
    (In thousands)  
 
Cash used in operating activities
  $ (52,845 )   $ (96,655 )
Cash used in investing activities
    (144,406 )     (275,300 )
Cash provided by financing activities
    206,950       389,181  
Effect of foreign exchange rates on cash and cash equivalents
    178       (636 )
                 
Net increase in cash and cash equivalents, including the effect of foreign exchange rates
    9,877       16,590  
Cash and cash equivalents at beginning of period
    2,721       12,598  
                 
Cash and cash equivalents at end of period
  $ 12,598     $ 29,188  
                 
 
Operating Activities
 
Net cash used in operating activities increased $43.9 million, to $96.7 million in 2005, from $52.8 million in 2004. Cash received from customers was $31.6 million in 2005 compared to $11.6 million in 2004. This increase was due to an increase in the number of our subscribers as we launched our service in 22 markets in the United States and two markets in Europe in 2005. This increase was more than offset by increases in all operating expenses, most significantly selling, general, and administrative expenses, due to the expansion of our wireless broadband network and a significant increase in the number of markets served.
 
Investing Activities
 
Net cash used in investing activities increased $130.9 million to $275.3 million in 2005 from $144.4 million in 2004. We launched 22 markets in the United States and two markets in Europe in 2005, and, as a result, invested $157.0 million in deploying our wireless broadband network and acquiring additional spectrum licenses in 2005, as compared to $33.9 million in 2004, an increase of $123.1 million. Also in 2005 we paid $27.8 million in cash for spectrum acquisitions, an increase of $22.5 million, from $5.3 million in 2004. These expenditures were partially offset by a reduction in our net investment in short-term investments.
 
Financing Activities
 
Net cash provided by financing activities increased $182.2 million to $389.2 million in 2005 from $207.0 million in 2004. This increase was primarily due to the issuance in 2005 of our senior secured notes, due 2010, in an aggregate principal amount of $260.3 million. We received $67.4 million less in proceeds from sales of capital stock in 2005 as compared to 2004. Proceeds from the issuance of capital stock in 2005 and 2004 were $139.6 million and $207.0 million, respectively.
 
Financings and Capital Requirements
 
We have financed our operations through the sale of debt and equity securities and the issuance of bank debt. Significant transactions for the years ended December 31, 2005 and 2006 and the six months ended June 30, 2007, include the following:
 
  •  in March 2007, we completed the initial public offering of our Class A common stock, raising net proceeds of approximately $555.2 million through the sale of 24,000,000 shares of our Class A common stock at $25 per share;
 
  •  in August 2006, we issued 33,333,333 shares of our capital stock to Intel Capital for a purchase price of $600.0 million;


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  •  in August 2006, we issued 16,666,666 shares of our common stock to Motorola for a purchase price of $300.0 million;
 
  •  between August and October 2006, we issued a total of 8,603,116 shares of our common stock to existing investors in a preemptive rights offering, for a purchase price of $154.9 million;
 
  •  in August 2006, we borrowed $125.0 million under a term loan;
 
  •  in June 2006, we borrowed $10.0 million under our July 2005 loan agreement with BCE Nexxia;
 
  •  in February 2006, we sold approximately $360.4 million in senior secured notes. In connection with the sale of these notes, we issued warrants to the purchasers entitling them to purchase up to 9,609,334 shares of our common stock;
 
  •  in August 2005, we sold approximately $260.3 million in senior secured notes. In connection with the sale of these notes, we issued warrants to the purchasers entitling them to purchase up to 6,942,552 shares of our common stock; and
 
  •  in March 2005, we issued 8,333,333 shares of our common stock to Bell Canada for a purchase price of $100.0 million.
 
In addition, on July 3, 2007, we entered into a $1.0 billion senior term loan facility.
 
Debt Obligations and Restricted Cash and Investments
 
Existing Debt
 
In August 2005, we completed the sale of senior secured notes due 2010 in an aggregate principal amount of $260.3 million. In connection with our sale of senior secured notes, we also issued warrants to purchase up to 6,942,552 shares of our common stock. In addition, we granted the purchasers of the senior secured notes a one-time option to acquire up to an equivalent amount of additional notes and warrants for a period of 180 days following the issuance of the senior secured notes. This option was exercised in February 2006, at which time we completed the sale to new and existing holders of additional senior secured notes due 2010 in an aggregate principal amount of $360.4 million, and warrants to purchase up to 9,609,334 shares of our common stock. As of June 30, 2007, we recorded the aggregate principal amount of the senior secured notes outstanding net of a discount of $98.9 million due to the unamortized portion of the proceeds allocated to the warrants, based on their estimated fair value. Additionally, under the terms of the senior secured notes, we were required to purchase and pledge non-callable government securities as interest payment collateral for the senior secured notes. These restricted investments, totaling $51.9 million at June 30, 2007, are included in current restricted investments in our consolidated balance sheets. As of June 30, 2007, we had restricted cash of $11.8 million. As of June 30, 2007, we were in compliance with our debt covenants.
 
On July 3, 2007 we entered into a $1.0 billion secured term loan facility, which granted the lenders a security interest in substantially all of our assets. We used $125.0 million of the proceeds of this loan to retire our existing term loan, and we used an additional $620.7 million to retire our outstanding senior secured notes on August 15, 2007. In connection with the repayment of our prior term loan and the retirement of our senior secured notes due 2010, we expect to record charges from debt restructuring that may be material in the third quarter of 2007.
 
Financing Transactions
 
New Senior Term Loan Facility
 
On July 3, 2007, we entered into a senior term loan facility. The new term loan facility is a senior secured facility providing for loans of up to $1.0 billion. At the closing, we borrowed approximately $379.3 million, in part, to repay our outstanding indebtedness under our prior $125.0 million term loan and we borrowed an additional $620.7 million under the senior term loan facility in order to redeem our senior secured notes, due 2010. The new senior term loan facility is scheduled to mature on July 3, 2012.


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In general, borrowings under the new senior term loan facility bear interest based, at our option, at either the Eurodollar rate or an alternate base rate (“ABR”), in each case plus a margin. The ABR shall mean the higher of 0.5% in excess of the federal funds rate and (y) the rate that the administrative agent announces from time to time as its prime or base commercial lending rate. The initial rate of interest for borrowings under the new senior term loan facility will be the Eurodollar rate plus 6.00% or ABR plus 5.00%.
 
Our obligations under the new senior term loan facility will be unconditionally and irrevocably guaranteed by certain of our existing and future domestic subsidiaries. In addition, the new senior term loan facility will be secured by first priority perfected security interests in substantially all of the assets of our business in the United States, including a pledge of all of our domestic subsidiaries.
 
Contractual Obligations
 
The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments as of December 31, 2006. Changes in our business needs or interest rates, as well as actions by third parties and other factors, may cause these estimates to change. Because these estimates are complex and necessarily subjective, our actual payments in future periods are likely to vary from those presented in the table. The following table summarizes certain of our contractual obligations, including principal and interest payments under our debt obligations and payments under our spectrum lease obligations, as of December 31, 2006:
 
                                         
          Less Than
                   
Contractual Obligations
  Total     1 Year     1-3 Years     3-5 Years     Over 5 Years  
    (In millions)                          
 
Long-term debt obligations
  $ 755.7     $ 1.3     $ 133.8     $ 620.6     $  
Interest payments(1)
    314.1       84.3       161.5       68.3        
Operating lease obligations
    684.2       29.3       55.7       52.3       546.9  
Spectrum lease obligations
    720.8       16.4       32.8       36.1       635.5  
                                         
Total(2)(3)
  $ 2,474.8     $ 131.3     $ 383.8     $ 777.3     $ 1,182.4  
                                         
 
 
(1) Our interest payment obligations are calculated for all years using an interest rate of 11%.
 
(2) Excludes $124.6 million remaining under our commitment to purchase no less than $150.0 million of infrastructure products and subscriber products from Motorola through August 29, 2008 under the terms of the commercial agreements that were entered into on August 29, 2006. Please see “Certain Relationships and Related Transactions” for more detailed description of our agreements with Motorola. Refer to Note 3 to our Consolidated Financial Statements for further details.
 
(3) Excludes obligations of approximately $75.0 million under pending spectrum acquisition agreements entered into as of December 31, 2006 and $300.0 million to fund the closing of the AT&T spectrum acquisition entered into in February 2007.
 
We had no off-balance-sheet arrangements as of June 30, 2007.
 
Future Liquidity and Capital Resource Requirements
 
Based upon our current plans, we believe that our existing cash, cash equivalents and marketable securities, together with the incremental proceeds from our July 3, 2007 senior term loan facility, will be sufficient to cover our estimated liquidity needs for at least the next twelve months. Our long-term economic model is designed to allow replicable, scalable individual market builds so that we can increase or decrease our market deployment schedule based on available cash. As a result, the amount and timing of our long-term capital needs will depend on the extent of our network deployment and, to a lesser degree, on the schedule on which mobile WiMAX technologies become available, which factors are difficult to estimate at this time. As our business is in its early stages, we regularly evaluate our plans and strategy, and these evaluations often result in changes, some of which may be material and significantly modify our cash requirements. These changes in our plans or strategy may include the introduction of new features or services, significant or


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enhanced distribution arrangements, joint ventures, asset swaps, investments in infrastructure, acquisition of another company, or any combination of the foregoing.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates used, including those related to the valuation of long-lived assets, goodwill and intangible assets, including spectrum, share-based compensation and deferred tax asset valuation.
 
Our accounting policies require management to make complex and subjective judgments. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
 
In consultation with our board of directors, we have identified the following accounting policies that we believe are key to an understanding of our financial statements: revenue recognition; impairments of long-lived assets; impairments of goodwill and intangible assets with indefinite useful lives; share-based compensation; valuation of common stock; accounting for spectrum licenses and leases; and the deferred tax asset valuation allowance.
 
Revenue Recognition
 
We recognize revenue in accordance with Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, when all of the following conditions exist: (i) persuasive evidence of an arrangement exists in the form of an accepted purchase order; (ii) delivery has occurred, based on shipping terms, or services have been rendered; (iii) the price to the buyer is fixed or determinable, as documented on the accepted purchase order; and (iv) collectibility is reasonably assured.
 
Service revenue — We primarily earn service revenue by providing access to our wireless broadband network. Also included in service revenue are revenue from optional services, including personal and business email and static Internet Protocol. Activation fees are charged to customers upon subscription.
 
We apply Emerging Issues Task Force, or EITF, Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, to account for revenue arrangements with multiple deliverables. These arrangements are allocated among the separate units of accounting based on the relative fair values if the deliverables in the arrangement meet certain criteria.
 
Service revenue from customers for the wireless broadband and optional services are billed in advance and recognized ratably over the service period. Activation fees charged to the customer are deferred and recognized as service revenue on a straight-line basis over the expected life of the customer relationship, which we have estimated to be 3.5 years. This expected life was determined based on our assessment of historical industry averages. Given our limited history we believe that these averages represent the best indicator of our future duration of customer life. As we develop more history of contract renewals, our estimate of the expected life of our customer relationship may change. Any change will be reflected prospectively beginning in the period that the change in estimate occurs.
 
Equipment and other revenue — We primarily earned equipment revenue from sales to third party network providers of base stations, CPE, related infrastructure, system services and software maintenance contracts prior to our sale of NextNet in August, 2006. Revenue associated with the shipment of CPE and other equipment to our customers was recognized when title and risk of loss transferred to the customer. Generally, the risks of


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ownership and title pass when product was delivered to our customer. Shipping and handling costs billed to customers are recorded to equipment and other revenue. Freight costs associated with shipping goods to customers are recorded to cost of equipment. There were no rights of return provided in any of our equipment sales contracts. In the interest of customer relations, in the past we have allowed returns or exchanges of certain products. If and when products are returned, we normally exchange them. We have not established a sales return allowance as returns have been insignificant to date and no significant returns are anticipated.
 
Sales discounts, primarily discounts on list prices of equipment sold, are generally classified as a reduction of revenues in accordance with EITF Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), and are recognized when revenue is recognized.
 
With the NextNet arrangements that included multiple elements including software, such as the sale of a base station with a software maintenance contract, we applied the accounting guidance in accordance with Statement of Position, or SOP, No. 97-2, Software Revenue Recognition. Revenue was allocated to each element of the transaction based upon its fair value as determined by vendor specific objective evidence. Vendor specific objective evidence of fair value for all elements of an arrangement was based upon the normal pricing and discounting practices for those products and services when sold separately.
 
Revenue is deferred for any undelivered elements and revenue is recognized when the product is delivered or over the period in which the service is performed. If we cannot objectively determine the fair value of any undelivered element included in the bundled product and software maintenance arrangements, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. If the fair value of a delivered element has not been established, we use the residual method to record revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
 
Software maintenance services include technical support and the right to receive unspecified upgrades and enhancements on a when-and-if available basis. Fees for software maintenance services are typically billed annually in advance of performance of the services with provisions for subsequent annual renewals. We defer the related revenues and recognize them ratably over the respective maintenance terms, which typically are one to two years.
 
Impairments of Long-lived Assets
 
We review our long-lived assets to be held and used, including property, plant and equipment and intangible assets with definite useful lives, for recoverability whenever an event or change in circumstances indicates that the carrying amount of such long-lived asset or group of long-lived assets may not be recoverable. Such circumstances include, but are not limited to the following:
 
  •  a significant decrease in the market price of the asset;
 
  •  a significant change in the extent or manner in which the asset is being used;
 
  •  a significant change in the business climate that could affect the value of the asset;
 
  •  a current period loss combined with projections of continuing losses associated with use of the asset;
 
  •  a significant change in our business or technology strategy, such as a switch to mobile WiMAX wireless broadband network;
 
  •  a significant change in our management’s views of growth rates for our business; and
 
  •  a significant change in the anticipated future economic and regulatory conditions and expected technological availability.
 
We frequently evaluate whether such events and circumstances have occurred. When such events or circumstances exist, we would determine the recoverability of the asset’s carrying value by estimating the undiscounted future net cash flows (cash inflows less associated cash outflows) that are directly associated


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with and that are expected to arise as a direct result of the use of the asset. For purposes of recognition and measurement, we group our long-lived assets at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets and liabilities.
 
If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value of the asset and its carrying value.
 
Impairments of Goodwill and Intangible Assets with Indefinite Useful Lives
 
We assess the impairment of goodwill and intangible assets with indefinite useful lives at least annually, or whenever an event or change in circumstances indicates that the carrying value of such asset or group of assets may not be recoverable. Factors we consider important, any of which could trigger an impairment review, include:
 
  •  significant underperformance relative to expected historical or projected future operating results;
 
  •  significant changes in our use of the acquired assets or the strategy for our overall business; and
 
  •  significant negative industry or economic trends.
 
Our owned spectrum licenses relate to our wireless broadband services business and are an integral part of our network coverage area, which is marketed under a single branding strategy and represent the highest and best use of the assets. Hence, they are evaluated as a single unit of accounting for impairment testing purposes.
 
We complete a two-step process to determine the amount of goodwill impairment. The first step involves comparison of the fair value of the reporting unit to its carrying value to determine if any impairment exists. If the fair value of the reporting unit is less than the carrying value, goodwill is considered to be impaired and the second step is performed. The second step involves comparison of the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating fair value to the various assets and liabilities within the reporting unit in the same manner goodwill is recognized in a business combination. In calculating an impairment charge, the fair value of the impaired reporting units are estimated using a discounted cash flow valuation methodology or by reference to recent comparable transactions. In making our assessment, we rely on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. There are inherent uncertainties related to these factors and judgment in applying these factors to our goodwill impairment test. We performed our annual impairment tests of goodwill as of October 1, 2006, and concluded that there was no impairment of our goodwill.
 
Our intangible assets with indefinite useful lives consist mainly of our spectrum licenses originally issued by the FCC, trade names and trademarks. The impairment test for intangible assets with indefinite useful lives consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess. The fair value is determined by estimating the discounted future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. We performed our annual impairment test of indefinite lived intangible assets as of October 1, 2006, and concluded that there was no impairment of these intangible assets.
 
Share-Based Compensation
 
Statement of Financial Accounting Standards No. 123, Accounting for Share-Based Compensation, or SFAS No. 123, established the use of the fair value based method of accounting for share-based compensation arrangements under which compensation cost is determined using the fair value of the share-based compensation determined as of the date of grant, which is recognized over the periods in which the related services are rendered. The statement also permitted companies to elect to continue using the intrinsic value accounting method specified in Accounting Principles Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, to account for share-based compensation issued to employees. Through December 31, 2005, we elected to use the intrinsic value based method for stock options issued to employees and have disclosed the pro forma effect


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of using the fair value based method to account for our share-based compensation pursuant to SFAS No. 148, Accounting for Share-Based Compensation — Transition and Disclosure, or SFAS No. 148.
 
On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, or SFAS No. 123(R), which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values. SFAS No. 123(R) was applied prospectively to new stock options and to options modified, repurchased, or cancelled on or after January 1, 2006. We recognize these compensation costs, net of a forfeiture rate, for those shares expected to vest on a graded vesting schedule over the requisite service period of the award, which is generally the option vesting term of four years. We continue to account for the outstanding awards at January 1, 2006 under APB 25 as we were considered a non-public entity at the date of adoption that used the minimum value method for pro forma disclosure under SFAS No. 148.
 
We use the Black-Scholes valuation model, or BSM, to estimate the fair value of stock options which requires complex and various judgmental assumptions including estimated stock price volatility, employee exercise patterns (expected life of the option) and future forfeitures. The computation of expected volatility is based on an average historical volatility from common shares of a group of our peers for an appropriate period of time. The expected life of options granted is based on the simplified calculation of expected life, described in Staff Accounting Bulletin No. 107, or SAB No. 107, Share-Based Payment, due to lack of option exercise history. In addition, an estimate of a 3% annual forfeiture rate was used for the year ended December 31, 2006 based on our historical experience since inception. If any of the assumptions used in the BSM change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. See Note 12, “Share-Based Payments” to our consolidated financial statements for additional information.
 
From January 1, 2005 to June 30, 2007, we granted options under our stock option plans as follows:
 
                                         
    Number of
    Weighted
    Weighted
    Weighted
    Weighted
 
    Options
    Average
    Average FV of
    Average FV of
    Average
 
Grant Date
  Granted     Exercise Price     Common Stock     Each Option     Intrinsic Value  
 
Q1 2005
    639,825     $ 8.94     $ 9.27     $ 2.84     $ 0.33  
Q2 2005
    232,661       12.00       12.11       2.68       0.11  
Q4 2005
    342,825       15.00       15.00       3.58        
Q1 2006
    1,248,761       15.00       15.00       10.77        
Q2 2006
    125,467       15.00       15.00       11.25        
Q3 2006
    2,458,246       18.00       18.00       11.95        
Q4 2006
    109,830       18.00       18.00       11.70        
Q1 2007
    2,869,913       24.87       25.00       15.99       0.13  
Q2 2007
    643,799       25.01       25.01       14.92        
                                         
Total
    8,671,327     $ 19.37     $ 19.44     $ 12.07     $ 0.07  
                                         
 
We account for grants under the Stock Appreciation Rights, or SAR, Plan, under SFAS No. 123(R). SARs are recorded as liability awards, as cash settlement is anticipated, and this liability is remeasured at fair value each reporting period until the awards are settled. The fair value is determined in the same manner as a stock option granted under the Stock Option Plan using the same assumptions and option-pricing model to estimate the fair value. Compensation expense for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value for each reporting period. See Note 12 “Share-Based Payments” of our consolidated financial statements for additional information.
 
In January 2007, our Board of Directors adopted the 2007 Stock Compensation Plan. The 2007 Stock Compensation Plan authorizes us to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock awards to our employees, directors and consultants. As of June 30, 2007, there were 11,911,775 shares of Class A common stock available for grant under the 2007 Stock Compensation Plan. Stock compensation awards under the 2007 Stock Compensation


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Plan will be made available at the discretion of the compensation committee, from authorized but unissued shares, authorized and issued shares reacquired and held as treasury shares, or a combination thereof. After January 19, 2007, we ceased granting stock options under the 2003 Stock Option Plan.
 
Valuation of Common Stock
 
Significant Factors, Assumptions, and Methodologies Used in Determining the Fair Value of our Capital Stock.
 
Members of our management possessing the requisite valuation experience estimated the fair value of our capital stock in connection with our stock option grants, stock awards, and other equity based compensation arrangements. We did not obtain contemporaneous valuations prepared by an unrelated valuation specialist at the time of each stock option issuance because we believe our management possessed the requisite valuation expertise to prepare a reasonable estimate of the fair value of the interests at the time of each issuance since inception.
 
The determination of the fair value of our common stock requires management to make judgments that are complex and inherently subjective. Management used the market approach to estimate the value of our enterprise at each date options were granted and at each reporting date. Under the market approach, a transaction-based method is used to estimate the value of our enterprise based on transactions involving capital stock with unrelated investors and other third parties. This approach assumes that such transactions constitute the best evidence as to the fair value of our common stock.
 
Sales of our capital stock for cash during the years ended December 31, 2005 and 2006 and the six months ended June 30, 2007 were as follows:
 
                         
    Number of
    Price
    Gross
 
    Shares     per Share     Proceeds  
 
March 2005
    9,957,837     $ 12.00     $ 119,494,048  
June 2005
    1,666,666 (1)   $ 12.00       20,000,000  
August/October 2006
    58,602,978 (2)   $ 18.00       1,054,853,604  
March 2007
    24,000,000     $ 25.00       600,000,000  
                         
Total
    94,227,481             $ 1,794,347,652  
 
 
(1) Of this amount, 1,273,593 shares were sold to a related party.
 
(2) Of this amount, 4,655,706 shares were sold to a related party.
 
Additionally, we use the best information available to corroborate our determination, including events affecting the fair value of our common stock during the year, such as:
 
  •  the implementation of our business strategy, including the achievement of significant qualitative and quantitative milestones relating to, among others things, the number of markets launched, subscriber growth, revenue growth, spectrum licenses acquired or leased, employee growth and the execution of strategic transactions;
 
  •  the exercise price of warrants for the purchase of our common stock issued to both related parties and third parties;
 
  •  the terms of cash sale transactions for the purchase of our common stock by related parties; and
 
  •  the terms of non-cash transactions in which related parties received our common stock as consideration.
 
In evaluating each of these events, we have assumed that such transactions provide additional corroborating evidence as to the fair value of our capital stock. For those transactions involving related parties, the facts and circumstances present are reviewed to evaluate whether the terms of these agreements differ materially from those that would have existed in an arms-length transaction with an unrelated party. This evaluation is performed by comparing those related party transactions to similar transactions with unrelated parties.


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We further corroborated the estimate of fair value by calculating the enterprise value using the income approach at various points throughout the year. The income approach applies an appropriate discount rate to an estimate of the future cash flows based on our forecasts of revenues, costs and capital expenditures. Given that we are an early stage company, forecasting these cash inflows and outflows requires that we make judgments that are substantially more complex and inherently subjective than those that would be required in a mature business. As such, we determined that the market approach was a more accurate method of estimating fair value and have relied on the income approach for corroboration only.
 
Accounting for Spectrum Licenses and Leases
 
We have two types of arrangements for spectrum licenses in the United States: direct licenses from the FCC which we own and leases or subleases from third parties that own or lease one or more FCC licenses.
 
The owned FCC licenses, as well as our licenses for spectrum in international markets, are accounted for as intangible assets with indefinite lives in accordance with the provisions of SFAS No. 142. In accordance with SFAS No. 142, intangible assets with indefinite useful lives are not amortized but must be assessed for impairment annually or more frequently if an event indicates that the asset might be impaired. We performed our annual impairment test of indefinite lived intangible assets as of October 1, 2006 and concluded that there was no impairment of these intangible assets. For leases involving significant up-front payments, we account for such payments as prepaid spectrum license fees.
 
We account for the spectrum lease arrangements as executory contracts which are similar to operating leases. For leases containing scheduled rent escalation clauses we record minimum rental payments on a straight-line basis over the terms of the leases, including the renewal periods as appropriate.
 
Deferred Tax Asset Valuation Allowance
 
A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. In accordance with SFAS No. 109, we record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including our limited operating history, scheduled reversals of deferred tax liabilities, projected future taxable income/loss, tax planning strategies and recent financial performance. We currently record a full valuation allowance for net deferred tax assets, which was approximately $67.1 million and $170.8 million as of December 31, 2005 and 2006, respectively.
 
Recent Accounting Pronouncements
 
SFAS No. 159 — In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (“fair value option”) and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS No. 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of Statement 157. We are currently evaluating the impact of this pronouncement on our financial statements.
 
FIN No. 48 — On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”). The adoption of FIN No. 48 did not impact our financial condition, results of operations or cash flows. See Note 8, Income Taxes for further discussion on the adoption of FIN No. 48.


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FSP EITF 00-19-2 — In December 2006, the Financial Accounting Standards Board, or FASB, approved FASB Staff Position, or FSP, No. EITF 00-19-2, Accounting for Registration Payment Arrangements, which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies, FSP EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, the maximum potential amount of consideration and the current carrying amount of the liability, if any. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006. The adoption of FSP EITF 00-19-2 did not have a material effect on our consolidated financial statements.
 
SAB No. 108 — In September 2006, the SEC staff issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated deficit as of the beginning of the fiscal year of implementation. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006, with earlier implementation encouraged. The implementation of SAB No. 108 did not have a material effect on our financial position, cash flows, or results of operations.
 
SFAS No. 157 — In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this pronouncement on our financial statements.
 
FSP No. SFAS 123(R)-3 — In November 2005, the FASB issued FSP No. SFAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides an alternative transition method for calculating the tax effects of adopting SFAS No. 123(R), which includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and the statement of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). There were no employee stock options exercises prior to January 1, 2006, the adoption date of SFAS 123(R), as such, the adoption of this FSP would have no impact on our financial position or results of operations. Therefore we will not adopt the FSP and will continue to follow the guidelines under SFAS 123(R).
 
Quantitative and Qualitative Disclosures about Market Risk
 
The risk inherent in our market risk sensitive instruments and positions is the potential loss from adverse changes in interest rates and foreign currency exchange rates. None of our market risk sensitive instruments are held for trading purposes.
 
Interest Rate Risk
 
Our primary interest rate risk is associated with our new senior term loan facility. We have a total outstanding balance on our new senior term loan facility of $1 billion at August 15, 2007. The interest rate on the new senior term loan facility is based, at our option, at either the Eurodollar rate, indexed to the LIBOR or an ABR indexed to the higher of 0.5% in excess of the federal funds rate or the rate that the administrative


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agent announces from time to time as its prime or base commercial lending rate. The weighted average interest rate under the new senior term loan facility was 11.59% at August 15, 2007. A one percent increase in the interest rate on the outstanding principal balance at August 15, 2007, would increase our annual interest expense by approximately $10.0 million per year.
 
We have short-term investments that are subject to interest rate risk that may impact the return on those investments. We do not expect our operating results, financial condition or cash flows to be materially affected by changes in market interest rates.
 
Foreign Currency Exchange Rates
 
We are exposed to foreign currency exchange rate risk as it relates to our international operations. We currently do not hedge our currency exchange rate risk and, as such, we are exposed to fluctuations in the value of the U.S. dollar against other currencies. Our international subsidiaries and equity investees generally use the currency of the jurisdiction in which they reside, or local currency, as their functional currency. Assets and liabilities are translated at exchange rates in effect as of the balance sheet date. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive (loss) income. Income and expense accounts are translated at the average monthly exchange rates during the reporting period. The effects of changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated are recorded as foreign currency transaction gains (losses) as a component of net loss.
 
Control and Procedures
 
Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining effective internal control over our financial reporting, as that term is defined under Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
 
  •  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
  •  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In connection with the audit of our consolidated financial statements for the years ended December 31, 2005 and 2006, both we and our independent public accountants identified material weaknesses, as well as, several significant deficiencies, with respect to our internal control over financial reporting. A significant deficiency is a control deficiency, or combination of control deficiencies, that could adversely affect our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. A


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material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements that is more than inconsequential will not be prevented or detected.
 
One of the material weaknesses related to our lack of sufficient review of our accounting for nonroutine and complex transactions specifically accounting for equity-method investments and issuance of debt with detachable warrants. The other material weakness related to a lack of proper cutoff of accounts payable and accrued expenses. These errors resulted in material adjustments and reclassifications to our consolidated financial statements. In addition, as of December 31, 2005 there were numerous significant deficiencies identified.
 
During 2006, we identified a material weakness in internal controls related to a lack of properly designed internal control over the preparation and review of the financial statements. This caused us to restate our consolidated financial statements for the nine month periods ended September 30, 2006 and 2005 (not included herein), and for the year ended December 31, 2005 related to the design and review of our allocation methodology between cost of services and cost of equipment. Additionally, we restated our unaudited statement of cash flows for the nine months ended September 30, 2006 (not included herein) for an error relating to the classification of amounts paid for leased spectrum assets, which were inappropriately classified as investing rather than operating activities.
 
During the year ended December 31, 2006 we noted significant deficiencies related to account reconciliations and related reviews; a lack of automation of our accounting for share-based payments, and ineffective controls relating to processes to ensure consistent communication of modifications in stock option grants to accounting personnel responsible for accounting for such modifications, accounting for leases and deferred rent, and information security.
 
Management’s Remediation Initiatives
 
We continue to address and remedy the material weaknesses in internal control over financial reporting noted in 2005 and 2006 as well as the significant deficiencies. Elements of our remediation plan are accomplished over time and we can offer no assurances that those initiatives will ultimately have the intended effects.
 
With respect to the material weaknesses, we have undertaken the following actions:
 
In order to address the material weakness identified in 2005 relating to the accounts payable cutoff, we have identified several areas for improvement. In the 1st quarter of 2007, we centralized the receipt and processing of invoice transactions in the accounts payable department. Our month end close procedures were modified to include a detailed review of vendor invoices to ensure completeness of accounts payable. Additionally, we have established a cross departmental team to implement improved policies and procedures for the procurement and payment processes that is also addressing the proper recording of accounts payable and accrued expenses.
 
With respect to financial reporting and complex accounting issues, we have increased the total number of staff within our department as well as the technical capability of that team. In April 2007, we hired a Chief Accounting Officer who has significant experience in leading an accounting function at a publicly held company and in overseeing the internal controls over financial reporting. He also has thorough knowledge and experience with technical accounting and US GAAP reporting requirements. To improve the quality of our month end close process, we have implemented several policies and procedures that are required to be followed by the accounting staff to ensure that all transactions are recorded consistently, are authorized and reviewed by higher level accounting personnel and include the appropriate level of supporting documentation.
 
We have also significantly increased management oversight and review of the financial information and engaged a nationally recognized accounting firm to advise us with respect to accounting for complex transactions as necessary.


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With respect to the significant deficiencies, we have undertaken the following actions:
 
We are currently implementing a software program to automate the accounting for share based payments and the modifications of stock option grants. With respect to leases and deferred rent, the accounting for leases has been automated and procedures are being implemented to ensure we have accounted for all leases as of a month end.
 
With the information technology department, we continue to enhance our resources and control environment. Related to information security, we have implemented stronger front end controls to address authentication and responsibilities within significant applications. Our technology group and internal compliance team, working with our third party providers, is currently evaluating access control procedures such as user access reviews and segregation of duties analysis, within and across applications. To address deficiencies in our network and data backup strategy, we have implemented off-site backup as part of the migration of financial software servers to a secure third party location.
 
Additionally, we have completed an annual assessment process which includes fraud risk and enterprise risk assessments where we have documented risks that are unique to our business. We are evaluating our existing controls to mitigate those risks and have examined whether there are gaps or deficiencies in these controls that require remediation. Our plan for 2007 is to address those gaps or deficiencies and controls to help reduce the underlying risks.
 
We believe that the changes in accounting, processes and people as described above will address and ultimately remedy the material weaknesses and the significant deficiencies in our internal control over financial reporting. We continue to review processes, procedures and systems and will implement additional measures as appropriate. Our remediation plan is expected to be accomplished over time and we cannot offer any assurances that our initiatives will ultimately be successful.


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BUSINESS
 
Overview
 
We build and operate next generation wireless broadband networks that enable fast, simple, portable, reliable and affordable Internet communications. Our wireless broadband networks cover entire communities and deliver a wireless broadband connection that not only creates a new communications path into the home or office, but also provides a broadband connection anytime and anywhere within our coverage area. We intend to evolve our network and the services we provide to facilitate a greater range of mobile communications services than we currently offer.
 
Our current service is both competitive with and complementary to existing services provided over wireline and wireless networks. Our subscribers access the same rich content, applications and services as subscribers of wireline broadband services, while also experiencing much of the freedom and flexibility that large scale wireless networks enable. We believe our network combines some of the best features of cellular, cable, DSL and WiFi networks into a single service offering that other networks cannot match. As our capabilities evolve, we also expect to develop and offer additional innovative and differentiated products and services. Our recently introduced VoIP telephony service is one example of a premium service that complements our current wireless broadband offering.
 
We launched our first market in August 2004. As of June 30, 2007, we offered our wireless broadband service to approximately 11.6 million people in the United States and Europe. Our network in the United States is deployed in 40 markets across more than 425 municipalities and covers an estimated 10.0 million people. Our markets range from major metropolitan areas to small, rural communities, and all sizes in between. As of June 30, 2007, we also offered our wireless broadband services in Ghent and Brussels, Belgium and Dublin, Ireland, where our network covers approximately 1.6 million people. Our equity investees in Denmark and Mexico offer comparable services.
 
We have grown from 1,000 wireless broadband subscribers as of September 30, 2004 to approximately 299,000 subscribers as of June 30, 2007. We believe that substantially all of the households we cover have access to cable modem and/or DSL Internet services, leading us to conclude that our rapid subscriber growth rates reflect the mass market appeal and robust customer demand for our differentiated services, even in the presence of highly competitive wireline broadband alternatives. We believe our subscriber growth rates reflect the mass market appeal and robust customer demand for our services, even in the presence of highly competitive wireline broadband alternatives.
 
Our network currently operates on Expedience technology, which we purchase from a subsidiary of Motorola. Unlike many existing wireline and wireless networks, our Expedience network was designed specifically to support portable, and eventually mobile, wireless broadband services. We recently committed to adopt a new network technology based on the mobile WiMAX standard. Once equipment incorporating this technology becomes commercially available and meets certain requirements, we expect to deploy networks based on mobile WiMAX in all of our subsequent markets and, over time, to migrate our existing markets to mobile WiMAX. As with our current Expedience technology, we expect mobile WiMAX to support fixed, portable and mobile service offerings using a single network architecture. In addition, we expect manufacturers to develop and eventually sell various handheld communications and consumer electronic devices that will be enabled to communicate using our planned mobile WiMAX network, including notebook computers, ultramobile PCs, PDAs, game consoles, MP3 players, and other handheld devices.
 
Background
 
Our company was founded by our Chairman Craig O. McCaw on October 27, 2003, as Flux U.S. Corporation. On November 13, 2003, an entity controlled by Mr. McCaw contributed all of the equity interests of Fixed Wireless Holdings, LLC, or FWH, in exchange for shares of our Class B common stock. FWH had been formed on March 13, 2003, and, from its formation until November 13, 2003, was engaged in acquiring and holding spectrum licenses and leases. We acquired the “Clearwire” trademark from a third party on


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November 13, 2003 and changed our name from Flux U.S. Corporation to Clearwire Corporation in February 2004.
 
On March 16, 2004, we acquired all of the outstanding capital stock of NextNet Wireless, Inc., or NextNet, in a merger between NextNet and one of our wholly-owned subsidiaries, NextNet was founded in January 1998 to develop and sell equipment that enables the deployment of broadband wireless networks. At the time of acquisition, ERH held approximately 25% of the voting stock of NextNet. We sold all of the outstanding capital stock of NextNet to Motorola on August 29, 2006.
 
We conduct our operations through our domestic and international subsidiaries. For information regarding the geographic distribution of our total revenues and total long-lived assets, see Note 15 “Geographic Information” of our consolidated financial statements. Our operations in the United States are primarily conducted through our subsidiary, Clearwire US LLC, and our spectrum leases and licenses in the United States are primarily held by separate holding companies. Internationally, our operations are conducted through Clearwire International, LLC, our wholly-owned subsidiary, which indirectly holds investments in Europe and Mexico. The chart below summarizes the structure of our company and our subsidiaries as of July 31, 2007.
 
CHART
 
We are an early stage company, and as such we are investing heavily in building our network and acquiring other assets necessary to expand our business. As a result, we have a history of operating losses and expect to have significant losses in the future. As of June 30, 2007, our accumulated deficit was approximately $669.3 million, and our total indebtedness was approximately $754.8 million.
 
On July 3, 2007 we entered into a $1.0 billion secured term loan facility, which granted the lenders a security interest in substantially all of our assets. At closing, we used approximately $125.0 million of the proceeds of this loan to retire our prior term loan, and we used an additional $620.7 million to redeem our outstanding senior secured notes on August 15, 2007. In connection with the repayment of our prior term loan and the retirement of our senior secured notes due 2010, we expect to record charges from debt restructuring that may be material in the third quarter of 2007. We believe our cash and short-term investments afford us adequate liquidity for at least the next 12 months, although we may raise additional capital during this period if attractive terms are available.
 
We expect our cash needs in fiscal 2007, exclusive of spectrum acquisition costs, to be approximately $800.0 million to fund operating losses, capital expenditures and working capital. We also expect to require


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substantial additional capital in the long-term to fund our business and our success and viability will depend on our ability to raise additional capital on reasonable terms.
 
Industry
 
We believe the U.S. broadband market offers significant long-term growth potential. According to IDC’s 2006-2010 U.S. Broadband Services Forecast (September 2006), the U.S. residential broadband market is expected to grow at a 14.3% compound annual growth rate between 2006 and 2010. According to that same report and IDC’s June 2006 Internet Commerce Market Model, Version 10.2, broadband penetration is expected to exceed 68% of U.S. residential households by 2010, up from 36% in 2005, as dial-up subscribers migrate to broadband connectivity and people with no Internet access become broadband subscribers. However, an estimated 34.1 million households, or 31% of all U.S. households, accessed the Internet via a dial-up or other narrowband connection, while an estimated 36.6 million households, or 33% of all U.S. households, had no Internet connectivity at all. Of the 40.5 million households with broadband connectivity in 2005, approximately 55% used a cable modem, 42% used DSL and 3% used other services such as wireless broadband or fiber networks. The worldwide broadband market is expected to experience similar growth trends, with IDC forecasting in its June 2006 Internet Commerce Model, Version 10.2 a 14% compound annual growth rate from 180.4 million households with broadband Internet connectivity at the end of 2005 to 346.8 million by the end of 2010.
 
As wireless broadband becomes widely available, we believe demand for a broad range of mobile applications will dramatically increase, including demand for email, web browsing, VoIP telephony, streaming audio and video, video conferencing, gaming, e-commerce, music and video downloading and file transfers. For instance, in its September 2006 Broadband /Voice Over IP report, JupiterResearch estimates that in 2005 approximately 4.3 million U.S. households used a VoIP-based broadband telephony service, while 105.8 million used a traditional switched access telephony service, according to the FCC, Statistics of Communications Common Carriers Report. The U.S. VoIP-based broadband telephony market is expected to grow to 22.5 million households by 2010, according to JupiterResearch, representing a 39% compound annual growth rate. The worldwide VoIP telephony market is expected to experience a similar growth trend, with iSuppli forecasting in its August 2006 Wired Communications Topical Report, growth in residential VoIP subscribers from 15.8 million subscribers in 2005 to 151.2 million subscribers in 2010, representing a 57% compound annual growth rate.
 
In addition to growing broadband demand, the rapid growth of mobile email products, as well as sales of notebook computers and ultramobile PCs, leads us to believe that subscribers will increasingly favor Internet access that provides the portability offered by our existing network and, once commercially available, the mobility expected from mobile WiMAX. In its August 2006 Worldwide Portable PC 2006-2010 Forecast by Screen Size and July 2006 Worldwide Converged Mobile 2006-2010 Forecast Update, IDC stated that it expects U.S. laptop sales to increase by approximately 19% annually, from 21.6 million in 2005 to 51.3 million in 2010, and U.S. shipment of converged mobile devices, generally consisting of handheld devices with mobile data access and telephony capabilities, are expected to increase by approximately 46% annually, from 5.2 million in 2005 to 34 million in 2010. Based on these same reports, worldwide shipments of converged mobile devices are expected to increase by approximately 34.1% annually from 56.5 million in 2005 to 244.7 million in 2010. As purchases of laptops and other portable data devices continue to accelerate, we believe consumers increasingly will look for more efficient and effective ways to access the Internet on these devices. According to IDC’s October 2006 Worldwide Telecom Blackbook, Version 3, U.S. spending on wireless data services is expected to increase from $9.5 billion in 2005 to $42.7 billion in 2010, representing a 35% compound annual growth rate.
 
Competitive Strengths
 
Our business is characterized by the following competitive strengths:
 
  •  Differentiated Services.  We offer our subscribers competitively priced services that combine speed, simplicity, portability and reliability. We believe that DSL, cable and cellular networks do not deliver


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  all of these characteristics in a single service offering. While many companies around the world have announced their intention to test and/or deploy WiMAX or mobile WiMAX networks, including some companies that currently operate PCS or cellular networks, we believe our business model is unique. Nevertheless, we may compete with companies in certain of our markets that adopt technologies and/or business models that are substantially similar to ours, and some of these competitors may be better established and have greater resources than we do.
 
  •  Attractive Spectrum Position.  We use licensed spectrum, which allows us to minimize the interference common to many networks that use unlicensed spectrum such as WiFi network operators. As the supply of licensed spectrum is limited, significant barriers to entry exist for competing wireless services. We believe that as of June 30, 2007, we have the second largest spectrum position in the 2.5 GHz (2495-2690 MHz) band in the United States with approximately 14.2 billion MHz-POPs in our spectrum portfolio, assuming all pending spectrum acquisitions and leases close, with a varying amount of spectrum in each of our markets. In Europe, as of June 30, 2007, we hold approximately 8.7 billion MHz-POPs of spectrum predominantly in the 3.5 GHz band, with a varying amount of spectrum in each of our markets. If demand increases for spectrum rights, our spectrum acquisition costs may increase, which may place competitors with greater capital resources at an advantage over us. Additionally, because we engineer our networks to optimize the number of users that the network can support while providing sufficient capacity and bandwidth, we do not currently launch our services in a market using our current technology unless we control a minimum of six channels containing at least 5 MHz of spectrum each. However, we expect the spectral efficiency of mobile WiMAX technologies to continue to evolve. As a result, if WiMAX becomes commercially available, we may decide to deploy our services in some markets where we hold less spectrum than we currently consider sufficient. Alternatively, we could find that new technologies and subscriber usage patterns require us to have more spectrum available in our markets.
 
  •  Efficient Economic Model.  We believe our economic model for deploying our services is based on replicable and scalable individual market builds, allowing us to repeat our build-out processes as we expand. Once our network is deployed, we are typically able to leverage our fixed costs over an increasing number of subscribers. We believe our model requires lower fixed capital and operating expenditures relative to other wireless and wireline broadband service providers. As our capabilities evolve, we also expect to generate incremental revenue from our subscriber base by developing and offering premium products and services, such as VoIP telephony services.
 
  •  World Class Management Team.  Regarded as a pioneer and leader in the wireless communications industry, Mr. McCaw, our founder and Chairman, has been an active entrepreneur, operator and investor in the industry for more than 35 years. In addition to Mr. McCaw, our senior management team consists of a core group of eight senior executives, who together average almost 23 years of experience in or serving the communications and technology industries with companies such as McCaw Cellular, AT&T Wireless, Nextel Communications, Nextel Partners, Intel and others.
 
  •  Strong Strategic Relationships.  We have key strategic relationships with three critical industry leaders, Intel, Motorola and Bell Canada, which, directly or indirectly through their affiliates, collectively have invested more than $1.1 billion in our equity securities. We believe our strategic relationships with Intel, Motorola and Bell Canada place us in an advantageous position with respect to access to equipment and deployment of premium services such as VoIP telephony. Our strategic relationship with Motorola permits us to acquire network infrastructure and subscriber equipment for our current deployment of Expedience systems and our planned future deployment of a mobile WiMAX network. Furthermore, we believe our collaboration with Intel to develop, deploy and market a co-branded service offering for certain notebook computers, ultramobile PCs and other portable devices will enhance our efforts to offer differentiated services while at the same time leveraging one of the world’s most recognized brands. In addition, Intel has committed to work with original equipment manufacturers and original design manufacturers to help ensure that equipment vendors offer WiMAX enabled notebook computers, ultramobile PCs, and other mobile computing devices containing Intel microprocessors that are compatible with our planned mobile WiMAX network, an arrangement we believe will


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  increase demand for our planned mobile WiMAX services. We currently depend on these strategic relationships to provide equipment that meets our requirements on a timely basis. If the equipment is not available on a timely basis, our ability to execute our business strategy and operate our business may be impaired.
 
Business Strategy
 
We intend to continue to grow our business by pursuing the following strategies:
 
  •  Deploy our service broadly and increase our subscriber base rapidly.  We intend to deploy our network throughout the United States and internationally in markets that we consider to be attractive. We are contractually committed to use commercially reasonable efforts to deploy mobile WiMAX networks in the United States if and when that technology meets certain requirements. If this occurs, we expect to deploy mobile WiMAX networks in our new markets in the United States and in other countries and, over time, to migrate our existing markets to the same technology. Our network, whether based on Expedience technology or the mobile WiMAX standard, should enable us to offer our services to a range of subscribers, from individuals, households and small businesses to market segments that depend on mobile communications, such as public safety personnel, field salespeople, traveling professionals, contractors, real estate agents and others. To reach potential subscribers, we plan to offer our services through multiple sales channels, including direct and indirect sales representatives, company owned retail stores, national retail chains and wholesale arrangements with third parties.
 
  •  Build our spectrum position.  We expect to continue acquiring spectrum in our existing bands in the United States and in other countries, thereby increasing the number of markets in which we are able to offer our services. We may also explore the acquisition of licensed spectrum in frequency bands other than those we use today if we believe that using such bands to launch our service is technologically and economically advantageous.
 
  •  Enhance portability and mobile service offerings.  We will continue to focus on enhancing the portability of subscriber equipment and to work with vendors to introduce devices that will permit full mobility of our services over our network, whether based on our existing Expedience network or on our planned mobile WiMAX network. We intend to work with Motorola to decrease costs and to introduce greater mobility by introducing a PC Card for our Expedience network in the second half of this year that will facilitate greater mobile access to our services. Our PC Card received FCC approval on May 1, 2007. We further believe that the commercial deployment of mobile WiMAX will lead to the development and availability of a greater number of mobile products that will be compatible with our planned mobile WiMAX network. As those products are introduced, we plan to create mobile service offerings that will be aimed at attracting the purchasers of those products to our network.
 
  •  Offer premium differentiated services.  We intend to generate incremental revenues, leverage our cost structure and improve subscriber retention by offering a variety of premium services. We currently offer VoIP telephony services in 28 of our United States markets, and plan to expand this offering to other markets in the future. We also plan to offer other premium services and applications, which may include WiFi hotspots, public safety services, security services and subscription-based technical support. We believe that our planned mobile WiMAX deployment will enable us to offer additional premium services over our network as manufacturers develop and sell devices that take advantage of the capabilities of mobile WiMAX.
 
Services
 
We offer our services in both domestic and international markets. Our services consist primarily of providing wireless broadband connectivity, but in some of our domestic markets, we also offer VoIP telephony services. Our service revenue accounted for approximately 2%, 25% and 67%, of total revenues for the years ended December 31, 2004, 2005 and 2006. For the six months ended June 30, 2006 and 2007, service revenue accounted for approximately 50% and 100% of total revenues, respectively. Prior to the launch of our first market in August 2004, equipment and other revenue accounted for all of our total revenues. Domestic sales accounted for approximately 79%, 83%, 75%, 73.9% and 80.6% of our service revenue for the years ended


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December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007, respectively, while our international sales accounted for approximately 21%, 17%, 25%, 26.1% and 19.4% of service revenue over the same periods, respectively. We began introducing VoIP telephony services in our United States markets in April 2006. To date, VoIP revenue has not contributed materially to our service revenue. The remainder of our total revenues for these periods were generated from sales of equipment by our former subsidiary NextNet, which we sold to Motorola in August 2006.
 
United States Wireless Broadband Services
 
We offer subscribers a fast, simple, portable, reliable and affordable way to connect to the Internet. In our domestic markets, we offer subscribers a choice of service plans designed to accommodate users that require greater access speeds or more email addresses and web hosting accounts. Our primary service plans for our current wireless broadband services in the United States include:
 
                         
    Download Speed to
    Upload Speed from
    Base Rate
   
Service
  End-User     End-User     ($/month)*   Additional Features
 
ClearValue
    Up to 768 Kbps       Up to 256 Kbps     $24.99 - $29.99   3 email addresses
ClearPremium
    Up to 1.5 Mbps       Up to 256 Kbps     $34.99 - $37.99   5 email addresses, 10 MB web hosting account
ClearPremium Plus
    Up to 2.0 Mbps       Up to 256 Kbps     $44.99   5 email addresses, 10 MB web hosting account
ClearBusiness
    Up to 1.5 Mbps       Up to 256 Kbps     $49.99   8 email addresses, 25 MB web account, 1 static IP address
 
 
* Excludes monthly modem lease fee of $4.99, where applicable, and excludes introductory and promotional rates and rate packages.
 
We believe that our subscribers are attracted to our current wireless broadband services primarily because our network combines some of the best features of cable modem, DSL and cellular networks into a single service offering at an attractive price. While we serve a large variety of subscribers, we believe that the majority of our subscriber base can be divided into the following broad categories:
 
  •  subscribers who require a portable high-speed Internet connection, such as on-the-go professionals, field salespeople, contractors, police and fire personnel and others;
 
  •  subscribers who value the flexibility of a portable wireless broadband service;
 
  •  subscribers who desire a simple way to obtain and use high-speed Internet access at a reasonable price; and
 
  •  subscribers who are dissatisfied with other service offerings, often because of perceived or actual poor quality of service, slow speeds, price, the requirement to participate in undesired bundled offers, difficulty of installation or unsatisfactory customer service;
 
Based on a subscriber survey we conducted in June 2007, approximately 65% of our new domestic subscribers in that month reported they were subscribers of either DSL or cable modem service at the time that they subscribed for our services, while approximately 30% of our new domestic subscribers in that month were Internet users migrating from dial up to broadband and a small minority of our new domestic subscribers were subscribers of other services or first time Internet subscribers. As of June 30, 2007, approximately 60% of our U.S. subscribers had selected our ClearPremium offering.
 
New subscribers to our ClearValue, ClearPremium and ClearBusiness service plans generally sign a service contract with a one or two year term. We typically charge an activation fee of $50. We typically waive activation fees for subscribers that sign a two year contract. Other variations on rate plans, promotions, terms and fees may be offered through certain of our distribution partners.
 
We recently began to offer alternative payment plans to address the specific needs of some of our subscribers. For example, we recently introduced a month-to-month no contract option for our ClearPremium


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service, which is well-suited for subscribers who either do not meet our credit requirements or who anticipate needing our service for a limited period of time, such as military personnel or students. These subscribers are not required to sign a contract, but they are charged a higher monthly fee than the price paid by subscribers who enter into a contract. Additionally, in lieu of signing a contract, our subscribers have the option of prepaying an amount equal to the fees for 12 months of our services, if they want to receive reduced contract pricing without signing a contract.
 
Our subscribers generally make their payments through an automatic charge to a credit or debit card. We believe automatic billing reduces our transaction costs, permits us to bill in advance, which limits our bad debt and accounts receivable expenses, and improves subscriber retention and renewal rates. We generally have not accepted other forms of payment.
 
To use our current services, our subscribers must obtain one of our modems. Our subscribers generally lease a modem from us at a rate of $4.99 per month. We also offer modems for sale to those subscribers who prefer to own rather than lease our modem. We require subscribers under our no contract payment plan to purchase a modem.
 
International Wireless Broadband Services
 
We expect to continue to leverage the product development initiatives of our domestic operations in establishing our service offerings in our international markets. We currently offer wireless broadband services similar to our domestic service through our subsidiaries in Belgium and Ireland. Our equity investees offer a comparable wireless broadband service in their markets in Denmark and Mexico.
 
In our international markets, we currently offer subscribers a choice of service plans designed to accommodate users that require faster access speeds or a greater number of email addresses and web hosting accounts. The specific service plans and pricing offered in a particular market depend on a variety of factors, including, among others, service offerings by competitors in that market. The service plans offered in Brussels and Dublin are summarized below:
 
                             
        Download Speed to
    Upload Speed from
    Base Rate
 
Market
  Service Plan   End-User     End-User     (€/month)  
 
Belgium
  Freedom Light     Up to 1.0 Mbps       Up to 128 Kbps       28.99  
    Freedom Premium     Up to 3.0 Mbps       Up to 256 Kbps       38.99  
Ireland
  Clear X2     Up to 512 Kbps       Up to 128 Kbps       24.95  
    Clear Freedom     Up to 1.0 Mbps       Up to 256 Kbps       39.95  
    Clear Performer     Up to 2.0 Mbps       Up to 256 Kbps       49.95  
    Clear Business     Up to 2.5 Mbps       Up to 256 Kbps       79.95  
 
As in our domestic markets, we continue to evaluate the service plans offered in each of our international markets. As we deploy our services in new markets internationally, the service plans in those markets may vary from our current offerings based on factors such as the local competitive environment and the demands of the subscribers we intend to target in that market.
 
Voice-over-Internet-Protocol Telephony
 
As a part of our plan to offer value-added services to increase subscriber demand and generate incremental revenue from our wireless broadband subscribers, in April 2006, we began offering VoIP


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telephony services in some of our domestic markets, which we call Clearwire Internet Phone Service. As of June 30, 2007, we had launched our VoIP telephony services in the following 28 markets:
 
         
Aberdeen, WA
  Klamath Falls, OR   Roseburg, OR
Abilene, TX
  Lewiston, ID   Stockton, CA
Amarillo, TX
  Lubbock, TX   Tri-Cities, WA
Bellingham WA
  Merced, CA   Visalia, CA
Bend, OR
  Medford, OR   Waco, TX
Boise, ID
  Midland/Odessa, TX   Wenatchee, WA
Chico, CA
  Modesto, CA   Wichita Falls, TX
Eugene, OR
  Redding, CA   Yakima, WA
Grants Pass, OR
  Reno, NV    
Greensboro/Winston Salem, NC
  Richmond, VA    
 
We plan to introduce our VoIP telephony service in each of our domestic markets. We continue to explore options for deploying VoIP telephony services in our international markets, but we do not have specific plans to deploy VoIP telephony services in those markets in the near term.
 
In our domestic VoIP markets, we are currently offering a single VoIP telephony service plan that provides subscribers with unlimited local and long distance calling, including calls within the United States, Canada and Puerto Rico, for a fixed monthly fee of $34.99 per month with a monthly $5.00 promotional discount during the first 12 months. Our VoIP telephony service permits calls outside these countries on a charge-per-call basis. Our VoIP telephony service package includes enhanced calling features such as voice mail, call waiting, 3-way calling and caller ID. In addition, our subscribers can set a range of telephony options online, such as call forwarding and call blocking. We expect to provide optional email notification of voicemail messages through which a subscriber may choose to receive a voicemail message attached as a file to an email message in early 2008.
 
Our VoIP telephony service is facilities-based, which means that the service is provided across our network and switches through equipment we control. This allows us to prioritize our voice traffic over other data traffic and, we believe, provide higher average call quality than is available on non facilities-based VoIP systems.
 
In the second quarter of 2007, we began introducing additional enhancements to our VoIP telephony services, which we believe will make our service offering more attractive to potential subscribers. These enhancements include local number portability, automatic location determination capability for E911 and caller identification, including name and number.
 
Future Mobile WiMAX Services
 
If and when we migrate our network to mobile WiMAX, we expect to be able to offer subscribers services over the mobile WiMAX network similar to the fixed and portable wireless high-speed Internet access and VoIP telephony services we currently offer our existing subscribers, but with a greater emphasis on mobility. Once mobile WiMAX becomes commercially available, we believe that manufacturers will have an interest in equipping a broad array of handheld communications and consumer electronic devices with mobile WiMAX chipsets, including notebook computers, ultramobile PCs, PDAs, games consoles, MP3 players, and other productivity and entertainment devices. As these products are introduced, we intend to explore offering new premium services designed to take advantage of the capabilities of these devices.
 
Beyond our existing and expected future fixed, portable and mobile service offerings, we and Intel have entered into a strategic collaboration agreement to develop, deploy and market a co-branded mobile WiMAX service in the United States that will target users of certain notebook computers, ultramobile PCs and other mobile computing devices containing Intel microprocessors. Both of the parties have committed to make certain contributions to the development, promotion and marketing of this service, which will be available only over our planned mobile WiMAX network.


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Markets Served and Deployment
 
United States Markets
 
We use the term “market” to refer to one or more municipalities in a geographically distinct location in which we provide our services. Our markets range from major metropolitan areas to small, rural communities, and markets of all sizes in between.
 
We determine which markets to enter by assessing a number of criteria in four broad categories. First, we evaluate our ability to deploy our service in a given market, taking into consideration our spectrum position, the availability of towers and zoning constraints. This evaluation includes determining the viability of our spectrum in terms of channel depth, contiguous channel grouping and licensing. In addition, we evaluate zoning constraints, the difficulty of obtaining permits and the acquisition of towers. Next, we assess the market by evaluating the number of competitors, existing price points, demographic characteristics and distribution channels. Then, we perform an analysis to evaluate the economic potential of the market, focusing on our forecasts of revenue growth opportunities, capital requirements and projected cash flow. Finally, we look at market clustering opportunities and other cost efficiencies that might be realized including the desirability of a geographic location in terms of the availability of synergies with other launched or potential markets and strategic considerations relating to competition and availability of partnerships. We continually evaluate the criteria and adjust our launch plans for specific markets accordingly. In addition, we may need to adjust our plans when facing difficulties relating to zoning, permitting and the acquisition of tower sites, all of which are out of our control. As a result, we often cannot forecast our launch plans with respect to any specific market with certainty.
 
Based on this approach, as of June 30, 2007, we offered our services in 40 markets in the United States across more than 425 municipalities covering an estimated 10.0 million people. Our markets, and the months they have been in commercial operation and the estimated population in our network coverage area are set forth below.
 
                 
          Estimated
 
    Months in
    Network
 
    Commercial
    Covered
 
United States Markets
  Operation     Population*  
          (In thousands)  
 
Jacksonville, FL
    33       677.8  
Abilene, TX
    30       110.6  
St. Cloud, MN
    30       145.5  
Daytona Beach, FL
    28       157.1  
Medford, OR
    24       91.9  
Stockton, CA
    23       397.6  
Modesto, CA
    23       324.2  
Midland/Odessa, TX
    23       175.3  
Eugene, OR
    23       184.7  
Visalia, CA
    23       178.3  
Merced, CA
    22       122.4  
Duluth, MN
    22       102.9  
Eau Claire, WI
    22       63.4  
Roseburg, OR
    22       21.4  
Tri-Cities, WA
    21       90.3  
Killeen/Temple, TX
    21       180.9  
Bellingham, WA
    20       115.5  
Lewiston, ID
    20       73.0  
Waco, TX
    20       127.7  
Anchorage, AK
    19       186.9  


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          Estimated
 
    Months in
    Network
 
    Commercial
    Covered
 
United States Markets
  Operation     Population*  
          (In thousands)  
 
Boise, ID
    19       347.9  
Redding, CA
    18       96.1  
Maui, HI**
    18       84.9  
Wichita Falls, TX
    18       102.0  
Bend, OR
    18       54.1  
Greensboro/Winston-Salem, NC
    16       535.0  
Reno/Carson City, NV
    15       304.4  
Amarillo, TX
    11       219.6  
Klamath Falls, OR
    10       32.1  
Aberdeen, WA
    10       26.7  
Oahu, HI**
    9       580.7  
Grants Pass, OR
    9       30.0  
Seattle/Tacoma, WA
    8       2,382.5  
Raleigh/Durham, NC
    8       600.8  
Chico, CA
    6       103.1  
Yakima, WA
    4       136.0  
Wenatchee, WA
    3       44.4  
Lubbock, TX
    2       216.4  
Richmond, VA
    1       520.6  
Longview, TX
    1       60.5  
                 
Total
            10,005.0  
                 
 
 
* Estimated based on 2.5 persons per covered household.
 
** These markets are operated by Clearwire Hawaii Partners LLC, an entity in which Clearwire US LLC held a 78.6% membership interest as of June 30, 2007.
 
As of June 30, 2007, we had approximately 270,000 subscribers in the United States.
 
We expect to launch additional markets in the remainder of 2007 and 2008 that, if launched, would expand our covered population in the United States and our markets internationally to approximately 13 to 15 million people in 2007. However, the number of people covered by our network may be less if we reduce our expansion plans, which we have the flexibility to do based on our capital availability. We believe our operations could result in as many as 375,000 to 400,000 total subscribers in both our U.S. and international markets by the end of 2007.
 
International Markets and Deployment
 
Outside the United States, we use categories of criteria similar to those we apply inside the United States to determine the markets in which to deploy. With respect to our equity investees, we work in conjunction

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with our partners in making these determinations. As of June 30, 2007, we, through our consolidated subsidiaries and equity investees, offered our services in the following countries:
 
                         
    Approximate
    Months in
    Estimated
 
    Percentage
    Commercial
    Covered
 
Country
  Owned(1)     Operation     Population  
    (In thousands)  
 
Subsidiaries
                       
Belgium
    100.0 %     20       920  
Ireland
    97.6 %     20       633  
                         
Total
                    1,553  
                         
Equity Investees
                       
Denmark(2)
    38.2 %     20       1,279  
Mexico(3)
    29.2 %     28       8,916  
                         
Total
                    10,195  
                         
 
 
(1) Approximate percentage owned in European countries assumes 100% ownership of Clearwire Europe B.V., or Clearwire Europe, a direct subsidiary of Clearwire Corporation through which we conduct our European operations. We may be obligated to issue up to ten percent of the current share capital of Clearwire Europe B.V. to a group of consultants under the terms of an existing services agreement with them. The interest held by these consultants may be diluted if we or any third parties make additional equity contributions to Clearwire Europe unless the consultants exercise preemptive rights to make their pro-rata share of such contributions.
 
(2) Services offered under the Clearwire brand and trademark.
 
(3) Services similar to ours offered under the MVS Net and E-go brand.
 
As of June 30, 2007, we had approximately 29,000 subscribers in Belgium and Ireland.
 
Sales and Marketing
 
Our marketing efforts include reliance on a full range of integrated marketing campaigns and sales activities, including advertising, direct marketing, public relations and events to support our direct sales teams, company-owned retail stores, mall and mobile kiosks, authorized representatives and resellers.
 
We believe we have a strong local presence in each of our markets, which enhances our ability to design marketing campaigns tailored to the preferences of the local community. We advertise across a broad range of media, including print, billboards, online and radio broadcast media. We also conduct community awareness campaigns that focus on grass-roots marketing efforts, and host local community events where potential subscribers can experience our service. Our direct marketing efforts have included direct mailings and delivering door hangers to potential subscribers in our network coverage area.
 
We use multiple distribution channels to reach potential subscribers, including:
 
Direct.  We have hired salespeople to sell our services directly to subscribers. Our salespeople also set up mobile kiosks at local community and sporting events and near retail establishments or educational institutions to demonstrate our services. Each of these salespeople carries a supply of modems, so that a new subscriber can activate his or her account and receive equipment while at the mobile kiosk. As of June 30, 2007, we employed approximately 389 salespeople in the United States. We generally compensate these employees on a salary plus commission basis. We anticipate that our direct sales teams will expand their focus in the future to include acquiring small and medium sized business accounts as subscribers.
 
Indirect.  Our indirect sales channels include a variety of authorized representatives, such as traditional cellular retailers, satellite television dealers and computer sales and repair stores. These authorized representatives typically operate retail stores but, subject to our approval, can also extend their sales efforts online.


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Authorized representatives assist in developing awareness of and demand for our service by promoting our services and brand as part of their own advertising and direct marketing campaigns. As of June 30, 2007, we had approximately 1,330 authorized representatives in the United States.
 
We also offer our services pursuant to distribution agreements through national retail chains, and we believe that the percentage of our total sales from this indirect sales channel will continue to increase.
 
Clearwire owned and operated retail.  We market our products and services through a number of Clearwire-operated retail outlets, including retail stores and kiosks located in malls and shopping centers. We generally compensate these employees on an hourly basis plus commissions.
 
Internet and telephone sales.  We direct prospective subscribers to our website or our telesales centers in our advertising. Our website is a fully functional sales channel where subscribers can check pricing and service availability, research service plans and activate accounts using a credit card. Prospective subscribers can also call into one of our telesales centers to activate service.
 
Wholesale distribution.  We intend to sell our wireless broadband Internet services at wholesale rates to strategic distribution partners, who as part of their agreements with us can re-market our services under their own brand name, under our brand name or on a co-branded basis.
 
Customer Service and Technical Support
 
We typically initiate each customer subscription through a credit or debit card approval process. We also check the subscriber’s credit and, depending on the result, may require for the customer purchase the wireless modem. Once we have an approved form of payment, we activate service and make an initial charge on the card to cover the activation fee and the first month of service. Finally, we establish monthly recurring, automatic card charges for the duration of the subscriber’s relationship with us. All of our subscriber invoices are electronic, and we have invested in a comprehensive billing system interface program.
 
We believe reliable customer service and technical support are critical to attracting and retaining subscribers and we provide the following support for all subscribers:
 
  •  toll-free, live telephone and email-based assistance available seven days a week, 24 hours a day;
 
  •  resources on our website that cover frequently asked questions and provide signal and networking tips;
 
  •  online account access and, for VoIP subscribers, web-based resources that allow them to control their telephony features and settings; and
 
  •  a network of service technicians available to provide on-site customer assistance and technical support.
 
In October 2006, we opened a call center in Las Vegas, Nevada currently staffed with approximately 220 customer service and technical support personnel. In April 2007, we opened a second call center in Milton, Florida currently staffed with approximately 95 customer service representatives. We believe that having our own internal customer service and technical support personnel enables us to deliver a consistent, high quality customer service, thereby improving subscriber retention.
 
Currently, some of our customer care operations are outsourced to a third-party vendor. However, we expect to replace some of these outsourced customer care operations with our own internal customer care services, particularly for calls regarding complicated technical support and retention issues.
 
Our Network
 
Our network, in both our domestic and international markets, currently relies on the Expedience wireless broadband access system that supports delivery of any IP-compatible broadband applications, including high-speed Internet access and VoIP telephony services. This system, which is manufactured by NextNet, a wholly-owned subsidiary of Motorola, is comprised of base station transceivers, a network management system, and modems used by our subscribers. Expedience operates over our spectrum in the 2.5 GHz band in


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the United States and in the 3.5 GHz band in Europe. We believe that the Expedience system has certain key advantages over competing technologies that are currently available, such as:
 
  •  simple self-installation by subscribers and provisioning of modems, with no software installation required on the subscriber’s computer;
 
  •  easy network and tower installation and deployment requirements;
 
  •  flexible and scalable architecture that can service large metropolitan or small rural areas;
 
  •  ability to provide overlapping coverage from multiple sites for reliable and robust connectivity; and
 
  •  enhanced reliability and reduced latency provided by linking our towers via a microwave mesh network that carries the majority of our backhaul traffic over licensed and unlicensed frequencies.
 
Once network infrastructure incorporating mobile WiMAX technology becomes commercially available and meets our performance requirements, we expect to deploy mobile WiMAX technology in all of our subsequent markets and, over time, migrate our existing markets to mobile WiMAX. Upon adopting the mobile WiMAX standard, we believe our network will continue to support fixed, portable and mobile service offerings using a network architecture that shares the key advantages of our current Expedience system.
 
Technology
 
Expedience Technology
 
The Expedience system is a wireless IP-based, Ethernet platform built around an OFDM and Time Division Duplex, or TDD, physical layer, which allows us to address two challenges that face wireless carriers, namely NLOS performance and frequency utilization.
 
OFDM is a physical layer protocol for NLOS broadband networks that uses a large number of individual carriers and a process of mapping a user’s data to those carriers to leverage the presence of multi-path to transmit and receive data robustly in the NLOS service environment. OFDM is preferable to single carrier technologies for addressing multi-path and frequency-selective fading in a broadband channel.
 
TDD allows upstream and downstream links to the network to exist on the same radio frequency channel, meaning that there is no need to use multiple channels or to have guard-bands between downstream and upstream channels. Thus, TDD enables wireless broadband access systems to be deployed on any channel in the radio frequency band, making it flexible for a carrier managing non-contiguous spectrum, such as our company. TDD also allows a service provider to maximize spectrum utilization by allocating up and down link resources appropriate to the traffic pattern over a given market.
 
Expedience Network Components
 
The Expedience CPE that currently operates on our network is a NLOS wireless modem that connects to any IP-based device, such as a computer, using a standard Ethernet connection. It is simple to install and requires no service provider configuration or support and no software download or installation. A subscriber need only connect the CPE to an external power source and to the subscriber’s computer. For those subscribers who live on the perimeter of our coverage area or who otherwise might have difficulty receiving our service, we also offer an optional outdoor subscriber unit that can be installed on the exterior of the subscriber’s home or office to obtain signals over an extended range. In addition to the Expedience CPE and outdoor subscriber units, we expect to offer a PC Card that will be compatible with our network to our subscribers in the second half of 2007. The PC Card received approval from the FCC on May 1, 2007.
 
The Expedience base station allows for 360 degree coverage by employing multiple transceivers and antennas on a single tower to maximize subscriber density and spectral efficiency. This setup is scalable, expandable and flexible, allowing us to control costs to promote efficient expansion as our subscriber base grows. Our base stations generally are located on existing communications towers, but can also be placed on rooftops of buildings and other elevated locations. We generally lease our tower locations from third parties.


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We also use a network management system that incorporates a complete set of management tools to enable the configuration, management, monitoring and reporting of all network status elements. This system provides secure, centralized and remote configuration of base stations, CPE, switches and other network elements. The system reports to and alerts system administrators to alarms and faults, and monitors system performance down to the individual CPE. It supports customizable report generation to track network performance, utilization and capacity.
 
Mobile WiMAX
 
Mobile WiMAX is an all IP-based technology and, like Expedience, is optimized for high-throughput, real-time data applications. Mobile WiMAX is based on the IEEE 802.16e-2005 standard and will operate in our 2.5 GHz and 3.5 GHz spectrum bands.
 
Similar to our current Expedience network, we expect our planned mobile WiMAX network to be a wireless IP-based, Ethernet platform designed around an OFDM and TDD physical layer, to address NLOS performance and frequency utilization issues. We expect that mobile WiMAX will meet all of our anticipated requirements for mobile Internet usage, as we believe it will support multiple handoff mechanisms, power-saving mechanisms for mobile devices, advanced quality of service and low latency for improved support of real-time applications, and advanced authorization, authentication and accounting functionality.
 
A mobile WiMAX network is expected to consist of the same primary elements as Expedience, including base station transceivers, a network management system and subscriber devices. For subscribers, we expect that mobile WiMAX enabled chipsets will initially be included in NLOS modems similar to the Expedience CPE and in PC Cards. Eventually, we expect manufacturers to sell a number of handheld communications and consumer electronic devices that will be enabled to communicate using our mobile WiMAX network, such as notebook computers, ultramobile PCs, PDAs, gaming consoles and MP3 players and other handheld devices.
 
On May 21, 2007, we announced the successful completion of the first phase of our first mobile WiMAX field trials. The field trial in the Portland, Oregon suburb of Hillsboro jointly conducted with Intel and Motorola is using infrastructure equipment based on the IEEE 802.16e standard and is relying on our spectrum in the 2.5GHz frequency band. The first phase of the field trial focused on coverage, capacity and speed associated with the air interface. The first phase achieved the coverage, capacity and speed guidelines as set by the WiMAX Forum, an industry-led, not-for-profit organization formed to certify and promote the compatibility and interoperability of broadband wireless products based on the IEEE 802.16e standard. The first phase of the field trial covered 15 square miles in Hillsboro using a mobile WiMAX laptop card, the first to be based on WiMAX.
 
Spectrum
 
Our network operates over licensed spectrum in our U.S. and international markets. Although several broadband technologies can operate in unlicensed or public access spectrum, we believe using licensed spectrum enables us to provide a consistently higher quality of service to our subscribers.
 
United States
 
In the United States, licensed spectrum is governed by FCC rules that restrict interference from other licensees and spectrum users, providing some protection against interruption and degradation of service. Under FCC rules, unlicensed spectrum users do not have exclusive use of any frequencies, may not cause interference with the operations of any licensed operators and may suffer interference from others using licensed frequencies in overlapping geographic areas, making quality and availability of their services unpredictable.
 
We are designing our network in the United States to operate primarily on spectrum located within the 2495 to 2690 MHz band, or 2.5 GHz band, which is designated for Broadband Radio Service, or BRS, and Educational Broadband Service, or EBS. Most BRS and EBS licenses are allocated in a scheme that provides for overlapping circular territories with a 35-mile radius. Under current FCC rules, the BRS and EBS band in each territory is generally divided into 33 channels consisting of a total of 186 MHz of spectrum, with an


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additional three channels consisting of 9 MHz of guard band spectrum. Prior to the adoption of the current FCC rules, BRS and EBS licenses were referred to, respectively, as Multichannel Multipoint Distribution Services, or MMDS, and Instructional Television Fixed Services, or ITFS, licenses and were divided into 33 channels consisting of 198 MHz of spectrum.
 
Under current FCC rules, we can access BRS spectrum either through outright ownership of a BRS license issued by the FCC or through a leasing arrangement with a BRS license holder. The FCC rules limit eligibility to hold EBS licenses to accredited educational institutions and certain governmental, religious and nonprofit entities, but permit those license holders to lease up to 95% of their capacity for non-educational purposes. Therefore, although we cannot hold an EBS license, we can access EBS spectrum through a long-term leasing arrangement with a license holder. EBS leases entered into prior to January 10, 2005, may remain in effect for up to 15 years and may be renewed and assigned in accordance with the terms of those leases. The initial term of EBS leases entered into after January 10, 2005, is required by FCC rules to be coterminous with the term of the license. In addition, these leases typically give the leaseholder the right to participate in and monitor compliance by the license holder with FCC rules and regulations. Our EBS spectrum leases typically have an initial term equal to the remaining term of the EBS license, with an option to renew the lease for up to three renewal terms of ten years or less with respect to a final renewal term, for a total lease term of up to 30 years. In addition, we generally have a right of first refusal for a period of time after our leases expire to match another party’s offer to lease the same spectrum. Our leases are generally transferable.
 
Since our formation, we have focused on acquiring BRS licenses and leases, as well as EBS leases, in markets throughout the United States. As of June 30, 2007, we believe that we are the second largest holder of licensed spectrum in the 2.5 GHz band in the United States. As of June 30, 2007, we owned or leased, or had entered into agreements to acquire or lease, approximately 14.2 billion MHz-POPs of spectrum in the United States. Of our approximately 14.2 billion MHz-POPs of spectrum in the United States, we estimate that we own approximately 26% with the remainder leased from third-parties, generally under lease terms of up to 30 years. When the FCC’s current rules for the 2.5 GHz band in the United States are fully implemented, the MHz for certain channels within this band will decrease from 6 MHz to 5.5 MHz. As our network is designed to operate using 5 MHz channels, this regulatory change will not adversely affect our ability to deliver our services but will cause a proportionate reduction of our calculated MHz-POPs. See “Business — Regulatory Matters — Spectrum Regulation.”
 
Our pending spectrum acquisition contracts are subject to various closing conditions, some of which are outside of our control and, as a result, we may not acquire all of the spectrum that is subject to these agreements. Nearly all of such closing conditions relate either to licensee or FCC consents, which we expect are likely to be granted. A limited number of our pending agreements are subject to closing conditions involving the resolution of bankruptcy or similar proceedings. As of June 30, 2007, we have minimum purchase commitments of approximately $29.5 million to acquire new spectrum.
 
We engineer our networks to optimize both the service that we offer and the number of subscribers to whom we can offer service. Consequently, we currently will not launch our services in a market using our current technology unless we control a minimum of six channels of spectrum that contain at least 5 MHz of spectrum each. However, we expect the spectral efficiency of technologies we deploy to continue to evolve, and as a result, we may decide to deploy our services in some markets with less spectrum. Alternatively, we could find that new technologies and subscriber usage patterns require us to have more spectrum available in our markets.
 
We are actively pursuing opportunities to acquire additional licensed spectrum in new markets and to add depth of spectrum where we require additional channels to deploy our services. We generally purchase and lease licensed spectrum for cash and, in some instances and subject to applicable securities laws, common stock or warrants. We have found that, in some instances, we have an advantage over other bidders because we have a demonstrated track record of using the spectrum to deploy wireless broadband services as opposed to simply warehousing spectrum rights. We also may pay commissions or issue shares, stock options or warrants to brokers who locate and secure spectrum for us. We have recently observed a significant increase in


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the cost of acquiring spectrum in the United States, and we expect this trend to continue as the supply of licensed spectrum diminishes.
 
We have entered into certain agreements for the purchase or lease of spectrum where, under certain circumstances, such as if we are not using or planning to use such spectrum pursuant to our business plan, the lessor or seller may have the right to repurchase or to terminate the lease in the future for a calculated payment. We may enter into additional agreements with similar rights in the future.
 
International
 
We currently hold spectrum rights in Belgium, Germany, Ireland, Poland, Romania and Spain. Our equity investees also control spectrum in Denmark and Mexico. In each of Germany, Poland, Romania and Spain, our licenses cover the entire country. Our licenses in Belgium and Ireland cover a significant portion of the countries’ populations. Unlike the United States where our spectrum is in a single band, our international spectrum falls within different frequency ranges, but we believe that each of the frequencies are or will be suitable for our service. A summary of the spectrum rights held by our subsidiaries and our equity investees is below, including the frequency band in which the spectrum is held, an estimate of the population covered by our spectrum in each country and the total MHz-POPs of our spectrum. We intend to continue to expand our international spectrum holdings.
 
                         
          Licensed
       
Country
  Frequency     Population(1)     MHz-POPs(2)  
    (GHz)     (In millions)  
 
Subsidiaries
                       
Belgium
    3.5       10.4       1,040.0  
Germany
    3.5       82.5       3,465.0  
Ireland
    3.5       1.5       127.5  
Poland
    3.6       38.1       1,066.8  
Romania
    3.5       21.6       1,209.6  
Spain
    3.5       45.1       1,804.0  
Equity Investees
                       
Denmark
    3.5       5.4       205.2  
Mexico
    2.5       81.0       N/A  
 
 
(1) Estimates based on country population data derived from the Economist Intelligence Unit database, except for Denmark, Ireland and Mexico, which are based on census or other market information gathered by us or our affiliates regarding the number of residents within the licensed coverage area.
 
(2) Represents the amount of our spectrum in a given area, measured in MHz, multiplied by the estimated population of that area.
 
As in the United States, we engineer our international networks to optimize the number of users that the network can support while providing sufficient capacity and bandwidth. Thus, we typically choose not to launch our services in a market using our current technology unless we control a minimum of 30 MHz of spectrum. However, we expect the spectral efficiency of technologies we deploy to continue to evolve, and as a result, we may decide to deploy our services in some markets with less spectrum. Alternatively, we could find that new technologies and subscriber usage patterns require us to have more spectrum available in our markets.
 
We currently have a dedicated team of professionals actively pursuing new spectrum opportunities and we are negotiating to acquire additional spectrum in countries throughout Europe as well as in select countries in Latin America. We intend to continue to expand our international spectrum holdings.


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Research and Development
 
Following the sale of our NextNet subsidiary to Motorola, our research and development efforts have focused on the design of our network, enhancements to the capabilities of our network and the evolution of our service offerings. A significant portion of our development efforts involves working with the suppliers of our network infrastructure and subscriber equipment. We are currently working with Motorola to introduce Expedience technology onto a PC card, which we expect to occur in the second half of 2007. At the same time, we are working with both Intel and Motorola to develop network components and subscriber equipment for our planned mobile WiMAX network, including an ongoing mobile WiMAX trial in Portland, Oregon. We expect to continue to these efforts in the future.
 
We spent approximately $5.8 million, $9.6 million, $8.9 million and $1.0 million on research and development activities during the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007, respectively. NextNet, which we sold in August 2006, incurred direct research and development expense of $7.2 million in 2006.
 
Suppliers
 
Motorola, which acquired our former NextNet subsidiary in August 2006, is currently the only supplier of certain network components and subscriber equipment for the Expedience system currently deployed on our network. Thus, we are dependent on Motorola to produce the equipment and software we need for our current network in a timely manner. Moreover, we are parties to a number of commercial agreements with Motorola that limit our ability to use other equipment suppliers under certain circumstances, not only for our current Expedience network, but also for our planned mobile WiMAX network. See “Certain Relationships and Related Transactions” for a discussion of these agreements.
 
Competition
 
The market for broadband services is highly competitive and includes companies that offer a variety of services using a number of different technological platforms, such as cable modems, DSL, third-generation cellular, satellite, wireless internet service and other emerging technologies. We compete with these companies on the basis of the speed, ease of use, portability, reliability, and price of our respective services.
 
Our principal competitors include cable and DSL operators, wireless telephone providers, WiFi and, prospectively, WiMAX providers, satellite providers and others.
 
Cable Modem and DSL Services
 
We compete with companies that provide Internet connectivity through cable modems or DSL. Principal competitors include cable companies, such as Time Warner and Comcast, as well as incumbent telephone companies, such as AT&T, Qwest and Verizon. Both cable and telephone companies deploy their services over wired networks initially designed for voice and one-way data transmission that have subsequently been upgraded to provide for additional services, such as Internet connectivity.
 
Cellular and PCS Services
 
Cellular and PCS carriers are seeking to expand their capacity to provide data and voice services that are superior to ours. These providers have substantially broader geographic coverage than we have and, for the foreseeable future, than we expect to have. If one or more of these providers can deploy technologies that compete effectively with our services, the mobility and coverage offered by these carriers will provide even greater competition than we currently face.
 
Wireless Broadband Service Providers
 
We also face competition from other wireless broadband service providers that use licensed spectrum. Moreover, if our technology is successful and garners widespread support, we expect these and other competitors to adopt or modify our technology or develop a technology similar to ours. We believe that, as


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network infrastructure based on mobile WiMAX technology becomes commercially available and manufacturers develop and sell handheld communications and consumer electronic devices that are enabled to communicate using mobile WiMAX networks, other network operators will introduce mobile WiMAX services comparable to ours in both our domestic and international markets.
 
Satellite
 
Satellite providers like Wild Blue and Hughes Network Services offer broadband data services that address a niche market, mainly less densely populated areas that are unserved or underserved by competing service providers. Although satellite offers service to a large geographic area, latency caused by the time it takes for the signal to travel to and from the satellite may challenge the ability to provide some services, such as VoIP, and reduces the size of the addressable market.
 
WISPs and WiFi
 
We also compete with other wireless Internet service providers that use unlicensed spectrum. In addition to these commercial operators, many local governments, universities and other governmental or quasi-governmental entities are providing or subsidizing WiFi networks over unlicensed spectrum, in some cases at no cost to the user. Unlicensed spectrum may be subject to interference from other users of the spectrum, which can result in disruptions and interruptions of service. We rely exclusively on licensed spectrum for our network and do not expect significant competition from providers using unlicensed spectrum to deliver services to their customers.
 
International
 
In our international markets, we generally face competition from incumbent telecommunications companies that provide their own wireless broadband or VoIP telephony services, as well as from other companies that provide Internet connectivity services. Although in certain European countries, incumbent telecommunications companies may have a dominant market share based on their past status as the single operator of telecommunications services in a particular country, these incumbent telecommunications companies rely on systems initially designed for voice transmission which have been upgraded to provide wireless broadband services.
 
Other
 
We believe other emerging technologies may also enter the broadband services market. For example, certain Internet service providers are working with electric distribution utilities to install broadband over power line, or BPL, technology on electric distribution lines to provide broadband services. These Internet service and BPL providers are potential competitors. BPL technology may turn electrical lines into large unshielded transmitting antennas that would allow transmission of data over these lines, but could potentially create interference with some wireless networks.
 
Regulatory Matters
 
Overview
 
The regulatory environment relating to our business and operations is evolving. A number of legislative and regulatory proposals under consideration by federal, state and local governmental entities may lead to the repeal, modification or introduction of laws or regulations that could affect our business. Significant areas of existing and potential regulation for our business include broadband Internet access, telecommunications and spectrum regulation and Internet taxation.


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Broadband Internet Access Regulation
 
In June 2005, the U.S. Supreme Court overturned the Ninth Circuit Court of Appeals, upholding the FCC’s findings in favor of cable modem operators in the National Cable & Telecommunications Association v. Brand X Internet Services case. The Court held that cable modem operators are not required to provide rival Internet service providers, such as Brand X, with access to their cable broadband lines. The central issue in the Brand X case was how cable broadband services, specifically cable modem services, should be classified under the Communications Act of 1934, as amended, or the Communications Act. In 2002, the FCC ruled that cable broadband was an “information service” not a “telecommunications service,” and therefore not subject to the same regulations imposed on telecommunications service providers under the Communications Act and FCC rules. In the Brand X decision, the Supreme Court upheld the FCC’s decision that cable modem service is an information service, and as such, cable operators are not required to share their cable modem lines with competitors. Consistent with this ruling, the FCC subsequently determined that broadband Internet access services provided over wireline, powerline and wireless facilities are also classified as information services under the Communications Act.
 
In August 2005, the FCC found that wireline broadband Internet access services, including DSL Internet access, provided by facilities-based telephone companies is an “information service” rather than a “telecommunications service” under the Communications Act. In addition, the FCC determined that the broadband transmission component of wireline broadband Internet access service is no longer required to be offered to competitors as a telecommunications service subject to Title II of the Communications Act, as previously required under the FCC’s rules. This ruling is currently being appealed. As a result, telephone companies no longer are required to share their broadband Internet access facilities with competing Internet service providers. The result of the Brand X decision and the FCC’s classification of wireline broadband Internet access service is that both DSL and cable modem providers are entitled to retain exclusive use of their broadband Internet access lines without having to open them up to competing Internet service providers. This regulatory framework may encourage independent Internet service providers to explore other options for broadband Internet access, including wireless services.
 
On September 23, 2005 the FCC released an Internet Policy Statement outlining its general views toward ensuring that broadband networks are widely deployed, open, affordable and accessible to all consumers. It adopted four principles to encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, and suggested that it would incorporate them into its ongoing policy-making activities. On March 22, 2007, the Commission initiated an inquiry into the performance of the broadband marketplace under the Commission’s 2005 Internet Policy Statement. In this inquiry, the FCC also seeks comment on whether the Policy Statement should incorporate a new principle of nondiscrimination and, if so, how such a nondiscrimination principle would be defined and applied.
 
On November 7, 2006, the FCC issued an order classifying BPL Internet access service as an “information service.” Like cable modem and DSL service, the broadband transmission component of BPL Internet access service is not required to be offered as a telecommunications service.
 
On March 22, 2007, the Commission adopted a Declaratory Ruling that wireless broadband services are information services regulated under Title I of the Communications Act and that mobile wireless broadband Internet access service is not a “commercial mobile service” under section 332 of the Act, even when it uses mobile technologies.
 
Telecommunications Regulation
 
The FCC has classified Internet access services generally as interstate “information services” rather than as “telecommunications services” regulated under Title II of the Communications Act. Accordingly, many regulations that apply to telephone companies and other common carriers currently do not apply to our wireless broadband Internet access service. For example, we are not currently required to contribute a percentage of gross revenues from our Internet access services to universal service funds, or USF, used to support local telephone service and advanced telecommunications services for schools, libraries and rural health care facilities.


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Internet access providers also are not required to file tariffs with the FCC, setting forth the rates, terms, and conditions of their Internet access service offerings. The FCC, however, is currently considering whether to impose various consumer protection obligations, similar to Title II obligations, on broadband Internet access providers, including DSL, cable modem and wireless broadband providers. These requirements may include obligations related to truth-in-billing, slamming, discontinuing service, customer proprietary network information and federal USF mechanisms. Internet access providers are currently subject to generally applicable state consumer protection laws enforced by state Attorneys General and general Federal Trade Commission, or FTC, consumer protection rules.
 
The FCC has not yet classified interconnected VoIP services as either information services or telecommunications services under the Communications Act. In November 2004, the Commission determined that regardless of their regulatory classification, certain interconnected VoIP services qualify as interstate services with respect to economic regulation. The FCC preempted state regulations that address such issues as entry certification, tariffing, and E911 requirements, as applied to certain interconnected VoIP services. On March 21, 2007, the U.S. Court of Appeals for the Eighth Circuit affirmed the FCC’s November 2004 Order with respect to these VoIP services, particularly those having portable or nomadic capability...The jurisdictional classification of other types of interconnected VoIP services, particularly “fixed” services, remains uncertain at this time.
 
In June 2006, the FCC determined that all “interconnected” VoIP services are required to contribute a percentage of interstate gross revenues to USF beginning October 1, 2006. On June 1, 2007, the U.S. Court of Appeals for the District of Columbia upheld FCC’s order that interconnected VoIP providers contribute to the Universal Service Fund on the basis of a 65% safe harbor or on the basis of actual traffic studies. The court vacated the portions of the mandating that VoIP providers using traffic studies get the traffic studies pre-approved by the FCC. Our VoIP service qualifies as “interconnected VoIP” for purposes of USF regulation and therefore is subject to this fee which may be passed on to our subscribers. We have incorporated this fee requirement into our VoIP billing system and collect and remit federal USF payments.
 
The FCC is conducting a comprehensive proceeding to address all types of IP-enabled services, including interconnected VoIP service, and to consider what regulations, if any, should be applied to such services, as use of broadband services becomes more widespread. In June 2005, the FCC adopted the first set of regulations in this comprehensive IP-enabled proceeding, imposing E911-related requirements on interconnected VoIP service providers as a condition of offering such service to consumers. The FCC defined “interconnected VoIP service” as voice service that: (i) enables real-time, two-way voice communications; (ii) requires a broadband connection from the user’s location; (iii) requires IP-compatible CPE; and (iv) permits users generally to receive calls that originate on and terminate to the public switched telephone network, or PSTN. Effective November 28, 2005, all interconnected VoIP providers are required to transmit, via the wireline E911 network, all 911 calls, as well as a call-back number and the caller’s registered location for each call, to the appropriate PSAP, provided that the PSAP is capable of receiving and processing that information. In addition, all interconnected VoIP providers must have a process to obtain a subscriber’s registered location prior to activating service, and a process to allow their subscribers to update their registered location immediately if the subscriber moves the service to a different location. Interconnected VoIP providers are also required to prominently and in plain English advise subscribers of the manner in which dialing 911 using VoIP service is different from dialing 911 service using traditional telephone service, and to provide warning labels with VoIP CPE. On May 31, 2007, the Commission initiated a proceeding proposing to adopt additional E911 obligations for providers of interconnected VoIP service that a customer may use at more than one location including a requirement to automatically identify subscribers’ physical locations through an automatic location technology that meets the same accuracy standards which apply to providers of commercial mobile radio services, or CMRS. The Commission has also proposed to tighten the current accuracy standards into a single, technology neutral standard and to clarify the geographic area over which wireless E911 providers must satisfy the E911 accuracy requirements.
 
On April 2, 2007, the FCC released an Order imposing, pursuant to its ancillary authority under Title I, the Communications Act’s Section 222 Customer Proprietary Network Information, or CPNI, requirements on interconnected VoIP providers. CPNI includes call detail information about a customer gained by the service


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provider as a result of providing the service, and includes such information as telephone numbers called, duration of such calls, and calling patterns. In this same Order, the Commission adopted new CPNI obligations designed to prevent fraud, unauthorized access to a customer’s CPNI, and other abuses of customer privacy, including specific required customer and law enforcement notification, annual certification, and explicit consent requirements. These new CPNI rules, once effective, are applicable to all providers subject to Section 222, including interconnected VoIP providers.
 
On May 31, 2007, the FCC also adopted new rules requiring interconnected VoIP service and equipment providers to comply with the same disability-access regulations that apply to traditional telephony service and equipment under Section 255 of the Communications Act, including the designation of an agent for the receipt and handling of accessibility complaints and inquiries. In addition, the FCC adopted requirement that interconnected VoIP providers contribute to the Telecommunications Relay Service ,or TRS fund, and provide 711-dialing for hearing and speech-impaired individuals to reach a local TRS provider pursuant to Section 225 of the Act.
 
The FCC is considering additional regulations, including what intercarrier compensation regime should apply to interconnected VoIP traffic over the PSTN. Accordingly, our costs to provide VoIP service may increase, which will impact our pricing decisions vis-à-vis our competitors and our profit margins, if any.
 
On August 5, 2005, the FCC adopted an Order finding that both facilities-based broadband Internet access providers and interconnected VoIP providers are subject to CALEA, which requires service providers covered by that statute to build certain law enforcement surveillance assistance capabilities into their communications networks and to maintain CALEA-related system security policies and procedures. The FCC required facilities-based broadband Internet access providers and interconnected VoIP providers to comply with CALEA’s assistance-capability requirements by May 14, 2007. On June 9, 2006, the Court of Appeals for the District of Columbia issued a ruling upholding the FCC Order.
 
On May 3, 2006, the FCC adopted an additional Order addressing the CALEA compliance obligations of these providers. In that order the FCC: (i) affirmed the May 14, 2007 assistance-capability compliance deadline; (ii) indicated compliance standards are to be developed by the industry within the telecommunications standards-setting bodies working together with law enforcement; (iii) permitted the use of certain third parties to satisfy CALEA compliance obligations; (iv) restricted the availability of compliance extensions; (v) concluded that facilities-based broadband Internet access providers and interconnected VoIP providers are responsible for any CALEA development and implementation costs; (vi) declared that the FCC may pursue enforcement action, in addition to remedies available through the courts, against any non-compliant provider; and (vii) adopted interim progress report filing requirements.
 
Broadband Internet access, VoIP and other IP-services’ regulatory policies are continuing to develop, and it is possible that our broadband Internet access and VoIP services could be subject to additional regulations in the future. The extent of the regulations that will ultimately be applicable to these services and the impact of such regulations on the ability of providers to compete are currently unknown.
 
Spectrum Regulation
 
The FCC routinely reviews its spectrum policies and may change its position on spectrum allocations from time to time. On July 29, 2004, the FCC issued rules revising the band plan for BRS and EBS and establishing more flexible technical and service rules to facilitate wireless broadband operations in the 2.495 to 2.690 GHz band. The FCC adopted new rules that (i) expand the permitted uses of EBS and BRS spectrum so as to facilitate the provision of high-speed data and voice services accessible to mobile and fixed users on channels that previously were used primarily for one-way video delivery to fixed locations; and (ii) change some of the frequencies on which BRS and EBS operations are authorized to enable more efficient operations. These new rules streamlined licensing and regulatory burdens associated with the prior service rules and created a “PCS-like” framework for geographic licensing and interference protection. Under the new rules, existing holders of BRS and EBS licenses and leases generally have exclusive rights over use of their assigned frequencies to provide commercial wireless broadband services to residences, businesses, educational and governmental entities within their geographic markets. These rules also require BRS licensees, including us, to


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bear their own expenses in transitioning to the new band plan and, if they are seeking to initiate a transition, to pay the costs of transitioning EBS licensees to the new band plan. The transition rules also provide a mechanism for reimbursement of transaction costs by other operators in the market. Additionally, the Commission expanded the scope of its spectrum leasing rules and policies to allow BRS and EBS licensees to enter into flexible, long-term spectrum leases.
 
On April 21, 2006, the FCC issued an Order adopting comprehensive rules for relocating incumbent BRS operations in the 2150 to 2162 MHz band. These rules will further facilitate the transition to the new 2.5 GHz band plan. This Order is currently subject to Petitions for Reconsideration and judicial appeal.
 
Additionally, on April 27, 2006, the FCC released an Order revising and clarifying its BRS/EBS rules. Petitions for Reconsideration of this Order are pending. Significantly, the FCC generally reaffirmed the flexible technical and operational rules upon which our systems are designed and operating. The FCC clarified the process of transitioning from the old spectrum plan to the new spectrum plan, but reduced the transition area from large “major economic areas,” to smaller, more manageable “basic trading areas.” Proponents seeking to initiate a transition to the new band plan will be given a 30-month timeframe within which to notify the FCC of their intent to initiate a transition, followed by a 3-month planning period and an 18-month period transition completion period. In markets where no proponent initiates a transition, licensees will be permitted to self-transition to the new band plan. The FCC adopted a procedure whereby the proponent will be reimbursed for the value it adds to a market through reimbursement by other commercial operators in a market, on a pro-rata basis, after the transition is completed and the FCC has been notified.
 
The FCC also clarified the procedure by which BRS and EBS licensees must demonstrate substantial service, and required them to demonstrate substantial service by May 1, 2011. Substantial service showings demonstrate to the FCC that a licensee is not warehousing spectrum, but rather is using the spectrum to provide actual service to subscribers. If a BRS or EBS licensee fails to demonstrate substantial service by May 1, 2011, its license may be canceled and made available for re-licensing.
 
The FCC reaffirmed its decision to permit mobile satellite service providers to operate in the 2496 to 2500 MHz band on a shared, co-primary basis with BRS licensees. It also concluded that spectrum sharing in the 2496 to 2500 MHz band between BRS licensees and a limited number of incumbent licensees, such as broadcast auxiliary service, fixed microwave, and public safety licensees, is feasible. It therefore declined to require the relocation of those incumbent licensees in the 2496 to 2500 MHz band. Additionally, the FCC reaffirmed its conclusion that BRS licensees can share the 2496 to 2500 MHz band with industrial, scientific, and medical, or ISM, devices because ISM devices typically operate in a controlled environment and use frequencies closer to 2450 MHz. The FCC also reaffirmed its decision to permit low-power, unlicensed devices to operate in the 2655 to 2690 MHz band, but emphasized that unlicensed devices in the band may not cause harmful interference to licensed BRS operations. Previously, low-power, unlicensed devices were permitted to operate in the 2500 to 2655 MHz band, but not in the 2655 to 2690 MHz band.
 
Finally, the FCC reaffirmed the application of its spectrum leasing rules and policies to BRS and EBS, and ruled that new EBS spectrum leases may provide for a maximum term (including initial and renewal terms) of 30 years. The FCC further required that new EBS spectrum leases with terms of 15 years or longer must allow the EBS licensee to review its educational use requirements every five years, beginning at the fifteenth year of the lease.
 
Although we believe that the FCC’s BRS/EBS rules will enable us to pursue our long-term business strategy, these rules may be interpreted in a manner materially and adversely to our business. In addition, these rules may be amended in a manner that materially and adversely affects our business.
 
In June, 2006, the Federal Aviation Administration, or FAA, proposed regulations governing potential interference to navigable airspace from certain FCC-licensed radio transmitting devices, including 2.5 GHz transmitters. These regulations would require FAA notice and approval for new or modified transmitting facilities. If adopted, these regulations could substantially increase the administrative burden and costs involved in deploying our service.


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In certain international markets, our subsidiaries are subject to rules that provide that, if the subsidiary’s wireless service is discontinued or impaired for a specified period of time, the spectrum rights may be revoked.
 
Internet Taxation
 
The Internet Tax Non-Discrimination Act, which was passed by Congress in November 2004 and signed into law in December 2004, renewed and extended until November 2007 a moratorium on taxes on Internet access and multiple, discriminatory taxes on electronic commerce under the Internet Tax Freedom Act. This moratorium had previously expired in November 2003, and its extension preserved the “grandfathering” of states that taxed Internet access prior to October 1998 to allow them to continue to do so. Certain states have enacted various taxes on Internet access or electronic commerce, and selected states’ taxes are being contested. State tax laws may not be successfully contested, and future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce may arise, any of which could increase the cost of our services and could materially adversely affect our business.
 
Intellectual Property
 
We review our technological developments with our technology staff and business units to identify and capture innovative and novel features of our core technology that provide us with commercial advantages and file patent applications as necessary to protect these features both in the United States and elsewhere. We hold 29 granted U.S. patents (two of which are jointly held), and we also have 8 pending U.S. patent applications. For our wireless broadband network, the patents and applications cover features and functionality, including the ability to manage device power output to ensure frequency stabilization, as well as the ability to manage network output and infrastructure in a dynamic output environment to produce, among other things, reliable network uptime. We hold 18 granted patents and have 17 pending patent applications in various foreign jurisdictions. Assuming that all maintenance fees and annuities continue to be paid, the patents expire on various dates from 2017 until 2023. “Clearwire” and the associated Clearwire corporate logo, “ClearBusiness,” “ClearPremium,” “ClearClassic” and “ClearValue” are our registered trademarks in the United States, and we have issued or pending trademark registrations covering all countries of the European Union and eight other jurisdictions.
 
Employees
 
As of June 30, 2007 we had approximately 1,340 employees in the United States and approximately 340 employees in our international operations. This total does not include employees of our equity investees. We believe our employee relations are good.
 
Properties and Facilities
 
Our executive offices are currently located in Kirkland, Washington, where we lease approximately 68,509 square feet of space. The lease will continue until 2013. We do not own any real property.
 
We believe that substantially all of our property and equipment is in good condition, subject to normal wear and tear. We believe that our current facilities have sufficient capacity to meet the projected needs of our business for the next twelve months.
 
The following table lists our significant properties and the inside square footage of those properties:
 
         
    Size
 
City, State
  (Square Feet)  
 
Kirkland, WA (headquarters and administrative)
    68,509  
Milton, FL (call center)
    40,000  
Las Vegas, NV (call center)
    13,565  
Henderson, NV (administrative and warehouse space)
    12,000  
Vienna, Austria (shared service center)
    4,500  


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We lease additional office space in Washington, D.C. and several of our current and planned markets. We also lease approximately 90 retail stores and mall kiosks. Our retail stores, excluding mall kiosks, range in size from approximately 700 square feet to 10,000 square feet, with leases having terms typically from three months to seven years. Internationally we have offices in Bucharest, Romania, Brussels, Belgium, Dublin, Ireland, Madrid, Spain and Warsaw, Poland.
 
Legal Proceedings
 
We are subject to various claims and legal actions arising in the ordinary course of business from time to time. We believe that the ultimate resolution of these matters, whether individually or in the aggregate, will not have a material adverse effect on our business, prospects, financial condition and results of operations.


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MANAGEMENT
 
The following table sets forth certain information regarding the members of our board of directors, executive officers and key employees, as of the date of this prospectus.
 
             
Name
  Age    
Position
 
Craig O. McCaw(1)
    58     Chairman
Benjamin G. Wolff
    38     Chief Executive Officer and Director
Perry S. Satterlee
    47     President and Chief Operating Officer; Chief Executive
Officer of Clearwire US LLC
John A. Butler
    45     Executive Vice-President and Chief Financial Officer
R. Gerard Salemme
    53     Director; Executive Vice President — Strategy, Policy and
External Affairs
Scott Richardson
    41     Executive Vice President and Chief Strategy Officer
Hope F. Cochran
    36     Vice President, Finance and Treasurer
Broady R. Hodder
    35     Vice President, General Counsel and Secretary
Dr. John Saw, PhD
    45     Chief Technology Officer
Robert DeLucia
    43     Chief Accounting Officer
Robert G. Mechaley, Jr. 
    56     Vice Chairman(2)
Nicolas Kauser
    67     Director
David Perlmutter(3)
    53     Director
Arvind Sodhani(3)
    53     Director
Peter L. S. Currie(4)
    50     Director
Richard P. Emerson(4)
    45     Director
Michael J. Sabia(5)
    53     Director
Stuart M. Sloan(1)
    63     Director
Michelangelo A. Volpi(4)
    40     Director
 
 
(1) Members of our compensation committee.
 
(2) Our Vice Chairman is not a director.
 
(3) Designated by Intel Capital pursuant to the voting agreement between ERH and Intel Capital.
 
(4) Members of our audit committee.
 
(5) Designated by Bell Canada pursuant to our agreement with Bell Canada.
 
Craig O. McCaw.  Mr. McCaw has served as our Chairman since he founded our company in October 2003. Previously, Mr. McCaw served as our Chief Executive Officer from October 2003 until May 2006 and as our Co-Chief Executive Officer from May 2006 to January 2007. Since May 2000, Mr. McCaw has served as a director and Chairman of ICO Global Communications (Holdings) Limited, or ICO, and has served as a director of ICO North America, Inc. since December 2004. Mr. McCaw is also Chairman, Chief Executive Officer and a member of Eagle River Investments, LLC, ERH, and Eagle River Inc. and its affiliates, which are private investment companies that focus on strategic investments in the communications industry. Mr. McCaw also currently serves as a director of RadioFrame Networks, Inc. and of Tello Corp. Mr. McCaw is a former director of Nextel Communications, Inc. and XO Communications, Inc., or XO, formerly known as NEXTLINK Communications, Inc.
 
Benjamin G. Wolff.  Mr. Wolff has served as our Chief Executive Officer and as a director since January 2007. Mr. Wolff previously served as Co-President and Chief Strategy Officer from October 2005 to January 2007, and as our Co-Chief Executive Officer from May 2006 to January 2007. Previously, Mr. Wolff served as our Executive Vice President from April 2004 to October 2005. In addition to his positions with our company, Mr. Wolff is a principal of ERH, the President of ERH and ERI, and a director of ICO and ICO North America. From August 1994 until April 2004, Mr. Wolff was a lawyer with Davis Wright Tremaine


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LLP, where he became a partner in January 1998. Mr. Wolff’s practice focused on mergers and acquisitions, corporate finance and strategic alliance transactions. While with Davis Wright Tremaine LLP, he co-chaired the firm’s Business Transactions Department, served on the firm’s Executive Committee, and had primary responsibility for representing clients such as 360 networks, Allied Signal, Eagle River, ICO, Intel, NEXTLINK and Starbucks Coffee Company in various corporate and transactional matters.
 
Perry S. Satterlee.  Mr. Satterlee has served as our President since January 2007, Chief Operating Officer since July 2004 and as the President and Chief Executive Officer of Clearwire US LLC, since May 2006. Mr. Satterlee served as our Co-President from October 2005 to January 2007. Previously, Mr. Satterlee was Chief Operating Officer from July 2002 to July 2004, and Vice President-Sales and Marketing, from August 1998 to July 2004, of Nextel Partners Inc. Prior to joining Nextel Partners, Mr. Satterlee was the President-Pacific Northwest Area of Nextel. Prior to joining Nextel, Mr. Satterlee served from 1992 to 1996 as Vice President and General Manager of Central California District of AT&T Wireless Services, formerly McCaw Cellular. From 1990 to 1992, he was General Manager of McCaw Cellular’s Ventura/Santa Barbara market. From 1988 to 1990, Mr. Satterlee was Director of Planning for McCaw Cellular, where he led the company’s planning and budgeting processes.
 
John A. Butler.  Mr. Butler has served as our Chief Financial Officer since March 2005. Previously, Mr. Butler served as Executive Vice President and Chief Financial Officer of Valor Communications Group, Inc. from 2000 to 2005. From 1998 to 2000, Mr. Butler served as Executive Vice President and Chief Financial Officer of Commonwealth Telephone Enterprises, Inc. Prior to 1998, he was a director at First Union Capital Markets (Wachovia) in the Media and Communications Group. Mr. Butler has been employed by a number of financial institutions, and began his career at Arthur Andersen & Co.
 
Dr. John Saw, PhD.  Dr. Saw has served as our Chief Technology Officer since July 2007. From October 2003 to July 2007 Dr. Saw served as our vice president of Engineering for Clearwire. Prior to joining Clearwire, from 2002 to 2003 Dr. Saw was senior vice president and general manager of Fixed Wireless Access at Netro Corp (now SR Telecom) where he initiated the rollout of Netro’s broadband wireless product in Europe. From 1997 to 2002 Dr. Saw served as chief engineer and vice president of Engineering at AT&T Wireless (now AT&T Inc.). At AT&T Wireless, Dr. Saw was instrumental in the development and rollout of the company’s digital broadband wireless service, one of the earliest OFDM-based wireless systems deployed and foreshadowed the subsequent development of the WiMAX 802.16 standards. Prior to joining AT&T Wireless, Dr. Saw spent 9 years in various leadership positions at Nortel where he was involved in the development of TDMA, GSM,CDMA and fixed wireless cellular infrastructure and microwave radio products.
 
R. Gerard Salemme.  Mr. Salemme has served as a director since November 2003 and Executive Vice President — Strategy, Policy, and External Affairs of our company since April 2004 and currently is a principal of ERH, a Vice President of ERI, and a director of and consultant to ICO and ICO North America. Previously, Mr. Salemme served as our Vice President and Secretary from November 2003 to April 2004. Prior to joining our company, Mr. Salemme was Senior Vice President, External Affairs of XO from May 1997 to June 2003. Before joining XO, Mr. Salemme served as AT&T Corp.’s Vice President of Government Affairs, directing AT&T’s federal regulatory public policy organization, including participation in the FCC’s narrowband and broadband PCS auctions. Prior to AT&T, Mr. Salemme served as Senior Vice President, External Affairs for McCaw Cellular. Previously, Mr. Salemme was the Senior Telecommunications Policy Analyst for the U.S. House of Representatives Subcommittee on Telecommunications and Finance. Prior to joining the subcommittee, he was a Regional Manager at GTE Corporation/Sprint Corporation and supervised the company’s government relations in the New York/New England region. Mr. Salemme has also served as Chief of Staff to Congressman Ed Markey of Massachusetts and was a lecturer of economics at the University of Massachusetts at Salem.
 
Scott Richardson.  Mr. Richardson has served as our Chief Strategy officer since January 2007. From 2002 to 2006 Mr. Richardson led Intel’s broadband wireless business and most recently served as vice president of Intel’s Mobility Group and general manager of the company’s Service Provider Business Group. In these roles, Mr. Richardson was responsible for creating the IEEE 802.16 standard and delivering the Company’s silicon products for WiMAX Certified wireless equipment and access devices. From 1998 to 2002


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Mr. Richardson served as general manager of Intel’s OEM communication systems business serving the networking and communications market. From 1988 to 1998 Mr. Richardson led software efforts within Intel’s Enterprise Server Group and held various staff roles in communications businesses.
 
Hope F. Cochran.  Mrs. Cochran has served as the Vice President, Finance for Clearwire since November 2005 and Treasurer since June 2006. Previously, from May 2003 to August 2005, Mrs. Cochran served as the Chief Financial Officer of Evant Incorporated, a planning and logistics software developer. From May 2001 to May 2003, Mrs. Cochran served as the Controller of the Americas — Sales Operations for PeopleSoft, Inc. Prior to 2001, Mrs. Cochran was a founder and served as the Chief Financial Officer of SkillsVillage, a contractor supply chain management software provider, until its sale to PeopleSoft, Inc. In both chief financial officer positions, Mrs. Cochran managed corporate finance, accounting, human resources, legal and facilities. Mrs. Cochran began her career as an auditor at Deloitte & Touche LLP.
 
Broady R. Hodder.  Mr. Hodder has served as our Vice President and General Counsel since May 2006 and has been our Secretary since June 2006. Previously, Mr. Hodder served as our Corporate Counsel and Assistant Secretary from November 2004 to November 2005 and Vice President Legal, Finance and Corporate Development from November 2005 to May 2006. Prior to joining our company, from April 2001 to November 2004, Mr. Hodder was a lawyer with Davis Wright Tremaine LLP, where he became a partner in January 2004. Before joining Davis Wright Tremaine LLP, Mr. Hodder was a lawyer with Gray Cary Ware & Freidenrich LLP and Lionel Sawyer and Collins Ltd.
 
Robert M. DeLucia.  Mr. DeLucia has served as our Chief Accounting Officer since May 2007. Prior to coming to the Company, Mr. DeLucia served in a variety of positions with Adelphia Communications Corporation from August 2002 to March 2007 as part of that company’s restructuring team, including most recently Vice President and Controller and previously Vice President of Reporting and Vice President and Assistant Controller. Prior to working for Adelphia, Mr. DeLucia worked for Public Interactive, Inc. as its interim Chief Financial Officer.
 
Robert G. Mechaley Jr.  Mr. Mechaley has served as our Vice Chairman since January 2005. Mr. Mechaley served as our Chief Technology Officer since October 2003 through January 2005. Mr. Mechaley is also a principal of ERH. In addition, since 2002 Mr. Mechaley has been the founder, Chairman and a director of Radioframe Networks, Inc., a wireless equipment provider, and previously served as its President and Chief Executive Officer from February 2000 to February 2002. Mr. Mechaley has also served as a director of Worldwide Packets since 2005. Previously, Mr. Mechaley served as President and Chief Executive Officer of Wildfire Communications, Senior Vice President and Chief Scientist of AT&T Wireless Services and Senior Vice President of McCaw Cellular Communications and General Manager of its Wireless Data Division.
 
Nicolas Kauser.  Mr. Kauser has served as a director since February 2004 and was our Chief Technology Officer from January 2005 to July 2007 and currently is a principal of ERH. Previously, Mr. Kauser was a director of XO. Mr. Kauser is also a director of Triquint Semiconductor, a position he has held since December 1999 and has been a director of RadioFrame Networks since 2002. Until September 1998, Mr. Kauser was an Executive Vice President and Chief Technology Officer for AT&T Wireless, formerly McCaw Cellular, where he was responsible for all aspects of engineering and technology projects, network operations, long-range planning and evolution of the network, and supporting network technologies. Mr. Kauser was also responsible for AT&T Wireless’ fixed wireless initiative, Project Angel. Before joining McCaw Cellular in 1990, Mr. Kauser was Vice President of Engineering and subsequently Senior Vice President Operations at Cantel, the Canadian nationwide cellular provider based in Toronto, Canada.
 
David Perlmutter.  Mr. Perlmutter has served as a director of our company since August 2006, having been designated by Intel Capital in connection with the voting agreement between ERH and Intel Capital, and is currently Senior Vice President of Intel Corporation. Mr. Perlmutter has served as the General Manager of Intel Corporation’s Mobility Group (previously Mobile Products Group) since January 2004, where he manages the design, development and marketing of Intel’s solutions for the mobile computing segment. From January 1996 to January 2006, he was a Vice-President of Intel Corporation. Mr. Perlmutter holds a B.Sc. in Electrical Engineering from Technion, Israel Institute of Technology.


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Arvind Sodhani.  Mr. Sodhani has served as a director of our company since September 2006 and is currently president of Intel Capital and senior vice president of Intel Corporation. Mr. Sodhani has served as President of Intel Capital since March 2005 and in that role oversees Intel’s internal new business incubation, external investments, and mergers and acquisitions in support of Intel’s strategic objectives. Mr. Sodhani joined Intel in 1981 as assistant treasurer of Intel Europe, was promoted to assistant treasurer in August 1984 and was named Treasurer of Intel Corporation in July 1998. Mr. Sodhani was elected vice president by the Intel Board of Directors in May 1990 and promoted to senior vice president in February 2005. Mr. Sodhani holds an MS from the University of London and an MBA from the University of Michigan. Mr. Sodhani was a member of the NASDAQ Board of Directors from 1997 to May 2007.
 
Peter L. S. Currie.  Mr. Currie has served as a director of our company since 2005 and is currently president of Currie Capital LLC. From 2002 to 2005 he was a managing member of General Atlantic LLC, a worldwide private equity investment company, where he continues to serve as special advisor. Before joining General Atlantic, Mr. Currie was a partner and co-founder of The Barksdale Group, an early-stage venture capital firm. Mr. Currie also served as executive vice president and chief administrative officer of Netscape Communications from 1995 to 1999, and held various positions, including executive vice president and chief financial officer, of McCaw Cellular Communications, Inc. from 1989 to 1995. Prior to joining McCaw Cellular he was a Principal at Morgan Stanley & Co. Incorporated, where he joined in 1982. He is also a director of CNET Networks, Inc., Safeco Corporation, Sun Microsystems and he is a charter trustee of Phillips Academy.
 
Richard P. Emerson.  Mr. Emerson has served as a director of our company since 2004 and is currently a Senior Managing Director of Evercore Partners, L.P. From 2000 to 2003, Mr. Emerson was Senior Vice President of Corporate Development and Strategy at Microsoft Corporation. Prior to joining Microsoft Corporation, Mr. Emerson was a Managing Director at Lazard Frères & Co. LLC. Mr. Emerson was also previously affiliated with The Blackstone Group and Morgan Stanley & Co. Incorporated.
 
Michael J. Sabia.  Mr. Sabia has served as a director of our company since March 2005 having been designated pursuant to our agreement with Bell Canada. Mr. Sabia is currently the President and Chief Executive Officer of BCE Inc, and Chief Executive Officer of Bell Canada. Mr. Sabia has held senior executive positions with BCE Inc. and Bell Canada since July 2000. Mr. Sabia also serves as a director of BCE, Bell Canada; Bell Aliant Regional Communications Inc.; The Thomson Corporation; and Telesat Canada.
 
Stuart M. Sloan.  Mr. Sloan has served as a director of our company since 2004 and since 1984 has been principal of Sloan Capital Companies. Mr. Sloan was also the Chairman of the Board from 1986 to 1998 and the Chief Executive Officer from 1991 to 1996 of Quality Food Centers, Inc., a supermarket chain. Mr. Sloan is also a director for Anixter International, Inc., and J. Crew.
 
Michelangelo A. Volpi.  Mr. Volpi has served as a director of our company since February 2007 and is currently the Chief Executive Officer of Joost, an Internet video company. Mr. Volpi previously served as Senior Vice President, Technology of Cisco Systems, Inc. from April 2001 to February 2007 and Senior Vice President/General Manager of the Routing and Service Provider Technology Group from July 2005 until February 2007. From 1994 to February 2007, Mr. Volpi held various positions at Cisco, including Senior Vice President, Chief Strategy Officer, Senior Vice President of Business Development/Global Alliances, Vice President of Business Development, Director of Business Development and Business Development Manager. Prior to joining Cisco, Mr. Volpi held various management positions at the Hewlett Packard Company’s Optoelectronics Division. Mr. Volpi also serves on the board of directors of Equinix, Inc. and Opsware, Inc. Mr. Volpi holds a B.S. in mechanical engineering, an M.S. in manufacturing systems engineering and an M.B.A., all from Stanford University.
 
Audit Committee
 
We have established an audit committee, the primary responsibilities of which are to oversee the accounting and financial reporting processes of our company as well as our affiliated and subsidiary companies, and to oversee the internal and external audit processes. The audit committee also assists the board


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of directors in fulfilling its oversight responsibilities by reviewing the financial information which is provided to stockholders and others, and the system of internal controls which management and the board of directors have established. The audit committee oversees the independent auditors, including their independence and objectivity. However, the committee members are not acting as professional accountants or auditors, and their functions are not intended to duplicate or substitute for the activities of management and the independent auditors. The audit committee is empowered to retain independent legal counsel and other advisors as it deems necessary or appropriate to assist the audit committee in fulfilling its responsibilities, and to approve the fees and other retention terms of the advisors.
 
The audit committee is comprised of three members, each of whom was elected by the board of directors. Peter Currie, Richard Emerson and Michelangelo Volpi currently serve as our audit committee members. Our board of directors has determined that each of the members of our audit committee is “independent,” as defined under and required by the federal securities laws and the rules of the Nasdaq Global Select Market. Our board of directors has determined that Mr. Currie qualifies as an “audit committee financial expert” under the federal securities laws and that each member of the audit committee has the “financial sophistication” required under the rules of the Nasdaq Global Select Market.
 
Compensation Committee
 
We have established a compensation committee, the primary responsibilities of which are to periodically review and approve the compensation and other benefits for our employees, officers and independent directors, including reviewing and approving corporate goals and objectives relevant to the compensation of our executive officers in light of those goals and objectives, and setting compensation for these officers based on those evaluations. Our compensation committee also administers and has discretionary authority over the issuance of stock awards under our stock compensation plans.
 
The compensation committee has in the past, and may in the future, delegate authority to review and approve the compensation of our employees to certain of our executive officers, including with respect to stock option or SAR grants made to under our Stock Option Plan, Stock Compensation Plan or Stock Appreciation Rights Plan. Even where the compensation committee has not delegated authority, our executive officers typically make recommendations to the compensation committee regarding compensation to be paid to our employees and the size of stock option, restricted stock or SAR grants.
 
The compensation committee is comprised of two members, Messrs. McCaw and Sloan. The board has determined that Mr. Sloan meets the independence requirements of the Nasdaq Marketplace Rules.
 
Code of Conduct and Ethics
 
Our board of directors has adopted a code of conduct and ethics that establishes the standards of ethical conduct applicable to all directors, officers and employees of our company. The code addresses, among other things, conflicts of interest, compliance with disclosure controls and procedures and internal control over financial reporting, corporate opportunities and confidentiality requirements. The audit committee is responsible for applying and interpreting our code of conduct and ethics in situations where questions are presented to it.
 
Compensation Committee Interlocks and Insider Participation
 
Our compensation committee is currently comprised of Messrs. McCaw and Sloan. Mr. McCaw also serves as our Chairman. For a description of the transactions between us and members of the compensation committee, and entities affiliated with such members, see the transactions described under the section entitled “Certain Relationships and Related Transactions.”


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COMPENSATION DISCUSSION AND ANALYSIS
 
The primary goals of the compensation committee of our board of directors with respect to executive compensation are to attract and retain the most talented and dedicated executives possible, to tie annual and long-term cash and stock incentives to achievement of specified performance objectives, and to align executives’ incentives with stockholder value creation. To achieve these goals, the compensation committee intends to implement and maintain compensation plans that tie a substantial portion of executives’ overall compensation to key strategic goals such as the development of our network, the establishment and maintenance of key strategic relationships, and the growth of our subscriber base as well as our financial and operational performance, as measured by metrics such as revenue, subscriber growth, churn and markets launched. The compensation committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating in the communications industry while taking into account our relative performance and our own strategic goals.
 
We have not retained a compensation consultant to review our policies and procedures with respect to executive compensation. We conduct an annual benchmark review of the aggregate level of our executive compensation, as well as the mix of elements used to compensate our executive officers. This review is based on a survey of executive compensation paid by 24 communications companies conducted by an independent third party, Thobe Group Inc., in which we participate. We benchmark our executive compensation against the median updated compensation paid by the eight companies generating less than $750 million in annual revenue.
 
Prior to February 2007, we did not directly compensate Mr. McCaw for his services. Mr. McCaw had been indirectly compensated for his services pursuant to an advisory services agreement, which the parties terminated effective January 31, 2007, between Clearwire and ERI, a corporation of which Mr. McCaw is the sole stockholder. For the year ended December 31, 2006, we paid ERI $800,000 for advisory services plus an additional $949,000 in out of pocket expense reimbursements. Mr. McCaw currently receives annual compensation of $300,000 for serving as our Chairman. We also reimburse Mr. McCaw for out of pocket expenses he incurs on our behalf. In addition, although Messrs. Wolff, Salemme and Kauser receive a salary from us, they are also compensated by ERI. We believe that the compensation paid by ERI to these executives relates to such executives’ services to ERI and not to those executives’ services to us or to the advisory services ERI previously provided to us. Consequently, our compensation committee does not take into account the compensation ERI pays to these executives when determining our executive compensation policies, programs or awards for these individuals.
 
Elements of Compensation
 
Executive compensation consists of following elements:
 
Base Salary.  Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. For 2007, this review occurred in the first quarter.
 
Discretionary Annual Bonus.  The compensation committee has the authority to award discretionary annual bonuses to our executive officers under the terms of our 2007 Annual Performance Bonus Plan. Our 2007 Annual Performance Bonus Plan formalizes our current procedures for granting annual bonus awards to our executive officers. The compensation committee will continue to have the authority to award bonuses, set the terms and conditions of those bonuses and take all other actions necessary for the plan’s administration. These awards are intended to compensate officers for achieving financial and operational goals and for achieving individual annual performance objectives. These objectives vary depending on the individual executive, but relate generally to strategic factors such as network


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deployment, new service implementation and subscriber acquisition, and to financial factors such as raising capital, improving our results of operations and increasing the price per share of our capital stock.
 
Under our 2007 Annual Performance Bonus Plan, for each fiscal year, the compensation committee will select, in its discretion, the executive officers of the Company or its subsidiaries who are to participate in the plan. The compensation committee will establish the terms and conditions applicable to any award granted under the plan and a participant will be eligible to receive an award under the plan in accordance with such terms and conditions. Awards will be paid in whole or in part in cash, common stock or other property and will generally be paid in the first quarter following completion of a given fiscal year. Similar to bonuses paid in the past, the actual amount of discretionary bonus will be determined following a review of each executive’s individual performance and contribution to our strategic goals. The plan does not fix a maximum payout for any officer’s annual discretionary bonus.
 
Pursuant to either an employment agreement or offer letter, each executive officer, is eligible for a discretionary annual bonus up to an amount equal to a specified percentage of such executive’s salary. However, the compensation committee may increase the discretionary annual bonus paid to our executive officers, and the discretionary bonus awarded to certain officers in 2007 for performance in 2006 and in 2006 for performance in 2005 exceeded this specified amount. The actual amount of discretionary bonus is determined following a review of each executive’s individual performance and contribution to our strategic goals conducted during the first quarter of each fiscal year. The compensation committee has not fixed a maximum payout for any officers’ annual discretionary bonus.
 
Long-Term Incentive Program.  We believe that long-term performance is achieved through an ownership culture that encourages such performance by our executive officers through the use of stock and stock-based awards. Our stock compensation plans have been established to provide certain of our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of stockholders. The compensation committee believes that the use of stock and stock-based awards offers the best approach to achieving our compensation goals. We have not adopted stock ownership guidelines, and, other than Mr. McCaw, our stock compensation plans have provided the principal method for our executive officers to acquire equity or equity-linked interests in our company. We believe that the annual aggregate value of these awards should be set near competitive median levels for comparable companies. However, due to the early stage of our business, we expect to provide a greater portion of total compensation to our executives through our stock compensation plans than through cash-based compensation.
 
Options.  Our 2003 Stock Option Plan authorized us to grant options to purchase shares of common stock to our employees, directors and consultants. Our compensation committee was the administrator of the stock option plan. Stock option grants were made at the commencement of employment and, occasionally, following a significant change in job responsibilities or to meet other special retention or performance objectives. The compensation committee reviewed and approved stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Periodic stock option grants were made at the discretion of the compensation committee to eligible employees and, in appropriate circumstances, the compensation committee considers the recommendations of members of management, such as Mr. Wolff, our Chief Executive Officer, Mr. Satterlee, our President, and Christine Bertany, our Vice President, People Development. In 2006, certain named executive officers were awarded stock options in the amounts indicated in the section entitled “Grants of Plan Based Awards”. These grants included grants made on August 30, 2006, in recognition of exceptional contributions to our company relating to the negotiation and subsequent closing in August of our transactions with Motorola and Intel, and on September 15, 2006, in connection with a merit-based grant to a large number of employees intended to encourage an ownership culture among our employees. Stock options granted by us have an exercise price equal to the fair market value of our common stock on the day of grant, typically vest 25% per annum based upon continued employment over a four-year period, and generally expire ten years after the date of grant. Incentive stock options also include certain other terms necessary to assure compliance with the Internal Revenue Code of 1986, as amended.


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2007 Stock Compensation Plan.  Our 2007 Stock Compensation Plan authorizes us to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock awards to our employees, directors and consultants. Our compensation committee is the administrator of the plan. Similar to our 2003 Stock Option Plan, stock option awards will be made at the commencement of employment and, occasionally, following a significant change in job responsibilities or to meet other special retention or performance objectives. The compensation committee will review and approve stock option awards to executive officers based upon a review of competitive compensation data, its assessment of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. Periodic stock option awards will continue to be made at the discretion of the compensation committee to eligible employees and, in appropriate circumstances, the compensation committee will consider the recommendations of members of management, as discussed above. Following the adoption of our 2007 Stock Compensation Plan, we ceased to grant additional stock options under our 2003 Stock Option Plan.
 
Stock Appreciation Rights.  Our Stock Appreciation Rights Plan authorizes us to grant stock appreciation rights, or SARs. A SAR represents a right to receive the appreciation in value, if any, of our common stock over the base value of the SAR. The base value of each SAR equals the value of our common stock on the date the SAR is granted. Upon surrender of each SAR, unless we elect to deliver common stock, we will pay an amount in cash equal to the value of our common stock on the date of delivery over the base price of the SAR. SARs typically vest based upon continued employment on a pro-rata basis over a four-year period, and generally expire ten years after the date of grant. Our compensation committee is the administrator of our stock appreciation rights plan. To date, no SARs have been awarded to any of our executive officers. We have the right to convert outstanding SARs into stock options, and, following this offering, we may elect to do so. The compensation committee may also grant SARs pursuant to the terms and conditions of our 2007 Stock Compensation Plan, which is more fully discussed above.
 
Restricted Stock Grants.  Our compensation committee has and may in the future elect to make grants of restricted stock to our executive officers. In April 2006, we granted Mr. Wolff restricted stock pursuant to a Stock Grant Agreement dated April 17, 2006. Fifty percent of the shares vested on March 1, 2007 and the remainder will vest on March 1, 2008, so long as Mr. Wolff remains in continuous employment with us through those dates. The compensation committee may also grant restricted stock pursuant to the terms and conditions of our 2007 Stock Compensation Plan, which is more fully discussed above.
 
Other Compensation.  Our executive officers who were parties to employment agreements prior to this offering will continue, following this offering, to be parties to such employment agreements in their current form until such time as the compensation committee determines in its discretion that revisions to such employment agreements are advisable. In addition, consistent with our compensation philosophy, we intend to continue to maintain our current benefits and perquisites for our executive officers; however, the compensation committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites if it deems it advisable. We believe these benefits and perquisites are currently lower than median competitive levels for comparable companies. We currently have plans to change either the employment agreements (except as required by law or as required to clarify the benefits to which our executive officers are entitled as set forth herein) or levels of benefits and perquisites provided thereunder.


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Summary Compensation Table
 
The following table sets forth information regarding compensation earned by our Co-Chief Executive Officers, Co-Presidents, Chief Financial Officer and two other most highly compensated executive officers during 2005 and 2006:
 
                                                         
                      Stock
    Option
    All Other
       
          Salary
    Bonus
    Awards(1)
    Awards(2)
    Compensation
    Total
 
Name and Principal Position
  Year     ($)     ($)     ($)     ($)     ($)     ($)  
 
Craig O. McCaw
    2006                               1,749,000 (3)     1,749,000 (3)
Chairman and Co-
    2005                               1,069,000 (3)     1,069,000 (3)
Chief Executive Officer
                                                       
Benjamin G. Wolff
    2006       364,000       900,000       1,250,000 (4)     6,848,800 (5)     716,955 (6)     10,079,755  
Co-President and
    2005       350,000       350,000                         700,000  
Co-Chief Executive Officer
                                                       
John A. Butler
    2006       310,000       200,000             1,563,350 (7)           2,073,350  
Chief Financial Officer
    2005       227,717       300,000             846,000 (8)     11,725 (9)     1,385,442  
Perry S. Satterlee
    2006       374,850       350,000               2,271,800 (10)           2,996,650  
Co-President and
    2005       357,000       350,000                             707,000  
Chief Operating Officer
                                                       
R. Gerard Salemme
    2006       323,420       200,000             3,026,400 (11)           3,549,820  
Executive Vice President —
    2005       309,000       155,000                         464,000  
Strategy, Policy and
                                                       
External Affairs
                                                       
Nicolas Kauser
    2006       364,000       182,000             2,031,400 (12)           2,577,400  
Chief Technology Officer
    2005       350,000       175,000                         525,000  
 
 
(1) The value of stock awards granted to our executive officers equals the number of shares granted multiplied by the estimated fair value of a share of our capital stock on the date of grant. For information regarding significant factors, assumptions and methodologies used in determining the fair value of our capital stock, see the section entitled “Critical Accounting Policies — Valuation of Common Stock.”
 
(2) The value of option awards granted to our executive officers has been estimated pursuant to SFAS No. 123(R) for 2006 and SFAS No. 123 for 2005. Our executive officers will not realize the estimated value of these awards in cash until these awards are vested and exercised or sold. Our adoption of SFAS No. 123(R) on January 1, 2006 resulted in a significant increase in the estimated value of our options. For instance, the weighted average fair value of our options granted during the year ended December 31, 2006, calculated pursuant to SFAS No. 123(R), was $11.52 per share. If this amount had been calculated pursuant to SFAS No. 123, it would have been $4.26 per share. For information regarding our valuation of option awards, see “Critical Accounting Policies — Stock-Based Expense.”
 
(3) Includes payment to ERI for management fees and reimbursement of certain expenses pursuant to the Advisory Services Agreement, between Clearwire and ERI, dated November 13, 2003, which the parties terminated effective January 31, 2007. Mr. McCaw owns 100% of the outstanding capital stock of ERI. We paid ERI management fees of $800,000 in each of 2005 and 2006, and reimbursed expenses of $296,000 and $949,000, respectively in 2005 and 2006.
 
(4) Relates to a grant of 83,333 restricted shares to Mr. Wolff on April 17, 2006.
 
(5) Represents the aggregate fair market value of options to purchase 133,333 share of Class A common stock granted January 26, 2006, with an exercise price of $15.00 per share, options to purchase 333,333 shares of Class A common stock granted August 30, 2006, with an exercise price of $18.00 per share and options to purchase 120,000 shares of Class A common stock granted September 15, 2006, with an exercise price of $18.00 per share.
 
(6) We paid Mr. Wolff $716,955 as a tax gross-up relating to the grant to Mr. Wolff of shares of restricted stock on April 17, 2006.
 
(7) Represents the aggregate fair market value of options to purchase 50,000 shares of Class A common stock granted January 26, 2006, with an exercise price of $15.00 per share, options to purchase


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33,333 shares of Class A common stock granted August 30, 2006, with an exercise price of $18.00 per share and options to purchase 52,500 shares of Class A common stock granted September 15, 2006, with an exercise price of $18.00 per share.
 
(8) Represents the aggregate fair market value of options to purchase 300,000 shares of Class A common stock granted March 31, 2005, with an exercise price of $12.00 per share.
 
(9) Reflects relocation expenses in the amount of $11,725 paid to Mr. Butler.
 
(10) Represents the aggregate fair market value of options to purchase 133,333 shares of Class A common stock granted January 26, 2006, with an exercise price of $15.00 per share and options to purchase 70,000 shares of our Class A common stock granted September 15, 2006 with an exercise price of $18.00 per share.
 
(11) Represents the aggregate fair market value of options to purchase 66,666 shares of Class A common stock granted January 26, 2006, with an exercise price of $15.00 per share, options to purchase 83,333 shares of Class A common stock granted August 30, 2006 with an exercise price of $18.00 per share and options to purchase 110,000 shares of Class A common stock granted September 15, 2006, with an exercise price of $18.00 per share.
 
(12) Represents the aggregate fair market value of options to purchase 66,666 shares of Class A common stock granted January 26, 2006, with an exercise price of $15.00 per share and options to purchase 110,000 shares of Class A common stock granted September 15, 2006, with an exercise price of $18.00 per share.
 
Advisory Services Agreement
 
We were parties to an Advisory Services Agreement dated November 13, 2003 with ERI, a corporation of which Mr. McCaw is the sole stockholder, pursuant to which we paid ERI an annual fee for services rendered amounting to $800,000 and reimbursed ERI for certain out of pocket expenses. The parties terminated this agreement effective January 31, 2007. Prior to such termination we did not compensate Mr. McCaw for his services other than directly in the form of stock based compensation and indirectly in cash through payments to ERI under the advisory services agreement. However, after February 1, 2007, we began paying Mr. McCaw annual compensation of $300,000 directly for his services as our Chairman, and we expect to continue to reimburse Mr. McCaw for out of pocket expenses he incurs on our behalf. See “Certain Relationships and Related Transactions — Advisory Services Agreement” for additional information about this advisory services agreement and the related payments.
 
Employment Agreement
 
Perry S. Satterlee
 
We have entered into an employment agreement with Perry S. Satterlee, our President and Chief Operating Officer, and the President and Chief Executive Officer of Clearwire US LLC, for renewable one year terms. Under his employment agreement, Mr. Satterlee is entitled to receive an annual base salary of $350,000, subject to review by our compensation committee. Mr. Satterlee also is entitled to a performance-based bonus of up to 50% of his salary. In addition, we granted Mr. Satterlee 333,333 shares of restricted stock and options covering 333,333 shares upon the execution of his employment agreement. If we terminate Mr. Satterlee’s employment without cause, we will pay Mr. Satterlee a lump sum payment in the amount of his annual base salary plus an amount equal to the most recent annual bonus payment he received. Our failure to renew the agreement for any subsequent one-year terms shall be deemed to be a termination without cause. The agreement also prohibits Mr. Satterlee from competing with us for a period of one year after termination of his employment relationship with our company, unless we terminate him without cause.
 
Offer Letters
 
We do not have formal employment agreements with any of our other senior executive officers; however, certain executives’ compensation and other arrangements are set forth in offer letters provided to each of them.


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These offer letters are described below. Since the date of these offer letters, the compensation paid to each of these executives has been increased and additional options have been awarded to these executives.
 
John A. Butler.  Effective March 8, 2005, we entered into a letter agreement with John A. Butler providing for his employment as Chief Financial Officer beginning on March 14, 2005. Under his letter agreement, Mr. Butler is entitled to receive an annual base salary of $300,000, subject to review by our compensation committee. Mr. Butler also is eligible to receive an annual discretionary performance-related bonus of up to 50% of his annual base salary. In addition, we granted Mr. Butler options to purchase 300,000 shares of our Company’s Class A common stock at an exercise price of $12.00 per share. Mr. Butler has entered into an agreement not to compete with us for a period of one year after termination of his employment relationship with us. In addition, we have a verbal agreement with Mr. Butler to provide him with a severance benefit equal to his annual salary.
 
Nicolas Kauser.  Effective May 17, 2004, we entered into a letter agreement with Nicolas Kauser providing for his employment on a part time basis amounting to two-thirds of his professional time as President, International Operations of Clearwire Corp., President of Clearwire Europe, s.a.r.l., and President of Clearwire International, LLC beginning May 3, 2004. Under his letter agreement, Mr. Kauser is entitled to receive an annual base salary of $250,000, subject to review by our compensation committee. Mr. Kauser also is eligible to receive an annual discretionary performance-related bonus of up to 25% of his annual base salary. As a condition of employment, Mr. Kauser has entered into an agreement not to compete with us for a period of one year after termination of his employment relationship with us. Mr. Kauser retired from the position of Chief Technology Officer effective August 1, 2007.
 
R. Gerard Salemme.  Effective April 30, 2004, we entered into a letter agreement with R. Gerard Salemme providing for his employment as Executive Vice President, External Affairs, beginning April 1, 2004. Under his letter agreement, Mr. Salemme is entitled to receive an annual base salary of $300,000, subject to review by our compensation committee. Mr. Salemme also is eligible to receive an annual discretionary performance-related bonus of up to 26% of his annual base salary. As a condition of employment, Mr. Salemme has entered into an agreement not to compete with us for a period of one year after termination of his employment relationship with us.
 
Benjamin G. Wolff.  Effective April 1, 2004, we entered into a letter agreement with Benjamin G. Wolff providing for his employment as Executive Vice-President, Corporate Affairs, beginning on April 1, 2004. Under his letter agreement, Mr. Wolff is entitled to receive an annual base salary of $250,000, subject to review by our compensation committee. Mr. Wolff also is eligible to receive an annual discretionary performance-related bonus of up to 25% of his base salary. In addition, we granted Mr. Wolff options to purchase 333,333 shares of our company’s Class A common stock at an exercise price of $2.25 per share, which options will vest over a four year period, unless earlier vested upon a change of control of our company. Mr. Wolff is also entitled to take a three month paid sabbatical upon request. As a condition of employment, Mr. Wolff has entered into an agreement not to compete with us for a period of one year after termination of his employment relationship with us.
 
The compensation committee, which is comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Internal Revenue Code, may elect to adopt plans or programs providing for additional benefits if the compensation committee determines that doing so is in our best interests.
 
Our employment letters with Messrs. Salemme and Wolff provide for a lump sum cash payment if we terminate their employment without cause. For a complete description and quantification of benefits payable to our named officers on and following termination of employment under plans and programs currently in effect, see “— Potential Payments Upon Termination Or Change In Control”.


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Grants of Plan Based Awards
 
The compensation committee approved awards under our 2003 Stock Option Plan to certain of our named executives in 2005 and 2006 and awarded restricted stock to Mr. Wolff in 2006. Our compensation committee has not established guidelines for the grant of plan-based awards for the remainder of 2006 or 2007. Set forth below is information regarding awards granted during 2005 and 2006:
 
                                                 
          All Other Stock
    All Other Option
                   
          Awards: Number of
    Awards: Number of
    Stock
    Option
    Exercise or Base
 
          Shares of Stock
    Securities Underlying
    Awards
    Awards
    Price of Option
 
Name
  Grant Date     or Units (#)     Options (#)     ($)     ($)     Awards ($/sh)  
 
Craig O. McCaw
                                   
Benjamin G. Wolff
    1/26/06               133,333             1,436,000     $ 15.00  
      4/17/06       83,333 (1)           1,250,000             15.00  
      8/30/06             333,333             3,980,000       18.00  
      9/15/06             120,000             1,432,800       18.00  
John A. Butler
    3/31/05             300,000             840,000       12.00  
      1/26/06             50,000             538,500       15.00  
      8/30/06             33,333             398,000       18.00  
      9/15/06             52,500             626,850       18.00  
Perry S. Satterlee
    1/26/06             133,333             1,436,000       15.00  
      9/15/06             70,000             835,800       18.00  
R. Gerard Salemme
    1/26/06             66,666             718,000       15.00  
      8/30/06             83,333             995,000       18.00  
      9/15/06             110,000             1,313,400       18.00  
Nicolas Kauser
    1/26/06             66,666             718,000       15.00  
      9/15/06             110,000             1,313,400       18.00  
 
 
(1) Represents restricted stock per Stock Grant Agreement dated April 17, 2006. 50% of the shares vested on March 1, 2007 and the balance will vest on March 1, 2008, so long as Mr. Wolff remains in continuous employment with the Company through that date.
 
2003 Stock Option Plan
 
Our 2003 Stock Option Plan is administered by our compensation committee. The objectives of the plan include attracting, motivating and retaining key personnel and promoting our success by linking the interests of our employees, directors and consultants with our success.
 
Options Available for Issuance
 
There are 16,666,666 shares of common stock authorized for options grants under the plan. With the adoption of our 2007 Stock Option Plan, we ceased granting stock options under the 2003 Stock Option Plan after January 19, 2007.
 
Term of Options
 
The term of each option is ten years from the date of the grant of the option, unless a shorter period is established for incentive stock options or the administrator of the 2003 Stock Option Plan establishes a shorter period.


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Vesting Schedule
 
Options granted under our 2003 Stock Option Plan, unless waived or modified in a particular option agreement or by action of the compensation committee, vest according to the following schedule:
 
         
    Portion of
 
From the Grant Date
  Grant Vested  
 
Less than 1 year
    0 %
1 year
    25 %
2 years
    50 %
3 years
    75 %
After 4 Years
    100 %
 
Options granted under the 2003 Stock Option Plan require that the recipient of a grant be continuously employed or otherwise provide services to us or our subsidiaries. Failure to be continuously employed or in another service relationship, generally results in the forfeiture of options not vested at the time the employment or other service relationship ends. Termination of a recipient’s employment or other service relationship for cause generally results in the forfeiture of all of the recipient’s options. In certain circumstances the compensation committee has, and may in the future, provide accelerated vesting of options upon a change of control.
 
Adjustments, Changes in Our Capital Structure
 
The number and kind of shares available for grants under our 2003 Stock Option Plan and any outstanding options under the plan, as well as the exercise price of outstanding options, will be subject to adjustment by the compensation committee in the event of any merger, consolidation, reorganization, stock split, stock dividend or other event causing a capital adjustment affecting the number of outstanding shares of common stock. In the event of a capital adjustment, the compensation committee may change the number and kind of shares granted under the plan. In the event of an adjustment to our capital structure, the compensation committee may change the number and kind of shares granted under the plan. In the event of a business combination or in the event of a sale of all or substantially all of our assets, the compensation committee may cash out some or all of the unexercised, vested options under the plan, or allow some or all of the options to remain outstanding, subject to certain conditions. Unless otherwise provided in individual option agreements, the vesting of outstanding options will not accelerate in connection with a business combination or in the event of a sale of all or substantially all of our assets.
 
Administration
 
The compensation committee has full discretionary authority to determine all matters relating to options granted under the plan.
 
The compensation committee has the authority to determine the persons eligible to receive options, the number of shares subject to each option, the exercise price of each option, any vesting schedule, any acceleration of the vesting schedule and any extension of the exercise period.
 
Amendment and Termination
 
Our board of directors has authority to suspend, amend or terminate the plan, except as would adversely affect participants’ rights to outstanding awards without their consent. As the plan administrator, our compensation committee has the authority to interpret the plan and options granted under the plan and to make all other determinations necessary or advisable for plan administration.
 
In connection with the amendment of our certificate of incorporation to effectuate a one for three reverse stock split, and the adoption of the 2007 Stock Compensation Plan, our board of directors will adopt an amendment to our stock option plan to reduce the number of shares available under the 2003 Stock Option Plan.


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We also grant options to individuals or entities pursuant to written agreements not subject to the terms of this plan. Please see the section entitled “Description of Capital Stock” for further discussion of our stock options.
 
2007 Stock Compensation Plan
 
Our 2007 Stock Compensation Plan is administered by our compensation committee. The objectives of the plan include attracting, motivating and retaining key personnel and promoting our success by linking the interests of our employees, directors and consultants with our success. The Plan will permit the grant of awards that constitute incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock awards. Each award shall be evidenced by an award agreement.
 
Shares Available for Issuance
 
As of June 30, 2007 there were 11,911,775 shares of common stock available for grants under the plan. Shares to be awarded under the plan will be made available, at the discretion of the compensation committee, from authorized but unissued shares, authorized and issued shares reacquired and held as treasury shares, or a combination thereof.
 
Stock Options
 
An award of options may include incentive stock options, non-qualified stock options or a combination thereof. Each option will have a term of no longer than 10 years and each incentive stock option granted to a ten percent holder will have a term of no longer than 5 years.
 
Stock Awards
 
Each stock award will be accompanied by a stock award agreement, which will specify the number of shares granted, the price, if any, to be paid for the shares and the period of restriction applicable to the restricted stock award. Shares subject to an award of restricted stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated during a period of restriction. The compensation committee, in its sole discretion, may impose such other restrictions on shares subject to an award of restricted stock as it may deem advisable or appropriate.
 
Stock Appreciation Rights
 
The terms and conditions of SARs granted under the plan will be determined by the compensation committee. A stock award agreement will specify the base price, the term and the conditions of exercise. Each SAR will have a term no longer than 10 years from the grant date, unless a shorter period is provided in the award agreement.
 
Vesting Schedule
 
Options and other stock awards may be made subject to vesting at the discretion of our compensation committee over such term as they shall determine.
 
Adjustments
 
The number and kind of shares available for grants under our 2007 Stock Compensation Plan and any outstanding shares under the plan, as well as the exercise price or base price of outstanding shares, will be subject to adjustment by our board of directors in the event of any merger, consolidation, reorganization, stock split, stock dividend or other event causing a capital adjustment affecting the number of outstanding shares of common stock. In the event of a capital adjustment, the board of directors may change the number and kind of shares granted under the plan. In the event of an adjustment to our capital structure, our board of directors may replace awards with substitute awards in respect of shares, other securities or other property of the surviving corporation or its affiliates, which shall substantially preserve the value, rights and benefits of any


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affected awards granted under the plan. In addition, we have the right, but not the obligation, to cancel each participant’s awards immediately prior to such an event and to pay to each affected participant in connection with the cancellation an amount equal that the compensation committee, in its sole discretion, in good faith determines to be the equivalent value of such award.
 
Administration
 
The compensation committee has full discretionary authority to determine all matters relating to options granted under the plan.
 
The compensation committee has the authority to determine the persons eligible to receive awards, the number of shares subject to each award, the base price or exercise price of the award, in certain circumstances, any vesting schedule, any acceleration of the vesting schedule and any extension of the exercise period.
 
Amendment and Termination
 
Our board of directors has authority to suspend, amend or terminate the plan, except as would adversely affect participants’ rights to outstanding awards without their consent. As the plan administrator, our compensation committee has the authority to interpret the plan and options granted under the plan and to make all other determinations necessary or advisable for plan administration.
 
Stock Appreciation Rights Plan
 
Our Stock Appreciation Rights Plan is administered by the compensation committee and provides for the granting of awards of SARs. The objectives of this plan include attracting, motivating and retaining the best personnel and promoting our success by linking the interests of our employees, directors and consultants with our company’s success. We typically do not make awards under this plan to our executive officers. We adopted this plan in January 2006 and, as of June 30, 2007, we had 121,392 SARs outstanding. We account for grants under the SAR Plan under SFAS No. 123(R). SARs are recorded as liability awards as cash settlement is anticipated and are remeasured at fair value as the end of each reporting period until the awards are settled. The fair value is determined in the same manner as a stock option granted under our 2003 Stock Option Plan, using the same assumptions and option pricing model to estimate the fair value. Compensation expense for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value for each reporting period.
 
SARs Available for Issuance
 
The SARs under this plan are based on our Class A common stock. There are 166,666 SARs authorized for issuance under the plan. Awards under the plan will be made available, at the discretion of the compensation committee, from authorized but unissued SARs or outstanding SARs that expire or cancelled. SARs may, at the discretion of the compensation committee, be settled either in cash or by issuance of shares of common stock and, in the case of settlement in stock, at a value based on the common stock price at the Settlement date.
 
Adjustments Changes in Our Capital Structure
 
The number and kind of shares available for SARs under our Stock Appreciation Rights Plan and any outstanding SARs under the plan, as well as the exercise price of outstanding options, will be subject to adjustment by the compensation committee in the event of any merger, consolidation, reorganization, stock split, stock dividend or other event causing a capital adjustment affecting the number of outstanding shares of common stock. In the event of a capital adjustment, the compensation committee may change the number and kind of shares granted under the plan. In the event of a business combination or in the event of a sale of all or substantially all of our property, any outstanding SARs will expire as long as all holders of SARs under the plan receive advance notice and an opportunity to surrender the outstanding SARs.
 
The compensation committee, in its sole discretion, may determine to redeem some or all of the outstanding, vested awards for an amount equal to the surrender value under the plan.


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Administration
 
The compensation committee has full discretionary authority to determine all matters relating to awards granted under the plan. The compensation committee has the authority to determine the persons eligible to receive options, and approves the number of shares subject to each option, the exercise price of each option, any vesting schedule, any acceleration of the vesting schedule and any extension of the exercise period.
 
Amendment and Termination
 
Our board of directors has authority to suspend, amend or terminate the plan. Our board of directors may, but does not expect to, terminate this plan in connection with our initial public offering.
 
If our board of directors terminates this plan following this offering unvested SARs will expire and vested SARs automatically will be surrendered.
 
Outstanding Equity Awards At Fiscal Year-End; Option Exercises and Stock Vested
 
The following table summarizes the outstanding equity award holdings held by our named executive officers.
 
                                                 
    Option Awards     Stock Awards  
                                  Market
 
    Number of
    Number of
                      Value of
 
    Securities
    Securities
                Number of
    Shares or
 
    Underlying
    Underlying
                Shares or Units
    Units of
 
    Unexercised
    Unexercised
    Option
          of Stock That
    Stock That
 
    Options
    Options
    Exercise
    Option
    Have Not
    Have Not
 
    Exercisable
    Unexercisable
    Price
    Expiration
    Vested
    Vested
 
Name
  (#)     (#)     ($)     Date     (#)     ($)(2)  
 
Craig O. McCaw
    416,666       1,250,000     $ 6.00       12/15/14              
Benjamin G. Wolff
    166,666       166,666       2.25       4/1/14       83,333 (1)   $ 2,083,325  
      83,333       250,000       6.00       12/15/14              
      0       133,333       15.00       1/26/16              
      0       333,333       18.00       8/30/16              
      0       120,000       18.00       9/14/16              
John A. Butler
    75,000       225,000       12.00       3/31/15              
      0       50,000       15.00       1/26/16              
      0       33,333       18.00       8/30/16              
      0       52,500       18.00       9/15/16              
Perry S. Satterlee
    166,666       166,666     $ 6.00       6/28/14              
      0       133,333       15.00       1/26/06              
      0       70,000       18.00       9/15/06              
R. Gerard Salemme
    312,500       104,167       2.25       11/26/13              
      62,500       187,500       6.00       12/15/14              
      0       66,666       15.00       1/26/16              
      0       83,333       18.00       8/30/16              
      0       110,000       18.00       9/14/06              
Nicolas Kauser
    250,000       83,333       2.25       11/26/13              
      83,333       250,000       6.00       12/15/14              
      0       66,666       15.00       1/26/16           &n