Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x****        QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                        |
| **For  the quarterly period ended June 30, 2008                     OR** |
|                                                                                                                                                                                        |
| **o****        TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                    |

 

**For the transition period from                                              to                                              **

 

**Commission File Number1-9712**

** **

**UNITED STATES CELLULARCORPORATION**

(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’s telephonenumber, 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.

 

Yesx  No o

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of 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 ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**                                  | ** ** | **Outstanding at ****June 30,**** 2008** |
|--------------------------------------------|------------|--------------------------------------------------------------|
| Common  Shares, $1 par value               |       | 54,472,294  Shares                                           |
| Series A  Common Shares, $1 par value |       | 33,005,877  Shares                                           |

 

 

 

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Table of Contents

 

**United States Cellular Corporation**

 

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

**For The Period Ended June 30, 2008**

 

#### **Index**

####  

|                                           |                                                                                                 | **Page No.** |
|------------------------------------------------|------------------------------------------------------------------------------------------------------|-------------------|
|                                           |                                                                                                 |              |
| Part I.  Financial  Information |                                                                                                 |
|                                           |                                                                                                 |              |
| Item 1.                                        | Financial  Statements (Unaudited)                                                                    |              |
|                                           |                                                                                                 |              |
|                                           | Consolidated Statements of  Operations  Three and Six Months Ended June 30, 2008 and 2007  | 3            |
|                                           |                                                                                                 |              |
|                                           | Consolidated Statements of  Cash Flows  Six Months Ended June 30, 2008 and 2007                 | 4                 |
|                                           |                                                                                                 |              |
|                                           | Consolidated Balance Sheets  June 30, 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         | 19                |
|                                           | Overview                                                                                             | 19                |
|                                           | Results  of Operations                                                                               | 22                |
|                                           | Recent  Accounting Pronouncements                                                                    | 34                |
|                                           | Financial Resources                                                                                  | 36                |
|                                           | Liquidity and Capital Resources                                                                      | 38                |
|                                           | Application of Critical Accounting Policies and  Estimates                                           | 41                |
|                                           | Safe Harbor Cautionary Statement                                                                     | 42                |
|                                           |                                                                                                 |              |
| Item 3.                                        | Quantitative  and Qualitative Disclosures About Market Risk                                          | 45                |
|                                           |                                                                                                 |              |
| Item 4.                                        | Controls and  Procedures                                                                             | 46                |
|                                           |                                                                                                 |              |
| Part II.  Other  Information    |                                                                                                 |
|                                           |                                                                                                 |              |
| Item 1.                                        | Legal Proceedings                                                                                    | 48                |
|                                           |                                                                                                 |              |
| Item 1A.                                       | Risk Factors                                                                                         | 48                |
|                                           |                                                                                                 |              |
| Item 2.                                        | Unregistered  Sales of Equity Securities and Use  of Proceeds                                        | 48                |
|                                           |                                                                                                 |              |
| Item 4.                                        | Submission  of Matters to a Vote of Security Holders                                                 | 50                |
|                                           |                                                                                                 |              |
| Item 5.                                        | Other Information                                                                                    | 52                |
|                                           |                                                                                                 |              |
| Item 6.                                        | Exhibits                                                                                             | 53                |
|                                           |                                                                                                 |              |
| Signatures                                     |                                                                                                 |
|                                                |                                                                                                      |                   |  |  |

 

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Table of Contents

 

**Part I.  Financial Information**

**ItemI.  Financial Statements**

 

**UnitedStates Cellular Corporation**

**Consolidated Statements of Operations**

**Unaudited**

 
| ** **                                                                                                                                                                                                                                             | ** ** | **Three Months Ended**                                                                        | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **June 30,**                                                                                       | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                                                                                                             | ** ** | **2008**                                                                                                | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                                                             | ** ** | **(Dollars and shares in thousands, except per share amounts)** | ** ** |
| **Operating  Revenues**                                                                                                                                                                                                                                |       |                                                                                                    |       |                           |       |   |   |   |   |
| Service                                                                                                                                                                                                                                                |       | $                                                                                                       | 987,352    |                           | $          | 906,218 |   | $ | 1,949,446 |   | $ | 1,766,801 |   |
| Equipment sales                                                                                                                                                                                                                                        |       | 73,240                                                                                                  |       | 65,428                         |       | 149,002 |   | 139,519 |   |
| Total Operating Revenues                                                                                                                                                                                                                               |       | 1,060,592                                                                                               |       | 971,646                        |       | 2,098,448 |   | 1,906,320 |   |
| **Operating  Expenses**                                                                                                                                                                                                                                |       |                                                                                                    |       |                           |       |   |   |   |   |
| System operations (excluding  Depreciation, amortization and accretion reported below)                                                                                                                                                                 |       | 196,652                                                                                                 |       | 176,409                        |       | 387,668 |   | 343,693 |   |
| Cost of equipment sold                                                                                                                                                                                                                                 |       | 172,194                                                                                                 |       | 148,241                        |       | 346,231 |   | 298,985 |   |
| Selling, general and  administrative                                                                                                                                                                                                                   |       | 422,367                                                                                                 |       | 374,668                        |       | 830,001 |   | 733,534 |   |
| (including charges from  affiliates of $26.4 million and $30.9 million for the three months ended June 30,  2008 and 2007, respectively, and $54.9 million and $58.7 million for the six  months ended June 30, 2008 and 2007, respectively) |       |                                                                                                    |       |                           |       |   |   |   |   |
| Depreciation, amortization and  accretion                                                                                                                                                                                                              |       | 145,258                                                                                                 |       | 146,024                        |       | 287,788 |   | 291,976 |   |
| Loss on asset disposals, net                                                                                                                                                                                                                           |       | 6,219                                                                                                   |       | 2,832                          |       | 9,892 |   | 6,137 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| Total Operating Expenses                                                                                                                                                                                                                               |       | 942,690                                                                                                 |       | 848,174                        |       | 1,861,580 |   | 1,674,325 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Operating  Income**                                                                                                                                                                                                                                  |       | 117,902                                                                                                 |       | 123,472                        |       | 236,868 |   | 231,995 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Investment  and Other Income (Expense)**                                                                                                                                                                                                             |       |                                                                                                    |       |                           |       |   |   |   |   |
| Equity in earnings of  unconsolidated entities                                                                                                                                                                                                         |       | 22,807                                                                                                  |       | 22,980                         |       | 44,042 |   | 46,078 |   |
| Interest and dividend income                                                                                                                                                                                                                           |       | 1,429                                                                                                   |       | 2,653                          |       | 3,334 |   | 5,203 |   |
| Fair value adjustment of  derivative instruments                                                                                                                                                                                                       |       | —                                                                                                  |       | (17,849                        | )          | — |   | (5,388 | ) |
| Gain on sale of investments                                                                                                                                                                                                                            |       | —                                                                                                  |       | 131,686                        |       | — |   | 131,686 |   |
| Interest expense                                                                                                                                                                                                                                       |       | (20,774                                                                                                 | )          | (21,325                        | )          | (40,889 | ) | (45,009 | ) |
| Other, net                                                                                                                                                                                                                                             |       | 600                                                                                                     |       | 91                             |       | 718 |   | (494 | ) |
| Total Investment and Other  Income (Expense)                                                                                                                                                                                                           |       | 4,062                                                                                                   |       | 118,236                        |       | 7,205 |   | 132,076 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Income  Before Income Taxes and Minority Interest**                                                                                                                                                                                                  |       | 121,964                                                                                                 |       | 241,708                        |       | 244,073 |   | 364,071 |   |
| Income tax expense                                                                                                                                                                                                                                     |       | 44,016                                                                                                  |       | 91,500                         |       | 91,556 |   | 135,388 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Income  Before Minority Interest**                                                                                                                                                                                                                   |       | 77,948                                                                                                  |       | 150,208                        |       | 152,517 |   | 228,683 |   |
| Minority share of income, net  of tax                                                                                                                                                                                                                  |       | (5,346                                                                                                  | )          | (2,637                         | )          | (9,358 | ) | (6,711 | ) |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Net  Income**                                                                                                                                                                                                                                        |       | $                                                                                                       | 72,602     |                           | $          | 147,571 |   | $ | 143,159 |   | $ | 221,972 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Basic  Weighted Average Shares Outstanding**                                                                                                                                                                                                         |       | 87,571                                                                                                  |       | 87,590                         |       | 87,571 |   | 87,735 |   |
| **Basic  Earnings Per Share**                                                                                                                                                                                                                          |       | $                                                                                                       | 0.83       |                           | $          | 1.68 |   | $ | 1.63 |   | $ | 2.53 |   |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |       |                           |       |   |   |   |   |
| **Diluted  Weighted Average Shares Outstanding**                                                                                                                                                                                                       |       | 87,872                                                                                                  |       | 88,410                         |       | 87,963 |   | 88,615 |   |
| **Diluted  Earnings Per Share**                                                                                                                                                                                                                        |       | $                                                                                                       | 0.83       |                           | $          | 1.67 |   | $ | 1.63 |   | $ | 2.50 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UnitedStates Cellular Corporation**

**Consolidated Statements of Cash Flows**

**Unaudited**

 
| ** **                                                                                    | ** ** | **Six Months Ended**       | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**                    | ** ** |
| ** **                                                                                    | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Cash  Flows from Operating Activities**                                                     |       |                                 |       |   |   |
| Net income                                                                                    |       | $                                    | 143,159    |   | $ | 221,972 |   |
| Add (deduct) adjustments to  reconcile net income to net cash flows from operating activities |       |                                 |       |   |   |
| Depreciation, amortization and  accretion                                                     |       | 287,788                              |       | 291,976 |   |
| Bad debts expense                                                                             |       | 32,426                               |       | 23,870 |   |
| Stock-based compensation  expense                                                             |       | 6,481                                |       | 8,177 |   |
| Deferred income taxes, net                                                                    |       | 27,231                               |       | 5,002 |   |
| Equity in earnings of  unconsolidated entities                                                |       | (44,042                              | )          | (46,078 | ) |
| Distributions from  unconsolidated entities                                                   |       | 45,569                               |       | 43,169 |   |
| Minority share of income                                                                      |       | 9,358                                |       | 6,711 |   |
| Unrealized fair value  adjustment of derivative instruments                                   |       | —                               |       | 5,388 |   |
| Gain on sale of investments                                                                   |       | —                               |       | (131,686 | ) |
| Loss on asset disposals, net                                                                  |       | 9,892                                |       | 6,137 |   |
| Noncash interest expense                                                                      |       | 886                                  |       | 890 |   |
| Excess tax benefit from stock  awards                                                         |       | (896                                 | )          | (9,679 | ) |
| Other operating activities                                                                    |       | —                               |       | (5,000 | ) |
| Changes in assets and  liabilities from operations                                            |       |                                 |       |   |   |
| Change in accounts receivable                                                                 |       | (50,059                              | )          | (30,103 | ) |
| Change in inventory                                                                           |       | (19,816                              | )          | (770 | ) |
| Change in accounts payable -  trade                                                           |       | 2,838                                |       | (3,781 | ) |
| Change in accounts payable -  affiliate                                                       |       | 171                                  |       | (3,530 | ) |
| Change in customer deposits  and deferred revenues                                            |       | 10,406                               |       | 17,606 |   |
| Change in accrued taxes                                                                       |       | 1,471                                |       | 60,418 |   |
| Change in accrued interest                                                                    |       | 455                                  |       | (742 | ) |
| Change in other assets and  liabilities                                                       |       | (36,486                              | )          | (19,510 | ) |
|                                                                                          |       | 426,832                              |       | 440,437 |   |
|                                                                                          |       |                                 |       |   |   |
| **Cash  Flows from Investing Activities**                                                     |       |                                 |       |   |   |
| Additions to property, plant  and equipment                                                   |       | (249,500                             | )          | (246,790 | ) |
| Proceeds from sale of  investments                                                            |       | —                               |       | 4,301 |   |
| Cash received from  divestitures                                                              |       | 6,838                                |       | 4,277 |   |
| Cash paid for acquisitions                                                                    |       | (312,615                             | )          | (18,283 | ) |
| Other investing activities                                                                    |       | (1,215                               | )          | (156 | ) |
|                                                                                          |       | (556,492                             | )          | (256,651 | ) |
|                                                                                          |       |                                 |       |   |   |
| **Cash  Flows from Financing Activities**                                                     |       |                                 |       |   |   |
| Issuance of notes payable                                                                     |       | 100,000                              |       | 25,000 |   |
| Repayment of notes payable                                                                    |       | (50,000                              | )          | (60,000 | ) |
| Common shares reissued, net of  tax payments                                                  |       | (1,878                               | )          | 9,223 |   |
| Common shares repurchased                                                                     |       | (14,516                              | )          | (49,057 | ) |
| Excess tax benefit from stock  awards                                                         |       | 896                                  |       | 9,679 |   |
| Capital distributions to  minority partners                                                   |       | (6,022                               | )          | (5,461 | ) |
| Other financing activities                                                                    |       | (2,198                               | )          | — |   |
|                                                                                          |       | 26,282                               |       | (70,616 | ) |
|                                                                                          |       |                                 |       |   |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                     |       | (103,378                             | )          | 113,170 |   |
|                                                                                          |       |                                 |       |   |   |
| **Cash and  Cash Equivalents**                                                                |       |                                 |       |   |   |
| Beginning of period                                                                           |       | 204,533                              |       | 32,912 |   |
| End of period                                                                                 |       | $                                    | 101,155    |   | $ | 146,082 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UnitedStates Cellular Corporation**

**Consolidated Balance Sheets**

**Assets**

 
| ** **                                                                            | ** ** | **June 30,**                    | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2008**                             | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)**                      | ** ** | **2007**              | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  Assets**                                                                   |       |                                 |       |                  |       |
| Cash and cash equivalents                                                             |       | $                                    | 101,155    |                  | $          | 204,533 |   |
| Accounts receivable                                                                   |       |                                 |       |                  |       |
| Customers, less allowances of  $9,383 and $12,305, respectively                       |       | 338,091                              |       | 327,076               |       |
| Roaming                                                                               |       | 42,528                               |       | 35,412                |       |
| Affiliated                                                                            |       | 99                                   |       | 12,857                |       |
| Other, less allowances of $249  and $112, respectively                                |       | 61,697                               |       | 60,152                |       |
| Marketable equity securities                                                          |       | 16,508                               |       | 16,352                |       |
| Inventory                                                                             |       | 120,817                              |       | 100,990               |       |
| Prepaid expenses                                                                      |       | 51,923                               |       | 41,588                |       |
| Net deferred income tax asset                                                         |       | 18,235                               |       | 18,566                |       |
| Other current assets                                                                  |       | 24,213                               |       | 16,227                |       |
|                                                                                  |       | 775,266                              |       | 833,753               |       |
| **Investments**                                                                       |       |                                 |       |                  |       |
| Licenses                                                                              |       | 1,792,728                            |       | 1,482,446             |       |
| Goodwill                                                                              |       | 493,918                              |       | 491,316               |       |
| Customer lists, net of  accumulated amortization of $84,461 and $80,492, respectively |       | 12,451                               |       | 15,375                |       |
| Investments in unconsolidated  entities                                               |       | 157,162                              |       | 157,693               |       |
| Notes and interest receivable –  long-term                                       |       | 4,359                                |       | 4,422                 |       |
|                                                                                  |       | 2,460,618                            |       | 2,151,252             |       |
| **Property,  Plant and Equipment**                                                    |       |                                 |       |                  |       |
| In service and under  construction                                                    |       | 5,612,054                            |       | 5,409,115             |       |
| Less accumulated depreciation                                                         |       | 3,045,114                            |       | 2,814,019             |       |
|                                                                                  |       | 2,566,940                            |       | 2,595,096             |       |
|                                                                                  |       |                                 |       |                  |       |
| **Other  Assets and Deferred Charges**                                                |       | 29,728                               |       | 31,773                |       |
|                                                                                  |       |                                 |       |                  |       |
| **Total  Assets**                                                                     |       | $                                    | 5,832,552  |                  | $          | 5,611,874 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UnitedStates Cellular Corporation**

**ConsolidatedBalance Sheets**

**Liabilitiesand Shareholders’ Equity**

 
| ** **                                                                                                                    | ** ** | **June 30,**                    | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2008**                             | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**                      | ** ** | **2007**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  Liabilities**                                                                                                      |       |                                 |       |                  |       |
| Notes payable                                                                                                                 |       | $                                    | 50,000     |                  | $          | — |   |
| Accounts payable                                                                                                              |       |                                 |       |                  |       |
| Affiliated                                                                                                                    |       | 8,690                                |       | 8,519                 |       |
| Trade                                                                                                                         |       | 256,196                              |       | 252,272               |       |
| Customer deposits and deferred  revenues                                                                                      |       | 153,860                              |       | 143,445               |       |
| Accrued taxes                                                                                                                 |       | 42,969                               |       | 43,105                |       |
| Accrued compensation                                                                                                          |       | 36,680                               |       | 59,224                |       |
| Other current liabilities                                                                                                     |       | 97,220                               |       | 97,678                |       |
|                                                                                                                          |       | 645,615                              |       | 604,243               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Deferred  Liabilities and Credits**                                                                                         |       |                                 |       |                  |       |
| Net deferred income tax  liability                                                                                            |       | 580,193                              |       | 554,412               |       |
| Asset retirement obligation                                                                                                   |       | 133,802                              |       | 126,844               |       |
| Other deferred liabilities and  credits                                                                                       |       | 85,602                               |       | 84,530                |       |
|                                                                                                                          |       | 799,597                              |       | 765,786               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Long-Term  Debt**                                                                                                           |       | 1,007,054                            |       | 1,002,293             |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Commitments  and Contingencies**                                                                                            |       |                                 |       |                  |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Minority  Interest**                                                                                                        |       | 48,391                               |       | 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                                                                                                    |       | 1,329,212                            |       | 1,316,042             |       |
| Treasury Shares, at cost,  573,391 and 455,287 Common Shares, respectively                                                    |       | (45,414                              | )          | (41,094               | )          |
| Accumulated other  comprehensive income                                                                                       |       | 10,233                               |       | 10,134                |       |
| Retained earnings                                                                                                             |       | 1,949,812                            |       | 1,823,022             |       |
|                                                                                                                          |       | 3,331,895                            |       | 3,196,156             |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                          |       | $                                    | 5,832,552  |                  | $          | 5,611,874 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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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 normal recurringitems unless otherwise disclosed) necessary to present fairly the financialposition as of June 30, 2008 and December 31, 2007, the results ofoperations for the three and six months ended June 30, 2008 and 2007, andthe cash flows for the six months ended June 30, 2008 and 2007.  The results of operations for the three andsix months ended June 30, 2008 and cash flows for the six months ended June 30,2008 are not necessarily indicative of the results to be expected for the fullyear.

 

**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 annually.  Pension costs were $2.4million and $5.2 million for the three and six months ended June 30, 2008,respectively; and $2.0 million and $4.1 million for the three and six monthsended June 30, 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 amounts recordedgross in Service revenues that are billed to customers and remitted togovernmental authorities totaled $36.3 million and $69.5 million for the threeand six months ended June 30, 2008, respectively; and $33.5 million and$60.9 million for the three and six months ended June 30, 2007,respectively.

 

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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 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 FASBStaff Position (“FSP”) FAS 157-2, to defer the effective date ofSFAS 157 for all nonfinancial assets and liabilities, except those itemsrecognized or disclosed at fair value on an annual or more frequently recurringbasis, until years beginning after November 15, 2008. U.S. Cellularadopted SFAS 157 for its financial assets and liabilities effective January 1,2008 (See Note 6 - Fair Value Measurements for more information related to U.S.Cellular’s adoption of SFAS 157 for its financial assets and liabilities). U.S.Cellular is currently reviewing the adoption requirements related to itsnonfinancial assets and liabilities and has not yet determined the impact, ifany, on its financial position or results of operations.

 

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) also would be determined in accordance with theprovisions 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.

 

InDecember 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 FASBStatement No. 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. SFAS 160 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 for U.S.Cellular on a prospective basis beginning January 1, 2009, 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.

 

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.S.Cellular beginning January 1, 2009. As of June 30, 2008, U.S.Cellular did not hold any derivative instruments.

 

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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 beginning January 1,2009. U.S. Cellular does not anticipate that the adoption of FSP FAS 142-3 willhave an impact on its financial position or results of operations.

 

InMay 2008, the FASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles* (“SFAS 162”).SFAS 162 identifies a consistent framework, or hierarchy, for selectingaccounting principles to be used in preparing financial statements that arepresented in conformity with U.S. GAAP for non-governmental entities. SFAS 162is effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, *The Meaning of Presenting Fairly in Conformity with Generally AcceptedAccounting Principles*. U.S. Cellular does not anticipate that theadoption of SFAS 162 will have an impact on its financial statements ordisclosures.

 

**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 asof June 30, 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 is eligible to receive a 25%bid credit available to “very small businesses,” defined as businesses havingannual gross revenues of less than $15 million. As discussed in Note 5 – Variable Interest Entities, U.S. Cellularconsolidates 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’sJune 30, 2008 Consolidated Balance Sheet. During the six months ended June 30, 2008, U.S. Cellular madecapital contributions and advances to King Street Wireless and its generalpartner of $300.5 million. King Street Wireless paid this amount to the FCC forthe licenses for which it was the provisional winning bidder in the auction.U.S. Cellular may agree to make additional capital contributions and/oradvances 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 awarded only a few of the licenses to winning bidders.There is no prescribed timeframe for the FCC to review the qualifications ofthe various winning bidders and award licenses.  The licenses expected tobe awarded to King Street Wireless cover areas that overlap or are proximate orcontiguous to areas covered by licenses that U.S. Cellular currently owns,operates and/or consolidates.

 

*Transactions Completed as of**June 30, 2008**:*

 

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 $6.9 million in cash.  On May 30, 2008,U.S. Cellular completed this transaction.

 

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In October 2006, U.S. Cellular’sinterest in Midwest Wireless Communications, LLC (“Midwest Wireless”) wassold to ALLTEL Corporation.  Inconnection 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.

 

On December 3,2007, U.S. Cellular entered into an agreement to acquire six 12 megahertz lowerC block 700 megahertz licenses in Maine for $5.0 million in cash.  On March 28, 2008, U.S. Cellularcompleted this transaction.

 

On November 30, 2007, U.S. Cellularentered into an exchange agreement with Sprint Nextel Corporation whichprovided for U.S. Cellular to receive personal communication service (“PCS”)spectrum in eight licenses covering portions of Oklahoma, West Virginia,Maryland and Iowa, in exchange for U.S. Cellular delivering PCS spectrum ineight licenses covering portions of Illinois.  In connection with theexchange, U.S. Cellular recognized a pre-tax loss of $20.8 million during thefourth quarter of 2007.  This transactionclosed on March 19, 2008.

 

U.S. Cellular’sacquisitions for the six months ended June 30, 2008 and the allocation ofthe purchase price for each respective acquisition were as follows:

 
| ** **                           | ** ** | ** **             | ** ** | **Allocation of Purchase Price** | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Purchase  price(1)** | ** ** | **Goodwill(2)**                                 | ** ** | **Licenses** | ** ** | **Customer  lists** | ** ** | **Net tangible  assets/(liabilities)** | ** ** |
| U.S. Cellular Acquisitions           |       |                   |       |                                            |       |   |   |   |   |   |   |
| Auction 73 Licenses                  |       | $                      | 300,479    |                                            | $          | — |   | $ | 300,479 |   | $ | — |   | $ | — |   |
| Maine Licenses                       |       | 5,000                  |       | —                                          |       | 5,000 |   | — |   | — |   |
| North Carolina RSA 1  Partnership    |       | 6,900                  |       | 1,632                                           |       | 4,180 |   | 81 |   | 1,007 |   |
| Other                                |       | 1,891                  |       | 970                                             |       | 623 |   | 964 |   | (666 | ) |
| Total                                |       | $                      | 314,270    |                                            | $          | 2,602 |   | $ | 310,282 |   | $ | 1,045 |   | $ | 341 |   |

 

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| (1)    | An aggregate of $1.7 million  is recorded as a component of Other current liabilities in U.S. Cellular’s  June 30, 2008 Consolidated Balance Sheet. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                          |
| (2)    | The goodwill associated with  the acquisition of the North Carolina RSA 1 partnership is deductible for tax  purposes.                                        |

 

Unaudited pro-formafinancial information related to U.S. Cellular’s 2008 acquisitions has not beenpresented because these acquisitions, individually and in the aggregate, werenot material to U.S. Cellular’s consolidated results of operations for the sixmonths ended June 30, 2008.

 

**4.**              **Gain on Sale of Investments**

 

Prior to and during May 2007,U.S. Cellular held Vodafone American Depository Receipts (“ADRs”) which wereobtained in connection with the sale of non-strategic investments.  U.S. Cellular entered into a number ofvariable prepaid forward contracts (“forward contracts”) related to theVodafone ADRs that it held.  The forwardcontracts matured in May 2007. U.S. Cellular settled the forward contractsby delivery of Vodafone ADRs pursuant to the formula in such forward contractsand then disposed of all remaining Vodafone ADRs. U.S. Cellular recognized apre-tax gain of $131.7 million at the time of delivery and sale of the sharesin May 2007. As a result, after this settlement in May 2007, U.S.Cellular no longer owned any Vodafone ADRs and no longer had any liability orother obligations under the related forward contracts.

 

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**5.****             ****Variable Interest Entities**

 

As of June 30, 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.

 

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.

 

As of June 30, 2008, U.S. Cellular has made capital contributions and advances toBarat Wireless and/or its general partner of $127.3 million; of thisamount, $127.1 million is included in Licenses in the Consolidated BalanceSheets.

 

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 open licenses, however, Carroll Wireless was qualified toreceive a 25% bid credit available to “very small businesses” which weredefined as having average annual gross revenues of less than $15 million.Carroll Wireless was a successful bidder for 16 licenses inAuction 58, which ended on February 15, 2005. The aggregate amountpaid to the FCC for the licenses was $129.7 million, net of the bid creditto which Carroll Wireless was entitled. On January 6, 2006, the FCCgranted Carroll Wireless’ applications with respect to the 16 licenses for whichit was the successful bidder. These licenses cover portions of 10 statesand are in markets which are either adjacent to or overlap currentU.S. Cellular licensed areas.

 

As of June 30, 2008, U.S. Cellular has made capital contributions and advances toCarroll Wireless and/or its general partner of approximately$130.1 million; of this amount, $129.7 million is included inLicenses in the Consolidated Balance Sheets.

 

**6.****             ****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 expand theuse of fair value measurements in financial statements, but standardizes itsdefinition 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 for identicalassets or liabilities in active markets. Level 2 inputs include quoted marketprices for similar assets and liabilities in active markets or quoted marketprices for identical assets and liabilities in inactive markets. Level 2 inputsmust be observable either directly or indirectly for substantially the fullterm of the financial instrument. Level 3 inputs are unobservable.

 

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Marketableequity securities were the only financial assets on U.S. Cellular’s BalanceSheet at June 30, 2008which required the application of SFAS 157. U.S. Cellular did not have any financial liabilities at June 30, 2008 which required theapplication of SFAS 157 for valuation purposes. U.S. Cellular’s marketable equity securities had a balance of $16.5million at June 30, 2008,and consisted entirely of an investment in the common stock of Rural CellularCorporation (“RCCC”).  This security ispublicly traded. Fair value for this security is based upon quoted marketprices for identical assets in active markets. Therefore, these inputs are considered Level 1 inputs in accordance withthe guidance set forth in SFAS 157. U.S. Cellular’s investment in RCCC isaccounted for as an “available for sale” security under the provisions of SFAS No. 115,*Accounting for Certain Investments in Debt andEquity Securities*.  Therefore,unrealized gains and losses on this investment are recorded as a component ofAccumulated other comprehensive income.

 

**7.****             ****Income Taxes**

 

Theoverall effective tax rate on income before income taxes and minority interestfor the three and six months ended June 30, 2008 was 36.1% and 37.5%,respectively, and for the three and six months ended June 30, 2007 was37.9% and 37.2%, respectively. The effective tax rate for the three monthsended June 30, 2008 is lower than the three months ended June 30,2007 primarily due to a reduction in state income tax expense.

 

**8.****             ****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 number ofcommon shares adjusted to include the effect of potentially dilutivesecurities. Potentially dilutive securities include incremental shares issuableupon exercise of outstanding stock options and the vesting of restricted stockunits.

 

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

 
| ** **                                                                                    | ** ** | **Three Months Ended**                                                                         | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**                                                                                        | ** ** | **June 30,**              | ** ** |
| ** **                                                                                    | ** ** | **2008**                                                                                                 | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars and shares in thousands, except earnings per share)** | ** ** |
|                                                                                          |       |                                                                                                     |       |                           |       |   |   |   |   |
| Net income                                                                                    |       | $                                                                                                        | 72,602     |                           | $          | 147,571 |   | $ | 143,159 |   | $ | 221,972 |   |
| Weighted average number of  shares used in basic earnings per share                           |       | 87,571                                                                                                   |       | 87,590                         |       | 87,571 |   | 87,735 |   |
| Effect of Dilutive Securities:                                                                |       |                                                                                                     |       |                           |       |   |   |   |   |
| Stock options(1)                                                                              |       | 181                                                                                                      |       | 573                            |       | 227 |   | 634 |   |
| Restricted stock units                                                                        |       | 120                                                                                                      |       | 133                            |       | 165 |   | 132 |   |
| Dilutive effect assuming  shares delivered upon settlement of Accelerated Share Repurchase(2) |       | —                                                                                                   |       | 114                            |       | — |   | 114 |   |
|                                                                                          |       |                                                                                                     |       |                           |       |   |   |   |   |
| Weighted average number of  shares used in diluted earnings per share                         |       | 87,872                                                                                                   |       | 88,410                         |       | 87,963 |   | 88,615 |   |
|                                                                                          |       |                                                                                                     |       |                           |       |   |   |   |   |
| Basic Earnings per Share                                                                      |       | $                                                                                                        | 0.83       |                           | $          | 1.68 |   | $ | 1.63 |   | $ | 2.53 |   |
|                                                                                          |       |                                                                                                     |       |                           |       |   |   |   |   |
| Diluted Earnings per Share                                                                    |       | $                                                                                                        | 0.83       |                           | $          | 1.67 |   | $ | 1.63 |   | $ | 2.50 |   |

 

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| (1) |   | Stock  options exercisable into 597,695 and 336,683 Common Shares in the three and  six months ended June 30, 2008, respectively, and 3,700 and 3,700 Common  Shares in the three and six months ended June 30, 2007, respectively,  were not included in computing Diluted Earnings per Share because their  effects were antidilutive. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | See  Note 15 - Common Share Repurchases below for a discussion  of U.S. Cellular’s purchase of 670,000 of its Common Shares from an investment  banking firm in a private transaction pursuant to an accelerated share  repurchase (“ASR”) agreement.                                                                               |

 

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**9.**              **Licenses and Goodwill**

 

Changesin U.S. Cellular’s licenses and goodwill are primarily the result ofacquisitions, divestitures and exchanges of licenses and wireless markets. SeeNote 3 - Acquisitions, Divestitures and Exchanges for information regardingtransactions which affected licenses and goodwill. The changes in Licenses andGoodwill for the six months ended June 30, 2008 and 2007 were as follows:

 
| ** **                   | ** ** | **June 30,**                    | ** ** | **June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                   | ** ** | **2008**                             | ** ** | **2007**          | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Licenses                     |       |                                 |       |              |       |
| Balance, beginning of period |       | $                                    | 1,482,446  |              | $          | 1,494,328 |   |
| Acquisitions                 |       | 310,282                              |       | 7,900             |       |
| Impairment                   |       | —                               |       | (2,136            | )          |
| Balance, end of period       |       | $                                    | 1,792,728  |              | $          | 1,500,092 |   |

 
| ** **                   | ** ** | **June 30,**                    | ** ** | **June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                   | ** ** | **2008**                             | ** ** | **2007**          | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Goodwill                     |       |                                 |       |              |       |
| Balance, beginning of period |       | $                                    | 491,316    |              | $          | 485,452 |   |
| Acquisitions                 |       | 2,602                                |       | 5,864             |       |
| Balance, end of period       |       | $                                    | 493,918    |              | $          | 491,316 |   |

 

Licenses and goodwill must be reviewed for impairmentannually or more frequently if events or changes in circumstances indicate thatthe asset might be impaired. U.S. Cellular performs the annual impairmentreview on licenses and goodwill during the second quarter of its fiscal year.Accordingly, the annual impairment reviews for licenses and goodwill for 2008and 2007 were performed in the second quarter of those years. Such impairmentreviews indicated that there was no impairment in 2008 and an impairment oflicenses of $2.1 million in 2007.  Theimpairment is included in Depreciation, amortization and accretion expense inthe Consolidated Statements of Operations.

 

**10.****      ****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 thestraight-line method over the remaining estimated life. The changes in thecustomer lists for the six months ended 2008 and 2007 were as follows:

 
| ** **                   | ** ** | **June 30,**                    | ** ** | **June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                   | ** ** | **2008**                             | ** ** | **2007**          | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Customer lists               |       |                                 |       |              |       |
| Balance, beginning of period |       | $                                    | 15,375     |              | $          | 26,196 |   |
| Acquisitions                 |       | 1,045                                |       | 1,560             |       |
| Amortization                 |       | (3,969                               | )          | (6,375            | )          |
| Balance, end of period       |       | $                                    | 12,451     |              | $          | 21,381 |   |

 

Based on the Customer lists balance as of June 30,2008, amortization expense for the remainder of 2008 and for the years2009-2013 is expected to be $3.4 million, $5.0 million, $3.3 million, $0.5million, $0.2 million and $0.1 million, respectively.

 

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**11.  Marketable Equity Securities**

 

As of June 30,2008, U.S. Cellular held marketable equity securities ofRural Cellular Corporation (“RCCC”), which were obtained in connection with a sale ofnon-strategic investments.  Informationregarding the investment in RCCC is summarized below.

 
| ** **                                                                       | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                                                       | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                             |       |                                 |       |                  |       |
| Rural Cellular Corporation  370,882 Common Shares                                |       | $                                    | 16,508     |                  | $          | 16,352 |   |
| Accounting cost basis                                                            |       | (334                                 | )          | (334                  | )          |
| Gross unrealized holding gains                                                   |       | 16,174                               |       | 16,018                |       |
| Deferred income tax liability                                                    |       | (5,941                               | )          | (5,884                | )          |
| Net unrealized holding gains  included in Accumulated other comprehensive income |       | $                                    | 10,233     |                  | $          | 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 June 30, 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.

 

**12.****      ****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 accountedfor using either the equity or cost method.

 

U.S.Cellular held a 5.5% ownership interest in the Los Angeles SMSA LimitedPartnership (“LA Partnership”) as of June 30, 2008 and June 30, 2007,and recorded related income of $18.2 million and $18.4 million, respectively,for the three month periods then ended and $34.0 million and $36.4 million,respectively, for the six month periods then ended.  Such amounts are included in Equity inearnings of unconsolidated entities in the Consolidated Statements ofOperations.

 

The following table summarizes the operating results ofthe LA Partnership as furnished to U.S. Cellular by the managing partner:

 
| ** **             | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **             | ** ** | **June 30,**                    | ** ** | **June 30,**              | ** ** |
| ** **             | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | **(Dollars in thousands)** | ** ** |
|                   |       |                                 |       |                           |       |   |   |   |   |
| Revenues               |       | $                                    | 968,000    |                           | $          | 909,000 |   | $ | 1,905,000 |   | $ | 1,783,000 |   |
| Operating expenses     |       | 661,000                              |       | 582,000                        |       | 1,300,000 |   | 1,133,000 |   |
| Operating income       |       | 307,000                              |       | 327,000                        |       | 605,000 |   | 650,000 |   |
| Other income (expense) |       | 9,000                                |       | 11,000                         |       | 15,000 |   | 18,000 |   |
| Net Income             |       | $                                    | 316,000    |                           | $          | 338,000 |   | $ | 620,000 |   | $ | 668,000 |   |

 

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**13.****       Notes Payable**

 

U.S. Cellular has a $700 million revolving creditfacility available for general corporate purposes.  At June 30, 2008, outstanding notespayable and letters of credit were $50.0 million and $0.3 million,respectively, leaving $649.7 million available for use. Borrowings under therevolving credit facility bear interest at the London InterBank Offered Rate (“LIBOR”)plus a contractual spread based on U.S. Cellular’s credit rating.  At June 30, 2008, the contractual spreadwas 75 basis points.  U.S. Cellular mayselect borrowing periods of either seven days or one, two, three or six months(the one-month LIBOR was 2.46% at June 30, 2008). If U.S. Cellularprovides less than two days’ notice of intent to borrow, interest on borrowingsis the prime rate less 50 basis points (the prime rate was 5.00% at June 30,2008).  This credit facility expires in December 2009.

 

U.S. Cellular’s interest cost on its revolving credit facilitywould increase if its current credit rating from Moody’s Investor Service (“Moody’s”)were lowered and would decrease if the rating were raised. The credit facilitywould not cease to be available or accelerate solely as a result of a downgradein U.S. Cellular’s credit rating. However, a downgrade inU.S. Cellular’s credit rating could adversely affect its ability to renewexisting, or obtain access to new, credit facilities in the future.

 

The maturity date of any borrowings under U.S. Cellular’s revolvingcredit facility would accelerate in the event of a change in control.

 

The continued availability of the revolving credit facility requiresU.S. Cellular to comply with certain negative and affirmative covenants,maintain certain financial ratios and make representations regarding certainmatters at the time of each borrowing. The covenants also prescribe certain terms associated with intercompanyloans from TDS or TDS subsidiaries to U.S. Cellular or U.S. Cellularsubsidiaries. There were no intercompany loans at June 30, 2008 and December 31,2007. U.S. Cellular believes it was in compliance as of June 30, 2008,with all covenants and other requirements set forth in its revolving creditfacility.

 

**14.****      ****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.

 

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Minority Interest inSubsidiaries

 

Under SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*, certain minorityinterests in consolidated entities with finite lives may meet the standard’sdefinition of a mandatorily redeemable financial instrument and thus requirereclassification as liabilities and remeasurement at the estimated amount ofcash that would be due and payable to settle such minority interests under theapplicable entity’s organization agreement assuming an orderly liquidation ofthe finite-lived entity, net of estimated liquidation costs (the “settlementvalue”). U.S. Cellular’s consolidated financial statements include certainminority interests that meet the standard’s definition of mandatorilyredeemable financial instruments. These mandatorily redeemable minorityinterests represent interests held by third parties in consolidatedpartnerships and limited liability companies (“LLCs”), where the terms of theunderlying partnership or LLC agreement provide for a defined termination dateat which time the assets of the subsidiary are to be sold, the liabilities areto be extinguished and the remaining net proceeds are to be distributed to theminority interest holders and U.S. Cellular in accordance with the respectivepartnership and LLC agreements. The termination dates of U.S. Cellular’smandatorily redeemable minority interests range from 2042 to 2106.

 

The settlement value ofU.S. Cellular’s mandatorily redeemable minority interests is estimated to be$149.5 million at June 30, 2008. This represents the estimated amount ofcash that would be due and payable to settle minority interests assuming anorderly liquidation of the finite-lived consolidated partnerships and LLCs on June 30,2008, net of estimated liquidation costs. This amount is being disclosedpursuant to the requirements of FASB Staff Position (“FSP”) No. FAS 150-3;U.S. Cellular has no current plans or intentions to liquidate any of therelated partnerships or LLCs prior to their scheduled termination dates. Thecorresponding carrying value of the minority interests in finite-livedconsolidated partnerships and LLCs at June 30, 2008 is $49.1 million, andis included in the Balance Sheet caption Minority interest. The excess of theaggregate settlement value over the aggregate carrying value of the mandatorilyredeemable minority interests of $100.4 million is primarily due to theunrecognized appreciation of the minority interest holders’ share of theunderlying net assets in the consolidated partnerships and LLCs. Neither theminority interest holders’ share, nor U.S. Cellular’s share, of theappreciation of the underlying net assets of these subsidiaries is reflected inthe consolidated financial statements. The estimate of settlement value wasbased on certain factors and assumptions which are subjective in nature.Changes in those factors and assumptions could result in a materially larger orsmaller settlement amount.

 

**15.****       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 (the “Limited Authorization”). This authorization does not have an expiration date. During the sixmonths ended June 30, 2008, U.S. Cellular repurchased 300,000 CommonShares for $19.1 million, or an average of $63.57 per share, pursuant tothis authorization.

 

Inaddition to U.S. Cellular’s Limited Authorization discussed above, on March 6,2007, the Board of Directors of U.S. Cellular authorized the repurchase of upto 500,000 Common Shares of U.S. Cellular from time to time through open marketpurchases, block transactions, private transactions or other methods (the “AdditionalAuthorization”). During the six months ended June 30, 2007, U.S. Cellularpurchased 670,000 Common Shares from an investment banking firm in a privatetransaction in connection with an accelerated share repurchase (“ASR”). Thispurchase of 670,000 shares represents 170,000 shares under the LimitedAuthorization and 500,000 shares under the Additional Authorization.  The initial price paid to the investmentbanking firm was approximately $49.1 million or $73.22 per share. The ASR wassettled for an additional $6.5 million in cash on December 18, 2007. Thesubsequent price adjustment resulted in the final weighted average price pershare of $82.90. U.S. Cellular also received $4.6 million in cash in January 2008as a final settlement payment for Common Share repurchases executed through ASRagreements with an investment banking firm in the third and fourth quarters of2007.

 

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**16.****      ****AccumulatedOther Comprehensive Income**

 

Thecumulative balances of gains and (losses) on securities and derivativeinstruments and related income tax effects included in Accumulated othercomprehensive income are as follows:

 
| ** **                                               | ** ** | **Six Months Ended**       | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **June 30,**                    | ** ** |
| ** **                                               | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Marketable  Equity Securities**                        |       |                                 |       |   |   |
| Balance, beginning of period                             |       | $                                    | 10,134     |   | $ | 77,545 |   |
| Add (deduct):                                            |       |                                 |       |   |   |
| Unrealized gains                                         |       | 156                                  |       | 20,721 |   |
| Deferred income tax expense                              |       | (57                                  | )          | (7,595 | ) |
| Net change in unrealized gains  in comprehensive income  |       | 99                                   |       | 13,126 |   |
|                                                     |       |                                 |       |   |   |
| Recognized gain on sale of  marketable equity securities |       | —                               |       | (127,207 | ) |
| Income tax expense                                       |       | —                               |       | 46,618 |   |
| Net recognized gain in  comprehensive income             |       | —                               |       | (80,589 | ) |
| Net change in comprehensive  income                      |       | 99                                   |       | (67,463 | ) |
| Balance, end of period                                   |       | $                                    | 10,233     |   | $ | 10,082 |   |
|                                                     |       |                                 |       |   |   |
| **Derivative  Instruments**                              |       |                                 |       |   |   |
| Balance, beginning of period                             |       | $                                    | —     |   | $ | 2,837 |   |
| Add (deduct):                                            |       |                                 |       |   |   |
| Recognized gain on settlement  of derivative instruments |       | —                               |       | (4,479 | ) |
| Income tax expense                                       |       | —                               |       | 1,642 |   |
| Net recognized gain in  comprehensive income             |       | —                               |       | (2,837 | ) |
| Net change in comprehensive  income                      |       | —                               |       | (2,837 | ) |
|                                                     |       |                                 |       |   |   |
| Balance, end of period                                   |       | $                                    | —     |   | $ | — |   |
|                                                     |       |                                 |       |   |   |
| **Accumulated  Other Comprehensive Income**              |       |                                 |       |   |   |
| Balance, beginning of period                             |       | $                                    | 10,134     |   | $ | 80,382 |   |
| Net change in marketable  equity securities              |       | 99                                   |       | (67,463 | ) |
| Net change in derivative  instruments                    |       | —                               |       | (2,837 | ) |
| Net change in comprehensive  income                      |       | 99                                   |       | (70,300 | ) |
| Balance, end of period                                   |       | $                                    | 10,233     |   | $ | 10,082 |   |

 
| ** **                                                                               | ** ** | **Six Months Ended**       | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **June 30,**                    | ** ** |
| ** **                                                                               | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Comprehensive  Income**                                                                |       |                                 |       |   |   |
| Net Income                                                                               |       | $                                    | 143,159    |   | $ | 221,972 |   |
| Net change in gains (losses)  on marketable equity securities and derivative instruments |       | 99                                   |       | (70,300 | ) |
|                                                                                     |       | $                                    | 143,258    |   | $ | 151,672 |   |

 

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**17.****      ****Supplemental Cash Flow Disclosures**

 

U.S. Cellularwithheld 217,535 and 483,543 Common Shares with an aggregate value of$12.8 million and $37.6 million during the six months ended June 30,2008 and 2007, respectively, from employees who exercised stock options or whoreceived vested restricted stock awards. Such shares were withheld to cover theexercise price of stock options, if applicable, and required tax withholdings.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

UnitedStates Cellular Corporation (“U.S. Cellular”) owns, operates and invests inwireless markets throughout the United States. U.S. Cellular is an 80.9%-ownedsubsidiary of Telephone and Data Systems, Inc. (“TDS”) as of June 30,2008.

 

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 June 30,2008, U.S. Cellular owned or had rights to acquire interests in 244 wirelessmarkets and operated approximately 6,596 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 believes that operating incontiguous market areas will continue to provide it with certain economies inits capital and operating costs.

 

Financial and operatinghighlights in the first six months of 2008 included the following:

 

·                  Totalcustomers increased 3% year-over-year to 6.2 million at June 30, 2008; netretail customer additions were 119,000;

 

·                  Theretail postpay churn rate was 1.4% per month. Retail postpay customerscomprised approximately 87% of U.S. Cellular’s customer base as of June 30,2008;

 

·                  Averagemonthly service revenue per customer increased 6% year-over-year to $52.78;

 

·                  Cashflows from operating activities were $426.8 million, a decrease of 3%year-over-year. Cash flows from operating activities other than changes inassets and liabilities increased 23%. At June 30, 2008, cash and cashequivalents totaled $101.2 million and outstanding balances under the revolvingcredit facility totaled $50.0million;

 

·                  Additionsto property, plant and equipment totaled $249.5 million, including expendituresto construct cell sites, increase capacity in existing cell sites and switches,purchase equipment to expand Evolution Data Optimized (“EVDO”) services toadditional markets, outfit new and remodel existing retail stores and continuethe development and enhancements of U.S. Cellular’s office systems. Total cellsites in service increased 7% year-over-year to 6,596; and

 

·                  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 Street Wireless wasthe provisional winning bidder for 152 licenses for an aggregate bid of $300.5million, net of its designated entity discount of 25%. The licenses expected tobe awarded to King Street Wireless cover areas that overlap or are proximate orcontiguous to areas covered by licenses that U.S. Cellular currently owns,operates and/or consolidates.

 

Service revenuesincreased $182.6 million, or 10%, to $1,949.4 million in 2008 from $1,766.8million in 2007.  Customer growth andimprovements 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 primarily bygrowth in revenues from data products and services.

 

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Operating incomeincreased $4.9 million, or 2%, to $236.9 million in 2008 from $232.0 million in2007.

 

U.S. Cellularanticipates that there will be continued pressure on its operating income inthe foreseeable future related to the following factors:

 

·                  increasingpenetration in the wireless industry;

 

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

 

·                  industryconsolidation and the resultant effects on roaming revenues, service andequipment pricing and other effects of 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.

 

Investment and OtherIncome (Expense) totaled $7.2 million in 2008 and $132.1 million in 2007.  The amount for 2007 included a gain of $131.7million resulting from the settlement of forward contracts related to VodafoneADRs and sale of the remaining ADRs.

 

Net Income decreased$78.8 million to $143.2 million in 2008 compared to $222.0 million in 2007,primarily due to lower Investment and Other Income (Expense). Basic Earningsper Share was $1.63 in 2008, which was $0.90 lower than in 2007 and DilutedEarnings per Share was $1.63, which was $0.87 lower than in 2007.

 

**Cash Flows and Investments**

 

U.S.Cellular believes that cash on hand, expected future cash flows from operatingactivities and sources of external financing provide financial flexibility andare sufficient to permit U.S. Cellular to finance its contractual obligationsand anticipated capital expenditures for the foreseeable future. U.S. Cellularcontinues to seek to maintain a strong balance sheet and an investment gradecredit rating.

 

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

 

**Recent Developments**

 

Asdisclosed in U.S. Cellular’s Annual Report on Form 10-K for the year endedDecember 31, 2007, before the FCC for comment are proposals made by theFederal-State Joint Board and by the FCC itself to change the universal servicehigh cost fund in various ways.  On April 29,2008, the FCC adopted an interim cap on the high cost program for funding thatgoes to competitive ETCs, limiting total high cost funding for the state to thelevels 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. While the cap is in effect, which will be of indefinite duration,wireless ETCs such as U.S. Cellular, will receive less support than they wouldhave been otherwise eligible to receive before the cap was in effect, asoverall support will not increase as a carrier adds customers or as newcompetitive carriers are granted ETC status in the state. The FCC orderimposing the cap was published on July 1, 2008 and became effective on August 1,2008.

 

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TheFCC also is considering the other changes in the Federal Universal Service Fund(“USF”) as discussed in U.S. Cellular’s Form 10-K for the year ended December 31,2007, under the heading of “Regulation, Pending Proceedings — UniversalService.” Adoption by the FCC of any form of permanent cap on funds availableto all carriers or just to wireless carriers, limits on the number of carrierseligible to receive support for a given area, or its proposals related toidentical support or reverse auctions, would likely reduce the amount ofsupport that wireless carriers such as U.S. Cellular would be eligible toreceive.

 

Furthermore, on July 28,2008, at least 24 companies, including TDS, U.S. Cellular’s parent company,were sent a letter from Congressman Henry A. Waxman, Chairman of the Committeeon Oversight and Government Reform of the House of Representatives of theCongress of the United States, relating to USF. The letter states that thecommittee is investigating the USF High Cost Program, focusing on how therecipients of support funds use the funds they receive, and requestedinformation regarding these support funds. TDS is in the process of providingthe information requested and responding to the questions and intends to fullycooperate with regard to this request. U.S. Cellular cannot predict any action that thecommittee or Congress may take as a result of the committee’s inquiry.

 

**2008 Estimates**

 

U.S.Cellular expects the above industry, competitive and regulatory factors toimpact revenues and operating income for the next several quarters. Any changesin the above factors, as well as the effects of other drivers of U.S. Cellular’soperating results, may cause revenues and operating income to fluctuate overthe next several quarters.

 

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 filing date of U.S. Cellular’s Form 10-Q forthe six months ended June 30, 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                         |       | 175,000-225,000            |       | 333,000                 |                 |
| Service revenues                                      |       | $3,900-$4,000 million      |       | $                       | 3,679.2 million |   |
| Operating income                                      |       | $385-$435 million          |       | $                       | 396.2 million   |   |
| Depreciation, amortization and  accretion expenses(1) |       | Approx. $615 million       |       | $                       | 637.1 million   |   |
| Capital expenditures                                  |       | $525-$575 million     |       | $                       | 565.5 million   |   |

 

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| (1)  Includes losses on  exchanges and disposals of assets. |   |   |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

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**RESULTS OF OPERATIONS**

 

**Six Months Ended June 30,2008 Compared to Six Months Ended June 30, 2007**

 

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

 
| **As of June 30,(1)**                          | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Total market population of  consolidated operating markets(2) |       | 45,493,000 |       | 44,955,000 |       |
| Customers(3)                                                  |       | 6,194,000  |       | 6,010,000  |       |
| Market penetration(2)                                         |       | 13.6       | %          | 13.4       | %          |
| Total full-time equivalent  employees                         |       | 8,386      |       | 7,516      |       |
| Cell sites in service                                         |       | 6,596      |       | 6,140      |       |

 
| **For the Six Months Ended June 30,(4)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net customer additions(5)                                              |       | 90,000   |       | 189,000  |       |
| Net retail customer  additions(5)                                      |       | 119,000  |       | 217,000  |       |
| Average monthly service  revenue per customer(6)                       |       | $        | 52.78      |     | $          | 49.60 |   |
| Retail postpay churn rate per  month(7)                                |       | 1.4      | %          | 1.3      | %          |
| Total postpay churn rate per  month(7)                                 |       | 1.6      | %          | 1.7      | %          |
|                                                                        |            |          |            |          |            |  |  |

 

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| (1)    | Amounts  include results for U.S. Cellular’s consolidated operating markets as of  June 30, 2008; results for operating markets acquired during a  particular period are included as of the acquisition date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (2)    | Calculated  using 2007 and 2006 Claritas population estimates for 2008 and 2007,  respectively. “Total market population of consolidated operating markets” is  used only for the purposes of calculating market penetration of consolidated  operating markets, which is calculated by dividing customers by the total  market population (without duplication of population in overlapping markets).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | The  total market population and penetration measures for consolidated operating  markets apply to markets in which U.S. Cellular provides wireless service to  customers. For comparison purposes, total market population and penetration  related to all consolidated markets in which U.S. Cellular owns an interest  were 82,875,000 and 7.5%, and 81,581,000 and 7.4%, as of June 30, 2008  and 2007, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | As  a result of exchange transactions with AT&T that closed in  August 2003, U.S. Cellular obtained rights to acquire majority interests  in additional licenses, some of which have been previously acquired and are  reflected in the total market population of consolidated markets. During the  first six months of 2008, U.S. Cellular exercised its rights to acquire all  but one of the remaining licenses pursuant to this exchange agreement.   The licenses that were exercised but not yet acquired as of June 30,  2008 will increase total market population of consolidated markets by  1,537,000 to 84,412,000. The exercise of these rights did not require U.S.  Cellular to provide any additional consideration to AT&T, other than  consideration already provided in conjunction with the August 2003  exchange transaction. Therefore, exercise of these rights did not cause a  change in U.S. Cellular’s Licenses balance in 2008. U.S. Cellular continues  to have a right that does not have a stated expiration date to acquire a  majority interest in one license under the exchange agreement. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (3)    | U.S.  Cellular’s customer base consists of the following types of customers:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 
| ** **                                                                                                                | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                | ** ** | **2008**          | ** ** | **2007** | ** ** |
| Customers on postpay service  plans in which the end user is a customer of U.S. Cellular (“postpay  customers”) |       | 5,367,000         |       | 5,126,000 |   |
| End user customers acquired  through U.S. Cellular’s agreement with a third party (“reseller customers”)*  |       | 517,000           |       | 562,000 |   |
| Total postpay customers                                                                                                   |       | 5,884,000         |       | 5,688,000 |   |
| Customers on prepaid service  plans in which the end user is a customer of U.S. Cellular (“prepaid  customers”) |       | 310,000           |       | 322,000 |   |
| Total customers                                                                                                           |       | 6,194,000         |       | 6,010,000 |   |

 

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| * Pursuant to its agreement with the third  party, U.S. Cellular is compensated by the third party on a postpay basis; as  a result, all customers U.S. Cellular has acquired through this agreement are  considered to be postpay customers. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| (4)    | Amounts  include results for U.S. Cellular’s consolidated operating markets for the  period January 1 through June 30; operating markets acquired during  a particular period are included as of the acquisition date.                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (5)    | “Net  customer additions” represents the number of net customers added to U.S.  Cellular’s overall customer base through all of its marketing distribution  channels, excluding any customers transferred through acquisitions,  divestitures or exchanges. “Net retail customer additions” represents the  number of net customers added to U.S. Cellular’s customer base through its  marketing distribution channels, excluding net reseller customers added to  its reseller customer base and excluding any customers transferred through  acquisitions, divestitures or exchanges. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (6)    | Management  uses this measurement to assess the amount of service revenue that U.S.  Cellular generates each month on a per customer basis. Variances in this  measurement are monitored and compared to variances in expenses on a per  customer basis. Average monthly service revenue per customer is calculated as  follows:                                                                                                                                                                                                                                                                                       |

 
| ** **                                                         | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Service revenues per Consolidated  Statements of Operations (000s) |       | $                              | 1,949,446  |   | $ | 1,766,801 |   |
| Divided by average customers  during period (000s)*                |       | 6,156                          |       | 5,937 |   |
| Divided by number of months in  each period                        |       | 6                              |       | 6 |   |
|                                                               |       |                           |       |   |   |
| Average monthly service  revenue per customer                      |       | $                              | 52.78      |   | $ | 49.60 |   |

 

----

| * “Average customers during period” is  calculated by adding the number of total customers, including reseller  customers, at the beginning of the first month of the period and at the end  of each month in the period and dividing by the number of months in the  period plus one. Acquired and divested customers are included in the  calculation on a prorated basis for the amount of time U.S. Cellular included  such customers during each period. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

 

**Components of Operating Income**

 
| **Six Months Ended June 30,**                                      | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** | ** ** |
| Retail service                                                                         |       | $                                    | 1,679,777  |       | $          | 1,543,050                 |       | $                      | 136,727    |   | 8.9 | % |
| Inbound roaming                                                                        |       | 117,122                              |       | 89,352     |       | 27,770                    |       | 31.1                   | %          |
| Long-distance and other                                                                |       | 152,547                              |       | 134,399    |       | 18,148                    |       | 13.5                   | %          |
| Service revenues                                                                       |       | 1,949,446                            |       | 1,766,801  |       | 182,645                   |       | 10.3                   | %          |
| Equipment sales                                                                        |       | 149,002                              |       | 139,519    |       | 9,483                     |       | 6.8                    | %          |
| Total Operating Revenues                                                               |       | 2,098,448                            |       | 1,906,320  |       | 192,128                   |       | 10.1                   | %          |
|                                                                                   |       |                                 |       |       |       |                      |       |                   |       |
| System operations (excluding  Depreciation, amortization and accretion reported below) |       | 387,668                              |       | 343,693    |       | 43,975                    |       | 12.8                   | %          |
| Cost of equipment sold                                                                 |       | 346,231                              |       | 298,985    |       | 47,246                    |       | 15.8                   | %          |
| Selling, general and  administrative                                                   |       | 830,001                              |       | 733,534    |       | 96,467                    |       | 13.2                   | %          |
| Depreciation, amortization and  accretion                                              |       | 287,788                              |       | 291,976    |       | (4,188                    | )          | (1.4                   | )%         |
| Loss on asset disposals, net                                                           |       | 9,892                                |       | 6,137      |       | 3,755                     |       | 61.2                   | %          |
| Total Operating Expenses                                                               |       | 1,861,580                            |       | 1,674,325  |       | 187,255                   |       | 11.2                   | %          |
| Total Operating Income                                                                 |       | $                                    | 236,868    |       | $          | 231,995                   |       | $                      | 4,873      |   | 2.1 | % |

 

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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 FederalUniversal Service Fund (“USF”).

 

Theincrease in service revenues was due to the growth in the average customerbase, which increased 4% to 6.2 million in 2008 from 5.9 million in2007, and higher monthly service revenue per customer; monthly service revenueper customer averaged $52.78 in 2008 and $49.60 in 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 service. However, the level of growth in the customer base for 2008will depend upon U.S. Cellular’s ability to attract new customers and retainexisting customers in a highly, and increasingly, competitive marketplace. See “Overview- 2008 Estimates” for U.S. Cellular’s estimate of net retail customer additionsfor 2008.

 

Theincrease in average monthly retail service revenue was driven primarily bygrowth in revenues from data products and services and higher regulatory feessuch as universal service fund contributions that are billed to customers.Average monthly retail service revenues per customer increased 5% to $45.48 in2008 from $43.32 in 2007.

 

Monthlylocal retail minutes of use per customer averaged 982 in 2008 and 821 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$239.4 million in 2008 and $163.3 million in 2007, and representing 12% oftotal service revenues in 2008 compared to 9% of total service revenues in2007. Such growth, which positively impacted average monthly retail servicerevenues per customer, reflected customers’ continued and increasing acceptanceand usage of U.S. Cellular’s text messaging and picture messaging services, **easy**edgeSM service and applications, and Smartphonehandsets and services.

 

***Inbound roaming revenues***

 

Theincrease in inbound roaming revenues in 2008 was related primarily to overallgrowth in the number of customers and retail minutes of use per customerthroughout the wireless industry, including usage related to data products andservices, which led to an increase in inbound traffic from other wirelesscarriers.

 

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U.S. Cellular anticipates that inbound roaming minutes of use and,therefore, inbound roaming revenues might decline significantly over the nextseveral quarters reflecting the expected completion of recently announcedacquisitions in the industry. U.S. Cellular anticipates that such a declinewould more than offset the impact of the trends of increasing minutes of useand increasing data usage described in the preceding paragraph. U.S. Cellularalso anticipates that its roaming revenue per minute of use will decline overtime due to the renegotiation of existing contracts as a result of theaforementioned industry consolidation.

 

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

 

In2008, there was a $20.8 million increase in other revenues, partiallyoffset by a $2.6 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 eightstates, respectively; the ETC revenue amounts recorded in 2008 and 2007 were$61.9 million and $43.3 million, respectively.

 

Long-distanceand other revenues also include long-distance roaming revenues.  U.S. Cellular anticipates that long-distanceroaming minutes of use and, therefore, long-distance roaming revenues mightdecline significantly over the next several quarters reflecting the expectedcompletion of recently announced acquisitions in the industry.

 

***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 handsetsand accessories to agents. All equipment sales revenues are recorded net ofanticipated rebates.

 

U.S.Cellular strives 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 8% inaverage revenue per handset sold, primarily reflecting the sale of moreexpensive handsets with expanded capabilities.

 

**Operating Expenses**

 

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

 

Systemoperations expenses (excluding Depreciation, amortization, and accretion) includecharges from wireline telecommunications service providers for U.S. Cellular’scustomers’ use of their facilities, costs related to local interconnection tothe wireline network, charges for maintenance of U.S. Cellular’s network,long-distance charges, outbound roaming expenses and payments to third-partydata product and platform developers. Key components of the overall increasesin system operations expenses were as follows:

 

·                  maintenance, utility andcell site expenses increased $18.6 million, or 14%, in 2008, primarilydriven by increases in the number of cell sites within U.S. Cellular’s network,resulting in higher cell site rent expense, and software maintenance costs to supportrapidly growing data needs. The number of cell sites totaled 6,596 in 2008 and6,140 in 2007, as U.S. Cellular continued to grow by expanding and enhancingcoverage in its existing markets and also through acquisitions of existingwireless operations;

 

·                  expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$16.5 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

 

·                  the cost of network usageon U.S. Cellular’s systems increased $8.9 million, or 7%, in 2008, as totalminutes used on U.S. Cellular’s systems increased 20% in 2008, primarily drivenby continued migration to pricing plans with a larger number of packagedminutes, mostly offset by the ongoing reduction in the per-minute cost of usagefor U.S. Cellular’s network. In addition, data network and developer costsincreased driven by the increase in data usage.

 

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Managementexpects total system operations expenses to increase in the foreseeable future,driven by the following factors:

 

·                  increases in the number ofcell sites and other network facilities within U.S. Cellular’s systems as itcontinues to add capacity and enhance quality in most markets and continuesdevelopment activities in recently launched markets; and

 

·                  increases in minutes ofuse, both on U.S. Cellular’s network and by U.S. Cellular’s customers on othercarriers’ networks when 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***

 

Costof equipment sold increased in 2008 primarily from a 17% increase in theaverage cost per handset as a result of sales of more expensive handsets withexpanded capabilities.  U.S. Cellularbelieves that the expanded capabilities will drive increases in data revenues.

 

***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 were a factor. Key componentsof the increases in Selling, general and administrative expenses were as follows:

 

·                  general and administrativeexpenses increased $51.9 million, or 13%, in 2008, due to increases in expensesrelated to the operations of U.S. Cellular’s regional support offices,primarily due to the increase in the customer base, increases related to baddebts expense (reflecting both higher revenues and higher bad debts experienceas a percent of revenues), increases in consulting and outsourcing expenses,and increases in federal universal service fund contributions and otherregulatory fees and taxes due to an increase in the contribution rate and anincrease in service revenues;

 

·                  advertising expensesincreased $25.3 million, or 26%, in 2008, primarily due to an increase inmedia purchases, including the launch of our new branding campaign launched inJune, Believe in Something BetterTM;

 

·                  other selling andmarketing expenses increased $19.3 million, or 8%, in 2008, reflecting moreretail sales associates, higher commissions due to a greater number of customerrenewal transactions and higher retail facility expenses.

 

***Depreciation, amortization andaccretion expenses***

 

See “Financial Resources”and “Liquidity and Capital Resources” for further discussions of U.S. Cellular’scapital expenditures.

 

Amortizationexpense decreased $4.8 million in 2008, primarily due to a customer listbecoming fully amortized in April 2007.

 

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In accordancewith SFAS No. 142, *Goodwill and OtherIntangible Assets,*U.S. Cellular performed the annual impairmentreview for its investment in licenses at the unit of accounting level in thesecond quarter of 2008 and 2007. Such reviews resulted in no impairment loss in2008 and a loss of $2.1  million in 2007. The impairment loss in2007 related to units of accounting in which operations had not yet begun. Fairvalues for such units of accounting were determined by reference to valuesestablished by auctions and other market transactions involving licensescomparable to those included in each specific unit of accounting.

 

***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 (Expense)**

 
| ** **                                        | ** ** | ** **                           | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Six Months Ended June 30,** | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                        | ** ** | ** **                           | ** ** |
| Total Operating Income                            |       | $                                    | 236,868    |       | $          | 231,995        |       | $              | 4,873      |   | 2.1 | % |
|                                              |       |                                 |       |       |       |           |       |           |       |
| Equity in earnings from  unconsolidated entities  |       | 44,042                               |       | 46,078     |       | (2,036         | )          | (4.4           | )%         |
| Interest and dividend Income                      |       | 3,334                                |       | 5,203      |       | (1,869         | )          | (35.9          | )%         |
| Fair value adjustment of  derivative instruments  |       | —                               |       | (5,388     | )          | 5,388          |       | N/M            |       |
| Gain on sale of investments                       |       | —                               |       | 131,686    |       | (131,686       | )          | N/M            |       |
| Interest expense                                  |       | (40,889                              | )          | (45,009    | )          | 4,120          |       | 9.2            | %          |
| Other, net                                        |       | 718                                  |       | (494       | )          | 1,212          |       | N/M            |       |
| Income Taxes                                      |       | (91,556                              | )          | (135,388   | )          | 43,832         |       | 32.4           | %          |
| Minority share of income, net  of tax             |       | (9,358                               | )          | (6,711     | )          | (2,647         | )          | (39.4          | )%         |
| Net Income                                        |       | $                                    | 143,159    |       | $          | 221,972        |       | $              | (78,813    | ) | (35.5 | )% |
|                                              |       |                                 |       |       |       |           |       |           |       |
| Basic Earnings per Share                          |       | $                                    | 1.63       |       | $          | 2.53           |       | $              | (0.90      | ) | (35.6 | )% |
| Diluted Earnings per Share                        |       | $                                    | 1.63       |       | $          | 2.50           |       | $              | (0.87      | ) | (34.8 | )% |

 
| N/M =  Not Meaningful |
|----------------------------|

 

***Equity in earningsfrom unconsolidated entities***

 

Equity in earnings from unconsolidated entities represents U.S. Cellular’sshare of net income from the markets in which it has a minority interest andfollows the equity method of accounting. U.S. Cellular follows the equitymethod of accounting for minority interests in which its ownership interestequals or exceeds 20% for corporations and 3% for partnerships and limitedliability companies. Equity in earnings from unconsolidated entities decreasedin 2008 primarily due to a $2.4 million decrease in income from U.S.Cellular’s investment in the Los Angeles SMSA Limited Partnership (“LAPartnership”).

 

U.S. Cellular’s investment in the LA Partnership contributed$34.0 million and $36.4 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 2008 compared to 2007, and a change inthe composition of U.S. Cellular’s cash investments in 2008 compared to2007.  During 2008, U.S. Cellularinvested substantially all of its cash balances in money market funds thatinvested exclusively in short-term U.S. Treasury securities.  During 2007, U.S. Cellular investedsubstantially all of its cash balances in prime money market funds.

 

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***Fair valueadjustment of derivative 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.

 

***Gain on sale ofinvestments***

 

Gain on saleof investments in 2007**wasattributable to the settlement of variable prepaid forward contracts related toVodafone ADRs and the sale of the remaining Vodafone ADRs.  See Note 4 - Gain on Sale of Investments ofNotes to Consolidated Financial Statements.

 

***Interest Expense***

 

The decrease in interest expense in 2008 was primarily due to U.S.Cellular settling its variable prepaid forward contracts in May 2007.

 

***Income Taxes***

 

The overall effective tax rate on incomebefore income taxes and minority interest for 2008 and 2007 was 37.5% and37.2%, respectively.

 

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 consolidated group.  For financial statement purposes, U.S.Cellular and its subsidiaries compute their income, income taxes and credits asif they comprised a separate affiliated group and were not included in the TDSgroup.

 

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**Three Months Ended June 30,2008 Compared to Three Months Ended June 30, 2007**

 

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

 
| **Three Months Ended June 30,**                                    | ** ** | **2008**                             | ** ** | **2007** | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Retail service                                                                         |       | $                                    | 845,564    |     | $          | 788,535                   |       | $                      | 57,029     |   | 7.2 | % |
| Inbound roaming                                                                        |       | 63,033                               |       | 48,084   |       | 14,949                    |       | 31.1                   | %          |
| Long-distance and other                                                                |       | 78,755                               |       | 69,599   |       | 9,156                     |       | 13.2                   | %          |
| Service revenues                                                                       |       | 987,352                              |       | 906,218  |       | 81,134                    |       | 9.0                    | %          |
| Equipment sales                                                                        |       | 73,240                               |       | 65,428   |       | 7,812                     |       | 11.9                   | %          |
| Total Operating Revenues                                                               |       | 1,060,592                            |       | 971,646  |       | 88,946                    |       | 9.2                    | %          |
|                                                                                   |       |                                 |       |     |       |                      |       |                   |       |
| System operations (excluding  Depreciation, amortization and accretion reported below) |       | 196,652                              |       | 176,409  |       | 20,243                    |       | 11.5                   | %          |
| Cost of equipment sold                                                                 |       | 172,194                              |       | 148,241  |       | 23,953                    |       | 16.2                   | %          |
| Selling, general and  administrative                                                   |       | 422,367                              |       | 374,668  |       | 47,699                    |       | 12.7                   | %          |
| Depreciation, amortization and  accretion                                              |       | 145,258                              |       | 146,024  |       | (766                      | )          | (0.5                   | )%         |
| Loss on asset disposals, net                                                           |       | 6,219                                |       | 2,832    |       | 3,387                     |       | N/M                    |       |
| Total Operating Expenses                                                               |       | 942,690                              |       | 848,174  |       | 94,516                    |       | 11.1                   | %          |
| Total Operating Income                                                                 |       | $                                    | 117,902    |     | $          | 123,472                   |       | $                      | (5,570     | ) | (4.5 | )% |

 
| **Operating Revenues** |
|------------------------|

 

***Service revenues***

 

Theincrease in service revenues was due to the growth in the average customerbase, which increased 3% to 6.2 million in 2008 from 6.0 million in2007 and higher monthly service revenue per customer; monthly service revenueper customer averaged $53.27 in 2008 and $50.42 in 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.

 

Theincrease in average monthly retail service revenue was driven primarily bygrowth in revenues from data products and services and higher regulatory feessuch as universal service fund contributions that are billed to customers.Average monthly retail service revenues per customer increased 4% to $45.62 in2008 from $43.87 in 2007.

 

Monthlylocal retail minutes of use per customer averaged 1,012 in 2008 and 858 in2007. The increase was primarily driven by U.S. Cellular’s focus on designingsales incentive programs and customer billing rate plans to stimulate overallusage.

 

Revenuesfrom data products and services grew significantly year-over-year, totaling$123.7 million in 2008 and $85.5 million in 2007, and representing13% of total service revenues in 2008 compared to 9% of total service revenuesin 2007. This growth reflected customers’ continued and increasing acceptanceand usage of U.S. Cellular’s text messaging and picture messaging services, **easy**edgeSM serviceand applications, and Smartphone handsets and services.

 

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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 and services, which led to an increase ininbound traffic from other wireless carriers.

 

U.S.Cellular anticipates that inbound roaming minutes of use and, therefore,inbound roaming revenues might decline significantly over the next severalquarters reflecting the expected completion of recently announced acquisitionsin the industry. U.S. Cellular anticipates that such a decline would more thanoffset the impact of the trends of increasing minutes of use and increasingdata usage described in the preceding paragraph. U.S. Cellular also anticipatesthat its roaming revenue per minute of use will decline over time due to therenegotiation of existing contracts as a result of the aforementioned industryconsolidation.

 

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

 

Theincrease in 2008 reflected an $11.4 million increase in other revenues,partially offset by a $2.3 million decrease in long-distance revenues.  The growth in other revenues was due primarilyto an increase in ETC funds that were received from the USF. In 2008 and 2007,U.S. Cellular was eligible to receive ETC funds in eleven and eight states,respectively; the ETC revenue amounts recorded in 2008 and 2007 were $31.5million and $20.8 million, respectively.

 

Long-distanceand other revenues also include long-distance roaming revenues.  U.S. Cellular anticipates that long-distanceroaming minutes of use and, therefore, long-distance roaming revenues mightdecline significantly over the next several quarters reflecting the expectedcompletion of recently announced acquisitions in the industry.

 

***Equipment sales revenues***

 

Theincrease in 2008 equipment sales revenues was driven by an increase of 13% inaverage revenue per handset sold, primarily reflecting the sale of moreexpensive handsets with expanded capabilities.

 

**Operating Expenses**

 

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

 

Keycomponents of the overall increases in system operations expenses were as follows:

 

·                  maintenance, utility andcell site expenses increased $6.5 million, or 9%, in 2008, primarilydriven by increases in the number of cell sites within U.S. Cellular’s network,resulting in higher cell site rent expense, and software maintenance costs tosupport rapidly growing data needs. The number of cell sites totaled 6,596 in2008 and 6,140 in 2007, as U.S. Cellular continued to grow by expanding andenhancing coverage in its existing markets and also through acquisitions ofexisting wireless operations;

 

·                  expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$8.4 million, or 21%, in 2008. The increase is due to an increase inroaming minutes of use driven by customer migration to national and wide areaplans; and

 

·                  the cost of network usageon U.S. Cellular’s systems increased $5.3 million, or 8%, in 2008, as totalminutes used on U.S. Cellular’s systems increased 18% in 2008, primarily drivenby continued migration to pricing plans with a larger number of packagedminutes, mostly offset by the ongoing reduction in the per-minute cost of usagefor U.S. Cellular’s network. In addition, data network and developer costsincreased driven by the increase in data usage.

 

***Cost of equipment sold***

 

Theincrease in Cost of equipment sold was due primarily to a 17% 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.

 

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***Selling, general and administrativeexpenses***

 

Theincrease in Selling, general and administrative expenses 2008 was due primarilyto higher expenses associated with acquiring, serving and retaining customers,driven in part by an increase in U.S. Cellular’s customer base in 2008;increased regulatory charges and taxes also drove the increase. Key componentsof the increases in selling, general and administrative expenses were asfollows:

 

·                  general and administrative expenses increased $27.3million, or 14%, in 2008, due to increases in expenses related to theoperations of U.S. Cellular’s regional support offices (primarily due to theincrease in the customer base), increases in consulting and outsourcingexpenses, and higher federal universal service fund contributions and otherregulatory fees and taxes due to an increase in the contribution rate and an increasein service revenues;

 

·                  advertising expensesincreased $10.6 million, or 20%, in 2008, primarily due to an increase inmedia purchases, including the launch of our new branding campaign launched inJune, Believe in Something BetterTM;

 

·                  other selling andmarketing expenses increased $9.8 million, or 8%, in 2008, reflecting moreretail sales associates, higher commissions due to a greater number of customerrenewal transactions and higher retail facility expenses.

 

***Depreciation, amortization andaccretion expenses***

 

See “Financial Resources”and “Liquidity and Capital Resources” for further discussions of U.S. Cellular’scapital expenditures.

 

Amortizationexpense decreased $1.5 million in 2008, primarily due to a customer listbecoming fully amortized in April 2007.

 

In accordance with SFAS No. 142, *Goodwill andOther Intangible Assets*, U.S. Cellular performed the annualimpairment review for its investment in licenses at the unit of accountinglevel in the second quarter of 2008 and 2007. Such reviews resulted in noimpairment loss in 2008 and a loss of $2.1 million in 2007. The impairment lossin 2007 related to units of accounting in which operations had not yet begun.Fair values for such units of accounting were determined by reference to valuesestablished by auctions and other market transactions involving licensescomparable to those included in each specific unit of accounting.

 

***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.

 

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**Components of Other Income (Expense)**

 
| ** **                                          | ** ** | ** **                           | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Three Months Ended June 30,** | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** ** |
|                                                |       |                                 |       |       |       |           |       |           |       |   |   |   |
| Total Operating Income                              |       | $                                    | 117,902    |       | $          | 123,472        |       | $              | (5,570     | ) | (4.5 | )% |
|                                                |       |                                 |       |       |       |           |       |           |       |
| Equity in earnings from  unconsolidated entities    |       | 22,807                               |       | 22,980     |       | (173           | )          | (0.8           | )%         |
| Interest and dividend Income                        |       | 1,429                                |       | 2,653      |       | (1,224         | )          | (46.1          | )%         |
| Fair value adjustment of  derivative instruments    |       | —                               |       | (17,849    | )          | 17,849         |       | N/M            |       |
| Gain on sale of investments                         |       | —                               |       | 131,686    |       | (131,686       | )          | N/M            |       |
| Interest expense                                    |       | (20,774                              | )          | (21,325    | )          | 551            |       | 2.6            | %          |
| Other, net                                          |       | 600                                  |       | 91         |       | 509            |       | N/M            |       |
| Income Taxes                                        |       | (44,016                              | )          | (91,500    | )          | 47,484         |       | 51.9           | %          |
| Minority share of income, net  of tax               |       | (5,346                               | )          | (2,637     | )          | (2,709         | )          | N/M            |       |
| Net Income                                          |       | $                                    | 72,602     |       | $          | 147,571        |       | $              | (74,969    | ) | (50.8 | )% |
|                                                |       |                                 |       |       |       |           |       |           |       |
| Basic Earnings per Share                            |       | $                                    | 0.83       |       | $          | 1.68           |       | $              | (0.85      | ) | (50.6 | )% |
| Diluted Earnings per Share                          |       | $                                    | 0.83       |       | $          | 1.67           |       | $              | (0.84      | ) | (50.3 | )% |

 
| N/M = Not Meaningful |   |   |   |   |   |   |   |   |   |
|---------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 

***Equity in earningsfrom unconsolidated entities***

 

U.S. Cellular’s investment in the LA Partnership contributed$18.2 million and $18.4 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 2008 compared to 2007, and a change inthe composition of U.S. Cellular’s cash investments in 2008 compared to2007.  During 2008, U.S. Cellularinvested substantially all of its cash balances in money market funds thatinvested exclusively in short-term U.S. Treasury securities.  During 2007, U.S. Cellular investedsubstantially all of its cash balances in prime money market funds.

 

***Fair valueadjustment of derivative 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.

 

***Gain on sale ofinvestments***

 

Gain on saleof investments in 2007**wasattributable to the settlement of variable prepaid forward contracts related toVodafone ADRs and the sale of the remaining Vodafone ADRs.  See Note 4 - Gain on Sale of Investments ofNotes to the Consolidated Financial Statements.

 

***Interest Expense***

 

The decrease in interest expense in 2008 was primarily due to U.S.Cellular settling its variable prepaid forward contracts in May 2007.

 

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***Income Taxes***

 

The overalleffective tax rate on income before income taxes and minority interest for 2008and 2007 was 36.1% and 37.9%, respectively. The effective taxrate in 2008 is lower than 2007 primarily due to a reduction in state incometax expense.

 

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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 FASBStaff Position (“FSP”) FAS 157-2, to defer the effective date ofSFAS 157 for all nonfinancial assets and liabilities, except those itemsrecognized or disclosed at fair value on an annual or more frequently recurringbasis, until years beginning after November 15, 2008. U.S. Cellularadopted SFAS 157 for its financial assets and liabilities effective January 1,2008 (See Note 6 - Fair Value Measurements in the Notes to the ConsolidatedFinancial Statements for more information related to U.S. Cellular’s adoptionof SFAS 157 for its financial assets and liabilities). U.S. Cellular iscurrently reviewing the adoption requirements related to its nonfinancialassets and liabilities and has not yet determined the impact, if any, on itsfinancial position or results of 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) is effective on a prospective basis for all businesscombinations 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) also would be determined in accordance with theprovisions 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 FASBStatement No. 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. SFAS 160 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 for U.S. Cellular on a prospective basis for U.S.Cellular beginning January 1, 2009, except for the presentation anddisclosure requirements, which will be applied retrospectively. U.S. Cellularis currently reviewing the requirements of SFAS 160 and has not yetdetermined the impact, if any, on its financial position or results ofoperations.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133*(“SFAS 161”). SFAS 161 expands the disclosure requirements forderivative instruments and hedging activities. The Statement specificallyrequires entities to provide enhanced disclosures addressing the following (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under Statement 133 andits related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS 161 is effective for U.S. Cellular beginning January 1,2009. As of June 30, 2008, U.S. Cellular did not hold any derivativeinstruments.

 

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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 beginning January 1,2009. U.S. Cellular does not anticipate that the adoption of FSP FAS 142-3 willhave an impact on its financial position or results of operations.

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles* (“SFAS 162”). SFAS 162 identifies aconsistent framework, or hierarchy, for selecting accounting principles to beused in preparing financial statements that are presented in conformity withU.S. GAAP for non-governmental entities. SFAS 162 is effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendments to AU Section 411, *The Meaning of PresentingFairly in Conformity with Generally Accepted Accounting Principles*.U.S. Cellular does not anticipate that the adoption of SFAS 162 will have animpact on its financial statements or disclosures.

 

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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 discussion in this Financial Resourcessection compares the six months ended June 30, 2008 to the six monthsended June 30, 2007.

 

The followingtable provides a summary of U.S. Cellular’s cash flow activities:

 
| ** **                                            | ** ** | **Six Months Ended**       | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                    | ** ** |
| ** **                                            | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from (used in)                             |       |                                 |       |   |   |
| Operating activities                                  |       | $                                    | 426,832    |   | $ | 440,437 |   |
| Investing activities                                  |       | (556,492                             | )          | (256,651 | ) |
| Financing activities                                  |       | 26,282                               |       | (70,616 | ) |
| Net increase (decrease) in  cash and cash equivalents |       | $                                    | (103,378   | ) | $ | 113,170 |   |

 

**Cash Flows from Operating Activities**

 

Excludingchanges in assets and liabilities from operations, cash flows from operatingactivities totaled $517.8 million in 2008 and $420.8 million in 2007.  Changes in assets and liabilities fromoperations required $91.0 million in 2008, primarily as a result of increasesin accounts receivable and inventory balances of $50.1 million and $19.8million, respectively. The increase in accounts receivable is attributable toincreased retail service revenue and the timing of customer payments. Theincrease in inventory is primarily attributable to new higher value handsetsintroduced in 2008. Changes in assets and liabilities from operations provided$19.6 million in 2007, reflecting an increase in accrued taxes partiallyoffset by changes in other working capital accounts. The increase in accruedtaxes in 2007 was primarily attributable to a current tax liability of $35.5million incurred on the settlement of the Vodafone ADR variable prepaid forwardcontracts and disposition of the remaining shares.

 

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

 
| ** **                                                                        | ** ** | **Six Months Ended**       | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                        | ** ** | **June 30,**                    | ** ** |
| ** **                                                                        | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                              |       |                                 |       |   |   |
| Net income                                                                        |       | $                                    | 143,159    |   | $ | 221,972 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities |       | 374,693                              |       | 198,877 |   |
|                                                                              |       | $                                    | 517,852    |   | $ | 420,849 |   |
| Changes in assets and  liabilities                                                |       | (91,020                              | )          | 19,588 |   |
|                                                                              |       | $                                    | 426,832    |   | $ | 440,437 |   |

 

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**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.

 

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 and system developmentexpenditures totaled $249.5 million in 2008 and $246.8 million in 2007.These expenditures were financed primarily with internally generated cash andborrowings under U.S. Cellular’s revolving credit facility. These expenditureswere made to fund construction of new cell sites, increase capacity in existingcell sites and switches, remodel new and existing retail stores and open newstores, and develop office systems.

 

Cash required for acquisitions totaled $312.6 million in 2008 and$18.3 million in 2007.  U.S.Cellular’s 2008 acquisitions included capital contributions and advances to KingStreet Wireless of $300.5 million for the purchase of licenses in Auction 73,cash paid for the remaining interest in North Carolina RSA 1 Partnership of$6.9 million, cash paid for licenses in Maine of $5.0 million and otheracquisitions of $0.2 million. Cash amounts paid for the acquisitions may differfrom the amount of purchase price recorded due to cash acquired in thetransactions, and also amounts not paid prior to June 30, 2008. See Note 3- Acquisitions, Divestitures and Exchanges in the Notes to the ConsolidatedFinancial Statements for details of these transactions.

 

**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.

 

Cash received from short-term borrowings provided $100.0 million and$25.0 million during 2008 and 2007, respectively; while repayments requiredcash payments of $50.0 million and $60.0 million during 2008 and 2007,respectively.

 

There-issuance of treasury shares in connection with employee benefits plans,net of tax payments made by U.S. Cellular on behalf of stock award holders, required****$1.9million in 2008 and provided $9.2 million in 2007. In certain situations, U.S.Cellular withholds shares that are issuable upon the exercise of stock optionsor the vesting of restricted shares to cover, and with a value equivalent to,the exercise price and/or the amount of taxes required to be withheld from thestock award holder at the time of the exercise or vesting. U.S. Cellular thenpays the amount of the required tax withholdings to the taxing authorities incash. Excess tax benefits from employee exercises of stock awards provided$0.9 million in 2008 and $9.7 million in 2007, respectively.

 

U.S. Cellularrepurchased $19.1 million of Common Shares during the sixmonths ended June 30, 2008.  U.S. Cellular also received $4.6 million in2008 from an investment banking firm for the final settlement of theaccelerated share repurchases made in 2007. U.S. Cellular paid $49.1 million inconnection with its Accelerated Share Repurchase (“ASR”) program during the sixmonths ended June 30, 2007. The ASR was subsequently settled for anadditional $6.5 million in cash in December 2007.  See Note 15 - Common Share Repurchasesin the Notes to the Consolidated Financial Statements.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

U.S. Cellular believes thatcash flows from operating activities, existing cash balances and fundsavailable from lines of credit arrangements provide financial flexibility forU.S. Cellular to meet both its short- and long-term needs. U.S. Cellular alsomay have access to public and private capital markets to help meet its long-termfinancing 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.

 

**Cash and Cash Equivalents**

 

At June 30, 2008, U.S.Cellular had $101.2 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 June 30, 2008, U.S. Cellular investedsubstantially all of its cash balances in money market funds that investedexclusively in short-term U.S. Treasury securities. Management believes thatthe credit risk associated with these investments is low.

 

**Revolving Credit Facility**

 

U.S.Cellular has a $700 million revolving credit facility available for generalcorporate purposes.  At June 30,2008, U.S. Cellular had $50.0 million of short-term borrowings and $0.3 millionof outstanding letters of credit, leaving $649.7 million available for use.Borrowings under the revolving credit facility bear interest at LIBOR plus acontractual spread based on U.S. Cellular’s credit rating.  At June 30, 2008, the contractual spreadwas 75 basis points.  U.S. Cellular mayselect borrowing periods of either seven days or one, two, three or six months(the one-month LIBOR was 2.46% at June 30, 2008).  If U.S. Cellular provides less than two days’notice of intent to borrow, interest on borrowings is the prime rate less 50basis points (the prime rate was 5.00% at June 30, 2008).  This credit facility expires in December 2009.

 

U.S. Cellular’s interestcost on its revolving credit facility would increase if its current creditrating from Moody’s Investor Service (“Moody’s”) were lowered and woulddecrease if the rating were raised. The credit facility would not cease to beavailable or accelerate solely as a result of a downgrade in U.S. Cellular’scredit rating. However, a downgrade in U.S. Cellular’s credit rating couldadversely affect its ability to renew existing, or obtain access to new, creditfacilities in the future. U.S. Cellular’s credit ratings as of June 30,2008 and the dates that such 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.

 

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Thecontinued availability of the revolving credit facility requires U.S. Cellularto comply with certain negative and affirmative covenants, maintain certain financialratios and make representations regarding certain matters at the time of eachborrowing. The covenants also prescribe certain terms associated withintercompany loans from TDS or TDS subsidiaries to U.S. Cellular or U.S.Cellular subsidiaries. U.S. Cellular believes it was in compliance as of June 30,2008 with all covenants and other requirements set forth in its revolvingcredit facility.

 

U.S.Cellular plans to obtain a new revolving credit facility prior to the December 2009expiration date of the current facility. Due to current unfavorable creditmarket conditions, U.S. Cellular may not be able to obtain similar terms or thesame amount of availability as exist in the current facility. If U.S. Cellular isunable to obtain a new revolving credit facility on acceptable terms or reducedavailability under the planned new revolving credit facility, it couldadversely affect U.S. Cellular’s future liquidity, capital resources, business,financial condition or results of operations.

 

**Long-Term Financing**

 

U.S.Cellular’s long-term debt indenture does not contain any provisions resultingin acceleration of the maturities of outstanding debt in the event of a changein U.S. Cellular’s credit rating. However, a downgrade in U.S. Cellular’scredit rating could adversely affect its ability to obtain long-term debtfinancing in the future.  U.S. Cellularbelieves it was in compliance as of June 30, 2008 with all covenants andother requirements set forth in its long-term debt indenture.

 

U.S.Cellular filed a shelf registration statement on Form S-3 with the SEC on May 9,2008.  Because U.S. Cellular is a “well-knownseasoned issuer” as defined in Rule 405 under the Securities Act of 1933,as amended, such registration statement became automatically effective uponfiling with the SEC and registered an indeterminate amount of debtsecurities.  Under such automatic shelfregistration statement, U.S. Cellular is permitted, at any time and from timeto time, to sell senior debt securities in one or more offerings in anindeterminate amount.  U.S. Cellular doesnot have any set time frame for issuing any specific amount of debt securitiesunder such registration statement at the present time.  U.S. Cellular’s ability to complete anoffering pursuant to such shelf registration statement will be dependent onmarket conditions and other factors at the time.

 

**Marketable Equity Securities**

 

Asof June 30, 2008, U.S. Cellular owned 370,882 shares of Rural CellularCorporation (“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 June 30, 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 capital expenditures for 2008 are expected to be approximately$525-$575 million. These expenditures primarily address the followingneeds:

 

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

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

·                  overlay EVDO technology incertain markets; and

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

 

U.S.Cellular plans to finance its capital expenditures program using cash on hand,cash flows from operating activities and short-term debt.

 

**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. U.S. Cellular from time totime may be engaged in negotiations relating to the acquisition, divestiture orexchange of companies, strategic properties or wireless spectrum.  In general, U.S. Cellular may not disclosesuch transactions until there is a definitive agreement.

 

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

 

Fromtime to time, the FCC conducts auctions through which additional spectrum ismade available for the provision of wireless services.  An FCC auction ofadditional spectrum, designated by the FCC as Auction 78, is scheduled to beginon August 13, 2008.  U.S. Cellular will participate in Auction78 indirectly through its interests in Aquinas Wireless, L.P. (“AquinasWireless”).  On July 15, 2008, U.S. Cellular made capitalcontributions and advances of $1.3 million to Aquinas Wireless to allow it toparticipate in Auction 78.  Aquinas Wireless intends to qualify as a “designatedentity” and thereby be eligible for bid credits with respect to any openlicenses purchased in Auction 78. Aquinas Wireless also expects to qualifyto bid on closed licenses. Beginning in the third quarter of 2008,U.S. Cellular expects to consolidate Aquinas Wireless and Aquinas Wireless, Inc.,the general partner of Aquinas Wireless, for financial reporting purposes,pursuant to the guidelines of FIN 46(R), as U.S. Cellular anticipatesbenefiting from or absorbing a majority of Aquinas Wireless’ expected gains orlosses.  If Aquinas Wireless is successful in Auction 78,U.S. Cellular may make additional capital contributions and/or advances toAquinas Wireless and/or its general partner to provide funding of any licensesgranted to Aquinas Wireless pursuant to Auction 78.

 

FCCanti-collusion rules place certain restrictions on business communicationsand disclosures by participants in an FCC auction.  The anti-collusion rules beganon the application deadline for Auction 78, which was June 19, 2008, andare expected to last until a date specified by the FCC some time shortly afterthe conclusion of Auction 78.  The FCC anti-collusion rules placecertain restrictions on business communications with other companies and onpublic disclosures relating to U.S. Cellular’s participation in an FCCauction.  For instance, these anti-collusion rules may restrict thenormal conduct of U.S. Cellular’s business and/or disclosures by U.S. Cellularrelating to the auctions.

 

**Variable Interest Entities**

 

U.S.Cellular consolidates certain variable interest entities pursuant to FIN46(R).  See Note 5 - 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 repurchased and expects to continue to repurchase its CommonShares subject to the repurchase program.  For details of the repurchaseprogram and repurchases during the six months ended June 30, 2008, seeNote 15 - Common ShareRepurchases in the Notes to the Consolidated Financial Statements.

 

**Contractual and Other Obligations**

 

The Contractual and Other Obligations disclosed in Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in U.S. Cellular’s Form 10-K for the year ended December 31,2007, did not include any liabilities related to unrecognized taxbenefits under FASB Interpretation 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 June 30, 2008.

 

**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 its financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

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**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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 2 – 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 criticalaccounting policies during the first six months of 2008, except as discussed inNote 6 - Fair ValueMeasurements in the Notes to the Consolidated Financial Statementsincluded herein, related to theadoption of SFAS No. 157, *Fair Value Measurements*.

 

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***PRIVATESECURITIES LITIGATION REFORM ACT OF 1995***

***SAFEHARBOR CAUTIONARY STATEMENT***

 

This Form 10-Q, including exhibits, containsstatements that are not based on historical fact and represent forward-lookingstatements, as this term is defined in the Private Securities Litigation ReformAct of 1995.  All statements, other than statements of historical facts,that address activities, events or developments that U.S. Cellular intends,expects, projects, believes, estimates, plans or anticipates will or may occurin the future are forward-looking statements.  The words “believes,” “anticipates,”“estimates,” “expects,” “plans,” “intends,” “projects” and similar expressionsare intended to identify these forward-looking statements, but are not theexclusive means of identifying them. Such forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause actualresults, events or developments to be significantly different from any futureresults, events or developments expressed or implied by such forward-lookingstatements.  Such risks, uncertainties and other factors include those setforth below, as more fully discussed under “Risk Factors” in U.S. Cellular’s Form 10-Kfor the 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 carefully considerthe 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’s revenuesor 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.*

 

·                  *U.S. Cellular currentlyrecognizes a significant amount of inbound roaming revenues. As a result ofrecently announced acquisitions in the wireless industry, U.S. Cellularanticipates that inbound roaming revenues could decline significantly over thenext several quarters, which could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results 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 are concentratedin the U.S. wireless telecommunications industry. As a result, its resultsof operations may fluctuate based on factors related entirely to conditions inthis industry.*

 

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*·**                 **The expected future completion ofrecently announced acquisitions will lead to increased consolidation in thewireless telecommunications industry. U.S. Cellular’s lower scale relative to larger wireless carriers couldprevent or delay its access to new products including handsets, new technologyand/or new content and applications which could adversely affect U.S. Cellular’sability to attract and retain customers and, as a result, could adverselyaffect its business, financial condition or results of operations.*

 

·                  *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 byU.S. Cellular obsolete, could reduce U.S. Cellular’s revenues orcould increase its costs 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 of U.S. Cellular’srevenues is derived from customers who buy services through independent agentsand dealers who market U.S. Cellular’s services on a commission basis. IfU.S. Cellular’s relationships with these agents and dealers are seriouslyharmed, 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, termination or impairment ofU.S. Cellular’s relationships with such suppliers or vendors, or a failureby U.S. Cellular to manage its supply chain effectively could result in delaysor termination of U.S. Cellular’s receipt of required equipment orservices, or could result in excess quantities of required equipment orservices, any of which could adversely affect U.S. Cellular’s business,financial condition or 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 interpretations ofaccounting requirements, changes in industry practice, identification of errorsor changes in management assumptions could require amendments to orrestatements of financial information or disclosures included in this or priorfilings 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 includingthe ability to borrow under the revolving credit facility, capital resources orability to access the capital markets, including pursuant to shelf registrationstatements; could adversely affect U.S. Cellular’s listing arrangements onthe American Stock Exchange and/or New York Stock Exchange; and/or could haveother negative consequences, any of which could have an adverse effect on thetrading prices of U.S. Cellular’s publicly traded equity and/or debtand/or U.S. Cellular’s business, financial condition or results ofoperations.*

 

·                  *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 successfullyremediate the existing material weakness in internal control over financialreporting in a timely manner or the identification of additional materialweaknesses in the effectiveness of internal control over financial reportingcould result in inaccurate financial statements or other disclosures or fail toprevent fraud, which could have an adverse effect on U.S. Cellular’s business,financial condition 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 in the amount ofU.S. Cellular’s debt in the future could subject U.S. Cellular tohigher interest costs and restrictions on its financing, investing andoperating activities and could 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.*

 

·                  *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 in controlof 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 afurther discussion of these risks as set forth under “Risk Factors” in U.S.Cellular’s Annual Report on Form 10-K for the year ended December 31,2007.  U.S. Cellular undertakes noobligation to update publicly any forward-looking statements whether as aresult of new information, future events or otherwise.  Readers should evaluate any statements inlight of these important factors.

 

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**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

**MARKET RISK**

 

**Long-term Debt**

 

As of June 30, 2008, the majority ofU.S. Cellular’s debt is in the form of long-term, fixed-rate notes withoriginal maturities ranging up to 30 years. Fluctuations in market interestrates can lead to fluctuations in the fair value of these fixed-rate notes.

 

Refer to the disclosure under Market Risk– Long Term Debt in U.S. Cellular’s Form 10-K for the year ended December 31,2007, for additional information regarding required principal payments andweighted average interest rates related to U.S. Cellular’s long-term debt.

 

**Marketable Equity Securities**

 

As of June 30,2008, U.S. Cellular’s available-for-sale marketable equity securities consistedsolely of 370,882 Common Shares of Rural Cellular Corporation (“RCCC”).  The market value of these investmentsaggregated $16.5 million at June 30, 2008 and $16.4 million at December 31,2007. U.S. Cellular’s cumulative net unrealized holding gain, net of tax,included in Accumulated other comprehensive income was $10.2 million at June 30,2008.

 

On July 30, 2007,RCCC announced that Verizon Wireless agreed to purchase all of the outstandingshares of RCCC for $45 per share in cash. The transaction is expected to close in 2008 and, therefore, theinvestment is classified as a Current Asset in U.S. Cellular’s ConsolidatedBalance Sheet as of June 30, 2008. If the transaction closes, U.S. Cellular will receive approximately$16.7 million in cash, recognize a $16.4 million pre-tax gain andcease to own any interest in RCCC.

 

The following analysispresents the hypothetical change in the fair value of U.S. Cellular’smarketable equity securities at June 30, 2008, assuming hypothetical pricefluctuations of plus and minus 10%, 20% and 30%.

 
| ** **                          | ** ** | **June 30,**   | ** ** | **Valuation of investments**    | ** ** |
|-------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2008**            | ** ** | **assuming indicated increase** | ** ** |
| **(Dollars in millions)** | ** ** | **Fair Value** | ** ** | **10%**                                   | ** ** | **20%** | ** ** | **30%** | ** ** |
| Marketable Equity  Securities       |       | $                   | 16.5       |                                      | $          | 18.2 |   | $ | 19.8 |   | $ | 21.5 |   |
|                                     |            |                     |            |                                           |            |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **June 30,**   | ** ** | **Valuation of investments**    | ** ** |
|-------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2008**            | ** ** | **assuming indicated decrease** | ** ** |
| **(Dollars in millions)** | ** ** | **Fair Value** | ** ** | **-10%**                                  | ** ** | **-20%** | ** ** | **-30%** | ** ** |
| Marketable Equity  Securities       |       | $                   | 16.5       |                                      | $          | 14.9 |   | $ | 13.2 |   | $ | 11.6 |   |
|                                     |            |                     |            |                                           |            |  |  |  |  |  |  |  |  |

 

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**Item 4. Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

U.S. Cellular maintains disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that aredesigned to ensure that information required to be disclosed in its reportsfiled or submitted under the Exchange Act is processed, recorded, summarizedand 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, can provideonly reasonable assurance of achieving the desired control objectives.

 

As required by SEC Rule 13a-15(b), U.S.Cellular carried out an evaluation, under the supervision and with theparticipation of management, including its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of U.S.Cellular’s disclosure controls and procedures as of the end of the periodcovered by this Quarterly Report.  Basedon this evaluation, U.S. Cellular’s Chief Executive Officer and Chief FinancialOfficer concluded that U.S. Cellular’s disclosure controls and procedures werenot effective as of June 30,2008 because of the material weakness in accounting for income taxesdescribed below.  Notwithstanding thematerial weakness that existed as of June 30, 2008, management has concluded that the consolidatedfinancial 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”).

 

A material weakness is a deficiency, or acombination of deficiencies, in internal control over financial reporting suchthat there is a reasonable possibility that a material misstatement of thecompany’s annual or interim financial statements will not be prevented ordetected on a timely basis.  Managementidentified the following material weakness in internal control over financialreporting as of December 31, 2007, which continued to exist at June 30, 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, U.S. Cellular’s management has determined that this controldeficiency constitutes a material weakness.

 

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.

 

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·                  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 June 30, 2008.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in U.S. Cellular’s internalcontrol over financial reporting during the quarter ended June 30, 2008, that havematerially affected, or are reasonably likely to materially affect, U.S.Cellular’s internal control over 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, other regulatoryauthorities, 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 Annual Report on Form 10-K for the year ended December 31,2007, which could materially affect U.S. Cellular’s business, financialcondition or future results. The risks described in this Form 10-Q and theForm 10-K for the year ended December 31, 2007 may not be the onlyrisks that may affect U.S. Cellular. Additional unidentified or unrecognized risks and uncertainties maymaterially adversely affect U.S. Cellular’s business, financial conditionand/or operating results. Subject to the foregoing, U.S. Cellular has notidentified for disclosure any material changes to the risk factors aspreviously disclosed in U.S. Cellular’s Annual Report on Form 10-K for theyear ended December 31, 2007, except as follows:

 

***U.S. Cellular currently recognizes a significant amount ofinbound roaming revenues.  As a result of recently announced acquisitionsin the wireless industry, U.S. Cellular anticipates that inbound roamingrevenues could decline significantly over the next several quarters, whichcould have an adverse affect on U.S. Cellular’s business, financial conditionor results of operations.***

 

U.S. Cellular’s Service revenues include inboundroaming revenues from roaming charges incurred by other carriers for the use ofU.S. Cellular’s network by the other carriers’ customers who travel within U.S.Cellular coverage areas.  Such inboundroaming revenues were $63.0 million and $117.1 million for the three and sixmonths ended June 30, 2008, respectively. A portion of this inbound roaming revenue is derived from VerizonWireless (“Verizon”) and Alltel Corporation (“Alltel”).  During June 2008, Verizon and Alltelentered into an agreement pursuant to which Verizon will acquire Alltel,subject to certain conditions.  Thistransaction is expected to close later in 2008. As a result of this transaction, the network footprints of Verizon andAlltel will be combined.  This isexpected to result in significant decreases in inbound roaming revenues forU.S. Cellular, since the combined Verizon and Alltel entity is expected toalmost cease using U.S. Cellular’s network in certain coverage areas that arecurrently used by Verizon and Alltel (as separate entities).  Additional changes in the network footprintsof the other carriers could have an adverse effect on U.S. Cellular’s inboundroaming revenues.  For example,consolidation among other carriers which have network footprints that currentlyoverlap U.S. Cellular’s network could further decrease the amount of inboundroaming revenues for U.S. Cellular.  The foregoingcould have an adverse affect on U.S. Cellular’s business, financial conditionor results of operations.

 

**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 June 30, 2008, U.S. Cellular repurchased 150,000 Common Shares for$8.3 million, or an average of $55.44 per share pursuant to thisauthorization.

 

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.

 

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| ** **                                                            | ** **        | ** **              | ** ** | ** **             | ** ** | **(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)**               | ** ** |
| April                                                            | 1 – 30, 2008 |                    | 150,000    |                   | $55.44     |                                    | 150,000    |                                    | 18,000     |   |
| May                                                              | 1 – 31, 2008 |                    | —     |                   | —     |                                    | —     |                                    | 18,000     |   |
| June                                                             | 1 – 30, 2008 |                    | —     |                   | —     |                                    | —     |                                    | 18,000     |   |
| Total for or as of end ofthe  quarter ended  June 30,  2008 |              | 150,000                 |       | $55.44            |       | 150,000                                 |       | 18,000                                  |       |

 

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(1)          Reflects purchases pursuantto the Limited Authorization applicable to the three-month period from April 18,2008 to July 17, 2008.

(2)          In April 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 less than 168,000.

(3)          Represents the remainingnumber of shares that could have been purchased during the period from July 1,2008 to July 17, 2008 pursuant to the Limited Authorization applicable tothe three-month period from April 18, 2008 to July 17, 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 June 30, 2008, this permitted U.S. Cellular toacquire slightly less than 18,000 Common Shares by July 17, 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 second 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 second quarter of 2008.

 

**Item 4. ****Submission of Matters to a Vote of Security Holders****.**

 

At the Annual Meeting ofShareholders of U.S. Cellular held on May 20, 2008, the following numberof votes was cast for the matters indicated:

 

1.               Electionof Directors:

 

a.                                       Forthe election of one Class III Director of U.S. Cellular by the holders ofCommon Shares:

 
| **Nominee**                 | ** ** | **For**    | ** ** | **Withhold** | ** ** | **Broker  Non-vote** | ** ** |
|-----------------------------|------------|------------|------------|--------------|------------|----------------------|------------|
|                        |       |       |       |         |       |                 |       |
| J. Samuel Crowley |       | 49,674,770 |       | 3,896,749    |       | —               |       |

 

b.                                      Forthe election of two Class III Directors of U.S. Cellular by the holder of Series ACommon Shares:

 
| **Nominee**                          | ** ** | **For**     | ** ** | **Withhold** | ** ** | **Broker  Non-vote** | ** ** |
|--------------------------------------|------------|-------------|------------|--------------|------------|----------------------|------------|
|                                 |       |        |       |         |       |                 | ** ** |
| LeRoy T. Carlson, Jr. |       | 330,058,770 |       | —       |       | —               | ** ** |
|                                 |       |        |       |         |       |                 | ** ** |
| Walter C.D. Carlson                  |       | 330,058,770 |       | —       |       | —               |       |

 

2.               Proposalto Approve an Amended Non-Employee Director Compensation Plan:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
|        |       |        |       |        |       |                 |       |
| 382,220,774 |       | 310,333     |       | 203,927     |       | 895,255              |       |

 

3.               Proposalto Approve the 2009 Employee Stock Purchase Plan:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
|        |       |        |       |        |       |                 |       |
| 382,426,140 |       | 108,404     |       | 200,490     |       | 895,255              |       |

 

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4.               Proposalto Ratify the Selection of PricewaterhouseCoopers LLP as Independent PublicAccountants for 2008:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|
|        |       |        |       |        |       |                 |       |
| 383,412,799 |       | 16,092      |       | 201,398     |       | —               |       |

 

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**Item 5. Other Information.**

 

The following information is being provided to update prior disclosuresmade pursuant to the requirements of Form 8-K, Item 2.03 - Creation of aDirect Financial Obligation or an Obligation Under an Off-Balance SheetArrangement of a Registrant.

 

U.S. Cellular borrowed $100 million under its revolving credit facilityin the second quarter of 2008. The amount of U.S. Cellular’s borrowingsoutstanding against its Revolving Credit Agreement was $50.0 million as of June 30,2008.

 

The foregoing description is qualified by reference to the descriptionof the Revolving Credit Facility under Item 1.01 in U.S. Cellular’s CurrentReport on Form 8-K dated December 9, 2004, and a copy of theRevolving Credit Facility, which is included as Exhibit 4.1 of U.S.Cellular’s Current Report on such Form 8-K dated December 9, 2004 andis incorporated by reference herein.

 

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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 hereby incorporatedby reference to U.S. Cellular’s Current Report on Form 8-K dated 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 8 of the Notes to theConsolidated Financial Statements.

 

Exhibit 12 – Statement regardingcomputation 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.

 

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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)

 

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

 

Signaturepage for the U.S. Cellular 2008 Second Quarter Form 10-Q

 

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