**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****                             ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended  March 31,2008 OR                      **

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from                                              to                                              **

 

**Commission File Number1-9712**

** **

**UNITED STATES CELLULAR CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **62-1147325**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  | ** ** | ** **                            |

 

| **8410 West Bryn Mawr,  Suite 700, Chicago, Illinois 60631** |
|-------------------------------------------------------------------|
| (Address of principal executive  offices)  (Zip Code)   |

 

Registrant’stelephone number, including area code: **(773) 399-8900**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large  accelerated filer   x                     |   | Accelerated  filer  o         |
|------------------------------------------------------------|--------|-----------------------------------------|
| Non-accelerated  filer  o                        |   | Smaller  reporting company  o |
|   (Do  not check if a smaller reporting company) |   |                                    |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes  o  No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                                  | ** ** | **Outstanding  at March 31, 2008** |
|--------------------------------------------|------------|-----------------------------------------|
| Common Shares, $1 par  value               |       | 54,575,148 Shares                       |
| Series A Common  Shares, $1 par value |       | 33,005,877 Shares                       |

 

 

----

 

**UnitedStates Cellular Corporation**

 

#### **QuarterlyReport on Form 10-Q**

**ForThe Period Ended March 31, 2008**

 

#### **Index**

 
|          |                  |                                                                                        | **Page No.** |
|---------------|-----------------------|---------------------------------------------------------------------------------------------|-------------------|
|          |                  |                                                                                        |              |
| Part I.  | Financial Information | 3                                                                                           |
|          |                  |                                                                                        |              |
|          | Item 1.               | Financial Statements (Unaudited)                                                            |              |
|          |                  |                                                                                        |              |
|          |                  | Consolidated  Statements of Operations Three Months Ended March 31, 2008 and 2007      | 3                 |
|          |                  |                                                                                        |              |
|          |                  | Consolidated  Statements of Cash Flows Three Months Ended March 31, 2008 and 2007      | 4                 |
|          |                  |                                                                                        |              |
|          |                  | Consolidated  Balance Sheets March 31, 2008 and December 31, 2007                 | 5                 |
|          |                  |                                                                                        |              |
|          |                  | Notes to Consolidated Financial Statements                                                  | 7                 |
|          |                  |                                                                                        |              |
|          | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18                |
|          |                  | Overview                                                                                    | 18                |
|          |                  | Results  of Operations                                                                      | 21                |
|          |                  | Recent Accounting Pronouncements                                                            | 28                |
|          |                  | Financial  Resources                                                                        | 30                |
|          |                  | Liquidity and Capital Resources                                                             | 31                |
|          |                  | Application of Critical Accounting Policies and  Estimates                                  | 35                |
|          |                  | Safe Harbor Cautionary Statement                                                            | 36                |
|          |                  |                                                                                        |              |
|          | Item 3.               | Quantitative  and Qualitative Disclosures About Market Risk                                 | 40                |
|          |                  |                                                                                        |              |
|          | Item 4.               | Controls and  Procedures                                                                    | 41                |
|          |                  |                                                                                        |              |
| Part II. | Other Information     | 43                                                                                          |
|          |                  |                                                                                        |              |
|          | Item 1.               | Legal Proceedings                                                                           | 43                |
|          |                  |                                                                                        |              |
|          | Item 1A.              | Risk Factors                                                                                | 43                |
|          |                  |                                                                                        |              |
|          | Item 2.               | Unregistered  Sales of Equity Securities and Use  of Proceeds                               | 43                |
|          |                  |                                                                                        |              |
|          | Item 5.               | Other Information                                                                           | 44                |
|          |                  |                                                                                        |              |
|          | Item 6.               | Exhibits                                                                                    | 45                |
|          |                  |                                                                                        |              |
| Signatures    |                  |
|               |                       |                                                                                             |                   |  |

 

----

 

**Part I.  FinancialInformation**

 

**Item I.  FinancialStatements**

 

**United States Cellular Corporation**

 

**Consolidated Statements of Operations**

 

**Unaudited**

 
| ** **                                                                                                                                                                                | ** ** | **Three Months Ended**                                                                    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                | ** ** | **March 31,**                                                                                  | ** ** |
| ** **                                                                                                                                                                                | ** ** | **2008**                                                                                            | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                | ** ** | **(Dollars and shares in thousands, except per  share amounts)** | ** ** |
| **Operating  Revenues**                                                                                                                                                                   | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** |
| Service                                                                                                                                                                                   |       | $                                                                                                   | 962,094    |   | $ | 860,583 |   |
| Equipment sales                                                                                                                                                                           |       | 75,762                                                                                              |       | 74,091 |   |
| Total Operating Revenues                                                                                                                                                                  |       | 1,037,856                                                                                           |       | 934,674 |   |
| **Operating  Expenses**                                                                                                                                                                   | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** |
| System operations (excluding  Depreciation, amortization and accretion reported below)                                                                                                    |       | 191,016                                                                                             |       | 167,284 |   |
| Cost of equipment sold                                                                                                                                                                    |       | 174,037                                                                                             |       | 150,744 |   |
| Selling, general and  administrative (including charges from affiliates of $28.5 million and $27.8  million for  the three months ended  March 31, 2008 and 2007, respectively) |       | 407,634                                                                                        |       | 358,866  |   |
| Depreciation, amortization and  accretion                                                                                                                                                 |       | 142,530                                                                                             |       | 145,952 |   |
| Loss on asset disposals, net                                                                                                                                                              |       | 3,673                                                                                               |       | 3,305 |   |
| Total Operating Expenses                                                                                                                                                                  |       | 918,890                                                                                             |       | 826,151 |   |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Operating  Income**                                                                                                                                                                     |       | 118,966                                                                                             |       | 108,523 |   |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Investment  and Other Income (Expense)**                                                                                                                                                | ** ** | ** **                                                                                          | ** ** | ** ** | ** ** |
| Equity in earnings of  unconsolidated entities                                                                                                                                            |       | 21,235                                                                                              |       | 23,098 |   |
| Interest and dividend income                                                                                                                                                              |       | 1,905                                                                                               |       | 2,550 |   |
| Fair value adjustment of  derivative instruments                                                                                                                                          |       | —                                                                                              |       | 12,461 |   |
| Interest expense                                                                                                                                                                          |       | (20,115                                                                                             | )          | (23,684 | ) |
| Other, net                                                                                                                                                                                |       | 118                                                                                                 |       | (585 | ) |
| Total Investment and Other  Income (Expense)                                                                                                                                              |       | 3,143                                                                                               |       | 13,840 |   |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Income  Before Income Taxes and Minority Interest**                                                                                                                                     |       | 122,109                                                                                             |       | 122,363 |   |
| Income tax expense                                                                                                                                                                        |       | 47,540                                                                                              |       | 43,888 |   |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Income  Before Minority Interest**                                                                                                                                                      |       | 74,569                                                                                              |       | 78,475 |   |
| Minority share of income, net  of tax                                                                                                                                                     |       | (4,012                                                                                              | )          | (4,074 | ) |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Net  Income**                                                                                                                                                                           |       | $                                                                                                   | 70,557     |   | $ | 74,401 |   |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Basic  Weighted Average Shares Outstanding (000s)**                                                                                                                                     |       | 87,571                                                                                              |       | 87,882 |   |
| **Basic  Earnings Per Share**                                                                                                                                                             |       | $                                                                                                   | 0.81       |   | $ | 0.85 |   |
|                                                                                                                                                                                      |       |                                                                                                |       |   |   |
| **Diluted  Weighted Average Shares Outstanding (000s)**                                                                                                                                   |       | 88,064                                                                                              |       | 88,688 |   |
| **Diluted  Earnings Per Share**                                                                                                                                                           |       | $                                                                                                   | 0.80       |   | $ | 0.84 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

----

 

**United States Cellular Corporation**

 

**Consolidated Statements of Cash Flows**

 

**Unaudited**

** **
| ** **                                                                                    | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**                   | ** ** |
| ** **                                                                                    | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Cash  Flows from Operating Activities**                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                                    |       | $                                    | 70,557     |   | $ | 74,401 |   |
| Add (deduct) adjustments to  reconcile net income to net cash flows from operating activities |       |                                 |       |   |   |
| Depreciation, amortization and  accretion                                                     |       | 142,530                              |       | 145,952 |   |
| Bad debts expense                                                                             |       | 17,962                               |       | 11,087 |   |
| Stock-based compensation  expense                                                             |       | 1,773                                |       | 3,022 |   |
| Deferred income taxes, net                                                                    |       | 15,926                               |       | 369 |   |
| Equity in earnings of  unconsolidated entities                                                |       | (21,235                              | )          | (23,098 | ) |
| Distributions from  unconsolidated entities                                                   |       | 6,933                                |       | 2,226 |   |
| Minority share of income                                                                      |       | 4,012                                |       | 4,074 |   |
| Unrealized fair value  adjustment for derivative instruments                                  |       | —                               |       | (12,461 | ) |
| Loss on asset disposals, net                                                                  |       | 3,673                                |       | 3,305 |   |
| Noncash interest expense                                                                      |       | 443                                  |       | 445 |   |
| Excess tax benefit from stock  awards                                                         |       | (764                                 | )          | (1,114 | ) |
| Changes in assets and  liabilities from operations                                            |       |                                 |       |   |   |
| Change in accounts receivable                                                                 |       | (8,615                               | )          | 14,019 |   |
| Change in inventory                                                                           |       | (13,697                              | )          | 16,106 |   |
| Change in accounts payable -  trade                                                           |       | (2,418                               | )          | (18,382 | ) |
| Change in accounts payable -  affiliate                                                       |       | (117                                 | )          | (2,676 | ) |
| Change in customer deposits  and deferred revenues                                            |       | 6,515                                |       | 11,639 |   |
| Change in accrued taxes                                                                       |       | 32,949                               |       | 47,155 |   |
| Change in accrued interest                                                                    |       | 9,337                                |       | 9,382 |   |
| Change in other assets and  liabilities                                                       |       | (35,967                              | )          | (30,385 | ) |
|                                                                                          |       | 229,797                              |       | 255,066 |   |
|                                                                                          |       |                                 |       |   |   |
| **Cash  Flows from Investing Activities**                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Additions to property, plant  and equipment                                                   |       | (111,690                             | )          | (109,729 | ) |
| Cash received from  divestitures                                                              |       | 6,838                                |       | 279 |   |
| Cash paid for acquisitions                                                                    |       | (102,000                             | )          | (18,237 | ) |
| Other investing activities                                                                    |       | 239                                  |       | 662 |   |
|                                                                                          |       | (206,613                             | )          | (127,025 | ) |
|                                                                                          |       |                                 |       |   |   |
| **Cash  Flows from Financing Activities**                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Issuance of notes payable                                                                     |       | —                               |       | 25,000 |   |
| Common shares repurchased                                                                     |       | (6,201                               | )          | — |   |
| Common shares reissued, net of  tax payments                                                  |       | (2,526                               | )          | 5,558 |   |
| Excess tax benefit from stock  awards                                                         |       | 764                                  |       | 1,114 |   |
| Capital distributions to  minority partners                                                   |       | (3,231                               | )          | (2,769 | ) |
| Other financing activities                                                                    |       | (48                                  | )          | — |   |
|                                                                                          |       | (11,242                              | )          | 28,903 |   |
|                                                                                          |       |                                 |       |   |   |
| **Net  Increase in Cash and Cash Equivalents**                                                |       | 11,942                               |       | 156,944 |   |
|                                                                                          |       |                                 |       |   |   |
| **Cash and  Cash Equivalents**                                                                | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Beginning of period                                                                           |       | 204,533                              |       | 32,912 |   |
| End of period                                                                                 |       | $                                    | 216,475    |   | $ | 189,856 |   |

** **

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

----

 

**United States Cellular Corporation**

 

**Consolidated Balance Sheets**

 

**Assets**

 
| ** **                                                                            | ** ** | **March 31,**                   | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2008**                             | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)**                      | ** ** | **2007**              | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  Assets**                                                                   | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                             |       | $                                    | 216,475    |                  | $          | 204,533 |   |
| Accounts receivable                                                                   |       |                                 |       |                  |       |
| Customers, less allowances of  $10,616 and $12,305, respectively                      |       | 322,848                              |       | 327,076               |       |
| Roaming                                                                               |       | 35,715                               |       | 35,412                |       |
| Affiliated                                                                            |       | 111                                  |       | 12,857                |       |
| Other, less allowances of $360  and $112, respectively                                |       | 56,504                               |       | 60,152                |       |
| Marketable equity securities                                                          |       | 16,404                               |       | 16,352                |       |
| Inventory                                                                             |       | 114,687                              |       | 100,990               |       |
| Prepaid expenses                                                                      |       | 56,619                               |       | 41,588                |       |
| Net deferred tax assets                                                               |       | 19,335                               |       | 18,566                |       |
| Other current assets                                                                  |       | 16,822                               |       | 16,227                |       |
|                                                                                  |       | 855,520                              |       | 833,753               |       |
| **Investments**                                                                       | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Licenses                                                                              |       | 1,788,548                            |       | 1,482,446             |       |
| Goodwill                                                                              |       | 492,286                              |       | 491,316               |       |
| Customer lists, net of  accumulated amortization of $82,498 and $80,492, respectively |       | 14,333                               |       | 15,375                |       |
| Investments in unconsolidated  entities                                               |       | 172,586                              |       | 157,693               |       |
| Notes and interest receivable –  long-term                                       |       | 4,391                                |       | 4,422                 |       |
|                                                                                  |       | 2,472,144                            |       | 2,151,252             |       |
| **Property,  Plant and Equipment**                                                    | ** ** | ** **                           | ** ** | ** **            | ** ** |
| In service and under  construction                                                    |       | 5,493,389                            |       | 5,409,115             |       |
| Less accumulated depreciation                                                         |       | 2,925,051                            |       | 2,814,019             |       |
|                                                                                  |       | 2,568,338                            |       | 2,595,096             |       |
|                                                                                  |       |                                 |       |                  |       |
| **Other  Assets and Deferred Charges**                                                |       | 30,072                               |       | 31,773                |       |
|                                                                                  |       |                                 |       |                  |       |
| **Total  Assets**                                                                     |       | $                                    | 5,926,074  |                  | $          | 5,611,874 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

----

 

**United States Cellular Corporation**

 

**ConsolidatedBalance Sheets**

 

**Liabilitiesand Shareholders’ Equity**

 
| ** **                                                                                                                    | ** ** | **March 31,**                   | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2008**                             | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**                      | ** ** | **2007**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  Liabilities**                                                                                                      | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Accounts payable                                                                                                              |       |                                 |       |                  |       |
| Affiliated                                                                                                                    |       | $                                    | 8,402      |                  | $          | 8,519 |   |
| Trade                                                                                                                         |       | 249,854                              |       | 252,272               |       |
| Customer deposits and deferred  revenues                                                                                      |       | 149,960                              |       | 143,445               |       |
| Accrued taxes                                                                                                                 |       | 75,003                               |       | 43,105                |       |
| Accrued compensation                                                                                                          |       | 37,489                               |       | 59,224                |       |
| Other current liabilities                                                                                                     |       | 306,743                              |       | 97,678                |       |
|                                                                                                                          |       | 827,451                              |       | 604,243               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Deferred  Liabilities and Credits**                                                                                         | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Net deferred income tax  liability                                                                                            |       | 570,299                              |       | 554,412               |       |
| Asset retirement obligation                                                                                                   |       | 130,098                              |       | 126,844               |       |
| Other deferred liabilities and  credits                                                                                       |       | 85,433                               |       | 84,530                |       |
|                                                                                                                          |       | 785,830                              |       | 765,786               |       |
| **Long-Term  Debt**                                                                                                           | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Long-term debt                                                                                                                |       | 1,006,395                            |       | 1,002,293             |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Commitments  and Contingencies**                                                                                            | ** ** | ** **                           | ** ** | ** **            | ** ** |
| ** **                                                                                                                    | ** ** | ** **                           | ** ** | ** **            | ** ** |
| **Minority  Interest**                                                                                                        |       | 44,772                               |       | 43,396                |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Common  Shareholders’ Equity**                                                                                         | ** ** | ** **                           | ** ** | ** **            | ** ** |
| Common Shares, par value $1  per share; authorized 140,000,000 shares; issued 55,045,685 shares                               |       | 55,046                               |       | 55,046                |       |
| Series A Common Shares,  par value $1 per share; authorized 50,000,000 shares; issued and outstanding  33,005,877 shares |       | 33,006                               |       | 33,006                |       |
| Additional paid-in capital                                                                                                    |       | 1,317,488                            |       | 1,316,042             |       |
| Treasury Shares, at cost,  470,537 and 455,287 Common Shares, respectively                                                    |       | (41,630                              | )          | (41,094               | )          |
| Accumulated other  comprehensive income                                                                                       |       | 10,167                               |       | 10,134                |       |
| Retained earnings                                                                                                             |       | 1,887,549                            |       | 1,823,022             |       |
|                                                                                                                          |       | 3,261,626                            |       | 3,196,156             |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                          |       | $                                    | 5,926,074  |                  | $          | 5,611,874 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

6

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**United States CellularCorporation**

 

**Notes To Consolidated FinancialStatements**

 

**1.****             ****Basis of Presentation**

 

Theaccounting policies of United States Cellular Corporation (“U.S. Cellular”)conform to accounting principles generally accepted in the United States ofAmerica (“U.S. GAAP”). The consolidated financial statements include theaccounts of U.S. Cellular, its majority-owned subsidiaries since acquisition,general partnerships in which U.S. Cellular has a majority partnership interestand any entity in which U.S. Cellular has a variable interest that requiresU.S. Cellular to recognize a majority of the entity’s expected gains or losses.All material intercompany accounts and transactions have been eliminated.Certain prior year amounts have been reclassified to conform to the 2008presentation.

 

The consolidated financial statementsincluded herein have been prepared by U.S. Cellular, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).Certain information and disclosures normally included in financial statementsprepared in accordance with U.S. GAAP have been condensed or omitted pursuantto such rules and regulations. However, U.S. Cellular believes that thedisclosures included herein are adequate to make the information presented notmisleading.  It is suggested that theseconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in U.S. Cellular’s AnnualReport on Form 10-K for the year ended December 31, 2007 (“Form 10-K”).

 

The accompanying unaudited consolidatedfinancial statements contain all adjustments (consisting of only normalrecurring items unless otherwise disclosed) necessary to present fairly thefinancial position as of March 31, 2008 and December 31, 2007, theresults of operations for the three months ended March 31, 2008 and 2007,and the cash flows for the three months ended March 31, 2008 and2007.  The results of operations and cashflows for the three months ended March 31, 2008 are not necessarilyindicative of the results to be expected for the full year.

 

**2.****             ****Summary of Significant Accounting Policies**

 

PensionPlan

 

U.S.Cellular participates in a qualified noncontributory defined contributionpension plan sponsored by Telephone and Data Systems, Inc. (“TDS”), U.S.Cellular’s parent organization.  The planprovides pension benefits for the employees of U.S. Cellular and itssubsidiaries.  Under this plan, pensionbenefits and costs are calculated separately for each participant and arefunded currently.  Pension costs were$2.8 million and $2.1 million for the three months ended March 31, 2008and 2007, respectively.

 

AmountsCollected from Customers and Remitted to Governmental Authorities

 

U.S.Cellular records amounts collected from customers and remitted to governmentalauthorities net within a tax liability account if the tax is assessed upon thecustomer and U.S. Cellular merely acts as an agent in collecting the tax onbehalf of the imposing governmental authority. If the tax is assessed upon U.S. Cellular, the amounts collected fromcustomers as recovery of the tax are recorded in Service revenues and amountsremitted to governmental authorities are recorded in Selling, general andadministrative expenses.  The amountsrecorded gross in Service revenues that are billed to customers and remitted togovernmental authorities totaled $33.2 million and $27.3 million for the threemonths ended March 31, 2008 and 2007, respectively.

 

7

----

 

Recent Accounting Pronouncements

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 157, *Fair Value Measurements* (“SFAS 157”).SFAS 157 defines fair value as used in numerous accounting pronouncements,establishes a framework for measuring fair value in U.S. GAAP, and expandsdisclosures related to the use of fair value measures in financial statements.SFAS 157 does not expand the use of fair value measurements in financialstatements, but standardizes its definition and guidance in U.S. GAAP.SFAS 157 emphasizes that fair value is a market-based measurement and notan entity-specific measurement, based on an exchange transaction in which the entitysells an asset or transfers a liability (exit price). SFAS 157 establishesa fair value hierarchy from observable market data as the highest level to anentity’s own fair value assumptions about market participant assumptions as thelowest level. In February 2008, the FASB issued FSP FAS 157-2, todefer the effective date of SFAS 157 for all nonfinancial assets andliabilities, except those items recognized or disclosed at fair value on anannual or more frequently recurring basis, until years beginning after November 15,2008. U.S. Cellular adopted SFAS 157 for its financial assets and liabilitieseffective January 1, 2008 (See Note 5 - Fair Value Measurements for moreinformation related to U.S. Cellular’s adoption of SFAS 157 for its financialassets and liabilities). U.S. Cellular is currently reviewing the adoptionrequirements related to its nonfinancial assets and liabilities and has not yetdetermined the impact, if any, on its financial position or results ofoperations.

 

InDecember 2007, the FASB issued SFAS No. 141 (revised 2007), *Business Combinations—a replacement of FASB StatementNo. 141* (“SFAS 141(R)”). SFAS 141(R) replacesFASB Statement No. 141, *BusinessCombinations* (“SFAS 141”). SFAS 141(R) retains theunderlying concept of SFAS 141 in that all business combinations are stillrequired to be accounted for at fair value under the acquisition method, amethod that requires the acquirer to measure and recognize the acquiree on anentire entity basis and recognize the assets acquired and liabilities assumedat their fair values as of the date of acquisition. However, SFAS 141(R) changesthe method of applying the acquisition method in a number of significantaspects, such as requiring the expensing of transaction costs previouslycapitalized and requiring the accrual at fair value of certain contractual andnoncontractual contingencies. SFAS 141(R) is effective on a prospective basis for allbusiness combinations for which the acquisition date is on or after January 1,2009, with the exception of the accounting for valuation allowances on deferredtaxes and acquired tax contingencies. SFAS 141(R) amends SFAS No. 109, *Accounting for Income Taxes*, such thatadjustments made to valuation allowances on deferred taxes and acquired taxcontingencies associated with acquisitions that closed prior to the effectivedate of SFAS 141(R) would also apply the provisions ofSFAS 141(R). U.S. Cellular is currently reviewing the requirements ofSFAS 141(R) and has not yet determined the impact, if any, on itsfinancial position or results of operations.

 

InDecember 2007, the FASB issued SFAS No.160, *Consolidated Financial Statements, Including Accounting and Reportingof Noncontrolling Interests in Subsidiaries—a replacement of ARB No. 51*(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51,*Consolidated Financial Statements*,as amended by FASB Statement No. 94, *Consolidationof All Majority-Owned Subsidiaries,* to establish new standards thatwill govern the accounting and reporting of (1) noncontrolling interests(commonly referred to as minority interests) in partially owned consolidatedsubsidiaries and (2) the loss of control of subsidiaries. It alsoestablishes that once control of a subsidiary is obtained, changes in ownershipinterests in that subsidiary that do not result in a loss of control shall beaccounted for as equity transactions, not as step acquisitions under SFAS141.  SFAS 160 is effective on aprospective basis for U.S. Cellular’s 2009 financial statements, except for thepresentation and disclosure requirements, which will be appliedretrospectively. U.S. Cellular is currently reviewing the requirements ofSFAS 160 and has not yet determined the impact, if any, on its financialposition or results of operations.

 

8

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InMarch 2008, the FASB issued SFAS No.161, *Disclosuresabout Derivative Instruments and Hedging Activities – an amendment of FASBStatement No. 133* (“SFAS 161”). SFAS 161 expands thedisclosure requirements for derivative instruments and hedging activities. TheStatement specifically requires entities to provide enhanced disclosuresaddressing the following: (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under Statement 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. SFAS 161 is effective for U.SCellular’s 2009 financial statements. However, U.S. Cellular currently does nothave any derivative instruments and, therefore, U.S. Cellular does not expectSFAS 161 to have an impact on its disclosures.

 

InApril 2008, the FASB issued FSP FAS 142-3, *Determinationof the Useful Life of Intangible Assets* (“FSP FAS 142-3”). FSP FAS142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS 142”). The intent of FSP FAS 142-3 is toimprove the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under SFAS 141(R) and other applicable accountingliterature. FSP FAS 142-3 is effective for U.S. Cellular’s 2009 financialstatements. U.S. Cellular does not anticipate that the adoption of FSP FAS142-3 will have an impact on its financial position or results of operations.

 

**3.****             ****Acquisitions, Divestitures and Exchanges**

 

U.S.Cellular assesses its existing wireless interests on an ongoing basis with agoal of improving the competitiveness of its operations and maximizing itslong-term return on investment. As part of this strategy, U.S. Cellular reviewsattractive opportunities to acquire additional operating markets and wirelessspectrum. In addition, U.S. Cellular may seek to divest outright or include inexchanges for other wireless interests those markets and wireless intereststhat are not strategic to its long-term success.

 

*Transactions Pending as of March 31, 2008:*

 

U.S.Cellular participated in the Federal Communications Commission (“FCC”) auctionof spectrum in the 700 megahertz band, known as Auction 73, indirectly throughits interest in King Street Wireless, L.P. (“King Street Wireless”).  U.S.Cellular is a limited partner in King Street Wireless.  King StreetWireless qualified as a “designated entity” and was eligible for bid creditswith respect to spectrum purchased in Auction 73.  As discussed in Note 4 – Variable InterestEntities, U.S. Cellular consolidates King Street Wireless.

 

TheFCC released the results of Auction 73 on March 20, 2008.  KingStreet Wireless was the provisional winning bidder for 152 licenses for anaggregate bid of $300.5 million, net of its designated entity discount of25%.  This amount is recorded as a component of Licenses in U.S. Cellular’sMarch 31, 2008 Consolidated Balance Sheet. In January 2008, U.S. Cellular made capital contributions andadvances to King Street Wireless and its general partner of $97.0million.  King Street Wireless used the funding to pay the FCC an initialdeposit of $97.0 million in January 2008 to allow it to participate inAuction 73.  During April 2008, U.S. Cellular made additional capitalcontributions and advances to King Street Wireless and its general partner of$203.5 million in cash.  This amount isrecorded as a component of Other current liabilities in U.S. Cellular’s March 31,2008 Consolidated Balance Sheet.  KingStreet Wireless then paid this amount to the FCC in April 2008 to fulfillits remaining obligation ($300.5 million aggregate bid less $97.0 milliondeposit) for the licenses for which it was the provisional winning bidder inthe auction. U.S. Cellular may agree to make additional capital contributionsand/or advances to King Street Wireless and/or its general partner to provideadditional funding for the development of such licenses.  U.S. Cellularmay finance such amounts with a combination of cash on hand, borrowings underits revolving credit agreement and/or long-term debt.  There is noassurance that U.S. Cellular will be able to obtain additional financing oncommercially reasonable terms or at all.  While the bidding in Auction 73has ended, the FCC has not yet awarded any of the licenses to winning biddersnor is there any prescribed timeframe for the FCC to review the qualificationsof the various winning bidders and award licenses.  The licenses expectedto be awarded to King Street Wireless cover areas that overlap or are proximateor contiguous to areas covered by licenses that U.S. Cellular currently owns,operates and/or consolidates.

 

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On March 21,2008, U.S. Cellular entered into an agreement to acquire the remaining 50%ownership interest of North Carolina RSA 1 Partnership, a wireless marketoperator in which U.S. Cellular had previously owned a 50% non-operating,unconsolidated interest, for $7.0 million in cash, subject to a working capitaladjustment.  The transaction is expected to close in the second quarter of2008.

 

*Transactions Completed as of March 31, 2008:*

 

As previously disclosed, in October 2006,U.S. Cellular’s interest in Midwest Wireless Communications, LLC (“MidwestWireless”) was sold to ALLTEL Corporation. In connection with the sale, U.S. Cellular became entitled to receiveapproximately $106.0 million in cash with respect to its interest inMidwest Wireless.  On January 8,2008, U.S. Cellular received a final distribution from the escrow of$6.3 million, plus interest of $0.5 million.  A gain and interest income of $6.3 millionand $0.5 million, respectively, were recognized in the fourth quarter of 2007related to this distribution.

 

As previouslydisclosed, on December 3, 2007, U.S. Cellular entered into an agreement toacquire six 12 megahertz lower C block 700 megahertz licenses in Maine for$5.0 million in cash.  On March 28,2008, U.S. Cellular completed this transaction.

 

As previously disclosed, on November 30,2007, U.S. Cellular entered into an exchange agreement with Sprint NextelCorporation which provided for U.S. Cellular to receive personal communicationservice (“PCS”) spectrum in eight licenses covering portions of four states(Oklahoma, West Virginia, Maryland and Iowa), in exchange for U.S. Cellulardelivering PCS spectrum in eight licenses covering portions of Illinois. In connection with the exchange, U.S. Cellular recognized a pre-tax loss of$20.8 million during the fourth quarter of 2007.  This transaction closed on March 19,2008.

 

U.S. Cellular’sacquisitions for the three months ended March 31, 2008 and the allocationof the purchase price for each respective acquisition were as follows:

 
| ** **                 | ** ** | ** **          | *** *** | **Allocation of Purchase Price** | *** *** |
|----------------------------|------------|---------------------|--------------|----------------------------------|--------------|
| **(Dollars in thousands)** | ** ** | **Purchase  price** | ** **   | **Goodwill(1)**                  | ** **   | **License** | ** ** | **Customer  list** | ** ** | **Net tangible  assets/(liabilities)** | ** ** |
| U.S. Cellular Acquisitions |       |                |         |                             |         |   |   |   |   |   |   |
| Auction 73 Licenses        |       | $                   | 300,479      |                             | $            | — |   | $ | 300,479 |   | $ | — |   | $ | — |   |
| Maine Licenses             |       | 5,000               |         | —                           |         | 5,000 |   | — |   | — |   |
| Other                      |       | 1,891               |         | 970                              |         | 623 |   | 964 |   | (666 | ) |
| Total                      |       | $                   | 307,370      |                             | $            | 970 |   | $ | 306,102 |   | $ | 964 |   | $ | (666 | ) |

 

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(1)          None of the goodwill isdeductible for tax purposes.

 

**4.****              Variable InterestEntities**

 

As of March 31, 2008, U.S. Cellular consolidates the following variable interest entities:

 

·                  King Street Wireless and King Street Wireless, Inc., the generalpartner of King Street Wireless

 

·                  Barat Wireless L.P. (“Barat Wireless”) and Barat Wireless, Inc.,the general partner of Barat Wireless

 

·                  Carroll Wireless L.P. (“Carroll Wireless”) and Carroll PCS, Inc.,the general partner of Carroll Wireless

 

These variable interestentities are consolidated pursuant to the guidelines of FASB Interpretation No. 46(R),*Consolidation of Variable Interest Entities*,*an interpretation of ARB No. 51* (“FIN 46(R)”),as U.S. Cellular anticipates benefiting from or absorbing a majority ofthe variable interest entities’ expected gains or losses.  Pending finalization of the variable interestentities’ permanent financing plans, and upon request by the variable interestentities, U.S. Cellular may agree to make additional capital contributionsand advances to the variable interest entities.

 

See Note 3 -Acquisitions, Divestitures and Exchanges for further details on King StreetWireless.

 

10

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U.S. Cellular is alimited partner in Barat Wireless, an entity which participated in the auctionof wireless spectrum designated by the FCC as Auction 66. Barat Wirelesswas qualified to receive a 25% bid credit available to “very small businesses”,defined as businesses having annual gross revenues of less than$15 million. At the conclusion of the auction on September 18, 2006,Barat Wireless was the successful bidder with respect to 17 licenses forwhich it had bid $127.1 million, net of its bid credit. On April 30,2007, the FCC granted Barat Wireless’ applications with respect to the17 licenses for which it was the successful bidder. These 17 license areascover portions of 20 states and are in markets which are either adjacentto or overlap current U.S. Cellular licensed areas.

 

Barat Wireless is in theprocess of developing its long-term business and financing plans. As of March 31,2008, U.S. Cellular has made capital contributions and advances to Barat Wirelessand/or its general partner of $127.2 million; of this amount, $127.1million is included in Licenses in the Consolidated Balance Sheets. BaratWireless used the funding to pay the FCC $127.1 million in 2006 to fulfill itsobligation for the licenses purchased in Auction 66.

 

U.S. Cellular is alimited partner in Carroll Wireless, an entity which participated in theauction of wireless spectrum designated by the FCC as Auction 58. CarrollWireless was qualified to bid on “closed licenses” that were available only tocompanies included under the FCC definition of “entrepreneurs,” which are smallbusinesses that have a limited amount of assets and revenues. In addition,Carroll Wireless bid on “open licenses” that were not subject to restriction.With respect to these licenses, Carroll Wireless was qualified to receive a 25%bid credit available to “very small businesses” which were defined as havingaverage annual gross revenues of less than $15 million. Carroll Wirelesswas a successful bidder for 16 licenses in Auction 58, which ended onFebruary 15, 2005. The aggregate amount paid to the FCC for the licenseswas $129.7 million, net of the bid credit to which Carroll Wireless wasentitled. These licenses cover portions of 10 states and are in markets whichare either adjacent to or overlap current U.S. Cellular licensed areas.

 

Carroll Wireless is inthe process of developing its long-term business and financing plans. As of March 31,2008, U.S. Cellular has made capital contributions and advances to CarrollWireless and/or its general partner of approximately $129.9 million; ofthis amount, $129.7 million is included in Licenses in the ConsolidatedBalance Sheets.

 

**5.****             ****Fair Value Measurements**

 

EffectiveJanuary 1, 2008, U.S. Cellular adopted the provisions of SFAS 157 for itsfinancial assets and liabilities.  SFAS157 defines “fair value”, establishes a framework for measuring fair value inthe application of U.S. GAAP, and expands disclosures about fair valuemeasurements.  SFAS 157 does not expandthe use of fair value measurements in financial statements, but standardizesits definition and application in U.S. GAAP. SFAS 157 provides that fair value is a market-based measurement and notan entity-specific measurement, based on an exchange transaction in which theentity sells an asset or transfers a liability (exit price). This pronouncementestablishes a fair value hierarchy that contains three levels for inputs usedin fair value measurements. Level 1 inputs include quoted market prices foridentical assets or liabilities in active markets. Level 2 inputs includequoted market prices for similar assets and liabilities in active markets orquoted market prices for identical assets and liabilities in inactive markets.Level 2 inputs must be observable either directly or indirectly forsubstantially the full term of the financial instrument. Level 3 inputs areunobservable.

 

Marketableequity securities were the only financial assets on U.S. Cellular’s BalanceSheet at March 31, 2008, which required the application of SFAS 157.  U.S. Cellular did not have any financialliabilities at March 31, 2008 which required the application of SFAS 157for valuation purposes.  U.S. Cellular’smarketable equity securities had a balance of $16.4 million at March 31,2008, and consisted entirely of an investment in the common stock of RuralCellular Corporation (“RCCC”).  Thissecurity is publicly traded. Fair value for this security is based upon quotedmarket prices for identical assets in active markets.  Therefore, these inputs are considered Level1 inputs in accordance with the guidance set forth in SFAS 157. U.S. Cellular’sinvestment in RCCC is accounted for as an “available for sale” security underthe provisions of SFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*.  Therefore, unrealized gains and losses onthis investment are recorded as a component of Accumulated other comprehensiveincome.

 

11

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**6.****             ****Income Taxes**

 

Theoverall effective tax rate on income before income taxes and minority interestfor the three months ended March 31, 2008 and 2007 was 38.9% and 35.9%,respectively. The effective tax rate for the 2007 period reflected lower stateincome tax rates.

** **

**7.****             ****Earnings per Share**

 

Basicearnings per share is computed by dividing Net income by the weighted averagenumber of common shares outstanding during the period. Diluted earnings pershare is computed by dividing Net income by the weighted average common sharesadjusted to include the effect of potentially dilutive securities. Potentiallydilutive securities include incremental shares issuable upon exercise ofoutstanding stock options and the vesting of restricted stock units.

 

Theamounts used in computing Earnings per Common and Series A Common Shareand the effect of potentially dilutive securities on the weighted averagenumber of Common and Series A Common Shares are as follows:

 
| ** **                                                            | ** **   | **Three Months Ended**                                            | ** ** |
|-----------------------------------------------------------------------|--------------|-------------------------------------------------------------------|------------|
| ** **                                                            | ** **   | **March 31,**                                                | ** ** |
| ** **                                                            | ** **   | **2008**                                                          | ** ** | **2007** | ** ** |
| ** **                                                            | ** **   | **(Dollars and shares in  thousands, except earnings per share)** | ** ** |
| ** **                                                            | *** *** | *** ***                                                      |
| * *                                                              | * *     | * *                                                          | * *   | * * | * * |
| Net income                                                            |         | $                                                                 | 70,557     |   | $ | 74,401 |   |
| Weighted average number of  shares used in basic earnings per share   |         | 87,571                                                            |       | 87,882 |   |
| Effect of Dilutive Securities:                                        |         |                                                              |       |   |   |
| Stock options(1)                                                      |         | 273                                                               |       | 698 |   |
| Restricted stock units                                                |         | 220                                                               |       | 108 |   |
| Weighted average number of  shares used in diluted earnings per share |         | 88,064                                                            |       | 88,688 |   |
|                                                                  |         |                                                              |       |   |   |
| Basic Earnings per Share                                              |         | $                                                                 | 0.81       |   | $ | 0.85 |   |
|                                                                  |         |                                                              |       |   |   |
| Diluted Earnings per Share                                            |         | $                                                                 | 0.80       |   | $ | 0.84 |   |

 

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(1)          Stock options exercisableinto 331,239 Common Shares in 2008 and 5,016 Common Shares in 2007 were notincluded in computing Diluted Earnings per Share because their effects wereantidilutive.

 

12

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**8.****             ****Licenses and Goodwill**

 

Changesin U.S. Cellular’s licenses and goodwill are primarily the result ofacquisitions, divestitures and exchanges of its licenses and wireless markets.See Note 3 - Acquisitions, Divestitures and Exchanges for information regardingtransactions which affected licenses and goodwill. The changes in Licenses andGoodwill for the three months ended March 31, 2008 and 2007 were asfollows:

 
| ** **                   | ** ** | **March 31,**         | ** ** | **March 31,** | ** ** |
|------------------------------|------------|----------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2008**                   | ** ** | **2007**           | ** ** |
| ** **                   |       | **(Dollars in thousands)** |       |
| Licenses                     | * *   | ** **                 | * *   | * *           | * *   |
| Balance, beginning of period |       | $                          | 1,482,446  |               | $          | 1,494,327 |   |
| Acquisitions                 |       | 306,102                    |       | 7,900              |       |
| Balance, end of period       |       | $                          | 1,788,548  |               | $          | 1,502,227 |   |

 
|                         |     | **March 31**          | ** ** | **March 31,** |     |
|------------------------------|----------|----------------------------|------------|--------------------|----------|
|                         |     | **2008**                   | ** ** | **2007**           |     |
| * *                     |     | **(Dollars in thousands)** |       |
| Goodwill                     | * * | * *                   | * *   | * *           | * * |
| Balance, beginning of period |     | $                          | 491,316    |               | $        | 485,452 |   |
| Acquisitions                 |     | 970                        |       | 5,818              |     |
| Balance, end of period       |     | $                          | 492,286    |               | $        | 491,270 |   |

 

**9.****             ****Customer Lists**

 

Customerlists, which are intangible assets resulting from acquisitions of wirelessmarkets, are amortized based on average customer retention periods using thedouble declining balance method in the first year, switching to straight-lineover the remaining estimated life. The changes in the customer lists for thethree months ended March 31, 2008 and 2007 were as follows:

 
| ** **                   | ** ** | **March 31,**         | ** ** | **March 31,** | ** ** |
|------------------------------|------------|----------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2008**                   | ** ** | **2007**           | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Customer lists               | * *   | * *                   | * *   | * *           | * *   |
| Balance, beginning of period |       | $                          | 15,375     |               | $          | 26,196 |   |
| Acquisitions                 |       | 964                        |       | 1,560              |       |
| Amortization                 |       | (2,006                     | )          | (3,773             | )          |
| Balance, end of period       |       | $                          | 14,333     |               | $          | 23,983 |   |

 

Based on the Customer lists balance as of March 31,2008, amortization expense for the remainder of 2008 and for the years2009-2012 is expected to be $5.4 million, $5.0 million, $3.3 million, $0.5million and $0.1 million, respectively.

 

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**10.****      ****Marketable Equity Securities**

 

U.S.Cellular holds RCCC Common Shares at March 31, 2008.  Information regarding U.S. Cellular’sinvestment in RCCC is summarized below.

 
| ** **                                        | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**                   | ** ** | **2007**              | ** ** |
| *** ***                                      | ** ** | **(Dollars in thousands)** | ** ** |
| * *                                          | * *   | * *                   | * *   | * *              | * *   |
| Rural Cellular Corporation 370,882 Common  Shares |       | $                          | 16,404     |                  | $          | 16,352 |   |
| Accounting cost basis                             |       | (334                       | )          | (334                  | )          |
| Gross unrealized holding gains                    |       | 16,070                     |       | 16,018                |       |
| Deferred income tax liability                     |       | (5,903                     | )          | (5,884                | )          |
| Net unrealized holding gains included in          |       |                       |       |                  |       |
| Accumulated other  comprehensive income           |       | $                          | 10,167     |                  | $          | 10,134 |   |

 

OnJuly 30, 2007, RCCC announced that Verizon Wireless agreed to purchase theoutstanding shares of RCCC for $45 per share in cash.  The acquisition is expected to close in 2008and, therefore, the investment is classified as a Current Asset in U.S.Cellular’s Consolidated Balance Sheet as of March 31, 2008.  If the transaction closes, U.S. Cellular willreceive approximately $16.7 million in cash, recognize a$16.4 million pre-tax gain and cease to own any interest in RCCC.

 

**11.****      ****Investment in Unconsolidated Entities**

 

Investmentsin unconsolidated entities consist of amounts invested in wireless entities inwhich U.S. Cellular holds a minority interest. These investments are accounted for using either the equity or costmethod.

 

U.S.Cellular held a 5.5% ownership interest in the Los Angeles SMSA LimitedPartnership (“LA Partnership”) as of March 31, 2008 and March 31,2007, and recorded $15.8 million and $18.0 million, respectively, of equityincome related to the LA Partnership in the three month periods thenended.  Such amounts are included inEquity in earnings of unconsolidated entities in the Consolidated Statements ofOperations.

 

Based on data furnished to U.S. Cellular by the managingpartner the following table summarizes the operating results of the LAPartnership:

 
| ** **             | ** ** | **Three Months Ended**     | ** ** |
|------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **March 31,**         | ** ** |
| ** **             | ** ** | **2008**                   | ** ** | **2007** | ** ** |
|                   |       | **(Dollars in thousands)** |       |
| * *               | * *   | * *                   | * *   | * * | * * |
| Revenues               |       | $                          | 949,000    |   | $ | 904,000 |   |
| Operating expenses     |       | 652,000                    |       | 584,000 |   |
| Operating income       |       | 297,000                    |       | 320,000 |   |
| Other income (expense) |       | 7,000                      |       | 8,000 |   |
| Net Income             |       | $                          | 304,000    |   | $ | 328,000 |   |

 

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**12.****      ****Commitments and Contingencies**

 

Indemnifications

 

U.S. Cellular enters into agreements in the normal course of businessthat provide for indemnification of counterparties. These agreements includecertain asset sales and financings with other parties. The terms of theindemnification vary by agreement. The events or circumstances that wouldrequire U.S. Cellular to perform under these indemnities are transactionspecific; however, these agreements may require U.S. Cellular to indemnify thecounterparty for costs and losses incurred from any litigation or claimsarising from the underlying transaction. U.S. Cellular is unable to estimatethe maximum potential liability for these types of indemnifications as theamounts are dependent on the outcome of future events, the nature andlikelihood of which cannot be determined at this time. Historically, U.S.Cellular has not made any significant indemnification payments under suchagreements.

 

Legal Proceedings

 

U.S. Cellular is involved or may be involved from time to time in legalproceedings before the FCC, other regulatory authorities, and/or various stateand federal courts.  If U.S. Cellularbelieves that a loss arising from such legal proceedings is probable and can bereasonably estimated, an amount is accrued in the financial statements for theestimated loss.  If only a range of loss can be determined, the bestestimate within that range is accrued; if none of the estimates within thatrange is better than another, the low end of the range is accrued.  The assessment of the expected outcomes oflegal proceedings is a highly subjective process that requires judgments aboutfuture events.  The legal proceedings arereviewed at least quarterly to determine the adequacy of accruals and relatedfinancial statement disclosures. The ultimate outcomes of legal proceedingscould differ materially from amounts accrued in the financial statements.

 

**13.****       Common Share Repurchases**

 

The Board of Directors of U.S. Cellular has authorized therepurchase of up to 1% of the outstanding U.S. Cellular Common Shares heldby non-affiliates in each three month period, primarily for use in employeebenefit plans. This authorization does not have an expiration date. During thethree months ended March 31, 2008, U.S. Cellular repurchased 150,000Common Shares for $10.8 million, or an average of $71.70 per share,pursuant to this authorization. U.S. Cellular also received $4.6 million incash during the first quarter of 2008 as a final settlement payment for 2007Common Share repurchases executed through accelerated share repurchaseagreements with an investment banking firm. U.S. Cellular did not repurchase any Common Shares in the first quarterof 2007.

 

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**14.****      ****AccumulatedOther Comprehensive Income**

 

The cumulative balances of unrealized gainsand (losses) on securities and derivative instruments and related income taxeffects included in Accumulated other comprehensive income are as follows:

 
| ** **                                                                | ** ** | **Three Months Ended**     | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                | ** ** | **March 31,**         | ** ** |
| ** **                                                                | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| * *                                                                  |       | **(Dollars in thousands)** |       |
| **Marketable  Equity Securities**                                         | * *   | * *                   | * *   | * * | * * |
| Balance, beginning of period                                              |       | $                          | 10,134     |   | $ | 77,545 |   |
| Add (deduct):                                                             |       |                       |       |   |   |
| Unrealized gains (losses)                                                 |       | 52                         |       | (8,685 | ) |
| Deferred income tax (expense)  benefit                                    |       | (19                        | )          | 3,182 |   |
| Net change in unrealized gains  (losses) in comprehensive income          |       | 33                         |       | (5,503 | ) |
| Balance, end of period                                                    |       | $                          | 10,167     |   | $ | 72,042 |   |
|                                                                      |       |                       |       |   |   |
| **Derivative  Instruments**                                               |       |                       |       |   |   |
| Balance, beginning of period                                              |       | $                          | —     |   | $ | 2,837 |   |
| Add (deduct):                                                             |       |                       |       |   |   |
| Deferred income tax (expense)                                             |       | —                     |       | — |   |
| Net change in unrealized gains  (losses) in comprehensive income          |       | —                     |       | — |   |
| Balance, end of period                                                    |       | $                          | —     |   | $ | 2,837 |   |
|                                                                      |       |                       |       |   |   |
| **Accumulated  Other Comprehensive Income**                               |       |                       |       |   |   |
| Balance, beginning of period                                              |       | $                          | 10,134     |   | $ | 80,382 |   |
| Net change in marketable  equity securities                               |       | 33                         |       | (5,503 | ) |
| Net change in derivative  instruments                                     |       | —                     |       | — |   |
| Net change in unrealized gains  (losses) included in comprehensive income |       | 33                         |       | (5,503 | ) |
| Balance, end of period                                                    |       | $                          | 10,167     |   | $ | 74,879 |   |

 
|                                                                         |     | **Three Months Ended**     |       |
|------------------------------------------------------------------------------|----------|----------------------------|------------|
|                                                                         |     | **March 31,**         |       |
|                                                                         |     | **2008**                   | ** ** | **2007** |   |
| ** **                                                                   |     | **(Dollars in thousands)** |       |
| **Comprehensive  Income**                                                    | * * | * *                   | * *   | * * | * * |
| Net Income                                                                   |     | $                          | 70,557     |   | $ | 74,401 |   |
| Net change in unrealized gains  (losses) on marketable equity securities and |     |                       |       |   |   |
| derivative instruments                                                       |     | 33                         |       | (5,503 | ) |
|                                                                         |     | $                          | 70,590     |   | $ | 68,898 |   |

 

**15.****      ****Supplemental Cash Flow Disclosures**

 

U.S.Cellular withheld 145,827 and 6,950 Common Shares with an aggregate value of$8.6 million and $0.5 million in the three months ended March 31,2008 and 2007, respectively, from employees who exercised stock options or whoreceived a distribution of vested restricted stock awards. Such shares werewithheld to cover the exercise price of stock options, if applicable, andrequired tax withholdings.

 

16

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** **

**16.****      ****Subsequent Events**

 

U.S. Cellular has a$700 million revolving credit facility available for general corporatepurposes. U.S. Cellular may select borrowing periods of either seven days orone, two, three or six months. If U.S. Cellular provides less than two days’notice of intent to borrow, the related borrowings bear interest at the primerate less 50 basis points. This credit facility expires in December 2009.

 

On April 15, 2008,U.S. Cellular borrowed $100 million under its revolving credit facility.  These proceeds along with additional cash onhand of $103.5 million were contributed to King Street Wireless and its generalpartner.  King Street Wireless in turnpaid $203.5 million to the FCC in order to fulfill its remaining obligationincurred upon the purchase of licenses in Auction 73.  See Note 3 - Acquisitions, Divestitures andExchanges for more information on Auction 73. U.S. Cellular is a limited partner of King Street Wireless andconsolidates this entity pursuant to the provisions of FIN 46(R).  See Note 4 - Variable Interest Entities formore information on King Street Wireless. U.S. Cellular anticipates repaying the amount borrowed from future cashflows from operations and/or long-term debt financing.

 

17

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

UnitedStates Cellular Corporation (“U.S. Cellular”) owns, operates and invests inwireless markets throughout the United States. U.S. Cellular is an 80.8%-ownedsubsidiary of Telephone and Data Systems, Inc. (“TDS”) as of March 31,2008.

 

The following discussionand analysis should be read in conjunction with U.S. Cellular’s interimconsolidated financial statements included in Item 1 above, and with itsaudited consolidated financial statements and Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in itsAnnual Report on Form 10-K (“Form 10-K”) for the year ended December 31,2007.

 

**OVERVIEW**

 

Thefollowing is a summary of certain selected information contained in thecomprehensive Management’s Discussion and Analysis of Financial Condition andResults of Operations that follows. The overview does not contain all of theinformation that may be important. You should carefully read the entireManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and not rely solely on the overview.

 

U.S.Cellular provides wireless telecommunications services to approximately6.2 million customers in five geographic market areas in 26 states. As of March 31,2008, U.S. Cellular owned or had rights to acquire interests in 260 wirelessmarkets and operated approximately 6,452 cell sites. U.S. Cellular operates ona customer satisfaction strategy, meeting customer needs by providing acomprehensive range of wireless products and services, excellent customersupport, and a high-quality network. U.S. Cellular’s business developmentstrategy is to operate controlling interests in wireless licenses in areasadjacent to or in proximity to its other wireless licenses, thereby buildingcontiguous operating market areas. U.S. Cellular anticipates that operating incontiguous market areas will continue to provide it with certain economies inits capital and operating costs.

 

Financial and operatinghighlights in the first quarter of 2008 included the following:

 

·                  Totalcustomers increased 4% year-over-year to 6.2 million at March 31,2008; net retail customer additions were 85,000;

 

·                  Theretail postpay churn rate was 1.4% per month. Retail postpay customerscomprised approximately 86% of U.S. Cellular’s customer base as of March 31,2008;

 

·                  Averagemonthly service revenue per customer increased 7% year-over-year to $52.06;

 

·                  Cashflows from operating activities were $229.8 million, a decrease of 10%year-over-year. Cash flows from operating activities other than changes inassets and liabilities increased 16%. During the period, U.S. Cellular had nooutstanding balances under its revolving credit facility and, at March 31,2008, had cash and cash equivalents totaling $216.5 million;

 

·                  Additionsto property, plant and equipment totaled $111.7 million, including expendituresto construct cell sites, increase capacity in existing cell sites and switches,outfit new and remodel existing retail stores and continue the development andenhancements of U.S. Cellular’s office systems. Total cell sites in serviceincreased 7% year-over-year to 6,452; and

 

·                  Tostrengthen its operating footprint, U.S. Cellular participated in the FederalCommunications Commission (“FCC”) auction of spectrum in the 700 megahertzband, known as Auction 73, indirectly through its interest in King StreetWireless, L.P. (“King Street Wireless”). U.S. Cellular is a limited partner inKing Street Wireless. King Street Wireless was the provisional winning bidderfor 152 licenses for an aggregate bid of $300.5 million, net of its designatedentity discount of 25%. The licenses expected to be awarded to King StreetWireless cover areas that overlap or are proximate or contiguous to areascovered by licenses that U.S. Cellular currently owns, operates and/orconsolidates.

 

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Servicerevenues increased $101.5 million, or 12%, to $962.1 million in 2008 from$860.6 million in 2007.  Customer growthand improvements in average monthly revenue per unit have driven increasedrevenues. U.S. Cellular continues to experience growth in its customer base,primarily in the retail postpay segment. In addition, U.S. Cellular continuesto experience increases in average monthly revenue per unit driven bycontinuing migration of customers to national, wide area and family serviceplans and growth in revenues from data products and services.

 

OperatingIncome increased $10.4 million, or 10%, to $119.0 million in 2008 from $108.5million in 2007. Operating income margin (as a percent of service revenues) was12.4% in 2008 compared to 12.6% in 2007.

 

U.S. Cellularanticipates that there will be continued pressure on its operating income andoperating income margin in the next few years related to the following factors:

 

·                  increasingpenetration in the wireless industry;

 

·                  costsof customer acquisition and retention, such as equipment subsidies andadvertising;

 

·                  effectsof competition;

 

·                  providingservice in recently launched areas or potential new market areas;

 

·                  potentialincreases in prepaid and reseller customers as a percentage of U.S. Cellular’scustomer base;

 

·                  costsof developing and introducing new products and services;

 

·                  continuedenhancements to its wireless networks, including potential deployments of newtechnology;

 

·                  increasingcosts of regulatory compliance; and

 

·                  uncertaintyin future eligible telecommunication carrier (“ETC”) funding.

 

In addressing thesechallenges, U.S. Cellular will continue to focus on improving customersatisfaction and enhancing the quality of its networks, its product and serviceofferings and its sales distribution.

 

Investmentand Other Income (Expense) totaled $3.1 million in 2008 and $13.8 million in2007.  The amount for 2007 included anunrealized gain of $12.5 million resulting from a fair value adjustment ofderivative instruments.

 

Net Income in 2008decreased 5% to $70.6 million compared to $74.4 million in 2007, primarily dueto lower Investment and Other Income (Expense) and a higher effective tax rate.Basic Earnings per Share was $0.81 in 2008, which was $0.04 lower than lastyear and Diluted Earnings per Share was $0.80, which was $0.04 lower than lastyear.

 

**Cash Flows and Investments**

 

U.S.Cellular believes that cash on hand, expected future cash flows from operatingactivities and sources of external financing provide substantial financialflexibility and are sufficient to permit U.S. Cellular to finance itscontractual obligations and anticipated capital expenditures for theforeseeable future. U.S. Cellular continues to seek to maintain a strongbalance sheet and an investment grade credit rating.

 

See“Financial Resources” and “Liquidity and Capital Resources” below foradditional information related to cash flows and investments.

 

19

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**Recent Developments**

 

As disclosed in our Annual Report on Form10-K for the year ended December 31, 2007, before the FCC for comment areproposals made by the Federal-State Joint Board and by the FCC itself to changethe universal service high cost fund in various ways. On April 29, 2008, theFCC adopted an interim "cap" on the high cost program for fundingthat goes to competitive ETCs, limiting total high cost funding for the stateto the levels being provided to all such carriers in that state in March 2008,with an exemption from the cap for carriers serving tribal lands and AlaskanNative Lands. The cap, which will be of indefinite duration, will result inwireless ETCs, such as U.S. Cellular, receiving less support than they wouldhave been otherwise eligible to receive while the cap is in effect, as overallsupport will not increase as a carrier adds customers or as new competitivecarriers are granted ETC status in the state. The FCC will also consider theother changes in the Federal Universal Service Fund (“USF”) discussed in ourForm 10-K.

 

**2008 Estimates**

 

U.S.Cellular expects the above industry, competitive and regulatory factors toimpact revenues, operating income and operating income margin for the nextseveral quarters. Any changes in the above factors, as well as the effects ofother drivers of U.S. Cellular’s operating results, may cause revenues,operating income and operating income margin to fluctuate over the next severalquarters.

 

Thefollowing are U.S. Cellular’s estimates of full year 2008 net retail customeradditions; service revenues; operating income; depreciation, amortization andaccretion expenses; and capital expenditures. Such estimates represent U.S.Cellular’s views as of the date of the filing of U.S. Cellular’s Form 10-Qfor the three months ended March 31, 2008. Such forward-looking statements should not be assumed to be accurate asof any future date. U.S. Cellular undertakes no duty to update such informationwhether as a result of new information, future events or otherwise. There canbe no assurance that final results will not differ materially from suchestimated results.

 
| ** **                                            | ** ** | **2008**                   | ** **                | **2007**                | ** **         |
|-------------------------------------------------------|------------|----------------------------|---------------------------|-------------------------|--------------------|
| ** **                                            | ** ** | **Estimated Results** | ** **                | **Actual Results** | ** **         |
| Net retail customer additions                         |       | 200,000-275,000            |                      | 333,000                 |               |
| Service revenues                                      |       | $                          | 3,900-$4,000 million |                    | $                  | 3,679.2 million |   |
| Operating income                                      |       | $                          | 435-$510 million     |                    | $                  | 396.2 million |   |
| Depreciation, amortization and  accretion expenses(1) |       | Approx. $615 million  |                      | $                       | 637.1 million |   |
| Capital expenditures                                  |       | $                          | 565-$615 million     |                    | $                  | 565.5 million |   |

 

----

(1) Includes losses onexchange and disposals of assets.

 

20

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**RESULTS OF OPERATIONS**

 

**Three Months Ended March 31,2008 Compared to Three Months Ended March 31, 2007**

 

Following is a table of summarized operatingdata for U.S. Cellular’s consolidated operations.

 
| **As of March 31,(1)**                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Total market population of  consolidated operating markets(2) |       | 45,262,000 |       | 44,416,000 |       |
| Customers(3)                                                  |       | 6,201,000  |       | 5,973,000  |       |
| Market penetration(2)                                         |       | 13.7       | %          | 13.4       | %          |
| Total full-time equivalent  employees                         |       | 8,105      |       | 7,484      |       |
| Cell sites in service                                         |       | 6,452      |       | 6,004      |       |

 
| **For the Three Months Ended March 31,(4)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net customer additions(5)                                                 |       | 80,000   |       | 152,000  |       |
| Net retail customer  additions(5)                                         |       | 85,000   |       | 146,000  |       |
| Average monthly service  revenue per customer(6)                          |       | $        | 52.06      |     | $          | 48.69 |   |
| Retail postpay churn rate per  month(7)                                   |       | 1.4      | %          | 1.3      | %          |
| Total postpay churn rate per  month(7)                                    |       | 1.5      | %          | 1.5      | %          |
|                                                                           |            |          |            |          |            |  |  |

 

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(1)          Amounts include results for U.S. Cellular’s consolidated operatingmarkets as of March 31; results for operating markets acquired during aparticular period are included as of the acquisition date.

 

(2)          Calculated using 2007 and 2006 Claritas population estimates for 2008and 2007, respectively. “Total market population of consolidated operatingmarkets” is used only for the purposes of calculating market penetration ofconsolidated operating markets, which is calculated by dividing customers bythe total market population (without duplication of population in overlappingmarkets).

 

The total market population and penetration measures for consolidatedoperating markets apply to markets in which U.S. Cellular provides wirelessservice to customers. For comparison purposes, total market population andpenetration related to all consolidated markets in which U.S. Cellular owns aninterest were 82,846,000 and 7.5%, and 56,048,000 and 10.7% as of March 31,2008 and 2007, respectively.

 

As of March 31, 2008, U.S. Cellular had rights to acquire majorityinterests in 19 licenses, resulting from an exchange transaction with AT&TWireless (now part of AT&T) that closed in August 2003. As of April 10,2008, U.S. Cellular exercised its rights to acquire 18 licenses pursuant tothis exchange agreement.  These licenses will increase total marketpopulation of consolidated markets by 1,566,000 to 84,412,000.  The exercise of these rights did not requireU.S. Cellular to provide any additional consideration to AT&T, other thanconsideration already provided in conjunction with the August 2003exchange transaction.  Therefore,exercise of these rights did not cause a change in U.S. Cellular’s Licensesbalance in 2008.  U.S. Cellular continuesto have a right that does not have a stated expiration date to acquire amajority interest in one license under the exchange agreement.

 

(3)          U.S. Cellular’s customer base consists of the following types ofcustomers:

 
| ** **                                                                                                                | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                | ** ** | **2008**           | ** ** | **2007** | ** ** |
| Customers on postpay service  plans in which the end user is a customer of U.S. Cellular (“postpay  customers”) |       | 5,331,000          |       | 5,048,000 |   |
| End user customers acquired  through U.S. Cellular’s agreement with a third party (“reseller customers”)*  |       | 561,000            |       | 596,000 |   |
| Total postpay customers                                                                                                   |       | 5,892,000          |       | 5,644,000 |   |
| Customers on prepaid service  plans in which the end user is a customer of U.S. Cellular (“prepaid  customers”) |       | 309,000            |       | 329,000 |   |
| Total customers                                                                                                           |       | 6,201,000          |       | 5,973,000 |   |

 

* Pursuant to its agreement withthe third party, U.S. Cellular is compensated by the third party on a postpaybasis; as a result, all customers U.S. Cellular has acquired through thisagreement are considered to be postpay customers.

 

(4)          Amounts include results for U.S. Cellular’s consolidated operatingmarkets for the period January 1 through March 31; operating marketsacquired during a particular period are included as of the acquisition date.

 

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(5)          “Net customer additions” represents the number of net customers added toU.S. Cellular’s overall customer base through all of its marketing distributionchannels, excluding any customers transferred through acquisitions,divestitures or exchanges. “Net retail customer additions” represents thenumber of net customers added to U.S. Cellular’s customer base through itsmarketing distribution channels, excluding net reseller customers added to itsreseller customer base and excluding any customers transferred throughacquisitions, divestitures or exchanges.

 

(6)          Management uses this measurement to assess the amount of service revenuethat U.S. Cellular generates each month on a per customer basis. Variances inthis measurement are monitored and compared to variances in expenses on a percustomer basis. Average monthly service revenue per customer is calculated asfollows:

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Service revenues per  Consolidated Statements of Operations (000s) |       | $                                                | 962,094    |   | $ | 860,583 |   |
| Divided by average customers  during period (000s)*                |       | 6,160                                            |       | 5,892 |   |
| Divided by number of months in  each period                        |       | 3                                                |       | 3 |   |
|                                                               |       |                                             |       |   |   |
| Average monthly service  revenue per customer                      |       | $                                                | 52.06      |   | $ | 48.69 |   |

 

* “Average customers duringperiod” is calculated by adding the number of total customers, includingreseller customers, at the beginning of the first month of the period and atthe end of each month in the period and dividing by the number of months in theperiod plus one. Acquired and divested customers are included in thecalculation on a prorated basis for the amount of time U.S. Cellular includedsuch customers during each period.

 

(7)**         **Postpay churn rate per month represents thepercentage of the postpay customer base that disconnects service each month.Retail postpay churn rate includes only retail customers; total postpay churnrate includes both retail and reseller customers. 

 

**Components of Operating Income**

 
| **Three Months Ended March 31,**                                   | ** ** | **2008**   | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|------------------------|------------|------------|------------|
| **(Dollars  in thousands)**                                                            | ** ** | ** ** | ** ** | ** **                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Retail service                                                                         |       | $          | 834,213    |                      | $          | 79,698                 |       | 10.6       | %          | $ | 754,515 |   |
| Inbound roaming                                                                        |       | 54,089     |       | 12,821                    |       | 31.1                   | %          | 41,268     |       |
| Long-distance and other                                                                |       | 73,792     |       | 8,992                     |       | 13.9                   | %          | 64,800     |       |
| Service revenues                                                                       |       | 962,094    |       | 101,511                   |       | 11.8                   | %          | 860,583    |       |
| Equipment sales                                                                        |       | 75,762     |       | 1,671                     |       | 2.3                    | %          | 74,091     |       |
| Total Operating Revenues                                                               |       | 1,037,856  |       | 103,182                   |       | 11.0                   | %          | 934,674    |       |
|                                                                                   |       |       |       |                      |       |                   |       |       |       |
| System operations (excluding  Depreciation, amortization and accretion reported below) |       | 191,016    |       | 23,732                    |       | 14.2                   | %          | 167,284    |       |
| Cost of equipment sold                                                                 |       | 174,037    |       | 23,293                    |       | 15.5                   | %          | 150,744    |       |
| Selling, general and  administrative                                                   |       | 407,634    |       | 48,768                    |       | 13.6                   | %          | 358,866    |       |
| Depreciation, amortization and  accretion                                              |       | 142,530    |       | (3,422                    | )          | (2.3                   | )%         | 145,952    |       |
| Loss on asset disposals, net                                                           |       | 3,673      |       | 368                       |       | 11.1                   | %          | 3,305      |       |
| Total Operating Expenses                                                               |       | 918,890    |       | 92,739                    |       | 11.2                   | %          | 826,151    |       |
| Total Operating Income                                                                 |       | $          | 118,966    |                      | $          | 10,443                 |       | 9.6        | %          | $ | 108,523 |   |
| Operating Income Margin (as a  percent of service revenues)                            |       | 12.4       | %          |                      |       |                   |       | 12.6       | %          |

 

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**Operating Revenues**

 

***Service revenues***

 

Servicerevenues primarily consist of: (i) charges for access, airtime, roaming,recovery of regulatory costs and value-added services, including data productsand services, provided to U.S. Cellular’s retail customers and to end usersthrough third party resellers (“retail service”); (ii) charges to otherwireless carriers whose customers use U.S. Cellular’s wireless systems whenroaming (“inbound roaming”); (iii) charges for long-distance calls made onU.S. Cellular’s systems; and (iv) amounts received from the USF.

 

Theincrease in service revenues was due to the growth in the average customerbase, which increased 5% to 6.2 million in 2008 from 5.9 million in2007 and higher monthly service revenue per customer; monthly service revenueper customer averaged $52.06 in the first three months of 2008 and $48.69 inthe first three months of 2007.

 

***Retail service revenues***

 

Theincrease in retail service revenues in 2008 was due primarily to growth in U.S.Cellular’s average customer base and an increase in average monthly retailrevenue per customer.

 

Theincrease in the average number of customers each year was primarily driven bythe net retail customer additions that U.S. Cellular generated from itsmarketing distribution channels. The average number of customers also wasaffected by the timing of acquisitions, divestitures and exchanges.

 

U.S.Cellular anticipates that its customer base will increase during 2008 as aresult of its continuing focus on customer satisfaction, attractively pricedservice plans, a broader line of handsets and other products, and improvementsin distribution. U.S. Cellular believes growth in its customer base will beprimarily from capturing wireless users switching from other wireless carriersor increasing the number of multi-device users rather than by adding users thatare new to the industry. However, the level of growth in the customer base for2008 will depend upon U.S. Cellular’s ability to attract new customers andretain existing customers in a highly, and increasingly, competitivemarketplace. See “Overview - 2008 Estimates” above for U.S. Cellular’s estimateof net retail customer additions for 2008.

 

Theincrease in average monthly retail service revenue was driven primarily bygrowth in revenues from data services and higher regulatory fees such asuniversal service fund contributions that are billed to customers. Averagemonthly retail service revenues per customer increased 6% to $45.14 in 2008from $42.69 in 2007.

 

Monthlylocal retail minutes of use per customer averaged 948 in 2008 and 783 in 2007.The increase in 2008 was primarily driven by U.S. Cellular’s focus on designingsales incentive programs and customer billing rate plans to stimulate overallusage. The impact on retail service revenues of the increase in average monthlyminutes of use was offset by a decrease in average revenue per minute of use.The decrease in average revenue per minute of use reflects the impact ofincreasing competition, which has led to the inclusion of an increasing numberof minutes in package pricing plans and the inclusion of features such asunlimited night and weekend minutes and unlimited mobile-to-mobile minutes incertain pricing plans. U.S. Cellular anticipates that its average revenue perminute of use may continue to decline in the future, reflecting increasedcompetition and continued penetration of the consumer market.

 

Revenuesfrom data products and services grew significantly year-over-year, totaling$115.7 million in 2008 and $77.5 million in 2007, and representing12% of total service revenues in 2008 compared to 9% of total service revenuesin 2007. Such growth, which positively impacted average monthly retail servicerevenues per customer, reflected customers’ continued increasing acceptance andusage of U.S. Cellular’s **easy**edgeSMproducts and offerings, such as Short Messaging Service (“SMS”) and Smartphonehandsets and service.

 

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***Inbound roaming revenues***

 

Theincrease in inbound roaming revenues in 2008 was related primarily to anincrease in roaming minutes of use. The increase in inbound roaming minutes ofuse was driven primarily by the overall growth in the number of customers andretail minutes of use per customer throughout the wireless industry, includingusage related to data products, leading to an increase in inbound traffic fromother wireless carriers.

 

U.S.Cellular anticipates that inbound roaming minutes of use might continue to growover the next few years, reflecting continuing industry-wide growth incustomers and usage per customer, including increased usage of data serviceswhile roaming, but that the rate of growth will decline due to higherpenetration, slower overall growth in the consumer wireless market and theconsolidation of wireless carriers. U.S. Cellular anticipates that its roamingrevenue per minute of use will remain fairly constant over the next few yearspursuant to its existing contract rates, but that renewal of these contractsand the negotiation of new contracts will reflect lower rates over time.

 

***Long-distance and other revenues***

 

In2008, the increase reflected a $9.3 million increase in other revenues,partially offset by a $0.4 million decrease in long-distance revenues.  The growth in other revenues was dueprimarily to an increase in ETC funds that were received from the USF. In 2008and 2007, U.S. Cellular was eligible to receive ETC funds in eleven and sevenstates, respectively; the ETC revenue amounts recorded in 2008 and 2007 were$30.5 million and $22.5 million, respectively.

 

***Equipment sales revenues***

 

Equipmentsales revenues include revenues from sales of handsets and related accessoriesto both new and existing customers, as well as revenues from sales of handsetsto agents. All equipment sales revenues are recorded net of anticipatedrebates.

 

U.S.Cellular continues to offer a competitive line of quality handsets to both newand existing customers. U.S. Cellular’s customer retention efforts includeoffering new handsets at discounted prices to existing customers as theexpiration date of the customer’s service contract approaches. U.S. Cellularalso continues to sell handsets to agents; this practice enables U.S. Cellularto provide better control over the quality of handsets sold to its customers,establish roaming preferences and earn quantity discounts from handsetmanufacturers which are passed along to agents. U.S. Cellular anticipates thatit will continue to sell handsets to agents in the future.

 

Theincrease in 2008 equipment sales revenues was driven by an increase of 3% inaverage revenue per handset sold, primarily reflecting the sale of more expensivehandsets with expanded capabilities.

 

**Operating Expenses**

 

***System operations expenses(excluding Depreciation, amortization, and accretion)***

 

Systemoperations expenses (excluding Depreciation, amortization, and accretion)include charges from wireline telecommunications service providers for U.S.Cellular’s customers’ use of their facilities, costs related to localinterconnection to the wireline network, charges for maintenance of U.S.Cellular’s network, long-distance charges, outbound roaming expenses andpayments to third-party data product and platform developers. Key components ofthe overall increases in system operations expenses were as follows:

 

·                  maintenance, utility and cell site expensesincreased $12.1 million, or 18%, in 2008, primarily driven by increases inthe number of cell sites within U.S. Cellular’s network, resulting in highercell site rent expense, and software maintenance costs to support rapidlygrowing data needs. The number of cell sites totaled 6,452 in 2008 and 6,004 in2007, as U.S. Cellular continued to grow by expanding and enhancing coverage inits existing markets and also through acquisitions of existing wireless operations;

 

·                  expenses incurred when U.S. Cellular’scustomers used other carriers’ networks while roaming increased$8.1 million, or 22%, in 2008. The increase is due to an increase inroaming minutes of use driven by customer migration to national and wide areaplans; and

 

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·                  the cost of network usage on U.S. Cellular’ssystems increased $3.6 million, or 6%, in 2008, as total minutes used on U.S.Cellular’s systems increased 23% in 2008, primarily driven by continuedmigration to pricing plans with a larger number of packaged minutes, mostlyoffset by the ongoing reduction in the per-minute cost of usage for U.S.Cellular’s network. In addition, data network and developer costs increaseddriven by the increase in data usage.

 

Managementexpects total system operations expenses to increase over the next few years,driven by the following factors:

 

·                  increases in the number of cell sites andother network facilities within U.S. Cellular’s systems as it continues to addcapacity and enhance quality in most markets and continues developmentactivities in recently launched markets; and

 

·                  increases in minutes of use, both on U.S.Cellular’s network and by U.S. Cellular’s customers on other carriers’ networkswhen roaming.

 

Thesefactors are expected to be partially offset by anticipated decreases in theper-minute cost of usage both on U.S. Cellular’s network and on other carriers’networks.

 

***Cost of equipment sold***

 

Theincrease in Cost of equipment sold was due primarily to a 16% increase in theaverage cost per handset due to a shift to the sale of more expensive handsetswith expanded capabilities.  U.S.Cellular believes that the expanded capabilities will drive increases in datarevenues.

 

***Selling, general and administrativeexpenses***

 

Selling,general and administrative expenses primarily consist of salaries, commissionsand expenses of field sales and retail personnel and facilities; telesalesdepartment salaries and expenses; agent commissions and related expenses;corporate marketing and merchandise management; advertising; and publicrelations expenses. Selling, general and administrative expenses also includethe costs of operating U.S. Cellular’s customer care centers and the majorityof U.S. Cellular’s corporate expenses.

 

Theincrease in selling, general and administrative expenses in 2008 was dueprimarily to higher expenses associated with acquiring, serving and retainingcustomers, driven in part by an increase in U.S. Cellular’s customer base in2008; increased regulatory charges and taxes also are a factor. Key componentsof the increases in selling, general and administrative expenses were asfollows:

 

·                  advertising expenses increased$15.7 million, or 38%, in 2008, primarily due to an increase in mediapurchases;

 

·                  other selling and marketing expensesincreased $8.9 million, or 7%, in 2008, reflecting more retail salesassociates, higher commissions due to a greater number of customer renewaltransactions and higher retail facility expenses; and

 

·                  general and administrative expenses increased$24.2 million, or 13%, in 2008, due to increases related to bad debts expense,reflecting both higher revenues and slightly higher bad debts experience as apercent of revenues, federal universal service fund contributions and otherregulatory fees and taxes due to an increase in the contribution rate and anincrease in service revenues, and increases in expenses related to theoperations of U.S. Cellular’s regional support offices, primarily due to theincrease in the customer base.

 

***Depreciation expense***

 

Depreciationexpense was relatively flat compared to the prior year.

 

See “Financial Resources” and “Liquidity andCapital Resources” for further discussions of U.S. Cellular’s capitalexpenditures.

 

25

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***Amortization and accretion expenses***

 

Amortizationexpense decreased $3.3 million in 2008, primarily due to a customer listbecoming fully amortized in April 2007.

 

Inaccordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations* (“SFAS 143”), U.S. Cellularaccretes liabilities for future remediation obligations associated with leasedproperties. Such accretion expense totaled $2.3 million in 2008 and 2007,respectively.

 

***Loss on asset disposals, net***

 

Theseamounts represent charges related to disposals of assets, trade-ins of olderassets for replacement assets and other retirements of assets from service.

 

**Components of Other Income and (Expenses)**

 
| ** **                                           | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|------------|------------|
| **Three Months Ended March 31,** | ** ** | **2008**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** | **2007**   | ** ** |
| **(Dollars in thousands)**                 | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** |
|                                                 |       |       |       |           |       |           |       |       |       |   |   |   |
| Total Operating Income                               |       | $          | 118,966    |           | $          | 10,443         |       | 9.6        | %          | $ | 108,523 |   |
|                                                 |       |       |       |           |       |           |       |       |       |
| Equity in earnings from  unconsolidated entities     |       | 21,235     |       | (1,863         | )          | (8.1           | )%         | 23,098     |       |
| Interest and dividend Income                         |       | 1,905      |       | (645           | )          | (25.3          | )%         | 2,550      |       |
| Fair value adjustment of  derivative instruments     |       | —     |       | (12,461        | )          | (100.0         | )%         | 12,461     |       |
| Interest expense                                     |       | (20,115    | )          | 3,569          |       | (15.1          | )%         | (23,684    | )          |
| Other, net                                           |       | 118        |       | 703            |       | N/M            |       | (585       | )          |
| Income Taxes                                         |       | 47,540     |       | 3,652          |       | 8.3            | %          | 43,888     |       |
| Minority share of income, net  of tax                |       | (4,012     | )          | 62             |       | (1.5           | )%         | (4,074     | )          |
| Net Income                                           |       | $          | 70,557     |           | $          | (3,844         | )     | (5.2       | )%         | $ | 74,401 |   |
|                                                 |       |       |       |           |       |           |       |       |       |
| Basic Earnings per Share                             |       | $          | $0.81      |           | $          | (0.04          | )          | (4.7       | )%         | $ | 0.85 |   |
| Diluted Earnings per Share                           |       | $          | $0.80      |           | $          | (0.04          | )          | (4.8       | )%         | $ | 0.84 |   |

 

N/M = Not Meaningful

 

***Equity in earningsfrom unconsolidated entities***

 

Equity in earnings from unconsolidated entities represents U.S.Cellular’s share of net income from the markets in which it has a minorityinterest and follows the equity method of accounting. U.S. Cellular follows theequity method of accounting for minority interests in which its ownershipinterest equals or exceeds 20% for corporations and 3% for partnerships andlimited liability companies. Equity in earnings from unconsolidated entitiesdecreased in 2008 primarily due to a $2.2 million decrease in income fromU.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (“LAPartnership”).

 

U.S. Cellular’s investment in the LA Partnership contributed$15.8 million and $18.0 million to equity in earnings fromunconsolidated entities in 2008 and 2007, respectively.

 

***Interest anddividend income***

 

The decreasein interest and dividend income in 2008 is primarily due to a lower interestrate paid on cash balances in 2008 than 2007. This was due to both adecline in short-term interest rates in the first quarter of 2008 compared tothe first quarter of 2007, and a change in U.S. Cellular’s cash investmentsduring each quarter.  During the firstquarter of 2008, U.S. Cellular invested substantially all of its cash balancesin money market funds that invested exclusively in short-term U.S. Treasurysecurities.  During the first quarter of2007, U.S. Cellular invested substantially all of its cash balances in primemoney market funds.

 

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***Fair value adjustment ofderivative instruments***

 

Fair value adjustment of derivative instruments in 2007 reflected thechange in the fair value of the bifurcated embedded collars within the variableprepaid forward contracts related to the Vodafone Group Plc American DepositaryReceipts (“ADRs”) not designated as a hedge. U.S. Cellular settled the forward contracts related to the Vodafone ADRsand sold the remaining ADRs in May 2007.

 

***Interest Expense***

 

The decrease in interest expense in 2008 was primarily due to U.S.Cellular settling its variable prepaid forward contracts and paying down itsoutstanding revolving credit facility balance in May 2007.

 

***Income Taxes***

 

The overall effective tax rate on incomebefore income taxes and minority interest for the three months ended March 31,2008 and 2007 was 38.9% and 35.9%, respectively. The effective tax rate for the2007 period reflected lower state income tax rates.

 

TDS and U.S. Cellular are parties to a Tax Allocation Agreement,pursuant to which U.S. Cellular and its subsidiaries are included in aconsolidated federal income tax return and in state income or franchise taxreturns in certain situations with other members of the TDS consolidatedgroup.  For financial statement purposes,U.S. Cellular and its subsidiaries compute their income, income taxes andcredits as if they comprised a separate affiliated group and were not includedin the TDS group.

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”).SFAS 157 defines fair value as used in numerous accounting pronouncements,establishes a framework for measuring fair value in U.S. GAAP, and expandsdisclosures related to the use of fair value measures in financial statements.SFAS 157 does not expand the use of fair value measurements in financialstatements, but standardizes its definition and guidance in U.S. GAAP.SFAS 157 emphasizes that fair value is a market-based measurement and notan entity-specific measurement, based on an exchange transaction in which theentity sells an asset or transfers a liability (exit price). SFAS 157establishes a fair value hierarchy from observable market data as the highestlevel to an entity’s own fair value assumptions about market participantassumptions as the lowest level. In February 2008, the FASB issued FSPFAS 157-2, to defer the effective date of SFAS 157 for allnonfinancial assets and liabilities, except those items recognized or disclosedat fair value on an annual or more frequently recurring basis, until yearsbeginning after November 15, 2008. U.S. Cellular adopted SFAS 157 for itsfinancial assets and liabilities effective January 1, 2008 (See Note 5 -Fair Value Measurements in the Notes to the Consolidated Financial Statementsfor more information related to U.S. Cellular’s adoption of SFAS 157 for itsfinancial assets and liabilities). U.S. Cellular is currently reviewing theadoption requirements related to its nonfinancial assets and liabilities andhas not yet determined the impact, if any, on its financial position or resultsof operations.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), *Business Combinations—a replacementof FASB Statement No. 141* (“SFAS 141(R)”). SFAS 141(R) replacesFASB Statement No. 141, *BusinessCombinations* (“SFAS 141”). SFAS 141(R) retains theunderlying concept of SFAS 141 in that all business combinations are stillrequired to be accounted for at fair value under the acquisition method, amethod that requires the acquirer to measure and recognize the acquiree on anentire entity basis and recognize the assets acquired and liabilities assumedat their fair values as of the date of acquisition. However, SFAS 141(R) changesthe method of applying the acquisition method in a number of significantaspects, such as requiring the expensing of transaction costs previouslycapitalized and requiring the accrual at fair value of certain contractual andnoncontractual contingencies.  SFAS 141(R) iseffective on a prospective basis for all business combinations for which theacquisition date is on or after January 1, 2009, with the exception of theaccounting for valuation allowances on deferred taxes and acquired taxcontingencies.  SFAS 141(R) amendsSFAS No. 109, *Accounting for IncomeTaxes*, such that adjustments made to valuation allowances ondeferred taxes and acquired tax contingencies associated with acquisitions thatclosed prior to the effective date of SFAS 141(R) would also applythe provisions of SFAS 141(R). U.S. Cellular is currently reviewing therequirements of SFAS 141(R) and has not yet determined the impact, ifany, on its financial position or results of operations.

 

In December 2007, the FASB issued SFAS No.160, *Consolidated Financial Statements, IncludingAccounting and Reporting of Noncontrolling Interests in Subsidiaries—areplacement of ARB No. 51* (“SFAS 160”). SFAS 160amends Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, as amended by FASB StatementNo. 94, *Consolidation of AllMajority-Owned Subsidiaries,* to establish new standards that willgovern the accounting and reporting of (1) noncontrolling interests(commonly referred to as minority interests) in partially owned consolidatedsubsidiaries and (2) the loss of control of subsidiaries. It alsoestablishes that once control of a subsidiary is obtained, changes in ownershipinterests in that subsidiary that do not result in a loss of control shall beaccounted for as equity transactions, not as step acquisitions under SFAS 141.SFAS 160 is effective on a prospective basis for U.S. Cellular’s 2009financial statements, except for the presentation and disclosure requirements,which will be applied retrospectively. U.S. Cellular is currently reviewing therequirements of SFAS 160 and has not yet determined the impact, if any, onits financial position or results of operations.

 

In March 2008, the FASB issued SFAS No.161, *Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133* (“SFAS 161”). SFAS 161 expands thedisclosure requirements for derivative instruments and hedging activities. TheStatement specifically requires entities to provide enhanced disclosuresaddressing the following (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under Statement 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. SFAS 161 is effective for U.SCellular’s 2009 financial statements. However, U.S. Cellular currently does nothave any derivative instruments and, therefore, U.S. Cellular does not expectSFAS 161 to have an impact on its disclosures.

 

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InApril 2008, the FASB issued FSP FAS 142-3, *Determinationof the Useful Life of Intangible Assets* (“FSP FAS 142-3”). FSP FAS142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under SFAS No. 142, *Goodwill and OtherIntangible Assets* (“SFAS 142”). The intent of FSP FAS 142-3 is toimprove the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under SFAS 141(R) and other applicable accountingliterature. FSP FAS 142-3 is effective for U.S. Cellular’s 2009 financialstatements. U.S. Cellular does not anticipate that the adoption of FSP FAS142-3 will have an impact on its financial position or results of operations.

 

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**FINANCIAL RESOURCES**

 

U.S. Cellularoperates a capital- and marketing-intensive business. In recent years, U.S.Cellular has generated cash from its operating activities, received cashproceeds from divestitures, used short-term credit facilities and usedlong-term debt financing to fund its acquisitions including licenses,construction costs and operating expenses. U.S. Cellular anticipates further increases in wireless customers,revenues, operating expenses, cash flows from operating activities and capitalexpenditures in the future.  Cash flowsmay fluctuate from quarter to quarter and year to year due to seasonality, thetiming of acquisitions, capital expenditures and other factors.  The following table provides a summary ofU.S. Cellular’s cash flow activities for the periods shown:

 
| ** **                                 | ** ** | **Three Months Ended**     | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **March 31,**                   | ** ** |
| ** **                                 | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from (used in)                  |       |                                 |       |   |   |
| Operating activities                       |       | $                                    | 229,797    |   | $ | 255,066 |   |
| Investing activities                       |       | (206,613                             | )          | (127,025 | ) |
| Financing activities                       |       | (11,242                              | )          | 28,903 |   |
| Net increase in cash and cash  equivalents |       | $                                    | 11,942     |   | $ | 156,944 |   |

 

**Cash Flows from Operating Activities**

 

Excludingchanges in assets and liabilities from operations, cash flows from operatingactivities totaled $241.8 million in 2008 and $208.2 million in 2007.  Changes in assets and liabilities fromoperations required $12.0 million in 2008 and provided $46.9 million in2007.  In 2008, an increase in accruedtaxes ($32.9 million) was more than offset by changes in other working capitalaccounts, primarily inventory and accrued compensation; in 2007, an increase inaccrued taxes ($47.2 million) was partially offset by changes in other workingcapital accounts.

 

The followingtable is a summary of the components of cash flows from operating activities:

 
| ** **                                                                        | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**                   | ** ** |
| ** **                                                                        | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
| Net income                                                                        |       | $                                    | 70,557     |   | $ | 74,401 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities |       | 171,253                              |       | 133,807 |   |
|                                                                              |       | $                                    | 241,810    |   | $ | 208,208 |   |
| Changes in assets and liabilities                                                 |       | (12,013                              | )          | 46,858 |   |
|                                                                              |       | $                                    | 229,797    |   | $ | 255,066 |   |

 

**Cash Flows from Investing Activities**

 

U.S. Cellularmakes substantial investments each year to construct and upgrade modern highquality wireless communications networks and facilities as a basis for creatinglong term value for shareholders. In recent years, rapid changes in technologyand new opportunities have required substantial investments inrevenue-enhancing and cost reducing upgrades of U.S. Cellular’s networks. Cashflows used for investing activities also represent cash required for theacquisition of wireless properties or spectrum. Proceeds from exchanges anddivestiture transactions have provided funds in recent years which havepartially offset the cash requirements for investing activities; however, suchsources cannot be relied upon to provide continuing or regular sources offinancing.

 

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The primary purpose of U.S. Cellular’s construction and expansionexpenditures is to provide for customer growth, to upgrade service, launch newmarket areas, and to take advantage of service-enhancing and cost-reducingtechnological developments in order to maintain competitive services.

 

Cash used for property, plant and equipment (“PP&E”) and systemdevelopment expenditures totaled $111.7 million in 2008 and $109.7 millionin 2007. These expenditures were financed primarily with internally generatedcash and borrowings under U.S. Cellular’s revolving credit facility. Theseexpenditures were made to fund construction of new cell sites, increasecapacity in existing cell sites and switches, remodel new and existing retailstores and open new stores, and develop office systems.

 

Cash required for acquisitions totaled $102.0 million in 2008 and$18.2 million in 2007.  The cashrequired for acquisitions in 2008 included primarily the capital contributionof $97.0 million to King Street Wireless and its general partner, which wasused to pay the FCC an initial deposit of $97.0 million to allow it to participatein Auction 73.  See Note 3 -Acquisitions, Divestitures and Exchanges in the Notes to the ConsolidatedFinancial Statements for details of this transaction.

 

**Cash Flows from Financing Activities**

 

Cash flows from financing activities primarily reflect changes inshort-term debt balances, proceeds from the sale of long-term debt, cash usedfor the repayment of long-term notes and the repurchase and conversion oflong-term debt securities, cash used to repurchase Common Shares and cashproceeds from re-issuance of Common Shares pursuant to stock-based compensationplans.

 

U.S. Cellular has used short-term debt to finance acquisitions, forgeneral corporate purposes and to repurchase Common Shares. Internallygenerated funds as well as proceeds from forward contracts and the sale ofnon-strategic cellular and other investments, from time to time, have been usedto reduce short-term debt. In addition, U.S. Cellular has taken advantage ofopportunities to reduce short-term debt with proceeds from the sale oflong-term debt securities.

 

There were no short-term borrowings under U.S. Cellular’s revolvingcredit facility in the first quarter of 2008. Borrowings totaled $25.0 million in the first quarter of 2007.

 

The re-issuance of treasury shares, net of tax payments, in connectionwith employee benefits plans required $2.5 million in 2008 and provided$5.6 million in 2007.  Excess taxbenefits from employee exercises of stock awards provided $0.8 million in2008 and $1.1 million in 2007.

 

In the three months ended March 31, 2008, U.S. Cellularrepurchased $10.8 million of Common Shares.  U.S. Cellular did not repurchase any sharesin the first quarter of 2007.  U.S.Cellular also received $4.6 million in 2008 from an investment banking firm forthe final settlement of the accelerated share repurchases made in 2007.  See Note 13 - Common Share Repurchases in theNotes to the Consolidated Financial Statements.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

U.S. Cellular believes thatcash flows from operating activities, existing cash balances and fundsavailable from lines of credit arrangements provide substantial financialflexibility for U.S. Cellular to meet both its short- and long-term needs. U.S.Cellular also may have access to public and private capital markets to helpmeet its long-term financing needs.

 

However, the availability ofexternal financial resources is dependent on economic events, businessdevelopments, technological changes, financial conditions or other factors,some of which are not in U.S. Cellular’s control. U.S. Cellular cannot provideassurances that circumstances that could have a material adverse affect on U.S.Cellular’s liquidity or capital resources will not occur. Economic downturns,changes in financial markets or other factors could affect U.S. Cellular’sliquidity and the availability of capital. Uncertainty of access to capital fortelecommunications companies, deterioration in the capital markets, otherchanges in market conditions or other factors could limit or restrict theavailability of financing on terms and prices acceptable to U.S. Cellular,which could require U.S. Cellular to reduce its construction, development,acquisition and Common Share repurchase programs. Any such reductions couldhave a material adverse effect on U.S. Cellular’s business, financial conditionor results of operations.

 

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**Cash and Cash Equivalents**

 

At March 31, 2008, U.S.Cellular had $216.5 million in cash and cash equivalents, which include cashand short-term, highly liquid investments with original maturities of threemonths or less. The primary objective of U.S. Cellular’s cash and cashequivalents investment activities is to preserve principal.  At March 31, 2008, U.S. Cellularinvested substantially all of its cash balances in money market funds thatinvested exclusively in short-term U.S. Treasury securities. Managementbelieves that the credit risk associated with these investments is minimal.

 

**Revolving Credit Facility**

 

U.S. Cellular has a$700 million revolving credit facility available for general corporatepurposes. At March 31, 2008, outstanding letters of credit were$0.2 million, leaving $699.8 million available for use. Borrowingsunder the revolving credit facility bear interest at the London InterBankOffered Rate (“LIBOR”) plus a contractual spread based on U.S. Cellular’scredit rating. U.S. Cellular may select borrowing periods of either seven daysor one, two, three or six months. At March 31, 2008, the one-month LIBORwas 2.70% and the contractual spread was 75 basis points. If U.S. Cellularprovides less than two days’ notice of intent to borrow, the related borrowingsbear interest at the prime rate less 50 basis points (the prime rate was 5.25%at March 31, 2008). This credit facility expires in December 2009.

 

On April 15, 2008, U.S.Cellular borrowed $100 million under its revolving credit facility.  These proceeds along with additional cash onhand of $103.5 million were contributed to King Street Wireless and its generalpartner.  King Street Wireless in turnpaid $203.5 million to the FCC in order to fulfill its remaining obligationincurred upon the purchase of licenses in Auction 73.  See Note 3 - Acquisitions, Divestitures andExchanges in the Notes to the Consolidated Financial Statements for moreinformation on Auction 73.  U.S. Cellularis a limited partner of King Street Wireless and consolidates this entitypursuant to the provisions of FASB Interpretation No. 46(R), *Consolidation of Variable Interest Entities, an interpretation of ARB No. 51*(“FIN 46(R)”).  See Note 4 -Variable Interest Entities in the Notes to the Consolidated FinancialStatements for more information on King Street Wireless.  U.S. Cellular anticipates repaying the amountborrowed from future cash flows from operations and/or long-term debtfinancing.

 

U.S. Cellular’s interestcost on its revolving credit facility would increase if its current creditrating from Moody’s Investor Service (“Moody’s”) was lowered and decrease ifthe rating improved. However, the credit facility would not cease to beavailable or accelerate solely as a result of a decline in U.S. Cellular’scredit rating. A downgrade in U.S. Cellular’s credit rating could adverselyaffect its ability to renew existing, or obtain access to new, creditfacilities in the future. U.S. Cellular’s current credit ratings and the datessuch ratings were issued, were as follows:

 
| Moody’s (issued April 3, 2008)                     |   | Baa3 | - | under review for possible upgrade |
|--------------------------------------------------------------|--------|------|---|-----------------------------------|
| Standard & Poor’s (issued March 13, 2008) |   | BBB- | - | with positive outlook             |
| Fitch Ratings (issued August 16, 2007)                  |   | BBB+ | - | stable outlook                    |

 

On April 3, 2008, Moody’schanged its outlook on U.S. Cellular’s credit rating to under review forpossible upgrade from stable.

 

On March 13, 2008, Standard &Poor’s upgraded its credit rating on U.S. Cellular to BBB- with positiveoutlook from BB+ with developing outlook.

 

On August 16, 2007,Fitch Ratings changed its outlook on U.S. Cellular’s credit rating to stablefrom ratings watch negative.

 

The maturity date of anyborrowings under U.S. Cellular’s revolving credit facility would accelerate inthe event of a change in control.

 

The financial covenantsassociated with U.S. Cellular’s revolving credit facility require that U.S.Cellular maintain certain debt-to-capital and interest coverage ratios. Thecovenants also prescribe certain terms associated with intercompany loans fromTDS or TDS subsidiaries to U.S. Cellular or U.S. Cellular subsidiaries.

 

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The continued availabilityof the revolving credit facility requires U.S. Cellular to comply with certainnegative and affirmative covenants, maintain certain financial ratios and makerepresentations regarding certain matters at the time of each borrowing. U.S.Cellular believes it was in compliance as of March 31, 2008 with allcovenants and other requirements set forth in its revolving credit facility.

 

**Long-Term Financing**

 

U.S. Cellular’s long-termdebt indenture does not contain any provisions resulting in acceleration of thematurities of outstanding debt in the event of a change in U.S. Cellular’scredit rating. However, a downgrade in U.S. Cellular’s credit rating couldadversely affect its ability to obtain long-term debt financing in thefuture.  U.S. Cellular believes it was incompliance as of March 31, 2008 with all covenants and other requirementsset forth in its long-term debt indenture.

 

U.S. Cellular expects tofile a shelf registration statement on Form S-3 with the Securities andExchange Commission (“SEC”) in May 2008, shortly after the filing of thisQuarterly Report on Form 10-Q. Because U.S. Cellular is a “well-known seasoned issuer” as defined in Rule 405under the Securities Act of 1933, as amended, such registration statement willbecome automatically effective upon filing with the SEC and will register anindeterminate amount of debt securities. Under such automatic shelf registration statement, U.S. Cellular will bepermitted, at any time and from time to time, to sell senior debt securities inone or more offerings in an indeterminate amount.  U.S. Cellular does not have any set timeframe for issuing any specific amount of debt securities under suchregistration statement at the present time. U.S. Cellular’s ability to complete an offering pursuant to such shelfregistration statement will be dependent on market conditions and other factorsat the time.

 

**Marketable Equity Securities**

 

U.S. Cellular holds RuralCellular Corporation (“RCCC”) Common Shares. RCCC is publicly traded and has readily available quoted market prices.The current investment in RCCC is the result of a consolidation of severalcellular partnerships in which U.S. Cellular subsidiaries held interests inRCCC, and the distribution of RCCC stock in exchange for these interests. At March 31,2008 and 2007, U.S. Cellular owned 370,882 Common Shares of RCCC. On July 30,2007, RCCC announced that Verizon Wireless agreed to purchase the outstandingshares of RCCC for $45 per share in cash. The acquisition is expected to closein 2008 and, therefore, the investment is classified as a Current Asset in U.S.Cellular’s Consolidated Balance Sheet as of March 31, 2008. If thetransaction closes, U.S. Cellular will receive approximately $16.7 millionin cash, recognize a $16.4 million pre-tax gain and cease to own anyinterest in RCCC.

 

**Capital Expenditures**

 

U.S. Cellular’s estimatedcapital expenditures for 2008 are approximately $565 - $615 million. Theseexpenditures primarily address the following needs:

 

·                  expand and enhance U.S.Cellular’s coverage in its service areas;

 

·                  provide additionalcapacity to accommodate increased network usage by current customers; and

 

·                  enhance U.S. Cellular’sretail store network and office systems.

 

U.S. Cellular plans tofinance its capital expenditures program using cash on hand, cash flows fromoperating activities and short-term debt.

 

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**Acquisitions, Divestitures and Exchanges**

 

U.S. Cellular assesses itsexisting wireless interests on an ongoing basis with a goal of improving thecompetitiveness of its operations and maximizing its long-term return oninvestment. As part of this strategy, U.S. Cellular reviews attractiveopportunities to acquire additional operating markets and wireless spectrum. Inaddition, U.S. Cellular may seek to divest outright or include in exchanges forother wireless interests those markets and wireless interests that are notstrategic to its long-term success. U.S. Cellular from time to time maybe engaged in negotiations relating to the acquisition, divestiture or exchangeof companies, strategic properties or wireless spectrum.  In general, U.S. Cellular may not disclosesuch transactions until there is a definitive agreement.

 

SeeNote 3 - Acquisitions, Divestitures and Exchanges in the Notes to theConsolidated Financial Statements for details on 2008 transactions.

 

**Variable Interest Entities**

 

U.S. Cellular consolidatescertain variable interest entities pursuant to FIN 46(R).  See Note 4 - Variable Interest Entities in the Notes to the ConsolidatedFinancial Statements for the details of these variable interest entities.  U.S. Cellular may elect to make additionalcapital contributions and/or advances to these variable interest entities infuture periods in order to fund their operations.

 

**Common Share Repurchases**

 

U.S. Cellular has andexpects to continue to repurchase its Common Shares subject to the repurchaseprogram.  For details of the repurchase program and repurchases during thethree months ended March 31, 2008, see Note 13 - Common Share Repurchases in the Notes to the ConsolidatedFinancial Statements.

 

**Contractual and Other Obligations**

 

TheContractual and Other Obligations disclosed in Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in U.S.Cellular’s Form 10-K for the year ended December 31, 2007,did not include any liabilities related to unrecognized tax benefits under FASBInterpretation 48, *Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109*(“FIN48”).  U.S. Cellular is unable to predictthe period of settlement of such FIN 48 liabilities.  Subject to the foregoing, there has been nomaterial change to Contractual and Other Obligations or FIN 48 liabilitiesbetween December 31, 2007and March 31, 2008, except as follows:

 

As disclosedin Note 3 -Acquisitions, Divestitures and Exchanges in the Notes to the ConsolidatedFinancial Statements, on March 20, 2008, the FCC announced that KingStreet Wireless was the provisional winning bidder for 152 licenses for anaggregate bid of $300.5 million, net of its designated entity discount of25%.  As disclosed in Note 4 - Variable Interest Entities in the Notesto the Consolidated Financial Statements, U.S. Cellular consolidates KingStreet Wireless and its general partner pursuant to FIN 46(R).  King Street Wireless’ bid amount, less theinitial deposit, was paid to the FCC in April 2008.  In January 2008, U.S. Cellular madecapital contributions and advances to King Street Wireless and its generalpartner of $97.0 million, which were used by King Street Wireless to pay theFCC an initial deposit of $97.0 million to allow it to participate in Auction73.  Also, during April 2008, U.S. Cellular made additional capitalcontributions and advances to King Street Wireless and its general partner of$203.5 million in cash and King Street Wireless then paid this amount to theFCC in April 2008 to fulfill its remaining obligation ($300.5 millionaggregate bid less $97.0 million deposit) for the licenses for which it was theprovisional winning bidder in the auction.

 

**Off-Balance Sheet Arrangements**

 

U.S. Cellular has no transactions, agreements or other contractualarrangements with unconsolidated entities involving “off-balance sheetarrangements,” as defined by SEC rules, that have or are reasonably likely tohave a material current or future effect on financial condition, changes infinancial condition, results of operations, cash flows from operatingactivities, liquidity, capital resources or financial flexibility.

 

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Investments in Unconsolidated Entities. U.S.Cellular has certain investments in unconsolidated entities that representvariable interests. The investments in unconsolidated entities total $172.6million as of March 31, 2008 and are accounted for using either the equityor cost method. U.S. Cellular’s maximum accounting loss exposure for thesevariable interests is limited to the aggregate carrying amount of theinvestments.

 

Indemnity Agreements. U.S. Cellular entersinto agreements in the normal course of business that provide forindemnification of counterparties. These agreements include certain asset salesand financings with other parties. The terms of the indemnification vary byagreement. The events or circumstances that would require U.S. Cellular toperform under these indemnities are transaction specific; however, theseagreements may require U.S. Cellular to indemnify the counterparty for costsand losses incurred from litigation or claims arising from the underlyingtransaction. U.S. Cellular is unable to estimate the maximum potentialliability for these types of indemnifications as the amounts are dependent onthe outcome of future events, the nature and likelihood of which cannot bedetermined at this time. Accordingly, no amounts have been recorded in thefinancial statements related to such agreements. Historically, U.S. Cellularhas not made any significant indemnification payments under such agreements.

 

**APPLICATION OF CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

U.S.Cellular prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”).  U.S. Cellular’s significantaccounting policies are discussed in detail in Note 1 – Summary of SignificantAccounting Policies of the Notes to the Consolidated Financial Statements andU.S. Cellular’s Application of Critical Accounting Policies and Estimates isdiscussed in detail in Management’s Discussion and Analysis of FinancialCondition and Results of Operations, both included in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2007. There were no material changes toU.S. Cellular’s significant accounting policies or application of critical accountingpolicies during the first three months of 2008, except as discussed in Note 5 - Fair Value Measurements inthe Notes to the Consolidated Financial Statements included herein, related to the adoption of Statement ofFinancial Accounting Standards No. 157, *Fair ValueMeasurements*.

 

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***PRIVATE SECURITIES LITIGATION REFORM ACTOF 1995***

***SAFEHARBOR CAUTIONARY STATEMENT***

 

This Form 10-Q,including exhibits, contains statements that are not based on historical factand represent forward-looking statements, as this term is defined in thePrivate Securities Litigation Reform Act of 1995.  All statements, otherthan statements of historical facts, that address activities, events ordevelopments that U.S. Cellular intends, expects, projects, believes,estimates, plans or anticipates will or may occur in the future areforward-looking statements.  The words “believes,” “anticipates,” “estimates,”“expects,” “plans,” “intends,” “projects” and similar expressions are intendedto identify these forward-looking statements, but are not the exclusive meansof identifying them. Such forward-looking statements involve known and unknownrisks, uncertainties and other factors that may cause actual results, events ordevelopments to be significantly different from any future results, events ordevelopments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include those set forth below, asmore fully discussed under “Risk Factors” in U.S. Cellular’s Form 10-K forthe year ended December 31, 2007.  However, such factors are notnecessarily all of the important factors that could cause actual results,performance or achievements to differ materially from those expressed in, orimplied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effectson future results, performance or achievements.  U.S. Cellular undertakesno obligation to update publicly any forward-looking statements whether as aresult of new information, future events or otherwise. You should carefullyconsider the Risk Factors in U.S. Cellular’s Form 10-K for the year ended December 31,2007, the following factors and other information contained in, or incorporatedby reference into, this Form 10-Q to understand the material risksrelating to U.S. Cellular’s business.

 

·                  *Intense competition in the marketsin which U.S. Cellular operates could adversely affect U.S. Cellular’srevenues or increase its costs to compete.*

 

·                  *A failure by U.S. Cellular’sservice offerings to meet customer expectations could limit U.S. Cellular’sability to attract and retain customers and could have an adverse effect onU.S. Cellular’s operations.*

 

·                  *U.S. Cellular’s systeminfrastructure may not be capable of supporting changes in technologies andservices expected by customers, which could result in lost customers andrevenues.*

 

·                  *An inability to obtain or maintainroaming arrangements with other carriers on terms that are acceptable toU.S. Cellular could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations. Such agreements covertraditional voice services as well as data services, which are an area ofstrong growth for U.S. Cellular and other carriers. U.S. Cellular’s rate ofadoption of new technologies, such as those enabling high-speed data services,could affect its ability to enter into or maintain roaming agreements withother carriers.*

 

·                  *Changes in access to content fordata or video services or access to new handsets being developed by vendors, oran inability to manage its supply chain or inventory successfully, could havean adverse effect on U.S. Cellular’s business, financial condition orresults of operations.*

 

·                  *A failure by U.S. Cellular’sbusiness to acquire adequate radio spectrum could have an adverse effect onU.S. Cellular’s business and operations.*

 

·                  *To the extent conducted by theFCC, U.S. Cellular is likely to participate in FCC auctions of additionalspectrum in the future and, during certain periods, will be subject to the FCC’santi-collusion rules, which could have an adverse effect on U.S. Cellular.*

 

·                  *An inability to attract and/orretain management, technical, sales and other personnel could have an adverseeffect on U.S. Cellular’s business, financial condition or results ofoperations.*

 

·                  *U.S. Cellular’s assets areconcentrated in the U.S. wireless telecommunications industry. As aresult, its results of operations may fluctuate based on factors relatedentirely to conditions in this industry.*

 

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·                  *Consolidation in thetelecommunications industry could adversely affect U.S. Cellular’srevenues and increase its costs of doing business.*

 

·                  *Changes in general economic andbusiness conditions, both nationally and in the markets in whichU.S. Cellular operates, could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations.*

 

·                  *Changes in various businessfactors could have an adverse effect on U.S. Cellular’s business,financial condition or results of operations. These factors include, but arenot limited to, demand for or usage of services; the pricing of services; theoverall size and growth rate of U.S. Cellular’s customer base; averagerevenue per unit; penetration rates; churn rates; selling expenses; netcustomer acquisition and retention costs; roaming rates; minutes of use; themix of products and services offered by U.S. Cellular and purchased bycustomers; and the costs of providing products and services.*

 

·                  *Advances or changes intelecommunications technology, such as Voice over Internet Protocol, WiMAX orLong-Term Evolution (LTE), could render certain technologies used by U.S. Cellularobsolete, could reduce U.S. Cellular’s revenues or could increase itscosts of doing business.*

 

·                  *Changes in U.S. Cellular’senterprise value, changes in the supply or demand of the market for wirelesslicenses, adverse developments in the business or the industry in whichU.S. Cellular is involved and/or other factors could requireU.S. Cellular to recognize impairments in the carrying value ofU.S. Cellular’s license costs, goodwill, customer lists and/or physicalassets.*

 

·                  *Costs, integration problems orother factors associated with acquisitions/divestitures of properties orlicenses and/or expansion of U.S. Cellular’s business could have anadverse effect on U.S. Cellular’s business, financial condition or resultsof operations.*

 

·                  *A significant portion ofU.S. Cellular’s revenues is derived from customers who buy servicesthrough independent agents and dealers who market U.S. Cellular’s serviceson a commission basis. If U.S. Cellular’s relationships with these agentsand dealers are seriously harmed, its revenues could be adversely affected.*

 

·                  *U.S. Cellular’s investmentsin technologies which are unproven or for which success has not yet beendemonstrated may not produce the benefits that U.S. Cellular expects.*

 

·                  *A failure by U.S. Cellular tocomplete significant network construction and system implementation as part ofits plans to improve the quality, coverage, capabilities and capacity of itsnetwork could have an adverse effect on its operations.*

 

·                  *Financial difficulties ofU.S. Cellular’s key suppliers or vendors, or termination or impairment ofU.S. Cellular’s relationships with such suppliers or vendors, could resultin a delay or termination of U.S. Cellular’s receipt of equipment,services or content which could adversely affect U.S. Cellular’s businessand results of operations.*

 

·                  *U.S. Cellular has significantinvestments in entities that it does not control. Losses in the value of suchinvestments could have an adverse effect on U.S. Cellular’s results ofoperations or financial condition.*

 

·                  *War, conflicts, hostilities and/orterrorist attacks or equipment failure, power outages, natural disasters orbreaches of network or information technology security could have an adverseeffect on U.S. Cellular’s business, financial condition or results ofoperations.*

 

·                  *The market price of U.S. Cellular’sCommon Shares is subject to fluctuations due to a variety of factors.*

 

·                  *Changes in guidance orinterpretations of accounting requirements, changes in industry practice,identification of errors or changes in management assumptions could requireamendments to or restatements of financial information or disclosures includedin this or prior filings with the SEC.*

 

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·                  *Restatements of financialstatements by U.S. Cellular and related matters, including resultingdelays in filing periodic reports with the SEC, could have an adverse effect onU.S. Cellular’s credit rating, liquidity, financing arrangements, capitalresources and ability to access the capital markets, including pursuant toshelf registration statements; could adversely affect U.S. Cellular’slisting arrangements on the American Stock Exchange and/or New York StockExchange; and/or could have other negative consequences, any of which couldhave an adverse effect on the trading prices of U.S. Cellular’s publiclytraded equity and/or debt and/or U.S. Cellular’s business, financialcondition or results of operations.*

 

·                  *The pending SEC investigationregarding the restatement of U.S. Cellular’s financial statements couldresult in substantial expenses, and could result in monetary or otherpenalties.*

 

·                  *Changes in facts or circumstances,including new or additional information that affects the calculation ofpotential liabilities for contingent obligations under guarantees, indemnitiesor otherwise, could require U.S. Cellular to record charges in excess ofamounts accrued in the financial statements, if any, which could have anadverse effect on U.S. Cellular’s financial condition or results ofoperations.*

 

·                  *A failure to successfully remediatethe existing material weakness in internal control over financial reporting ina timely manner or the identification of additional material weaknesses in theeffectiveness of internal control over financial reporting could result ininaccurate financial statements or other disclosures or fail to prevent fraud,which could have an adverse effect on U.S. Cellular’s business, financialcondition or results of operations.*

 

·                  *Early redemptions of debt orrepurchases of debt, issuances of debt, changes in operating leases, changes inpurchase obligations or other factors or developments could cause the amountsreported under Contractual Obligations in U.S. Cellular’s Management’sDiscussion and Analysis of Financial Condition and Results of Operations to bedifferent from the amounts actually incurred.*

 

·                  *An increase of U.S. Cellular’sdebt in the future could subject U.S. Cellular to various restrictions andhigher interest costs and decrease its cash flows and earnings.*

 

·                  *Uncertainty of access to capitalfor telecommunications companies, deterioration in the capital markets, otherchanges in market conditions, changes in U.S. Cellular’s credit ratings orother factors could limit or restrict the availability of financing on termsand prices acceptable to U.S. Cellular, which could requireU.S. Cellular to reduce its construction, development and acquisitionprograms.*

 

·                  *Changes in the regulatoryenvironment or a failure by U.S. Cellular to timely or fully comply withany regulatory requirements could adversely affect U.S. Cellular’sfinancial condition, results of operations or ability to do business.*

 

·                  *Changes in income tax rates, laws,regulations or rulings, or federal or state tax assessments could have anadverse effect on U.S. Cellular’s financial condition or results ofoperations.*

 

·                  *Settlements, judgments, restraintson its current or future manner of doing business or legal costs resulting frompending and future litigation could have an adverse effect onU.S. Cellular’s financial condition, results of operations or ability todo business.*

 

·                  *The possible development ofadverse precedent in litigation or conclusions in professional studies to theeffect that radio frequency emissions from handsets, wireless data devicesand/or cell sites cause harmful health consequences, including cancer ortumors, or may interfere with various electronic medical devices such aspacemakers, could have an adverse effect on U.S. Cellular’s business,financial condition or results of operations.*

 

·                  *There are potential conflicts ofinterests between TDS and U.S. Cellular.*

 

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·                  *Certain matters, such as controlby TDS and provisions in the U.S. Cellular restated certificate ofincorporation, may serve to discourage or make more difficult a change incontrol of U.S. Cellular.*

 

·                  *Any of the foregoing events orother events could cause revenues, customer additions, operating income,capital expenditures and/or any other financial or statistical information tovary from U.S. Cellular’s forward-looking estimates by a material amount.*

 

You are referred to a further discussionof these risks as set forth under “Risk Factors” in U.S. Cellular’s AnnualReport on Form 10-K for the year ended December 31, 2007.  U.S. Cellular undertakes no obligation toupdate publicly any forward-looking statements whether as a result of newinformation, future events or otherwise. Readers should evaluate any statements in light of these importantfactors.

 

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**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

**MARKETRISK**

 

**Long-termDebt**

 

As of March 31,2008, the majority of U.S. Cellular’s debt is in the form of long-term,fixed-rate notes with original maturities ranging up to 30 years. Fluctuationsin market interest rates can lead to fluctuations in the fair value of thesefixed-rate notes.

 

Refer to the disclosureunder Market Risk – Long Term Debt in U.S. Cellular’s Form 10-K for theyear ended December 31, 2007, for additional information regardingrequired principal payments and weighted average interest rates related to U.S.Cellular’s long-term debt.

 

**Marketable Equity Securities**

 

U.S. Cellularholds available-for-sale marketable equity securities. The market value ofthese investments aggregated $16.4 million at March 31, 2008 and$16.4 million at December 31, 2007. U.S. Cellular’s cumulativenet unrealized holding gain, net of tax, included in Accumulated othercomprehensive income was $10.2 million at March 31, 2008.

 

The followinganalysis presents the hypothetical change in the fair value ofU.S. Cellular’s marketable equity securities at March 31, 2008,assuming hypothetical price fluctuations of plus and minus 10%, 20% and 30%.

 
| ** **                          | ** ** | **March 31,**  | ** ** | **Valuation of investments**    | ** ** |
|-------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2008**            | ** ** | **assuming indicated increase** | ** ** |
| **(Dollars in millions)** | ** ** | **Fair Value** | ** ** | **10%**                                   | ** ** | **20%** |   | **30%** |   |
| Marketable Equity Securities        |       | $                   | 16.4       |                                      | $          | 18.0 |   | $ | 19.7 |   | $ | 21.3 |   |
|                                     |            |                     |            |                                           |            |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **March 31,  2008** | ** ** | **Valuation of investments  assuming indicated decrease** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                          | ** ** |
| **(Dollars in millions)** | ** ** | **Fair Value**      | ** ** | **-10%**                                                                      | ** ** | **-20%** | ** ** | **-30%** | ** ** |
| Marketable Equity Securities        |       | $                        | 16.4       |                                                                          | $          | 14.8 |   | $ | 13.1 |   | $ | 11.5 |   |
|                                     |            |                          |            |                                                                               |            |  |  |  |  |  |  |  |  |

 

The table above presents hypothetical information as required by SECrules. The marketable equity securities held at March 31, 2008 represent370,882 common shares of Rural Cellular Corporation (“RCCC”).  On July 30, 2007, RCCC announced thatVerizon Wireless agreed to purchase all of the outstanding shares of RCCC for$45 per share in cash.  The transactionis expected to close in 2008 and, therefore, the investment is classified as aCurrent Asset in U.S. Cellular’s Consolidated Balance Sheet as of March 31,2008.  If the transaction closes,U.S. Cellular will receive approximately $16.7 million in cash,recognize a $16.4 million pre-tax gain and cease to own any interest inRCCC.

 

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**Item 4. Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

U.S.Cellular maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed inits reports filed or submitted under the Exchange Act is processed, recorded,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to U.S.Cellular’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure.  In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.

 

Asrequired by SEC Rule 13a-15(b), U.S. Cellular carried out an evaluation,under the supervision and with the participation of management, including itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of U.S. Cellular’s disclosure controls and proceduresas of the end of the period covered by this Quarterly Report.  Based on this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that U.S. Cellular’s disclosurecontrols and procedures were not effective as of March 31, 2008 because ofthe material weakness in accounting for income taxes described below.  Notwithstanding the material weakness thatexisted as of March 31, 2008, management has concluded that theconsolidated financial statements included in this Quarterly Report on Form 10-Qpresent fairly, in all material respects, the financial position, results ofoperations and cash flows of U.S. Cellular in conformity with accountingprinciples generally accepted in the United States of America (“U.S. GAAP”).

 

Amaterial weakness is a deficiency, or a combination of deficiencies, ininternal control over financial reporting such that there is a reasonablepossibility that a material misstatement of the company’s annual or interimfinancial statements will not be prevented or detected on a timely basis.  Management identified the following materialweakness in internal control over financial reporting as of December 31,2007, which continued to exist at March 31, 2008:

 

U.S. Cellular did not maintain effective controls over thecompleteness, accuracy, presentation and disclosure of its accounting forincome taxes.  Specifically, U.S.Cellular did not have effective controls designed and in place to monitor thedifference between the income tax basis and the financial reporting basis ofassets and liabilities and reconcile the resulting basis difference to itsdeferred income tax asset and liability balances. This control deficiencyaffected deferred income tax asset and liability accounts and income taxespayable. This control deficiency resulted in the restatement of U.S. Cellular’sannual consolidated financial statements for 2005, 2004, 2003 and 2002, theinterim consolidated financial statements for all quarters in 2005, 2004 and2003, the interim consolidated financial statements for the first and secondquarters of 2006, as well as adjustments, including audit adjustments, to the2006 third quarter interim consolidated financial statements and the 2006 and2007 annual consolidated financial statements. Additionally, this control deficiency could result in a misstatement ofthe aforementioned accounts that would result in a material misstatement toU.S. Cellular’s interim or annual consolidated financial statements that wouldnot be prevented or detected.  Accordingly, our management has determined that this control deficiencyconstitutes a material weakness.

 

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Remediationof Material Weakness in Internal Control Over Financial Reporting

 

Managementhas been and is currently addressing this material weakness in internal controlover financial reporting and is committed to remediating it as expeditiously aspossible.

 

TDSprovides shared services to U.S. Cellular including assistance with accountingfor income taxes.  During 2007, TDS implemented tax provisioning softwarewhich enhanced internal controls related to accounting for income taxes on aTDS enterprise-wide basis, including U.S. Cellular. Further, during 2007, TDStook the following steps:

 

·                  Withthe assistance of external tax advisors, enhanced controls and policies withrespect to monitoring the difference between the income tax basis and financialreporting basis of assets and liabilities and reconciling the difference to thedeferred income tax asset and liability balances. The scope of this projectencompassed controls over income taxes on a TDS enterprise-wide basis,including U.S. Cellular.

 

·                  Providedextensive training to associates to strengthen their technical expertise inU.S. GAAP, including accounting for income taxes.

 

·                  Reorganizedthe tax department to have a separate group responsible solely for income taxaccounting which reports directly to the Senior Vice President and CorporateController.

 

TDSis in the process of implementing additional controls to address the remainingincome tax accounting control deficiencies which together constitute a materialweakness at December 31, 2007 and March 31, 2008.

 

Changes in Internal Control Over Financial Reporting

 

Therewere no changes in U.S. Cellular’s internal control over financial reportingduring the quarter ended March 31, 2008, that have materially affected, orare reasonably likely to materially affect, U.S. Cellular’s internal controlover financial reporting.

 

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**Part II. Other Information**

 

**Item 1.  Legal Proceedings**

 

U.S. Cellular is involved ormay be involved from time to time in legal proceedings before the FCC, otherregulatory authorities, and/or various state and federal courts.  If U.S. Cellular believes that a loss arisingfrom such legal proceedings is probable and can be reasonably estimated, anamount is accrued in the financial statements for the estimated loss.  Ifonly a range of loss can be determined, the best estimate within that range isaccrued; if none of the estimates within that range is better than another, thelow end of the range is accrued.  Theassessment of the expected outcomes of legal proceedings is a highly subjectiveprocess that requires judgments about future events.  The legal proceedings are reviewed at leastquarterly to determine the adequacy of accruals and related financial statementdisclosures.  The ultimate outcomes oflegal proceedings could differ materially from amounts accrued in the financialstatements.

 

**Item 1A. Risk Factors.**

 

Inaddition to the information set forth in this Form 10-Q, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in U.S. Cellular’s Form 10-K for the year ended December 31, 2007,which could materially affect U.S. Cellular’s business, financial condition orfuture results. The risks described in this Form 10-Q and the Form 10-Kfor the year ended December 31, 2007 may not be the only risks that mayaffect U.S. Cellular.  Additionalunidentified or unrecognized risks and uncertainties may materially adverselyaffect U.S. Cellular’s business, financial condition and/or operating results.Subject to the foregoing, U.S. Cellular has not identified for disclosure anymaterial changes to the risk factors as previously disclosed in U.S. Cellular’sForm 10-K for the year ended December 31, 2007.

 

**Item 2. ****Unregistered Sales of Equity Securities and****Use of Proceeds.**

 

The Board of Directorsof U.S. Cellular has authorized the repurchase of up to 1% of theoutstanding U.S. Cellular Common Shares held by non-affiliates in eachthree month period, primarily for use in employee benefit plans (the “LimitedAuthorization”).  This authorization doesnot have an expiration date.

 

During the three monthsended March 31, 2008, U.S. Cellular repurchased 150,000 Common Shares for$10.8 million, or an average of $71.70 per share pursuant to thisauthorization. U.S. Cellular did not repurchase any Common Shares in the firstquarter of 2007.

 

The following tableprovides certain information with respect to all purchases made by or on behalfof U.S. Cellular, and any open market purchases made by any “affiliatedpurchaser” (as defined by the SEC), of U.S. Cellular Common Shares during thequarter covered by this Form 10-Q.

 
| ** **                                  | ** ** | ** **                   | ** ** | ** **             | ** ** | **(c)**                                  | ** ** | **(d)**                                  | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | ** **             | ** ** | **Total Number of**            | ** ** | **Maximum Number of**          | ** ** |
| ** **                                  | ** ** | **(a)**                      | ** ** | **(b)**                | ** ** | **Common Shares**                   | ** ** | **Common Shares that**         | ** ** |
| ** **                                  | ** ** | **Total Number**        | ** ** | **Average Price** | ** ** | **Purchased as Part of**  | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **                                  | ** ** | **of Common**           | ** ** | **Paid per**      | ** ** | **Publicly Announced**              | ** ** | **Under the**                       | ** ** |
| **Period**                                  | ** ** | **Shares Purchased(1)** | ** ** | **Common Share**  | ** ** | **Plans or Programs (2)** | ** ** | **Plans or Programs (3)** | ** ** |
| January 1 – 31, 2008              |       | 150,000                      |       | $                      | 71.70      |                                     | 150,000    |                                     | 18,000     |   |
| February 1 – 29, 2008             |       | —                       |       | —                 |       | —                                   |       | 18,000                                   |       |
| March 1 – 31, 2008                |       | —                       |       | —                 |       | —                                   |       | 18,000                                   |       |
| Total for or as of end of the quarter ended |       |                         |       |                   |       |                                     |       |                                     |       |
| March 31, 2008                         |       | 150,000                      |       | $                      | 71.70      |                                     | 150,000    |                                     | 18,000     |   |
|                                             |            |                              |            |                        |            |                                          |            |                                          |            |  |  |

 

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(1)         Reflects purchases pursuantto the Limited Authorization applicable to the three-month period from January 18,2008 to April 18, 2008.

(2)         In January 2008, U.S.Cellular purchased 150,000 Common Shares, utilizing a substantial amount of themaximum number of shares available for purchase under the LimitedAuthorization, which was slightly more than 168,000.

(3)         Represents the remainingnumber of shares that could have been purchased during the period from April 1,2008 to April 18, 2008 pursuant to the Limited Authorization applicable tothe three-month period from January 18, 2008 to April 18, 2008.  No additional shares were purchased duringthis period.

 

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The following isadditional information with respect to the Limited Authorization:

 

i.                                         Thedate the program was announced was May 15, 2000 by Form 10-Q.

 

ii.                                      Theshare amount originally approved was up to 1% of the number of outstandingCommon Shares of U.S. Cellular not held by TDS or any affiliate thereof in anythree-month period. As of March 31, 2008, this permitted U.S. Cellular toacquire slightly more than 18,000 Common Shares by April 18, 2008 based onthe number of unaffiliated Common Shares outstanding on such date, reflectingthe fact that 150,000 shares were purchased within the preceding threemonths.

 

iii.                                   Thereis no expiration date for the program.

 

iv.                                  NoCommon Share repurchase program has expired during the first quarter of 2008.

 

v.                                     U.S.Cellular has not determined to terminate the foregoing Common Share repurchaseprogram prior to expiration, or to cease making further purchases thereunder,during the first quarter of 2008.

 

**Item 5. Other Information.**

 

1.               Thefollowing information is being provided to update prior disclosures madepursuant to the requirements of Form 8-K, Item 2.03 - Creation of a DirectFinancial Obligation or an Obligation Under an Off-Balance Sheet Arrangement ofa Registrant.

 

OnApril 15, 2008, U.S. Cellular borrowed $100 million under its revolvingcredit facility.  U.S. Cellularanticipates repaying the amount borrowed from future cash flows from operationsand/or long-term debt financing.

 

Theforegoing description is qualified by reference to the description of theRevolving Credit Facility under Item 1.01 in U.S. Cellular’s Current Report on Form 8-Kdated December 9, 2004, and a copy of the Revolving Credit Facility, whichis included as Exhibit 4.1 of U.S. Cellular’s Current Report on such Form 8-Kdated December 9, 2004 and is incorporated by reference herein.

 

2.               Thefollowing information is being provided to update prior disclosuresmade with respect to Form 8-K, Item 5.02(e) -Departure of Directors or Certain Officers; Election ofDirectors; Appointment of Certain Officers; Compensatory Arrangements ofCertain Officers.

 

OnAugust 8, 2007, U.S. Cellular’s Chairman approved an Executive Bonus Planfor 2007.  A copy of this plan was filed with the SEC on a Form 8-Kdated August 9, 2007.  This plan applies to the below named executiveofficers other than John E. Rooney, President and CEO of U.S. Cellular. However, the Chairman of U.S. Cellular also considers the performance underthis plan in determining the amount of bonus for Mr. Rooney.  Fordisclosure purposes, the amount of bonus paid on March 14, 2008 withrespect to 2007 performance to the named executive officers was asfollows:

 
| ** **                        | ** ** | **John E.   Rooney** | ** ** | **Steven T.   Campbell** | ** ** | **Jay M.   Ellison** | ** ** | **Michael S.   Irizarry** | ** ** | **Jeffrey J.   Childs** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| Total Bonus for 2007 paid in 2008 |       | $                              | 675,000    |                               | $          | 252,000                        |       | $                                   | 401,000    |                              | $          | 275,000 |   | $ | 204,000 |   |
|                                   |            |                                |            |                                    |            |                                |            |                                     |            |                                   |            |  |  |  |  |  |

 

Althoughthe performance factors set forth in the Bonus Plan are considered indetermining the amount of the bonus paid, the entire amount of the bonus paidto each of the named executive officers is discretionary and subject toapproval by the Chairman.  The officers are not entitled to any amount ofbonus unless and only to the extent awarded and paid.  Performancemeasures are only one category of the factors used to determine the amount ofthe bonus, all of which is discretionary.  These amounts and thecalculation thereof will be reported in the Compensation Discussion andAnalysis to be included in U.S. Cellular’s 2009 proxy statement.

 

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**Item 6. Exhibits**

 

Exhibit 10.1- Form of U.S. Cellular 2005 Long-Term Incentive Plan Stock Option AwardAgreement to be used for grants to John E. Rooney, is hereby incorporated byreference to U.S. Cellular’s Current Report on Form 8-K dated March 13,2008.

 

Exhibit 10.2- Form of U.S. Cellular 2005 Long-Term Incentive Plan Restricted StockUnit Award Agreement to be used for grants to John E. Rooney, is herebyincorporated by reference to U.S. Cellular’s Current Report on Form 8-Kdated March 13, 2008.

 

Exhibit 10.3- Form of U.S. Cellular 2005 Long-Term Incentive Plan Stock Option AwardAgreement to be used for grants to executive officers other than John E.Rooney, is hereby incorporated by reference to U.S. Cellular’s Current Reporton Form 8-K dated March 13, 2008.

 

Exhibit 10.4- Form of U.S. Cellular 2005 Long-Term Incentive Plan Restricted StockUnit Award Agreement to be used for grants to executive officers other thanJohn E. Rooney, is hereby incorporated by reference to U.S. Cellular’s CurrentReport on Form 8-K dated March 13, 2008.

 

Exhibit 11– Statement regarding computation of per share earnings is included herein asNote 7 of the Notes to theConsolidated Financial Statements.

 

Exhibit 12– Statement regarding computation of ratios of earnings to fixed charges.

 

Exhibit 31.1– Chief Executive Officer certification pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934.

 

Exhibit 31.2– Chief Financial Officer certification pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934.

 

Exhibit 32.1– Chief Executive Officer certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

Exhibit 32.2– Chief Financial Officer certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

Theforegoing exhibits include only the exhibits that relate specifically to this Form 10-Qor that supplement the exhibits identified in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2007. Reference is made to U.S. Cellular’s Form 10-K for the year ended December 31,2007 for a complete list of exhibits, which are incorporated herein except tothe extent supplemented or superseded above.

 

45

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

UNITED STATES CELLULARCORPORATION

(Registrant)

 
|                    |  /s/ John E. Rooney               |
|-------------------------|----------------------------------------|
| Date: May  7, 2008 | John  E. Rooney                        |
|                    | President  and                         |
|                    | Chief  Executive Officer               |
|                    | (Principal  Executive Officer)         |
|                    |                                   |
|                    |                                   |
| Date: May  7, 2008 |  /s/ Steven T. Campbell           |
|                    | Steven  T. Campbell                    |
|                    | Executive  Vice President-Finance,     |
|                    | Chief  Financial Officer and Treasurer |
|                    | (Principal  Financial Officer)         |
|                    |                                   |
|                    |                                   |
| Date: May  7, 2008 |  /s/ Kenneth R. Meyers            |
|                    | Kenneth  R. Meyers                     |
|                    | Chief  Accounting Officer              |
|                    | (Principal  Accounting Officer)        |

 

 

Signature page for the U.S. Cellular2008 First Quarter Form 10-Q

 

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