Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

** **

**Forthe quarterly period ended September 30, 2008 OR**

 

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

 

**Forthe transition period from                                              to**

 

**Commission File Number1-9712**

** **

**UNITEDSTATES CELLULAR CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**8410 West Bryn Mawr, Suite 700,Chicago, Illinois  60631**

(Address of principalexecutive offices)  (Zip Code)

 

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

 

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

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 the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

 

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

Yeso  Nox

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| **Class**                                  | ** ** | **Outstanding at****September 30,****2008** |
|--------------------------------------------|------------|--------------------------------------------------|
| Common  Shares, $1 par value               |       | 54,360,613  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 September 30, 2008**

 

#### **Index**

####  

| ** **    | ** **                                                                                           | **Page No.** |
|---------------|------------------------------------------------------------------------------------------------------|--------------|
| Part I.  | Financial Information                                                                                |         |
|          |                                                                                                 |         |
| Item 1.       | Financial Statements (Unaudited)                                                                     | 3            |
|          |                                                                                                 |         |
|          | Consolidated  Statements of Operations Three and Nine Months Ended September 30, 2008  and 2007 | 3            |
|          |                                                                                                 |         |
|          | Consolidated  Statements of Cash Flows Nine Months Ended September 30, 2008 and 2007            | 4            |
|          |                                                                                                 |         |
|          | Consolidated Balance Sheets September 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          | 21           |
|          | Overview                                                                                             | 21           |
|          | Results  of Operations                                                                               | 24           |
|          | Recent  Accounting Pronouncements                                                                    | 35           |
|          | Financial Resources                                                                                  | 37           |
|          | Liquidity and  Capital Resources                                                                     | 39           |
|          | Application  of Critical Accounting Policies and Estimates                                           | 43           |
|          | Safe Harbor  Cautionary Statement                                                                    | 44           |
|          |                                                                                                 |         |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                          | 48           |
|          |                                                                                                 |         |
| Item 4.       | Controls and Procedures                                                                              | 49           |
|          |                                                                                                 |         |
| Part II. | Other Information                                                                                    |         |
|          |                                                                                                 |         |
| Item 1.       | Legal Proceedings                                                                                    | 51           |
|          |                                                                                                 |         |
| Item 1A.      | Risk Factors                                                                                         | 51           |
|          |                                                                                                 |         |
| Item 2.       | Unregistered  Sales of Equity Securities and Use  of Proceeds                                        | 52           |
|          |                                                                                                 |         |
| Item 5.       | Other Information                                                                                    | 53           |
|          |                                                                                                 |         |
| Item 6.       | Exhibits                                                                                             | 54           |
|          |                                                                                                 |         |
| Signatures    |                                                                                                 |         |
|               |                                                                                                      |              |  |

 

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Table of Contents

 

**Part I.  Financial Information**

**ItemI.  Financial Statements**

 

**United States Cellular Corporation**

**Consolidated Statements of Operations**

**Unaudited**

 
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **Three Months Ended**                                                                        | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **September 30,**                                                                                  | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **2008**                                                                                                | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **(Dollars and shares in thousands, except per share amounts)** | ** ** |
| **Operating  Revenues**                                                                                                                                                                                                                                                                                 |       |                                                                                                    |       |                            |       |   |   |   |   |
| Service                                                                                                                                                                                                                                                                                                 |       | $                                                                                                       | 1,013,928  |                            | $          | 954,540 |   | $ | 2,963,374 |   | $ | 2,721,341 |   |
| Equipment sales                                                                                                                                                                                                                                                                                         |       | 77,947                                                                                                  |       | 61,294                          |       | 226,949 |   | 200,813 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| Total Operating Revenues                                                                                                                                                                                                                                                                                |       | 1,091,875                                                                                               |       | 1,015,834                       |       | 3,190,323 |   | 2,922,154 |   |
| **Operating  Expenses**                                                                                                                                                                                                                                                                                 |       |                                                                                                    |       |                            |       |   |   |   |   |
| System operations (excluding  Depreciation, amortization and accretion reported below)                                                                                                                                                                                                                  |       | 197,473                                                                                                 |       | 185,479                         |       | 585,141 |   | 529,172 |   |
| Cost of equipment sold                                                                                                                                                                                                                                                                                  |       | 180,584                                                                                                 |       | 161,428                         |       | 526,815 |   | 460,413 |   |
| Selling, general and  administrative  (including charges from affiliates of $30.7 million and $31.4 million for the  three months ended September 30, 2008 and 2007, respectively, and $85.6  million and $90.1 million for the nine months ended September 30, 2008  and 2007, respectively) |       | 441,543                                                                                                 |       | 418,212                         |       | 1,271,544 |   | 1,151,746 |   |
| Depreciation, amortization and  accretion                                                                                                                                                                                                                                                               |       | 145,434                                                                                                 |       | 148,014                         |       | 433,222 |   | 439,990 |   |
| Loss on asset disposals, net                                                                                                                                                                                                                                                                            |       | 6,884                                                                                                   |       | 1,762                           |       | 16,776 |   | 7,899 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| Total Operating Expenses                                                                                                                                                                                                                                                                                |       | 971,918                                                                                                 |       | 914,895                         |       | 2,833,498 |   | 2,589,220 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Operating  Income**                                                                                                                                                                                                                                                                                   |       | 119,957                                                                                                 |       | 100,939                         |       | 356,825 |   | 332,934 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Investment  and Other Income (Expense)**                                                                                                                                                                                                                                                              |       |                                                                                                    |       |                            |       |   |   |   |   |
| Equity in earnings of  unconsolidated entities                                                                                                                                                                                                                                                          |       | 22,319                                                                                                  |       | 23,782                          |       | 66,361 |   | 69,860 |   |
| Interest and dividend income                                                                                                                                                                                                                                                                            |       | 1,137                                                                                                   |       | 3,395                           |       | 4,471 |   | 8,598 |   |
| Fair value adjustment of derivative  instruments                                                                                                                                                                                                                                                        |       | —                                                                                                  |       | —                          |       | — |   | (5,388 | ) |
| Gain on disposition of  investments                                                                                                                                                                                                                                                                     |       | 16,628                                                                                                  |       | —                          |       | 16,628 |   | 131,686 |   |
| Interest expense                                                                                                                                                                                                                                                                                        |       | (19,722                                                                                                 | )          | (19,625                         | )          | (60,611 | ) | (64,634 | ) |
| Other, net                                                                                                                                                                                                                                                                                              |       | 391                                                                                                     |       | 179                             |       | 1,109 |   | (315 | ) |
| Total Investment and Other  Income (Expense)                                                                                                                                                                                                                                                            |       | 20,753                                                                                                  |       | 7,731                           |       | 27,958 |   | 139,807 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Income  Before Income Taxes and Minority Interest**                                                                                                                                                                                                                                                   |       | 140,710                                                                                                 |       | 108,670                         |       | 384,783 |   | 472,741 |   |
| Income tax expense                                                                                                                                                                                                                                                                                      |       | 45,506                                                                                                  |       | 41,154                          |       | 137,062 |   | 176,542 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Income  Before Minority Interest**                                                                                                                                                                                                                                                                    |       | 95,204                                                                                                  |       | 67,516                          |       | 247,721 |   | 296,199 |   |
| Minority share of income, net  of tax                                                                                                                                                                                                                                                                   |       | (5,255                                                                                                  | )          | (3,961                          | )          | (14,613 | ) | (10,672 | ) |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Net  Income**                                                                                                                                                                                                                                                                                         |       | $                                                                                                       | 89,949     |                            | $          | 63,555 |   | $ | 233,108 |   | $ | 285,527 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Basic  Weighted Average Shares Outstanding**                                                                                                                                                                                                                                                          |       | 87,460                                                                                                  |       | 87,757                          |       | 87,534 |   | 87,743 |   |
| **Basic  Earnings Per Share**                                                                                                                                                                                                                                                                           |       | $                                                                                                       | 1.03       |                            | $          | 0.72 |   | $ | 2.66 |   | $ | 3.25 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |
| **Diluted  Weighted Average Shares Outstanding**                                                                                                                                                                                                                                                        |       | 87,833                                                                                                  |       | 88,589                          |       | 87,908 |   | 88,680 |   |
| **Diluted  Earnings Per Share**                                                                                                                                                                                                                                                                         |       | $                                                                                                       | 1.02       |                            | $          | 0.72 |   | $ | 2.65 |   | $ | 3.22 |   |
|                                                                                                                                                                                                                                                                                                    |       |                                                                                                    |       |                            |       |   |   |   |   |

 

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

 

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**United StatesCellular Corporation**

**Consolidated Statements of Cash Flows**

**Unaudited**

 
| ** **                                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)**                | ** ** |
| **Cash  Flows from Operating Activities**                                                     |       |                                                |       |   |   |
| Net income                                                                                    |       | $                                                   | 233,108    |   | $ | 285,527 |   |
| Add (Deduct) adjustments to  reconcile net income to net cash flows from operating activities |       |                                                |       |   |   |
| Depreciation, amortization and  accretion                                                     |       | 433,222                                             |       | 439,990 |   |
| Bad debts expense                                                                             |       | 52,753                                              |       | 46,539 |   |
| Stock-based compensation  expense                                                             |       | 11,293                                              |       | 11,383 |   |
| Deferred income taxes, net                                                                    |       | 44,486                                              |       | (10,756 | ) |
| Equity in earnings of  unconsolidated entities                                                |       | (66,361                                             | )          | (69,860 | ) |
| Distributions from  unconsolidated entities                                                   |       | 50,859                                              |       | 47,595 |   |
| Minority share of income                                                                      |       | 14,613                                              |       | 10,672 |   |
| Unrealized fair value  adjustment of derivative instruments                                   |       | —                                              |       | 5,388 |   |
| Gain on disposition of  investments                                                           |       | (16,628                                             | )          | (131,686 | ) |
| Loss on asset disposals, net                                                                  |       | 16,776                                              |       | 7,899 |   |
| Other noncash expense                                                                         |       | 1,539                                               |       | 1,333 |   |
| Excess tax benefit from stock  awards                                                         |       | (1,018                                              | )          | (11,374 | ) |
| Other operating activities                                                                    |       | —                                              |       | (5,000 | ) |
| Changes in assets and  liabilities from operations                                            |       |                                                |       |   |   |
| Change in accounts receivable                                                                 |       | (71,551                                             | )          | (72,684 | ) |
| Change in inventory                                                                           |       | (11,552                                             | )          | 4,224 |   |
| Change in accounts payable -  trade                                                           |       | 11,383                                              |       | 2,873 |   |
| Change in accounts payable -  affiliate                                                       |       | 134                                                 |       | (4,393 | ) |
| Change in customer deposits  and deferred revenues                                            |       | 9,534                                               |       | 20,413 |   |
| Change in accrued taxes                                                                       |       | (1,724                                              | )          | 39,302 |   |
| Change in accrued interest                                                                    |       | 9,787                                               |       | 8,595 |   |
| Change in other assets and  liabilities                                                       |       | (24,073                                             | )          | (4,267 | ) |
|                                                                                          |       | 696,580                                             |       | 621,713 |   |
|                                                                                          |       |                                                |       |   |   |
| **Cash  Flows from Investing Activities**                                                     |       |                                                |       |   |   |
| Additions to property, plant  and equipment                                                   |       | (395,637                                            | )          | (377,399 | ) |
| Proceeds from disposition of  investments                                                     |       | 16,690                                              |       | 4,301 |   |
| Cash received from  divestitures                                                              |       | 6,838                                               |       | 4,277 |   |
| Cash paid for acquisitions and  licenses                                                      |       | (314,730                                            | )          | (18,283 | ) |
| Other investing activities                                                                    |       | (1,255                                              | )          | (1,346 | ) |
|                                                                                          |       | (688,094                                            | )          | (388,450 | ) |
|                                                                                          |       |                                                |       |   |   |
| **Cash  Flows from Financing Activities**                                                     |       |                                                |       |   |   |
| Issuance of notes payable                                                                     |       | 100,000                                             |       | 25,000 |   |
| Repayment of notes payable                                                                    |       | (100,000                                            | )          | (60,000 | ) |
| Common shares reissued, net of  tax payments                                                  |       | (1,286                                              | )          | 12,181 |   |
| Common shares repurchased                                                                     |       | (23,146                                             | )          | (65,202 | ) |
| Excess tax benefit from stock  awards                                                         |       | 1,018                                               |       | 11,374 |   |
| Capital distributions to  minority partners                                                   |       | (9,146                                              | )          | (7,508 | ) |
| Other financing activities                                                                    |       | (2,851                                              | )          | — |   |
|                                                                                          |       | (35,411                                             | )          | (84,155 | ) |
|                                                                                          |       |                                                |       |   |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                     |       | (26,925                                             | )          | 149,108 |   |
|                                                                                          |       |                                                |       |   |   |
| **Cash and  Cash Equivalents**                                                                |       |                                                |       |   |   |
| Beginning of period                                                                           |       | 204,533                                             |       | 32,912 |   |
| End of period                                                                                 |       | $                                                   | 177,608    |   | $ | 182,020 |   |

 

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

 

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**UnitedStates Cellular Corporation**

**Consolidated Balance Sheets**

**Assets**

 
| ** **                                                                            | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)**                      | ** ** | ** **            | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  Assets**                                                                   |       |                                 |       |                  |       |
| Cash and cash equivalents                                                             |       | $                                    | 177,608    |                  | $          | 204,533 |   |
| Accounts receivable                                                                   |       |                                 |       |                  |       |
| Customers, less allowances of  $8,423 and $12,305, respectively                       |       | 334,553                              |       | 327,076               |       |
| Roaming                                                                               |       | 43,142                               |       | 35,412                |       |
| Affiliated                                                                            |       | 1,683                                |       | 12,857                |       |
| Other, less allowances of $209  and $112, respectively                                |       | 64,156                               |       | 60,152                |       |
| Marketable equity securities                                                          |       | —                               |       | 16,352                |       |
| Inventory                                                                             |       | 112,553                              |       | 100,990               |       |
| Prepaid expenses                                                                      |       | 59,565                               |       | 41,588                |       |
| Net deferred income tax asset                                                         |       | 20,555                               |       | 18,566                |       |
| Other current assets                                                                  |       | 14,527                               |       | 16,227                |       |
|                                                                                  |       | 828,342                              |       | 833,753               |       |
| **Investments**                                                                       |       |                                 |       |                  |       |
| Licenses                                                                              |       | 1,794,843                            |       | 1,482,446             |       |
| Goodwill                                                                              |       | 493,918                              |       | 491,316               |       |
| Customer lists, net of  accumulated amortization of $86,367 and $80,492, respectively |       | 10,544                               |       | 15,375                |       |
| Investments in unconsolidated  entities                                               |       | 175,424                              |       | 157,693               |       |
| Notes and interest receivable –  long-term                                       |       | 4,328                                |       | 4,422                 |       |
|                                                                                  |       | 2,479,057                            |       | 2,151,252             |       |
| **Property,  Plant and Equipment**                                                    |       |                                 |       |                  |       |
| In service and under  construction                                                    |       | 5,754,793                            |       | 5,409,115             |       |
| Less accumulated depreciation                                                         |       | 3,179,513                            |       | 2,814,019             |       |
|                                                                                  |       | 2,575,280                            |       | 2,595,096             |       |
|                                                                                  |       |                                 |       |                  |       |
| **Other  Assets and Deferred Charges**                                                |       | 31,290                               |       | 31,773                |       |
|                                                                                  |       |                                 |       |                  |       |
| **Total  Assets**                                                                     |       | $                                    | 5,913,969  |                  | $          | 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**

 
| ** **                                                                                                                    | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**                      | ** ** | ** **            | ** ** |
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  Liabilities**                                                                                                      |       |                                 |       |                  |       |
| Accounts payable                                                                                                              |       |                                 |       |                  |       |
| Affiliated                                                                                                                    |       | $                                    | 8,653      |                  | $          | 8,519 |   |
| Trade                                                                                                                         |       | 264,740                              |       | 252,272               |       |
| Customer deposits and deferred  revenues                                                                                      |       | 152,988                              |       | 143,445               |       |
| Accrued taxes                                                                                                                 |       | 35,874                               |       | 43,105                |       |
| Accrued compensation                                                                                                          |       | 52,296                               |       | 59,224                |       |
| Other current liabilities                                                                                                     |       | 100,025                              |       | 97,678                |       |
|                                                                                                                          |       | 614,576                              |       | 604,243               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Deferred  Liabilities and Credits**                                                                                         |       |                                 |       |                  |       |
| Net deferred income tax  liability                                                                                            |       | 603,323                              |       | 554,412               |       |
| Asset retirement obligation                                                                                                   |       | 145,512                              |       | 126,844               |       |
| Other deferred liabilities and  credits                                                                                       |       | 83,677                               |       | 84,530                |       |
|                                                                                                                          |       | 832,512                              |       | 765,786               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Long-Term  Debt**                                                                                                           |       | 1,006,431                            |       | 1,002,293             |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Commitments  and Contingencies**                                                                                            |       |                                 |       |                  |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Minority  Interest**                                                                                                        |       | 51,684                               |       | 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                                                                                                    |       | 1,335,241                            |       | 1,316,042             |       |
| Treasury Shares, at cost,  685,072 and 455,287 Common Shares, respectively                                                    |       | (50,361                              | )          | (41,094               | )          |
| Accumulated other  comprehensive income                                                                                       |       | —                               |       | 10,134                |       |
| Retained earnings                                                                                                             |       | 2,035,834                            |       | 1,823,022             |       |
|                                                                                                                          |       | 3,408,766                            |       | 3,196,156             |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                          |       | $                                    | 5,913,969  |                  | $          | 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.    Basisof Presentation**

 

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

 

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

 

The accompanying unaudited consolidatedfinancial statements contain all adjustments (consisting of only normalrecurring items unless otherwise disclosed) necessary to present fairly thefinancial position as of September 30, 2008 and December 31, 2007,the results of operations for the three and nine months ended September 30,2008 and 2007, and the cash flows for the nine months ended September 30,2008 and 2007.  The results of operationsfor the three and nine months ended September 30, 2008 and cash flows forthe nine months ended September 30, 2008 are not necessarily indicative ofthe results to be expected for the full year.

 

**2.    Summaryof Significant Accounting Policies**

 

PensionPlan

 

U.S.Cellular participates in a qualified noncontributory defined contributionpension plan sponsored by Telephone and Data Systems, Inc. (“TDSTM”),U.S. Cellular’s parent organization.  Theplan provides 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 $3.1million and $8.3 million for the three and nine months ended September 30,2008, respectively; and $2.6 million and $6.8 million for the three and ninemonths ended September 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 in the Consolidated Statements of Operations.  The amounts recorded gross in Servicerevenues that are billed to customers and remitted to governmental authoritiestotaled $38.3 million and $107.8 million for the three and nine months ended September 30,2008, respectively; and $35.3 million and $96.1 million for the three and ninemonths ended September 30, 2007, respectively.

 

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Recent Accounting Pronouncements

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 definesfair value as used in numerous accounting pronouncements, establishes aframework for measuring fair value in U.S. GAAP, and expands disclosuresrelated 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, not anentity-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. In October 2008, the FASB issued FSP FAS 157-3 to clarify and demonstratehow the fair value of a financial asset is determined when the market for thatfinancial asset is inactive. As of September 30, 2008, U.S. Cellular didnot have any financial assets or liabilities that required the application ofSFAS 157 for purposes of reporting such amounts in its Consolidated BalanceSheet. U.S. Cellular is currently reviewing the requirements of SFAS 157related to its nonfinancial assets and liabilities which become effective January 1,2009, and has not yet determined the impact of adoption, if any, on itsfinancial 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) replacesSFAS No. 141, *Business Combinations*(“SFAS 141”). SFAS 141(R) retains the underlying concept ofSFAS 141 in that all business combinations are still required to beaccounted for at fair value under the acquisition method, a method thatrequires the acquirer to measure and recognize the acquiree on an entire entitybasis and recognize the assets acquired and liabilities assumed at their fairvalues as of the date of acquisition. However, SFAS 141(R) changes themethod of applying the acquisition method in a number of significant aspects,such as requiring the expensing of transaction costs previously capitalized andrequiring the accrual at fair value of certain contractual and noncontractualcontingencies.  SFAS 141(R) iseffective on a prospective basis for all business combinations for which theacquisition date is on or after January 1, 2009, with the exception of theaccounting for valuation allowances on deferred taxes and acquired taxcontingencies.  SFAS 141(R) amendsSFAS No. 109, *Accounting for IncomeTaxes*, such that adjustments made to valuation allowances ondeferred taxes and acquired tax contingencies associated with acquisitions thatclosed prior to the effective date of SFAS 141(R) also would bedetermined in accordance with the provisions of SFAS 141(R). U.S. Cellularhas determined that any transaction costs incurred and capitalized in 2008 fora business combination that will not close until on or after January 1,2009 will be expensed upon U.S. Cellular’s adoption of SFAS 141(R) on January 1,2009. U.S. Cellular does not anticipate that this treatment will have asignificant impact on its financial position or results of operations. U.S.Cellular is currently reviewing the remaining requirements of SFAS 141(R) andhas not yet determined the impact of adoption, if any, on its financialposition 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 SFAS No. 94,*Consolidation of All Majority-OwnedSubsidiaries,* to establish new standards that will govern theaccounting and reporting of (1) noncontrolling interests (commonlyreferred to as minority interests) in partially owned consolidated subsidiariesand (2) the loss of control of subsidiaries. SFAS 160 also establishesthat once control of a subsidiary is obtained, changes in ownership interestsin that subsidiary that do not result in a loss of control shall be accountedfor as equity transactions, not as step acquisitions under SFAS 141.  SFAS 160 is effective for U.S. Cellularon 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 of adoption, if any, on itsfinancial position or results of operations.

 

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InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133* (“SFAS 161”). SFAS 161 expands thedisclosure requirements for derivative instruments and hedging activities. TheStatement specifically requires entities to provide enhanced disclosuresaddressing the following: (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under Statement 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. SFAS 161 is effective for U.S.Cellular beginning January 1, 2009. As of September 30, 2008, U.S.Cellular did not hold any derivative instruments and, therefore, does notexpect any impact as a result of this pronouncement.

 

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.*The**SEC approvedthe amendments on September 15, 2008. Therefore, SFAS 162 is effective asof November 15, 2008. U.S. Cellular does not anticipate that the adoptionof SFAS 162 will have an impact on either 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 wireless operating markets andwireless spectrum. In addition, U.S. Cellular may seek to divest outright orinclude in exchanges for other wireless interests those wireless interests thatare not strategic to its long-term success.

 

*Transactions Pending asof September 30, 2008:*

 

OnAugust 1, 2008, U.S. Cellular executed an agreement to acquire 12megahertz Block C licenses in the Lower 700 megahertz band of the wirelessspectrum in three market areas in the state of Missouri for $11.6 million incash, including acquisition costs.  Thetransaction is expected to close in the fourth quarter of 2008.

 

OnJuly 30, 2008, U.S. Cellular signed an agreement to purchase four 700megahertz licenses in the state of Missouri for $8.0 million in cash. Thistransaction is expected to close in the fourth quarter of 2008.

 

A Federal Communications Commission (“FCC”)auction of spectrum in the PCS and AWS-1 bands, designated by the FCC asAuction 78, began on August 13, 2008 and closed August 20,2008.  U.S. Cellular participated in Auction 78 indirectly throughits interest in Aquinas Wireless, L.P. (“Aquinas Wireless”).   AquinasWireless paid $2.1 million to the FCC for the licenses for which it was theprovisional winning bidder in the auction.

 

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U.S.Cellular also participated in the 2008 FCC auction of spectrum in the 700megahertz band, known as Auction 73, indirectly through its interest in KingStreet Wireless, L.P. (“King Street Wireless”).  King Street Wireless paid$300.5 million to the FCC for the licenses for which it was the provisionalwinning bidder in the auction.

 

SeeNote 5 – Variable Interest Entities, for further details on Aquinas Wirelessand King Street Wireless and the licenses acquired in Auctions 78 and 73.

 

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

 

On May 30, 2008, U.S. Cellular acquiredthe remaining 50%-ownership interest of North Carolina RSA 1 Partnership, awireless market operator in which U.S. Cellular had previously owned a 50%non-operating, unconsolidated interest, for $6.9 million in cash.

 

On March 28, 2008, U.S. Cellular acquiredsix 12 megahertz Block C licenses in the Lower 700 megahertz band of thewireless spectrum in Maine for $5.0 million in cash.

 

In October 2006, U.S. Cellular’s interestin Midwest Wireless Communications, LLC was sold to ALLTEL Corporation. Inconnection with the sale, U.S. Cellular became entitled to receiveapproximately $106.0 million in cash. Of this amount, $95.1 million wasdistributed upon closing and $10.9 million was held in escrow to secure certaintrue-up, indemnification and other possible adjustments; the funds held inescrow were to be distributed in installments over a period of four to fifteenmonths following the closing. U.S. Cellular received $6.6 million and $4.3million of funds from the escrow, plus interest of $0.2 million and $0.3million, in the nine months ended September 30, 2008 and 2007, respectively.

 

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’s acquisitions for the ninemonths ended September 30, 2008 and the allocation of the purchase price foreach respective acquisition were as follows:

 
| ** **                        | ** ** | ** **             | ** ** | **Allocation of Purchase Price** | ** ** |
|-----------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **Purchase  price(1)** | ** ** | **Goodwill(2)**                                 | ** ** | **Licenses** | ** ** | **Customer  lists** | ** ** | **Net tangible  assets/(liabilities)** | ** ** |
| ** **                        | ** ** | ** **             | ** ** | **(Dollars in thousands)**            | ** ** | ** ** | ** ** |
| U.S. Cellular Acquisitions        |       |                   |       |                                            |       |   |   |   |   |   |   |
| Auction 73 Licenses               |       | $                      | 300,479    |                                            | $          | — |   | $ | 300,479 |   | $ | — |   | $ | — |   |
| North Carolina RSA 1  Partnership |       | 6,900                  |       | 1,632                                           |       | 4,180 |   | 81 |   | 1,007 |   |
| Maine Licenses                    |       | 5,000                  |       | —                                          |       | 5,000 |   | — |   | — |   |
| Auction 78 Licenses               |       | 2,115                  |       | —                                          |       | 2,115 |   | — |   | — |   |
| Other                             |       | 1,891                  |       | 970                                             |       | 623 |   | 964 |   | (666 | ) |
| Total                             |       | $                      | 316,385    |                                            | $          | 2,602 |   | $ | 312,397 |   | $ | 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  September 30, 2008 Consolidated Balance Sheet. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | $1.6 million of the goodwill is deductible  for tax purposes.                                                                                                      |

 

Unaudited pro-formafinancial information related to U.S. Cellular’s 2008 acquisitions has not beenpresented because the financial statement impact of these acquisitions,individually and in the aggregate, was not material to U.S. Cellular’sconsolidated results of operations for the nine months ended September 30,2008.

 

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**4.**    **Gain on Disposition ofInvestments**

 

Priorto August 7, 2008, U.S. Cellular held 370,882 common shares of RuralCellular Corporation (“RCC”).  On August 7,2008, RCC was acquired by Verizon Wireless, with shareholders of RCC receivingcash of $45 per share in exchange for each RCC share owned.  Accordingly, in August 2008, U.S.Cellular received total cash proceeds of $16.7 million, recognized a pre-taxgain of $16.4 million and recorded a current tax liability of $5.6 million. Asa result of this transaction, U.S. Cellular no longer had any interest in RCCas of September 30, 2008.

 

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.

 

**5.    VariableInterest Entities**

 

From time to time, theFCC conducts auctions through which additional spectrum is made available forthe provision of wireless services. U.S. Cellular participated in spectrumauctions indirectly though its interests in Aquinas Wireless, King StreetWireless, Barat Wireless L.P (“Barat Wireless”) and Carroll Wireless L.P. (“CarrollWireless”).  Each entity qualified as a “designatedentity” and thereby was eligible for bid credits with respect to licensespurchased in accordance with the rules defined by the FCC for eachauction. In most cases, the bidding credits resulted in a 25% discount from thegross winning bid.  Some licenses were “closed licenses”, for which nocredit was received, but bidding was restricted to bidders qualifying as “entrepreneurs”,which are small businesses that have a limited amount of assets and revenues.

 

A summary of the auctionsin which each entity participated and the auction results for each of theseentities are shown in the table below.

 
| ** **           | ** ** | **FCC  Auction** | ** ** | **Auction End Date** | ** ** | **Date  Applications  Granted by FCC** | ** ** | **Number  of  Licenses  Won** | ** ** | **Amount Paid  to FCC, Net of  Bid Credits  (in millions)** | ** ** |
|----------------------|------------|------------------|------------|--------------------------------|------------|--------------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| Aquinas Wireless     |       | 78               |       | August 20, 2008           |       | (1)                                              |       | 5                             | (2)        | $                                                                                         | 2.1        |   |
| King Street Wireless |       | 73               |       | March 20, 2008            |       | (1)                                              |       | 152                           | (2)        | 300.5                                                                                     |       |
| Barat Wireless       |       | 66               |       | September 18, 2006        |       | April 30, 2007                              |       | 17                            |       | 127.1                                                                                     |       |
| Carroll Wireless     |       | 58               |       | February 15, 2005         |       | January 6, 2006                             |       | 16                            |       | 129.7                                                                                     |       |
|                      |            |                  |            |                                |            |                                                  |            |                               |            |                                                                                           |            |  |

 

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(1)          Licenses have not yet beengranted by the FCC for Auctions 78 and 73.

(2)          Provisionally won.

 

Although the bidding in Auction 73 and Auction 78 has ended, the FCChas awarded only a few of the licenses to winning bidders. There is noprescribed timeframe for the FCC to review the qualifications of the variouswinning bidders and award licenses.

 

As of September 30, 2008, U.S. Cellular consolidates the following variableinterest entities:

 

·                  Aquinas Wireless (1)

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

·                  Barat Wireless and Barat Wireless, Inc., the general partner ofBarat Wireless

·                  Carroll Wireless and Carroll PCS, Inc., the general partnerof Carroll Wireless

 

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(1)          Aquinas Wireless, Inc., the generalpartner of Aquinas Wireless, is a variable interest entity, but was notconsolidated by U.S. Cellular as of September 30, 2008 because U.S.Cellular does not currently benefit from or absorb a majority of AquinasWireless, Inc.’s expected gains or losses.

 

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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)”),because U.S. Cellular anticipates benefiting from or absorbing a majorityof the 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/or advances to the variable interest entities.

 

Following are a summaryof the capital contributions and advances made to each entity and theclassification of these amounts in U.S. Cellular’s Consolidated Balance Sheetas of September 30, 2008:

 
| ** **                                                       | ** ** | **Capital contributions and  advances to date** | ** ** | **Amount of capital contributions  and advances included in  Licenses in the Consolidated  Balance Sheets** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(in millions)**                                              | ** ** |
| Aquinas Wireless                                                 |       | $                                                                   | 2.1        |                                                                                                                                                          | $          | 2.1 |   |
| King Street  Wireless & King Street Wireless, Inc. |       | 300.5                                                               |       | 300.5                                                                                                                                                         |       |
| Barat Wireless &  Barat Wireless, Inc.             |       | 127.3                                                               |       | 127.1                                                                                                                                                         |       |
| Carroll Wireless &  Carroll PCS, Inc.              |       | 130.1                                                               |       | 129.7                                                                                                                                                         |       |
|                                                                  |            |                                                                     |            |                                                                                                                                                               |            |  |  |

 

U.S. Cellular may agree to make additional capital contributions and/oradvances to the variable interest entities discussed above and/or to theirgeneral partners to provide additional funding for the development of licensesawarded in the various auctions.  U.S. Cellular may finance such amountswith a combination of cash on hand, borrowings under its revolving creditagreement and/or long-term debt.  There is no assurance that U.S. Cellularwill be able to obtain additional financing on commercially reasonable terms orat all.

 

**6.    Income Taxes**

 

Theoverall effective tax rate on income before income taxes and minority interestfor the three and nine months ended September 30, 2008 was 32.3% and35.6%, respectively, and for the three and nine months ended September 30,2007 was 37.9% and 37.3%, respectively. The effective tax rate for the threeand nine months ended September 30, 2008 is lower than the rate for thethree and nine months ended September 30, 2007 primarily due to lowerstate income tax expense resulting from a change in the filing method in onestate.

 

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**7.    Earnings per Share**

 

Basicearnings per share is computed by dividing Net income by the weighted averagenumber of common shares outstanding during the period. Diluted earnings pershare is computed by dividing Net income by the weighted average number ofcommon shares adjusted to include the effect of potentially dilutivesecurities. Potentially dilutive securities include incremental shares issuableupon exercise of outstanding stock options, vesting of restricted stock unitsand settlement of accelerated share repurchase agreements.

 

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

 
| ** **                                                                    | ** ** | **Three Months Ended**                                                                         | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**                                                                                   | ** ** | **September 30,**          | ** ** |
| ** **                                                                    | ** ** | **2008**                                                                                                 | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **(Dollars and shares in thousands, except earnings per share)** | ** ** |
|                                                                          |       |                                                                                                     |       |                            |       |   |   |   |   |
| Net income                                                                    |       | $                                                                                                        | 89,949     |                            | $          | 63,555 |   | $ | 233,108 |   | $ | 285,527 |   |
| Weighted average number of  shares used in basic earnings per share           |       | 87,460                                                                                                   |       | 87,757                          |       | 87,534 |   | 87,743 |   |
| Effect of dilutive securities:                                                |       |                                                                                                     |       |                            |       |   |   |   |   |
| Stock options(1)                                                              |       | 136                                                                                                      |       | 500                             |       | 195 |   | 622 |   |
| Restricted stock units(2)                                                     |       | 237                                                                                                      |       | 199                             |       | 179 |   | 182 |   |
| Assuming shares delivered upon  settlement of Accelerated Share Repurchase(3) |       | —                                                                                                   |       | 133                             |       | — |   | 133 |   |
|                                                                          |       |                                                                                                     |       |                            |       |   |   |   |   |
| Weighted average number of  shares used in diluted earnings per share         |       | 87,833                                                                                                   |       | 88,589                          |       | 87,908 |   | 88,680 |   |
|                                                                          |       |                                                                                                     |       |                            |       |   |   |   |   |
| Basic Earnings per Share                                                      |       | $                                                                                                        | 1.03       |                            | $          | 0.72 |   | $ | 2.66 |   | $ | 3.25 |   |
|                                                                          |       |                                                                                                     |       |                            |       |   |   |   |   |
| Diluted Earnings per Share                                                    |       | $                                                                                                        | 1.02       |                            | $          | 0.72 |   | $ | 2.65 |   | $ | 3.22 |   |

 

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(1)          Stock options exercisableinto 1,265,000 and 794,000 Common Shares in the three and nine months ended September 30,2008, respectively, and 4,000 and 10,000 Common Shares in the three and ninemonths ended September 30, 2007, respectively, were not included incomputing Diluted Earnings per Share because their effects were antidilutive.

(2)          Restricted stock unitsissuable upon vesting into 1,000 and 151,000 Common Shares in the three andnine months ended September 30, 2008, respectively, were not included incomputing Diluted Earnings per Share because their effects were antidilutive.  There were no antidilutive restricted stockunits for the three or nine months ended September 30, 2007.

(3)          See Note 14 - Common ShareRepurchases for a discussion of U.S. Cellular’s purchase of 838,000 of itsCommon Shares from an investment banking firm in a private transaction pursuantto an accelerated share repurchase (“ASR”) agreement.

 

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

 

Changesin U.S. Cellular’s licenses and goodwill are primarily the result ofacquisitions, divestitures and exchanges of 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 nine months ended September 30, 2008 and 2007 were asfollows:

 
| ** **                   | ** ** | **September 30,**               | ** ** | **September 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **2008**                             | ** ** | **2007**               | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Licenses                     |       |                                 |       |                   |       |
| Balance, beginning of period |       | $                                    | 1,482,446  |                   | $          | 1,494,328 |   |
| Acquisitions                 |       | 312,397                              |       | 7,900                  |       |
| Impairment                   |       | —                               |       | (2,136                 | )          |
| Balance, end of period       |       | $                                    | 1,794,843  |                   | $          | 1,500,092 |   |

 
| ** **                   | ** ** | **September 30,**     | ** ** | **September 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 of licenses and goodwill during the second quarter of the 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.

 

As stated above, U.S. Cellular performs its annualimpairment assessment of goodwill and licenses in the second quarter of theyear.  Given recent economic events including significant decreases ininvestment security values, the tightening of credit markets and other factors,U.S. Cellular considered whether the decline in its market capitalization inthe third quarter of 2008 required an updated impairment assessment of itsgoodwill and licenses at September 30, 2008.  Given that the marketcapitalization of U.S. Cellular at September 30, 2008 was greater than itsbook value, and U.S. Cellular’s operating results and key performanceindicators for the three months ended September 30, 2008 provided noevidence of significant deterioration, U.S. Cellular concluded that an updatedimpairment analysis was not required for its goodwill or licenses at September 30,2008.

 

**9.    Customer Lists**

 

Customerlists, which are intangible assets resulting from acquisitions of wirelessmarkets, are amortized based on average customer retention periods using thedouble-declining balance method in the first year, and switching to thestraight-line method over the remaining estimated life. The changes in thecustomer lists balance for the nine months ended September 30, 2008 and2007 were as follows:

 
| ** **                   | ** ** | **September 30,**               | ** ** | **September 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **2008**                             | ** ** | **2007**               | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Customer lists               |       |                                 |       |                   |       |
| Balance, beginning of period |       | $                                    | 15,375     |                   | $          | 26,196 |   |
| Acquisitions                 |       | 1,045                                |       | 1,560                  |       |
| Impairments                  |       | —                               |       | (1,947                 | )          |
| Amortization                 |       | (5,876                               | )          | (8,367                 | )          |
| Balance, end of period       |       | $                                    | 10,544     |                   | $          | 17,442 |   |

 

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U.S. Cellular reviews its customer lists periodicallythroughout the year to ensure that they are being amortized over the properperiod.  No significant adjustments tothe amortization periods used for customer lists were made during the ninemonths ended September 30, 2008.

 

During the third quarter of 2007, it was determinedthat the carrying value of certain customer list balances exceeded theirestimated fair values and an impairment loss of $1.9 million was recorded. Theloss was included in Depreciation, amortization and accretion in theConsolidated Statements of Operations. Fair values were determined basedupon a present value analysis of expected future cash flows and customer churnrates.

 

Based on the Customer lists balance as of September 30,2008, amortization expense for the remainder of 2008 and for the years2009-2013 is expected to be $1.6 million, $4.9 million, $3.3 million, $0.4million, $0.2 million and $0.1 million, respectively.

 

**10.  Marketable Equity Securities**

 

Informationregarding U.S. Cellular’s marketable equity securities is summarized below:

 
| ** **                                                              | ** ** | **September 30,**               | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                                              | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                    |       |                                 |       |                  |       |
| Rural Cellular Corporation - 0  and 370,882 Common Shares, respectively |       | $                                    | —     |                  | $          | 16,352 |   |
| Accounting cost basis                                                   |       | —                               |       | (334                  | )          |
| Gross unrealized holding gains                                          |       | —                               |       | 16,018                |       |
| Deferred income tax liability                                           |       | —                               |       | (5,884                | )          |
| Net unrealized holding gains  included in                               |       |                                 |       |                  |       |
| Accumulated other  comprehensive income                                 |       | $                                    | —     |                  | $          | 10,134 |   |

 

Priorto August 7, 2008, U.S. Cellular held 370,882 common shares of RCC.  On August 7, 2008, RCC was acquired byVerizon Wireless, with shareholders of RCC receiving cash of $45 per share inexchange for each RCC share owned. Accordingly, in August 2008, U.S. Cellular received total cashproceeds of $16.7 million, recognized a pre-tax gain of $16.4 million andrecorded a current tax liability of $5.6 million related to the exchange. As aresult of this transaction, U.S. Cellular no longer had any interest in RCC asof September 30, 2008.

 

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

 

Investmentsin unconsolidated entities consist of amounts invested in wireless entities inwhich U.S. Cellular holds a minority interest. These investments are 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 September 30, 2008 and 2007, andrecorded related income of $15.3 million and $17.9 million, respectively, forthe three-month periods then ended and $49.2 million and $54.3 million,respectively, for the nine-month periods then ended.  Such amounts are included in Equity inearnings of unconsolidated entities in the Consolidated Statements ofOperations.

 

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

 
| ** **             | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended** | ** ** |
|------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **September 30,**               | ** ** | **September 30,**          | ** ** |
| ** **             | ** ** | **2008**                             | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | **(Dollars in thousands)** | ** ** |
|                   |       |                                 |       |                            |       |   |   |   |   |
| Revenues               |       | $                                    | 1,025,000  |                            | $          | 953,000 |   | $ | 2,930,000 |   | $ | 2,776,000 |   |
| Operating expenses     |       | 728,000                              |       | 642,000                         |       | 2,028,000 |   | 1,815,000 |   |
| Operating income       |       | 297,000                              |       | 311,000                         |       | 902,000 |   | 961,000 |   |
| Other income (expense) |       | 4,000                                |       | 9,000                           |       | 19,000 |   | 27,000 |   |
| Net Income             |       | $                                    | 301,000    |                            | $          | 320,000 |   | $ | 921,000 |   | $ | 988,000 |   |

 

**12.  NotesPayable**

 

U.S. Cellular has a $700 million revolving creditfacility available for general corporate purposes.  At September 30, 2008, there were nooutstanding borrowings and $0.3 million of outstanding letters of credit,leaving $699.7 million available for use. Borrowings under the revolving creditfacility bear interest at the London InterBank Offered Rate (“LIBOR”) plus acontractual spread based on U.S. Cellular’s credit rating. U.S. Cellular mayselect borrowing periods of either seven days or one, two, three or six months.At September 30, 2008, the one-month LIBOR was 3.93% and the contractualspread was 60 basis points. 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 September 30, 2008). This creditfacility expires in December 2009.

 

U.S.Cellular’s interest cost on its revolving credit facility would increase if itscurrent credit rating from Moody’s Investors Service 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 the existing credit facility or obtainaccess 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. U.S. Cellular believes it was in compliance as of September 30,2008 with all covenants and other requirements set forth in its revolvingcredit facility. There were no intercompany loans at September 30, 2008 orDecember 31, 2007.

 

**13.  Commitments andContingencies**

 

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.

 

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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.

 

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 the minorityinterest 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 2107.

 

The settlement value ofU.S. Cellular’s mandatorily redeemable minority interests is estimated to be$155.6 million at September 30, 2008. This represents the estimated amountof cash that would be due and payable to settle these minority interestsassuming an orderly liquidation of the finite-lived consolidated partnershipsand LLCs on September 30, 2008, net of estimated liquidation costs. Thisamount is being disclosed pursuant to the requirements of FSP No. FAS150-3, *Effective Date, Disclosures, and Transition forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities andCertain Mandatorily Redeemable Noncontrolling Interests under SFAS 150*. U.S. Cellular has no current plans orintentions to liquidate any of the related partnerships or LLCs prior to theirscheduled termination dates. The corresponding carrying value of the minorityinterests in finite-lived consolidated partnerships and LLCs at September 30,2008 is $52.3 million, and is included in Minority interest in the ConsolidatedBalance Sheet. The excess of the aggregate settlement value over the aggregatecarrying value of the mandatorily redeemable minority interests of $103.3million is due primarily to the unrecognized appreciation of the minorityinterest holders’ share of the underlying net assets in the consolidatedpartnerships and LLCs. Neither the minority interest holders’ share, nor U.S.Cellular’s share, of the appreciation of the underlying net assets of thesesubsidiaries is reflected in the consolidated financial statements. Theestimate of settlement value was based on certain factors and assumptions whichare subjective in nature. Changes in those factors and assumptions could resultin a materially larger or smaller settlement amount.

 

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**14.  Common Share Repurchases**

 

The Board of Directors ofU.S. Cellular has authorized the repurchase of up to 1% of the outstandingU.S. Cellular Common Shares held by non-affiliates in each three-monthperiod, primarily for use in employee benefit plans (the “Limited Authorization”).This authorization does not have an expiration date. During the nine monthsended September 30, 2008, U.S. Cellular repurchased 450,000 Common Sharesfor $27.7 million, or an average of $61.56 per share, pursuant to thisauthorization.

 

In addition to U.S. Cellular’s LimitedAuthorization discussed above, on March 6, 2007, the Board of Directors ofU.S. Cellular authorized the repurchase of up to 500,000 Common Shares of U.S.Cellular from time to time through open market purchases, block transactions,private transactions or other methods (the “Additional Authorization”). Duringthe nine months ended September 30, 2007, U.S. Cellular purchased 838,000Common Shares from an investment banking firm in private accelerated sharerepurchase (“ASR”) transactions dated April 4, 2007 and July 10,2007. These purchases consisted of 338,000 shares under the LimitedAuthorization and 500,000 shares under the Additional Authorization.  Activity related to these purchases isdetailed in the table below.

 
| ** **                                                             | ** ** | **April 4,**                                     | ** ** | **July 10,** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                             | ** ** | **2007**                                              | ** ** | **2007**          | ** ** | **Total**  | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| **Number of shares purchased**                                         |       | 670,000                                               |       | 168,000           |       | 838,000    |       |
| **ASR Transactions**                                                   | ** ** | ** **                                            | ** ** | ** **        | ** ** | ** ** | ** ** |
| Initial purchase price paid to  investment banking firm                |       | $                                                     | 49,057     |              | $          | 16,145     |       | $ | 65,202 |   |
| Weighted average price per  share                                      |       | $                                                     | 73.22      |              | $          | 96.10      |       | $ | 77.81 |   |
| **ASR Settlements**                                                    | ** ** | ** **                                            | ** ** | ** **        | ** ** | ** ** | ** ** |
| Additional amount paid to  (received from) investment banking firm (1) |       | $                                                     | 6,485      |              | $          | (2,080     | )          | $ | 4,405 |   |
|                                                                   |
| Final total cost of shares,  including discount and commission         |       | $                                                     | 55,542     |              | $          | 14,065     |       | $ | 69,607 |   |
| Final weighted average price  per share                                |       | $                                                     | 82.90      |              | $          | 83.72      |       | $ | 83.06 |   |

 

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(1)          The cash settlements with the investment banking firm for the April 4,2007 and July 10, 2007 ASRs occurred in December 2007 and January 2008,respectively.

 

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**15.  Accumulated Other Comprehensive Income**

 

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

 
| ** **                                                          | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **September 30,**     | ** ** |
| ** **                                                          | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| **Marketable  Equity Securities**                                   | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Balance, beginning of period                                        |       | $                          | 10,134     |   | $ | 77,545 |   |
| Add (deduct):                                                       |       |                       |       |   |   |
| Unrealized gains                                                    |       | 338                        |       | 20,606 |   |
| Income tax expense                                                  |       | (124                       | )          | (7,553 | ) |
| Net change in unrealized gains  in comprehensive income             |       | 214                        |       | 13,053 |   |
|                                                                |       |                       |       |   |   |
| Recognized gain on disposition  of marketable equity securities (1) |       | (16,356                    | )          | (127,207 | ) |
| Income tax expense                                                  |       | 6,008                      |       | 46,618 |   |
| Net recognized gain in  comprehensive income                        |       | (10,348                    | )          | (80,589 | ) |
| Net change in comprehensive  income                                 |       | (10,134                    | )          | (67,536 | ) |
| Balance, end of period                                              |       | $                          | —     |   | $ | 10,009 |   |
|                                                                |       |                       |       |   |   |
| **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                         |       | (10,134                    | )          | (67,536 | ) |
| Net change in derivative  instruments                               |       | —                     |       | (2,837 | ) |
| Net change in comprehensive  income                                 |       | (10,134                    | )          | (70,373 | ) |
| Balance, end of period                                              |       | $                          | —     |   | $ | 10,009 |   |

 
| ** **                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)**                | ** ** |
| **Comprehensive  Income**                    | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net Income                                   |       | $                                                   | 233,108    |   | $ | 285,527 |   |
| Net change included in comprehensive  income |       | (10,134                                             | )          | (70,373 | ) |
|                                         |       | $                                                   | 222,974    |   | $ | 215,154 |   |

 

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(1)          In August 2008, U.S.Cellular disposed of its investment in Rural Cellular Corporation. See Note 10 – MarketableEquity Securities.

 

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**16.  SupplementalCash Flow Disclosures**

 

U.S. Cellularwithheld 287,609 and 544,000 Common Shares with an aggregate value of$16.9 million and $43.5 million during the nine months ended September 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 81%-ownedsubsidiary of Telephone and Data Systems, Inc. (“TDS**TM**”) as of September 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 September 30,2008, U.S. Cellular owned or had rights to acquire interests in 244 wirelessmarkets and operated 6,716 cell sites. U.S. Cellular operates on a customersatisfaction strategy, meeting customer needs by providing a comprehensiverange of wireless products and services, excellent customer support, and ahigh-quality network. U.S. Cellular’s business development strategy is tooperate controlling interests in wireless licenses in areas adjacent to or inproximity to its other wireless licenses, thereby building contiguous operatingmarket areas. U.S. Cellular believes that operating in contiguous market areaswill continue to provide it with certain economies in its capital and operatingcosts.

 

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

 

·                  Total customers increased 2%year-over-year to 6.2 million at September 30, 2008; net retail customeradditions were 116,000;

 

·                  The retail postpay churn rate was1.4% per month. Retail postpay customers comprised approximately 87% of U.S.Cellular’s customer base as of September 30, 2008;

 

·                  Average monthly service revenue percustomer increased 5% year-over-year to $53.40;

 

·                  Cash flows from operating activitieswere $696.6 million, an increase of 12% year-over-year. At September 30,2008, cash and cash equivalents totaled $177.6 million and there were nooutstanding borrowings under the revolving credit facility;

 

·                  Additions to property, plant andequipment totaled $395.6 million, including expenditures to construct cellsites, increase capacity in existing cell sites and switches, purchaseequipment to expand Evolution Data Optimized (“EVDO”) services to additionalmarkets, outfit new and remodel existing retail stores and continue thedevelopment and enhancement of U.S. Cellular’s office systems. Total cell sitesin service increased 7% year-over-year to 6,716; and

 

·                  U.S. Cellular participated in theFederal Communications Commission (“FCC”) auction of spectrum in the 700megahertz band, known as Auction 73, indirectly through its interest in KingStreet Wireless, L.P. (“King Street Wireless”). U.S. Cellular is a limitedpartner in King Street Wireless. King Street Wireless was the provisionalwinning bidder for 152 licenses for an aggregate bid of $300.5 million, net ofits designated entity discount of 25%. The licenses expected to be awarded toKing Street Wireless cover areas that overlap or are proximate or contiguous toareas covered by licenses that U.S. Cellular currently owns, operates and/orconsolidates.

 

Service revenuesincreased $242.0 million, or 9%, to $2,963.4 million in 2008 from $2,721.3million in 2007. Customer growth and improvements in average monthly revenueper unit have driven increased revenues. U.S. Cellular continues to experienceincreases in average monthly revenue per unit driven primarily by growth inrevenues from data products and services.

 

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Operating incomeincreased $23.9 million, or 7%, to $356.8 million in 2008 from $332.9 millionin 2007.

 

U.S. Cellularanticipates that future growth in its operating income will be affected by thefollowing factors:

 

·                  uncertaintyrelated to current economic conditions and their impact on demand for U.S.Cellular’s products and services;

 

·                  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, and its customer support and administrative systems;

 

·                  increasingcosts of regulatory compliance; and

 

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

 

Investment and OtherIncome (Expense) totaled $28.0 million in 2008 and $139.8 million in 2007. Theamounts were comprised mainly of gains of $16.4 million resulting from thedisposition of Rural Cellular Corporation (“RCC”) shares in 2008 and $131.7million resulting from the settlement of forward contracts related to VodafoneAmerican Depository Receipts (“ADRs”) and disposition of the remaining ADRs in2007.

 

Net Income decreased$52.4 million to $233.1 million in 2008 compared to $285.5 million in 2007,primarily due to lower Investment and Other Income (Expense). Basic Earningsper Share was $2.66 in 2008, which was $0.59 lower than in 2007 and DilutedEarnings per Share was $2.65, which was $0.57 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 and operating expenditures for the foreseeable future.U.S. Cellular continues to seek to maintain a strong balance sheet and aninvestment grade credit rating.

 

See“Financial Resources” and “Liquidity and Capital Resources” below foradditional information related to cash flows and investments, including theimpacts of recent economic events.

 

**Recent Developments**

 

FCCRegulatory Developments

 

Asdisclosed in U.S. Cellular’s Form 10-K, before the FCC for comment areproposals made by the Federal-State Joint Board and by the FCC itself to changethe universal service fund (“USF”) high cost program in various ways. On April 29,2008, the FCC adopted an interim cap on the USF high cost funding that goes tocompetitive ETCs, limiting such funding for the state to the levels provided toall such carriers in that state in March 2008, with an exemption from thecap for carriers serving tribal lands and Alaskan Native Lands. While the capis in effect, which will be of indefinite duration, wireless ETCs such as U.S.Cellular will receive less support than they otherwise would have been eligibleto receive before the cap was in effect, because overall support will notincrease as a carrier adds customers or as new competitive carriers are grantedETC status in the state. The FCC order imposing the cap was published on July 1,2008 and became effective on August 1, 2008.

 

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TheFCC also is considering other significant changes in the USF, as discussed inU.S. Cellular’s Form 10-K under the heading of “Regulation, PendingProceedings – Universal Service.” Although there have been numerous recentpress reports indicating that the FCC is considering these and other potentialchanges in USF funding and intercarrier compensation, U.S. Cellular is not ableto predict what, if any, changes ultimately will be adopted by the FCC.  Such changes could have a material adverseimpact on U.S. Cellular’s financial condition and results of operations.

 

Also, on July 28,2008, at least 24 companies, including TDS, U.S. Cellular’s parent company,were sent a letter relating to USF from a congressional committee. The letterstates that the committee is investigating the USF High Cost Program, focusingon how the recipients of support funds used the funds they received, andrequested information regarding these support funds. TDS has provided theinformation requested and intends to fully cooperate with regard to thisrequest. TDS and U.S. Cellular cannot predict any action that the Committee orCongress may take as a result of the Committee’s inquiry.

 

Change in Listingfrom American Stock Exchange to New York Stock Exchange

 

In 2008, the NewYork Stock Exchange (“NYSE”) agreed to purchase the American Stock Exchange (“AMEX”).  As a result, U.S. Cellular determined tochange its listing from the AMEX to the NYSE. Effective September 15, 2008, U.S. Cellular voluntarily transferredthe listing of its Common Shares from the AMEX to the NYSE. The Common Sharestrade on the NYSE under the ticker symbol “USM”.

 

Licenses andGoodwill Impairment Assessment

 

U.S. Cellular performsits annual impairment assessment of goodwill and licenses in the second quarterof the year.  Given recent economic events including significant decreasesin investment security values, the tightening of credit markets and other factors,U.S. Cellular considered whether the decline in its market capitalization inthe third quarter of 2008 required an updated impairment assessment of itsgoodwill and licenses at September 30, 2008.  Given that the marketcapitalization of U.S. Cellular at September 30, 2008 was greater than itsbook value, and U.S. Cellular’s operating results and key performanceindicators for the three months ended September 30, 2008 provided noevidence of significant deterioration, U.S. Cellular concluded that an updatedimpairment analysis was not required for its goodwill or licenses at September 30,2008. U.S. Cellular will continue to monitor economic events and marketconditions and will perform such impairment testing as may be required in thefourth quarter of 2008.

 

**2008 Estimates**

 

U.S.Cellular expects that the industry, competitive, regulatory, and economicfactors discussed above may impact its results of operations for the nextseveral quarters.

 

U.S.Cellular’s estimates of full year 2008 results are shown below. Such estimatesrepresent U.S. Cellular’s views as of the filing date of U.S. Cellular’s Form 10-Qfor the nine months ended September 30, 2008.  Such forward-looking statements should not beassumed to be accurate as of any future date. U.S. Cellular undertakes no dutyto update such information whether as a result of new information, futureevents or otherwise. There can be no assurance that final results will notdiffer materially from such estimated results.

 
| ** **                                            | ** ** | **2008**                   | ** ** | **2007**                | ** **      |
|-------------------------------------------------------|------------|----------------------------|------------|-------------------------|-----------------|
| ** **                                            | ** ** | **Estimated Results** | ** ** | **Actual Results** | ** **      |
| Net retail customer additions                         |       | 125,000-160,000            |       | 333,000                 |            |
| Service revenues                                      |       | $3,925-$3,975 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 onexchanges and disposals of assets.

 

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**RESULTS OF OPERATIONS**

 

**Nine Months Ended September 30,2008 Compared to Nine Months Ended September 30, 2007**

 

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

 
| **As of  September 30,(1)**                              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Total market population of  consolidated operating markets(2) |       | 45,493,000 |       | 44,955,000 |       |
| Customers(3)(8)                                               |       | 6,176,000  |       | 6,058,000  |       |
| Market penetration(2)                                         |       | 13.6       | %          | 13.5       | %          |
| Total full-time equivalent  employees                         |       | 8,414      |       | 7,634      |       |
| Cell sites in service                                         |       | 6,716      |       | 6,255      |       |

 
| **For the Nine Months Ended  September 30,(4)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Net customer additions(5)(8)                         |       | 72,000   |       | 237,000  |       |
| Net retail customer  additions(5)                    |       | 116,000  |       | 269,000  |       |
| Average monthly service  revenue per customer(6)(8)  |       | $        | 53.40      |     | $          | 50.67 |   |
| Retail postpay churn rate per  month(7)              |       | 1.4      | %          | 1.4      | %          |
| Total postpay churn rate per  month(7)               |       | 1.7      | %          | 1.7      | %          |
|                                                      |            |          |            |          |            |  |  |

 

----

(1)          Amounts include results for U.S. Cellular’sconsolidated operating markets as of September 30; results for operatingmarkets acquired during a particular period are included as of the acquisitiondate.

 

(2)          Calculated using 2007 and 2006 Claritaspopulation estimates for 2008 and 2007, respectively. “Total market populationof consolidated operating markets” is used only for the purposes of calculatingmarket penetration of consolidated operating markets, which is calculated bydividing customers by the total market population (without duplication ofpopulation in overlapping markets).

 

Thetotal market population and penetration measures for consolidated operatingmarkets apply to markets in which U.S. Cellular provides wireless service tocustomers. For comparison purposes, total market population and penetrationrelated to all consolidated markets in which U.S. Cellular owns an interest were82,875,000 and 7.5%, and 81,841,000 and 7.4%, as of September 30, 2008 and2007, respectively.

 

As a result of exchange transactions with AT&T that closed in August 2003,U.S. Cellular obtained rights to acquire additional licenses, some of whichlicenses have been acquired and are reflected in the total market population ofconsolidated markets as of September 30, 2008.  During the first nine months of 2008, U.S.Cellular exercised its rights to acquire all but one of the remaining licensespursuant to this exchange agreement.  License rights that were exercisedbut for which the licenses were not yet acquired as of September 30, 2008will increase total market population of consolidated markets by 1,537,000to 84,412,000.  The exercise of theserights did not require U.S. Cellular to provide any consideration to AT&Tbeyond that already provided in conjunction with the August 2003 exchangetransaction and, thus, did not cause a change in U.S. Cellular’s Licensesbalance in 2008.  U.S. Cellular continuesto have a right under the August 2003 exchange agreement to acquire amajority interest in one additional license; that right does not have a statedexpiration date.

 

(3)          U.S. Cellular’s customer base consists of thefollowing types of customers:

 
| ** **                                                                                                                | ** ** | **September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                | ** ** | **2008**               | ** ** | **2007** | ** ** |
| Customers on postpay service  plans in which the end user is a customer of U.S. Cellular (“postpay  customers”) |       | 5,379,000              |       | 5,199,000 |   |
| End user customers acquired  through U.S. Cellular’s agreement with a third party (“reseller customers”)*  |       | 502,000                |       | 558,000 |   |
| Total postpay customers                                                                                                   |       | 5,881,000              |       | 5,757,000 |   |
| Customers on prepaid service  plans in which the end user is a customer of U.S. Cellular (“prepaid  customers”) |       | 295,000                |       | 301,000 |   |
| Total customers                                                                                                           |       | 6,176,000              |       | 6,058,000 |   |

 

----

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

 

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(4)          Amounts include results for U.S. Cellular’sconsolidated operating markets for the period January 1 through September 30;operating markets acquired during a particular period are included as of theacquisition date.

 

(5)          “Net customer additions” represents the numberof net customers added to U.S. Cellular’s overall customer base through all ofits marketing distribution channels, excluding any customers transferredthrough acquisitions, divestitures or exchanges. “Net retail customeradditions” represents the number of net customers added to U.S. Cellular’scustomer base through its marketing distribution channels, excluding net resellercustomers added to its reseller customer base and excluding any customerstransferred through acquisitions, divestitures or exchanges.

 

(6)          Management uses this measurement to assess theamount of service revenue that U.S. Cellular generates each month on a percustomer basis. Variances in this measurement are monitored and compared tovariances in expenses on a per customer basis. Average monthly service revenueper customer is calculated as follows:

 
| ** **                                                         | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **September 30,** | ** ** |
| ** **                                                         | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **                                                         | ** ** | ** **             | ** ** | ** ** | ** ** |
| Service revenues per Consolidated  Statements of Operations (000s) |       | $                      | 2,963,374  |   | $ | 2,721,341 |   |
| Divided by average customers during period  (000s)*                |       | 6,166                  |       | 5,968 |   |
| Divided by number of months in each period                         |       | 9                      |       | 9 |   |
|                                                               |       |                   |       |   |   |
| Average monthly service revenue per  customer                      |       | $                      | 53.40      |   | $ | 50.67 |   |

 

----

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

 

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

 

(8)   The amounts presented as of or for the ninemonths ended September 30, 2007 were adjusted slightly from amountspreviously reported as a result of a review of U.S. Cellular’s customerreporting procedures.  The amounts previously reported as Customers, Netcustomer additions, and Average monthly service revenue per customer were6,067,000, 246,000 and $50.66, respectively.

 

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**Components of Operating Income**

** **
| **Nine Months Ended  September 30,**                                              | ** **   | **2008**                   | ** ** | **2007**  | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|--------------|----------------------------|------------|-----------|------------|---------------------------|------------|------------------------|------------|
| *** ***                                                                           | *** *** | **(Dollars in thousands)** | ** ** |
| Retail service                                                                         |         | $                          | 2,534,944  |      | $          | 2,357,998                 |       | $                      | 176,946    |   | 7.5 | % |
| Inbound roaming                                                                        |         | 186,441                    |       | 150,195   |       | 36,246                    |       | 24.1                   | %          |
| Long-distance and other                                                                |         | 241,989                    |       | 213,148   |       | 28,841                    |       | 13.5                   | %          |
| Service revenues                                                                       |         | 2,963,374                  |       | 2,721,341 |       | 242,033                   |       | 8.9                    | %          |
| Equipment sales                                                                        |         | 226,949                    |       | 200,813   |       | 26,136                    |       | 13.0                   | %          |
| Total Operating Revenues                                                               |         | 3,190,323                  |       | 2,922,154 |       | 268,169                   |       | 9.2                    | %          |
|                                                                                   |         |                       |       |      |       |                      |       |                   |       |
| System operations (excluding  Depreciation, amortization and accretion reported below) |         | 585,141                    |       | 529,172   |       | 55,969                    |       | 10.6                   | %          |
| Cost of equipment sold                                                                 |         | 526,815                    |       | 460,413   |       | 66,402                    |       | 14.4                   | %          |
| Selling, general and  administrative                                                   |         | 1,271,544                  |       | 1,151,746 |       | 119,798                   |       | 10.4                   | %          |
| Depreciation, amortization and  accretion                                              |         | 433,222                    |       | 439,990   |       | (6,768                    | )          | (1.5                   | )%         |
| Loss on asset disposals, net                                                           |         | 16,776                     |       | 7,899     |       | 8,877                     |       | N/M                    |       |
| Total Operating Expenses                                                               |         | 2,833,498                  |       | 2,589,220 |       | 244,278                   |       | 9.4                    | %          |
| Total Operating Income                                                                 |         | $                          | 356,825    |      | $          | 332,934                   |       | $                      | 23,891     |   | 7.2 | % |

 

----

N/M =Not meaningful

** **

**Operating Revenues**

 

***Service revenues***

 

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

 

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 average monthly service revenue per customer; average monthlyservice revenue per customer averaged $53.40 in 2008 and $50.67 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 retailservice revenue per customer.

 

Theincrease in the average number of customers was primarily driven by the netretail customer additions that U.S. Cellular generated from its marketingdistribution channels. The average number of customers also was affected by thetiming 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 for2008 will depend upon U.S. Cellular’s ability to attract new customers andretain existing customers in a highly and increasingly competitive marketplace.The rate of growth in U.S.Cellular’s total customer base has slowed from 2007 to 2008 as U.S. Cellular’stotal customers increased 6% from September 30, 2006 to September 30,2007, and 2% from September 30, 2007 to September 30, 2008.  Duringthe third quarter of 2008, U.S. Cellular’s total retail customers decreased by3,000 and its total reseller customers decreased by 15,000. See “Overview - 2008 Estimates” for U.S.Cellular’s estimate of net retail customer additions for 2008.

 

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Averagemonthly retail service revenue per customer increased 4% to $45.68 in 2008 from$43.90 in 2007. The increase in average monthly retail service revenue percustomer was driven primarily by growth in revenues from data products andservices.

 

Monthlylocal retail voice minutes of use per customer averaged 700 in 2008 and 671 in2007. The increase in 2008 was driven primarily by U.S. Cellular’s focus ondesigning sales incentive programs and customer billing rate plans to stimulateoverall usage. The impact on retail service revenues of the increase in averagemonthly minutes of use was offset by a decrease in average revenue per minuteof use. The decrease in average revenue per minute of use reflects the impactof increasing competition, which has led to the inclusion of an increasingnumber of minutes in package pricing plans and the inclusion of features suchas unlimited inbound calling, which U.S. Cellular had made a differentiatingfactor in its current calling plans, as well as unlimited night and weekendminutes and unlimited mobile-to-mobile minutes in certain pricing plans. U.S.Cellular anticipates that its average revenue per minute of use may continue todecline in the future, reflecting increased competition and continuedpenetration of the consumer market.

 

Revenuesfrom data products and services grew significantly year-over-year, totaling $369.6 millionin 2008 and $260.1 million in 2007, and representing 12% of total servicerevenues in 2008 compared to 10% of total service revenues in 2007. Suchgrowth, which positively impacted average monthly retail service revenue percustomer, reflected customers’ continued and increasing acceptance and usage ofU.S. Cellular’s text messaging and picture messaging services, **easy**edgeSM service andapplications, and Smartphone handsets and services.

 

***Inbound roaming revenues***

 

Theincrease in inbound roaming revenues in 2008 was related primarily to anincrease in roaming minutes of use, partially offset by a decline in rate perminute caused by decreases in rates with key roaming partners. The increase ininbound roaming minutes of use was driven primarily by the overall growth inthe number of customers and retail minutes of use per customer throughout thewireless industry, including usage related to data products and services, whichled to an increase in inbound traffic from other wireless carriers.

 

A portion of the inboundroaming revenues is derived from Verizon Wireless (“Verizon”) and AlltelCorporation (“Alltel”).  During June 2008,Verizon and Alltel entered into an agreement pursuant to which Verizon willacquire Alltel, subject to certain conditions. Subject to regulatory approvals, this transaction is expected to closelater in 2008 or in 2009.  As a result ofthis transaction, the network footprints of Verizon and Alltel will becombined.  This is expected to result insignificant decreases in inbound roaming revenues for U.S. Cellular, since thecombined Verizon and Alltel entity is expected to almost cease using U.S.Cellular’s network in certain coverage areas that are currently used by Verizonand Alltel (as separate entities).  U.S. Cellular anticipates that such a declinewould more than offset the positive impact of the trends of increasing minutesof use and increasing data usage described in the preceding paragraph. Additional changes in the network footprintsof other carriers also 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.  U.S. Cellular also anticipates that itsroaming revenue per minute of use will decline over time due to therenegotiation of existing contracts as a result of the aforementioned industryconsolidation. The foregoingcould have an adverse effect on U.S. Cellular’s business, financial conditionor results of operations.

 

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

 

In2008, there was a $32.3 million increase in other revenues, partiallyoffset by a $3.5 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. U.S.Cellular was eligible to receive ETC funds in eleven states in 2008 and eightstates in 2007; the ETC revenue amounts recorded were $100.1 million in 2008and $70.8 million in 2007.  See “RecentDevelopments” in the preceding “Overview” section for a discussion of thepending changes in USF funding for wireless ETCs.

 

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.

 

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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 14% inaverage revenue per handset sold, primarily reflecting the sale of moreexpensive handsets with expanded capabilities, partially offset by a decline intotal handsets sold.

 

**Operating Expenses**

 

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

 

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

 

·                  expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$21.8 million, or 18%, in 2008. The increase is due to an increase inroaming minutes of use driven by customer migration to national and wide areaplans;

 

·                  maintenance, utility andcell site expenses increased $20.9 million, or 10%, in 2008, primarilydriven by increases in the number of cell sites within U.S. Cellular’s network,rent expense per cell site, and software maintenance costs to support rapidlygrowing data needs. The number of cell sites totaled 6,716 in 2008 and 6,255 in2007, as U.S. Cellular continued to grow by expanding and enhancing coverage inits existing markets and also through acquisitions of existing wirelessoperations; and

 

·                  the cost of network usageon U.S. Cellular’s systems increased $13.3 million, or 7%, in 2008, as voiceand data usage on U.S. Cellular’s systems increased driven primarily bycontinued migration to voice plans with a larger number of packaged minutes,text messaging plans, and other data offerings. In addition, data network anddeveloper costs increased due to the increase in data usage.

 

U.S.Cellular expects total system operations expenses to increase in theforeseeable 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;

 

·                  continued expansion ofEVDO services to additional markets; and

 

·                  increases in voice minutesof use and data usage, both on U.S. Cellular’s network and by U.S. Cellular’scustomers on other carriers’ networks when roaming.

 

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

 

***Cost of equipment sold***

 

Costof equipment sold increased in 2008 primarily from a 16% increase in theaverage cost per handset sold as a result of sales of more expensive handsetswith expanded capabilities.  U.S.Cellular believes that the expanded capabilities will drive increases in datarevenues.

 

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U.S.Cellular expects loss on equipment, defined as equipment sales revenues lesscost of equipment sold, to increase in the foreseeable future as wirelesscarriers continue to use handset availability and pricing as a means ofcompetitive differentiation. New handsets with expanded capabilities,particularly Smartphones, generally have higher purchase costs for carriers which,due to competitive market conditions, generally cannot be recovered throughproportionately higher selling prices to customers.

 

***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 due tohigher expenses associated with acquiring, serving and retaining customers,driven in part by an increase in U.S. Cellular’s customer base in 2008, andincreased regulatory charges and taxes. Key components of the increase inSelling, general and administrative expenses were as follows:

 

·                  general and administrativeexpenses increased $58.3 million, or 10%, in 2008, due to increases in expensesrelated to the operations of U.S. Cellular’s regional support offices;increases related to bad debts expense (reflecting both higher revenues and higherbad debts experience as a percent of revenues); increases in consulting andoutsourcing expenses; and increases in federal universal service fundcontributions and other regulatory fees and taxes;

 

·                  advertising expensesincreased $37.6 million, or 23%, in 2008, primarily due to an increase inmedia purchases, including the launch in June 2008 of a new brandingcampaign, Believe in Something BetterTM;

 

·                  other selling andmarketing expenses increased $23.9 million, or 6%, in 2008, reflecting moreretail sales associates, higher retail facilities expenses and highercommissions due to a greater number of customer renewal transactions.

 

U.S.Cellular expects Selling, general and administrative expenses to increase inthe foreseeable future driven primarily by increases in expenses associatedwith acquiring, serving and retaining customers.

 

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

 

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

 

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**Components of Other Income (Expense)**

 
| ** **                                        | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Nine Months Ended  September 30,**         | ** ** | **2008**                                                                           | ** ** | **2007**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| Total Operating Income                            |       | $                                                                                  | 356,825    |       | $          | 332,934        |       | $              | 23,891     |   | 7.2 | % |
|                                              |       |                                                                               |       |       |       |           |       |           |       |
| Equity in earnings from  unconsolidated entities  |       | 66,361                                                                             |       | 69,860     |       | (3,499         | )          | (5.0           | )%         |
| Interest and dividend income                      |       | 4,471                                                                              |       | 8,598      |       | (4,127         | )          | (48.0          | )%         |
| Fair value adjustment of  derivative instruments  |       | —                                                                             |       | (5,388     | )          | 5,388          |       | N/M            |       |
| Gain on disposition of  investments               |       | 16,628                                                                             |       | 131,686    |       | (115,058       | )          | (87.4          | )%         |
| Interest expense                                  |       | (60,611                                                                            | )          | (64,634    | )          | 4,023          |       | 6.2            | %          |
| Other, net                                        |       | 1,109                                                                              |       | (315       | )          | 1,424          |       | N/M            |       |
| Total Investment and Other  Income (Expense)      |       | 27,958                                                                             |       | 139,807    |       | (111,849       | )          | (80.0          | )%         |
|                                              |       |                                                                               |       |       |       |           |       |           |       |
| Income Before Income Taxes and  Minority Interest |       | 384,783                                                                            |       | 472,741    |       | (87,958        | )          | (18.6          | )%         |
| Income tax expense                                |       | (137,062                                                                           | )          | (176,542   | )          | 39,480         |       | 22.4           | %          |
|                                              |       |                                                                               |       |       |       |           |       |           |       |
| Income Before Minority  Interest                  |       | 247,721                                                                            |       | 296,199    |       | (48,478        | )          | (16.4          | )%         |
| Minority share of income, net  of tax             |       | (14,613                                                                            | )          | (10,672    | )          | (3,941         | )          | (36.9          | )%         |
| Net Income                                        |       | $                                                                                  | 233,108    |       | $          | 285,527        |       | $              | (52,419    | ) | (18.4 | )% |
|                                              |       |                                                                               |       |       |       |           |       |           |       |
| Basic Earnings per Share                          |       | $                                                                                  | 2.66       |       | $          | 3.25           |       | $              | (0.59      | ) | (18.2 | )% |
| Diluted Earnings per Share                        |       | $                                                                                  | 2.65       |       | $          | 3.22           |       | $              | (0.57      | ) | (17.7 | )% |

 

----

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 an interest and followsthe equity method of accounting. U.S. Cellular follows the equity method ofaccounting for interests in which its ownership interest is less than or equalto 50% but equals or exceeds 20% for corporations and 3% for partnerships andlimited liability companies. Equity in earnings from unconsolidated entitiesdecreased in 2008 primarily due to a $5.1 million decrease in income fromU.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership (“LAPartnership”).

 

U.S. Cellular’s investment in the LA Partnership contributed$49.2 million and $54.3 million to Equity in earnings fromunconsolidated entities in 2008 and 2007, respectively.

 

***Interest anddividend income***

 

The decreasein interest and dividend income in 2008 is due primarily to lower interestrates earned on cash balances in 2008 than 2007. This was due to both adecline in short-term interest rates and a change in the composition of U.S.Cellular’s cash investments in 2008 compared to 2007.  U.S. Cellular invested substantially all ofits cash balances in prime money market funds through August 2007 and inmoney market funds that invested exclusively in short-term U.S. Treasurysecurities thereafter.

 

***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”).  U.S. Cellular settledthe forward contracts related to the Vodafone ADRs and sold the remaining ADRsin May 2007.

 

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***Gain on dispositionof investments***

 

Gain on disposition of investments in 2008related to the exchange of Rural Cellular Corporation (“RCC”) shares for cashin conjunction with Verizon’s acquisition of RCC.  Gain on disposition of investments in 2007**was attributable to the settlement of variable prepaidforward contracts related to Vodafone ADRs and the disposition of the remainingVodafone ADRs.  See Note 4 - Gain onDisposition of Investments in the Notes to the Consolidated FinancialStatements for additional information regarding these transactions.

*** ***

***Interest expense***

 

The decrease in interest expense in 2008 was primarily due to thesettlement of U.S. Cellular’s variable prepaid forward contracts inMay 2007.

 

***Income tax expense***

 

See Note 6 - Income Taxes in the Notes toConsolidated Financial Statements for a discussion of the change in income taxexpense from 2007 to 2008.

 

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

 

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**Three Months EndedSeptember 30, 2008 Compared to Three Months Ended September 30, 2007**

 

**Components of Operating Income**

 
| **Three Months Ended  September 30,**                                             | ** **   | **2008**                   | ** ** | **2007**  | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|--------------|----------------------------|------------|-----------|------------|---------------------------|------------|------------------------|------------|
| *** ***                                                                           | *** *** | **(Dollars in thousands)** | ** ** |
| Retail service                                                                         |         | $                          | 855,167    |      | $          | 814,948                   |       | $                      | 40,219     |   | 4.9 | % |
| Inbound roaming                                                                        |         | 69,319                     |       | 60,843    |       | 8,476                     |       | 13.9                   | %          |
| Long-distance and other                                                                |         | 89,442                     |       | 78,749    |       | 10,693                    |       | 13.6                   | %          |
| Service revenues                                                                       |         | 1,013,928                  |       | 954,540   |       | 59,388                    |       | 6.2                    | %          |
| Equipment sales                                                                        |         | 77,947                     |       | 61,294    |       | 16,653                    |       | 27.2                   | %          |
| Total Operating Revenues                                                               |         | 1,091,875                  |       | 1,015,834 |       | 76,041                    |       | 7.5                    | %          |
|                                                                                   |         |                       |       |      |       |                      |       |                   |       |
| System operations (excluding  Depreciation, amortization and accretion reported below) |         | 197,473                    |       | 185,479   |       | 11,994                    |       | 6.5                    | %          |
| Cost of equipment sold                                                                 |         | 180,584                    |       | 161,428   |       | 19,156                    |       | 11.9                   | %          |
| Selling, general and  administrative                                                   |         | 441,543                    |       | 418,212   |       | 23,331                    |       | 5.6                    | %          |
| Depreciation, amortization and  accretion                                              |         | 145,434                    |       | 148,014   |       | (2,580                    | )          | (1.7                   | )%         |
| Loss on asset disposals, net                                                           |         | 6,884                      |       | 1,762     |       | 5,122                     |       | N/M                    |       |
| Total Operating Expenses                                                               |         | 971,918                    |       | 914,895   |       | 57,023                    |       | 6.2                    | %          |
| Total Operating Income                                                                 |         | $                          | 119,957    |      | $          | 100,939                   |       | $                      | 19,018     |   | 18.8 | % |

 

----

N/M = Not meaningful

 

**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 average monthly service revenue per customer; average monthlyservice revenue per customer averaged $54.59 in 2008 and $52.73 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 retailservice revenue per customer.

 

Theincrease in the average number of customers was primarily driven by the netretail customer additions that U.S. Cellular generated from its marketingdistribution channels. The average number of customers also was affected by thetiming of acquisitions, divestitures and exchanges.

 

Averagemonthly retail service revenue per customer increased 2% to $46.04 in 2008 from$45.03 in 2007. The increase in average monthly retail service revenue percustomer was driven primarily by growth from data products and services.

 

Monthlylocal retail voice minutes of use per customer averaged 695 in 2008 and 680 in2007. The increase was driven primarily 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 $130.2 millionin 2008 and $96.8 million in 2007, and representing 13% of total servicerevenues in 2008 compared to 10% of total service revenues in 2007. This growthreflected customers’ continued and increasing acceptance and usage of U.S. Cellular’stext messaging and picture messaging services, **easy**edgeSMservice and 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, partially offset by a decline in rate perminute caused by decreases in rates with key roaming partners. The increase ininbound roaming minutes of use was driven primarily by the overall growth inthe number of customers and retail minutes of use per customer throughout thewireless industry, including usage related to data products and services, whichled to an increase in inbound traffic from other wireless carriers.

 

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

 

Theincrease in 2008 reflected an $11.6 million increase in other revenues,partially offset by a $0.9 million decrease in long-distance revenues. Thegrowth in other revenues was due primarily to an increase in ETC funds thatwere received from the USF. U.S. Cellular was eligible to receive ETC funds ineleven states in 2008 and nine states in 2007; the ETC revenue amounts recordedwere $38.2 million in 2008 and $27.4 million in 2007.

 

***Equipment sales revenues***

 

Theincrease in 2008 equipment sales revenues was driven by an increase of 30% inaverage revenue per handset sold, primarily reflecting the sale of moreexpensive handsets with expanded capabilities, partially offset by a decline inthe total number of handsets sold.

 

**Operating Expenses**

 

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

 

Keycomponents of the overall increase in system operations expenses were asfollows:

 

·                  expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$5.3 million, or 11%, in 2008. The increase is due to an increase inroaming minutes of use driven by customer migration to national and wide areaplans;

 

·                  the cost of network usageon U.S. Cellular’s systems increased $4.4 million, or 7%, in 2008, as voice anddata usage on U.S. Cellular’s systems increased driven primarily by continuedmigration to voice plans with a larger number of packaged minutes, text messageplans, and other data offerings. In addition, data network and developer costsincreased due to the increase in data usage; and

 

·                  maintenance, utility andcell site expenses increased $2.3 million, or 3%, in 2008, primarilydriven by increases in the number of cell sites within U.S. Cellular’s network,rent expense per cell site, and software maintenance costs to support rapidlygrowing data needs. The number of cell sites totaled 6,716 in 2008 and 6,255 in2007, as U.S. Cellular continued to grow by expanding and enhancing coverage inits existing markets and also through acquisitions of existing wirelessoperations.

 

***Cost of equipment sold***

 

Theincrease in Cost of equipment sold was due primarily to a 14% increase in theaverage cost per handset sold as a result of sales of more expensive handsetswith expanded capabilities.

 

***Selling, general and administrativeexpenses***

 

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 drove the increase. Keycomponents of the increase in selling, general and administrative expenses wereas follows:

 

·                  advertising expensesincreased $12.3 million, or 19%, in 2008, primarily due to an increase inmedia purchases, including the launch in June 2008 of a new brandingcampaign, Believe in Something BetterTM;

 

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·                  general and administrative expenses increased $6.4million, or 3%, in 2008, due to higher expenses related to the operations ofU.S. Cellular’s regional support offices and higher federal universal servicefund contributions, partially offset by a decrease related to bad debts expense (reflectinglower bad debts experience as a percent of revenues); and

 

·                  other selling andmarketing expenses increased $4.6 million, or 4%, in 2008, reflecting moreretail sales associates, higher commissions due to a greater number of customerrenewal transactions and higher retail facilities expenses.

 

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

 

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

 

**Components of Other Income (Expense)**

 
| ** **                                        | ** **   | ** **                                            | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|---------------------------------------------------|--------------|-------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Three Months Ended  September 30,**        | ** **   | **2008**                                              | ** ** | **2007**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| *** ***                                      | *** *** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Total Operating Income                            |         | $                                                     | 119,957    |       | $          | 100,939        |       | $              | 19,018     |   | 18.8 | % |
|                                              |         |                                                  |       |       |       |           |       |           |       |
| Equity in earnings from  unconsolidated entities  |         | 22,319                                                |       | 23,782     |       | (1,463         | )          | (6.2           | )%         |
| Interest and dividend Income                      |         | 1,137                                                 |       | 3,395      |       | (2,258         | )          | (66.5          | )%         |
| Gain on disposition of  investments               |         | 16,628                                                |       | —     |       | 16,628         |       | N/M            |       |
| Interest expense                                  |         | (19,722                                               | )          | (19,625    | )          | (97            | )          | (0.5           | )%         |
| Other, net                                        |         | 391                                                   |       | 179        |       | 212            |       | N/M            |       |
| Total Investment and Other  Income (Expense)      |         | 20,753                                                |       | 7,731      |       | 13,022         |       | N/M            |       |
| Income Before Income Taxes and  Minority Interest |         | 140,710                                               |       | 108,670    |       | 32,040         |       | 29.5           | %          |
| Income tax expense                                |         | (45,506                                               | )          | (41,154    | )          | (4,352         | )          | (10.6          | )%         |
| Income Before Minority  Interest                  |         | 95,204                                                |       | 67,516     |       | 27,688         |       | 41.0           | %          |
| Minority share of income, net  of tax             |         | (5,255                                                | )          | (3,961     | )          | (1,294         | )          | (32.7          | )%         |
| Net Income                                        |         | $                                                     | 89,949     |       | $          | 63,555         |       | $              | 26,394     |   | 41.5 | % |
|                                              |         |                                                  |       |       |       |           |       |           |       |
| Basic Earnings per Share                          |         | $                                                     | 1.03       |       | $          | 0.72           |       | $              | 0.31       |   | 43.1 | % |
| Diluted Earnings per Share                        |         | $                                                     | 1.02       |       | $          | 0.72           |       | $              | 0.30       |   | 41.7 | % |

 

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N/M = Not meaningful

 

***Equity in earningsfrom unconsolidated entities***

 

U.S. Cellular’s investment in the LA Partnership contributed$15.3 million and $17.9 million to Equity in earnings fromunconsolidated entities in 2008 and 2007, respectively.

 

***Interest anddividend income***

 

The decrease in interest and dividend income in 2008 is due primarilyto lower interest rates earned on cash balances in 2008 than 2007. Thiswas due to both a decline in short-term interest rates in and a change in thecomposition of U.S. Cellular’s cash investments in 2008 compared to 2007. U.S.Cellular invested substantially all of its cash balances in prime money marketfunds through August 2007 and in money market funds that investedexclusively in short-term U.S. Treasury securities thereafter.

 

***Gain on dispositionof investments***

 

Gain on disposition of investments in 2008**related to the exchange of RCC shares for cash inconjunction with Verizon’s acquisition of RCC. See Note 4 – Gain on Dispositionof Investments in the Notes to Consolidated Financial Statements for additionalinformation regarding this transaction.

 

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***Income tax expense***

 

See Note 6 – Income Taxes in the Notes toConsolidated Financial Statements for a discussion of the changes in income taxexpense from 2007 to 2008.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 definesfair value as used in numerous accounting pronouncements, establishes aframework for measuring fair value in U.S. GAAP, and expands disclosuresrelated 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, not anentity-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. In October 2008, the FASB issued FSP FAS 157-3 to clarify anddemonstrate how the fair value of a financial asset is determined when themarket for that financial asset is inactive. As of September 30, 2008,U.S. Cellular did not have any financial assets or liabilities that requiredthe application of SFAS 157 for purposes of reporting such amounts in itsConsolidated Balance Sheet. U.S. Cellular is currently reviewing therequirements of SFAS 157 related to its nonfinancial assets and liabilitieswhich become effective January 1, 2009, and has not yet determined theimpact of adoption, if any, on its financial 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) replacesSFAS No. 141, *Business Combinations*(“SFAS 141”). SFAS 141(R) retains the underlying concept ofSFAS 141 in that all business combinations are still required to beaccounted for at fair value under the acquisition method, a method thatrequires the acquirer to measure and recognize the acquiree on an entire entitybasis and recognize the assets acquired and liabilities assumed at their fairvalues 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 has determined that anytransaction costs incurred and capitalized in 2008 for a business combinationthat will not close until on or after January 1, 2009 will be expensedupon U.S. Cellular’s adoption of SFAS 141(R) on January 1, 2009. U.S.Cellular does not anticipate that this treatment will have a significant impacton its financial position or results of operations. U.S. Cellular is currentlyreviewing the remaining requirements of SFAS 141(R) and has not yetdetermined the impact of adoption, if any, on its financial position or resultsof 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 SFAS No. 94,*Consolidation of All Majority-OwnedSubsidiaries,* to establish new standards that will govern theaccounting and reporting of (1) noncontrolling interests (commonlyreferred to as minority interests) in partially owned consolidated subsidiariesand (2) the loss of control of subsidiaries. SFAS 160 also establishesthat once control of a subsidiary is obtained, changes in ownership interestsin that subsidiary that do not result in a loss of control shall be accountedfor as equity transactions, not as step acquisitions under SFAS 141.  SFAS 160 is effective for U.S. Cellularon 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 of adoption, if any, on itsfinancial position or results of operations.

 

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In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities – anamendment of FASB Statement No. 133* (“SFAS 161”).SFAS 161 expands the disclosure requirements for derivative instrumentsand hedging activities. The Statement specifically requires entities to provideenhanced disclosures addressing the following: (a) how and why an entityuses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under Statement 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS 161 is effective for U.S. Cellular beginning January 1, 2009.As of September 30, 2008, U.S. Cellular did not hold any derivativeinstruments and, therefore, does not expect any impact as a result of thispronouncement.

 

In April 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 recognized intangibleasset 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 FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted Accounting Principles* (“SFAS162”). 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.*The**SEC approvedthe amendments on September 15, 2008. Therefore, SFAS 162 is effective asof November 15, 2008. U.S. Cellular does not anticipate that the adoptionof SFAS 162 will have an impact on either its financial statements ordisclosures.

 

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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 used long-termdebt financing to fund its acquisitions including licenses, construction costsand operating expenses.  Cash flows mayfluctuate 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 nine months ended September 30, 2008 to the ninemonths ended September 30, 2007.

 

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

 
| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)**                | ** ** |
| Cash flows from (used in)                             |       |                                                |       |   |   |
| Operating activities                                  |       | $                                                   | 696,580    |   | $ | 621,713 |   |
| Investing activities                                  |       | (688,094                                            | )          | (388,450 | ) |
| Financing activities                                  |       | (35,411                                             | )          | (84,155 | ) |
| Net increase (decrease) in cash  and cash equivalents |       | $                                                   | (26,925    | ) | $ | 149,108 |   |

 

**Cash Flows from Operating Activities**

 

The net increase in cash flowsfrom operating activities was primarily attributable to a $63.0 milliondecrease in income tax payments. Income tax payments in 2008 and 2007 were$96.1 million and $159.2 million, respectively. Such income tax payments areincluded as a component of the change in accrued taxes, along with accrualsrecorded for current income tax expense, and accruals for other non-incometaxes. The 2007 income tax payments were higher primarily due to increasedestimated tax payments that resulted from the gain on the disposition ofVodafone American Depository Receipts and the settlement of the related forwardcontracts.

 

**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 licenses. 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 and usage growth, to upgrade serviceand to take advantage of service-enhancing and cost-reducing technologicaldevelopments in order to maintain competitive services.

 

Cash used for property, plant and equipment and system developmentexpenditures totaled $395.6 million in 2008 and $377.4 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, upgrade technology including the overlay of EVDOtechnology in certain markets, remodel new and existing retail stores and opennew stores, and develop office systems.

 

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Cash required for acquisitions totaled $314.7 million in 2008 and$18.3 million in 2007. The cash impact of 2008 acquisitions is summarizedbelow.

 
| **2008 Acquisitions**       | ** ** | **Cash Payment**               | ** ** |
|----------------------------------|------------|-------------------------------------|------------|
| ** **                       | ** ** | **(Dollars in millions)** | ** ** |
|                             |       |                                |       |
| Auction 73 Licenses              |       | $                                   | 300.5      |   |
| North Carolina RSA 1 Partnership |       | 6.9                                 |       |
| Maine Licenses                   |       | 5.0                                 |       |
| Auction 78 Licenses              |       | 2.1                                 |       |
| Other                            |       | 0.2                                 |       |
| Total                            |       | $                                   | 314.7      |   |

 

Cash amounts paid for the acquisitions differ from the purchase pricedue to transaction related expenses incurred, but not yet paid, as of September 30,2008. See Note 3 - Acquisitions, Divestitures and Exchanges in the Notes toConsolidated Financial Statements for details of these transactions.

 

In 2008, U.S. Cellular realized cash proceeds of $16.7 million from thedisposition of RCC Common Shares in conjunction with Verizon Wireless’acquisition of RCC. In 2007, U.S. Cellular realized cash proceeds of $4.3million related to the disposition of Vodafone ADRs. See Note 4 – Gain onDisposition of Investments in the Notes to Consolidated Financial Statementsfor 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.

 

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****$1.3million in 2008 and provided $12.2 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.

 

In 2008, U.S.Cellular repurchased 450,000 Common Shares at an aggregate cost of $27.7 million.U.S. Cellular also received $4.6million in 2008 from an investment banking firm for the final settlement of theAccelerated Share Repurchases (“ASR”) made in the second half of 2007. In 2007, U.S. Cellularpurchased 838,000 Common Shares for $65.2 million from an investment bankingfirm in connection with two ASR programs. See Note 14 - Common ShareRepurchases in the Notes to Consolidated Financial Statements for details ofthese transactions.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Recent events in thefinancial services sector and correlating impacts to other sectors of theeconomy have resulted in concerns regarding investment security values, theavailability of and concentration of credit, insurance coverage and a varietyof other areas. Although U.S. Cellular’s cash balance, conservative strategiesfor investing cash on hand from time to time and funds available under itsrevolving credit agreement have limited its exposure to these events to date,U.S. Cellular continues to monitor economic conditions and developments andwill make adjustments to its cash investments, borrowing arrangements andinsurance coverage as necessary and feasible.

 

Consumer spending alsosignificantly impacts U.S. Cellular’s operations and performance. Recent economicconditions could cause consumer spending to deteriorate significantly. Factorsthat influence levels of consumer spending include: unemployment rates,increases in fuel and other energy costs, conditions in residential real estateand mortgage markets, labor and health care costs, access to credit, consumerconfidence and other macroeconomic factors. Changes in these and other economicfactors could have a material adverse effect on demand for U.S. Cellular’sproducts and services and on U.S. Cellular’s financial condition and results ofoperations.

 

U.S. Cellular believes thatexisting cash balances and cash flows from operating activities providefinancial flexibility for U.S. Cellular to meet its normal financing needs(including working capital, construction and development expenditures,acquisitions, and share repurchases under its approved program) for theforeseeable future. As discussed further below, U.S. Cellular also has fundsavailable under a revolving credit facility which will provide additionalflexibility through the date of its expiration in December 2009. Inaddition, U.S. Cellular may have access to public and private capital marketsto help meet its financing needs.

 

U.S. Cellular cannot provideassurances that circumstances that could have a material adverse affect on itsliquidity or capital resources will not occur. Economic conditions, changes infinancial markets, deterioration in the capital markets or other factors couldrestrict U.S. Cellular’s liquidity and availability of financing on terms andprices acceptable to U.S. Cellular, which could require U.S. Cellular to reduceits construction, development, acquisition or Common Share repurchase programs.Such reductions could have a material adverse effect on U.S. Cellular’s business,financial condition or results of operations.

 

**Cash and Cash Equivalents**

 

At September 30, 2008,U.S. Cellular had $177.6 million in cash and cash equivalents, which includecash and 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 September 30,2008, U.S. Cellular invested substantially all of its cash balances in moneymarket funds that invested exclusively in short-term U.S. Treasury securitiesor repurchase agreements backedby U.S. Treasury securities. U.S. Cellular monitors the financialviability of the money market funds in which it invests and believes that the credit risk associated withthese investments is low.

 

**Revolving Credit Facility**

 

U.S.Cellular has a $700 million revolving credit facility available for generalcorporate purposes. This revolving credit facility is comprised of commitmentsfrom thirteen lending institutions, with individual commitments ranging from 1%to 16% of the total commitment. At September 30, 2008, there were nooutstanding borrowings and $0.3 million of outstanding letters of credit,leaving $699.7 million available for use. Borrowings under the revolving creditfacility bear interest at the London InterBank Offered Rate (“LIBOR”) plus acontractual spread based on U.S. Cellular’s credit rating. U.S. Cellular mayselect borrowing periods of either seven days or one, two, three or six months.At September 30, 2008, the one-month LIBOR was 3.93% and the contractualspread was 60 basis points. 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 September 30, 2008). This creditfacility expires in December 2009.

 

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U.S. Cellular’s interestcost on its revolving credit facility would increase if its current creditrating from Moody’s Investors 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 September 30,2008 and the dates that such ratings were issued, were as follows:

 
| Moody’s  (issued August 15, 2008)                   |   | Baa2 |   | -  stable outlook        |
|---------------------------------------------------------------|--------|------|--------|--------------------------|
| Standard &  Poor’s (issued March 13, 2008) |   | BBB- |   | -  with positive outlook |
| Fitch  Ratings (issued August 16, 2007)                  |   | BBB+ |   | -  stable outlook        |

 

On August 15, 2008,Moody’s changed its outlook on U.S. Cellular’s credit rating to stable fromunder review for possible upgrade.

 

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

 

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

 

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

 

The continued availabilityof the revolving credit facility requires U.S. Cellular to comply with certainnegative and affirmative covenants, maintain certain financial ratios and makerepresentations regarding certain matters at the time of each borrowing. Thecovenants also prescribe certain terms associated with intercompany loans fromTDS or TDS subsidiaries to U.S. Cellular or U.S. Cellular subsidiaries. U.S.Cellular believes it was in compliance as of September 30, 2008 with allcovenants and other requirements set forth in its revolving credit facility. Therewere no intercompany loans at September 30, 2008 or December 31,2007.

 

U.S. Cellular is maintaining an active dialogue with its existing lenders and plans to obtain a newrevolving credit facility prior to the December 2009 expiration date ofthe current facility. Due to current unfavorable credit market conditions, U.S.Cellular may not be able to obtain similar terms or the same amount ofavailability as exist in the current facility. If U.S. Cellular is unable torenew its revolving credit facility or to obtain a new revolving creditfacility from alternative sources on acceptable terms or at current fundinglevels for any reason, including reduced availability of credit or theconsolidation of lending institutions as a result of recent market events, U.S.Cellular’s future liquidity, capital resources, business, financial conditionand/or results of operations could be adversely affected.

 

**Long-Term Financing**

 

U.S. Cellular’s long-termdebt indenture does not contain any provisions resulting in acceleration of thematurities of outstanding debt in the event of a change in U.S. Cellular’scredit rating. However, a downgrade in U.S. Cellular’s credit rating couldadversely affect its ability to obtain long-term debt financing in the future. U.S.Cellular believes it was in compliance as of September 30, 2008 with allcovenants and other requirements set forth in its long-term debt indenture.

 

U.S. Cellular filed a shelfregistration statement on Form S-3 with the SEC on May 9, 2008. BecauseU.S. Cellular was a “well-known seasoned issuer” as defined in Rule 405under the Securities Act of 1933, as amended, such registration statementbecame automatically effective upon filing with the SEC and registered anindeterminate amount of debt securities. 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 does not have any set time frame forissuing any specific amount of debt securities under such registrationstatement at the present time. U.S. Cellular’s ability to complete an offeringpursuant to such shelf registration statement will be dependent on marketconditions and other factors at the time. If U.S. Cellular does not qualify as a “well-known seasonedissuer” at the time of filing of any of its Forms 10-K in the future, U.S.Cellular would thereafter cease to be able to use this automatic shelfregistration statement until it again so qualified, or would be required toconvert this automatic shelf registration statement into another registrationstatement that U.S. Cellular was then qualified to use.

 

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The long-term debt principalpayments due for the remainder of 2008 and the next four years compriseapproximately 1% of the total long-term debt obligation at September 30,2008. 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, foradditional information regarding required principal payments and the weightedaverage interest rates related to U.S. Cellular’s long-term debt.

 

U.S. Cellular mayfrom time to time seek to retire or purchase its outstanding debt through cashpurchases and/or exchanges for other securities, in open market purchases,privately negotiated transactions, tender offers, exchange offers or otherwise.Such repurchases or exchanges, if any, will depend on prevailing marketconditions, liquidity requirements, contractual restrictions and otherfactors.  The amounts involved may be material.

 

**Marketable Equity Securities**

 

U.S. Cellular had no investments in marketable equity securities at September 30,2008. See Note 10 - Marketable Equity Securities of Notes to ConsolidatedFinancial Statements for a description of marketable equity securitiestransactions during the nine months ended September 30, 2008 and 2007.

 

**Capital Expenditures**

 

U.S. Cellular’s capitalexpenditures for 2008 are expected to be approximately $525-$575 million.These expenditures primarily address the following needs:

 

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

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

·                  overlay EVDO technology incertain markets; and

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

 

U.S. Cellular plans tofinance its capital expenditures program for 2008 using cash on hand, cashflows from operating activities and short-term debt.

 

**Suppliers**

 

U.S. Cellular depends upon certain key suppliers to provide it withequipment, services or content that U.S. Cellular needs to continue U.S.Cellular’s network build and upgrade and to operate its business.  U.S. Cellular does not have operational orfinancial control over any of such key suppliers and has limited influence withrespect to the manner in which these key suppliers conduct theirbusinesses.  If these key suppliersexperience financial difficulties and are unable to provide equipment, servicesor content to U.S. Cellular on a timely basis or cease to provide such equipment,services or content or if such key suppliers otherwise fail to honor theirobligations to U.S. Cellular, U.S. Cellular may be unable to maintain andupgrade its network or provide services to its customers in a competitivemanner, or could suffer other disruptions to its business.  In that event, U.S. Cellular’s business,financial condition or results of operations could be adversely affected.  U.S. Cellular monitors the financialcondition of its key suppliers through its risk management process.

 

**Acquisitions, Divestitures and Exchanges**

 

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

 

See Note 3 - Acquisitions,Divestitures and Exchanges in the Notes to Consolidated Financial Statementsfor details on 2008 transactions.

 

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**Variable Interest Entities**

 

U.S. Cellular consolidatescertain variable interest entities pursuant to FIN 46(R).  See Note 5 - Variable Interest Entities in the Notes to 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 hasrepurchased and expects to continue to repurchase its Common Shares subject tothe repurchase program.  For details of this program and repurchases madeduring the nine months ended September 30, 2008, see Note 14 - Common Share Repurchases in theNotes to Consolidated Financial Statements.

 

**Contractual and Other Obligations**

 

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

 

**Accounts Receivable and Allowance for Doubtful Accounts**

 

U.S. Cellular’saccounts receivable consist primarily of amounts owed by customers pursuant toservice contracts and for equipment sales, by agents for equipment sales, byother wireless carriers whose customers have used U.S. Cellular’s wirelesssystems for roaming and by unaffiliated third-party partnerships orcorporations pursuant to equity distribution declarations.

 

The allowancefor doubtful accounts is the best estimate of the amount of probable creditlosses related to existing accounts receivable. The allowance is estimated based on historical experience and otherfactors that could affect collectability. Accounts receivable balances are reviewed on either an aggregate orindividual basis for collectability depending on the type of receivable.  When it is probable that an account balancewill not be collected, the account balance is charged against the allowance fordoubtful accounts.  U.S. Cellular’sexperience related to credit losses does not appear to have been affected toany significant degree by recent economic conditions and events as of September 30,2008.

 

**Insurance**

 

U.S. Cellular has severalcommercial property and casualty insurance policies with a variety ofsubsidiary companies of American International Group, Inc. (“AIG”).  These companies operate under the insuranceregulations of various states, including New York, Pennsylvania andDelaware.  U.S. Cellular has inquiredinto the ability of these AIG companies to meet their obligations in the eventof a claim against these policies and has received assurance from AIG and U.S.Cellular’s insurance brokers that the companies remain able to meet theseobligations. State insurance regulators and the rating agencies have issuedpress releases indicating the same.  U.S.Cellular does not have any significant property and casualty claims outstandingwith these companies.  U.S. Cellularcontinues to monitor the financial condition of other insurance providers.

 

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**APPLICATION OF CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

U.S.Cellular prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”).  U.S. Cellular’s significantaccounting policies are discussed in detail in Note 2 – Summary of SignificantAccounting Policies of the Notes to Consolidated Financial Statements and U.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 nine months of 2008, except the adoptionof SFAS No. 157, *Fair Value Measurements*.

 

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***PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995***

***SAFE HARBOR CAUTIONARY STATEMENT***

 

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

 

·                  *Intense competition in the marketsin which U.S. Cellular operates could adversely affect U.S. Cellular’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 roaming revenues. As a result of recentlyannounced acquisitions in the wireless industry, U.S. Cellular anticipates thatroaming revenues could decline significantly over the next several quarters,which could have an adverse effect on U.S. Cellular’s business, financialcondition 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 areconcentrated in the U.S. wireless telecommunications industry. As aresult, its results of operations may fluctuate based on factors relatedentirely to conditions in this industry.*

 

·                  *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 has inthe past and could in the future prevent or delay its access to new productsincluding handsets, new technology and/or new content and applications whichcould adversely affect U.S. Cellular’s ability to attract and retain customersand, as a result, could adversely affect its business, financial condition orresults of operations.*

 

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·                  *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, High-SpeedPacket Access, WiMAX or Long-Term Evolution (LTE), could render certaintechnologies used by U.S. Cellular obsolete, could reduceU.S. Cellular’s revenues or could 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 ofU.S. Cellular’s revenues is derived from customers who buy servicesthrough independent agents and dealers who market U.S. Cellular’s serviceson a commission basis. If U.S. Cellular’s relationships with these agentsand dealers are seriously harmed, its revenues could be adversely affected.*

 

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

 

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

 

·                  *Financial difficulties ofU.S. Cellular’s key suppliers or vendors, 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 New York Stock Exchange; and/or could have other negative consequences, anyof which could have an adverse effect on the trading prices ofU.S. Cellular’s publicly traded equity and/or debt and/orU.S. Cellular’s business, financial condition or results of operations.*

 

·                  *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 reporting couldresult 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.*

 

·                  *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.*

 

·                  *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.*

 

·                  *Recent market events and conditions,including disruption in credit and other financial markets and thedeterioration of U.S. and global economic conditions, could, among otherthings, impede U.S. Cellular’s access to or increase the cost of financing itsoperating and investment activities and/or result in reduced revenues and loweroperating income and cash flows, which would have an adverse effect on U.S.Cellular’s financial condition or results of operations.*

 

·                  *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 require U.S. Cellularto reduce its construction, development or acquisition programs.*

 

·                  *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 USF funding and/orintercarrier compensation could have a material adverse impact on U.S. Cellular’sfinancial position or results of operations.*

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**MARKETRISK**

 

**Long-termDebt**

 

As of September 30,2008, U.S. Cellular’s long-term debt was in the form of 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 disclosureunder Market Risk – Long Term Debt in U.S. Cellular’s Form 10-K for theyear ended December 31, 2007, for additional information regardingrequired principal payments and weighted average interest rates related to U.S.Cellular’s long-term debt.

 

**Marketable Equity Securities**

 

As of September 30, 2008, U.S.Cellular did not hold any marketable equity securities. See Note 10 –Marketable Equity Securities of the Notes to Consolidated Financial Statementsfor a description of marketable equity securities transactions during the ninemonths ended September 30, 2008.

 

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**Item 4. Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Asrequired by SEC Rule 13a-15(b), U.S. Cellular carried out an evaluation,under the supervision and with the participation of management, including itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of U.S. Cellular’s disclosure controls and proceduresas of the end of the period covered by this Quarterly Report.  Based on this evaluation, U.S. Cellular’sChief Executive Officer and Chief Financial Officer concluded that U.S.Cellular’s disclosure controls and procedures were not effective as of September 30, 2008 because of thematerial weakness in accounting for income taxes described below.  Notwithstanding the material weakness thatexisted as of September 30,2008,management has concluded that the consolidated financial statements included inthis Quarterly Report on Form 10-Q present fairly, in all materialrespects, the financial position, results of operations and cash flows of U.S.Cellular in conformity with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”).

 

Amaterial weakness is a deficiency, or a combination of deficiencies, ininternal control over financial reporting such that there is a reasonablepossibility that a material misstatement of the company’s annual or interimfinancial statements will not be prevented or detected on a timely basis.  Management identified the following materialweakness in internal control over financial reporting as of December 31,2007, which continued to exist at September 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 to U.S.Cellular’s interim or annual consolidated financial statements that would notbe prevented or detected.   Accordingly,U.S. Cellular’s management has determined that this control deficiencyconstitutes 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.

 

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 September 30, 2008.

 

Changes in Internal Control Over Financial Reporting

 

Therewere no changes in U.S. Cellular’s internal control over financial reportingduring the quarter ended September 30,2008, that have materially affected, or are reasonably likely to materiallyaffect, 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, otherregulatory authorities, and/or various state and federal courts.  If U.S. Cellular believes that a loss arisingfrom such legal proceedings is probable and can be reasonably estimated, anamount is accrued in the financial statements for the estimated loss.  Ifonly a range of loss can be determined, the best estimate within that range isaccrued; if none of the estimates within that range is better than another, thelow end of the range is accrued.  Theassessment of the expected outcomes of legal proceedings is a highly subjectiveprocess that requires judgments about future events.  The legal proceedings are reviewed at leastquarterly to determine the adequacy of accruals and related financial statementdisclosures.  The ultimate outcomes oflegal proceedings could differ materially from amounts accrued in the financialstatements.

 

**Item 1A. Risk Factors.**

 

Inaddition to the information set forth in this Form 10-Q, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in U.S. Cellular’s 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 ofroaming revenues. As a result of recently announced acquisitions in thewireless industry, U.S. Cellular anticipates that roaming revenues coulddecline significantly over the next several quarters, which could have anadverse effect on U.S. Cellular’s business, financial condition or results ofoperations.***

 

U.S. Cellular’s Service revenues include roamingrevenues related to the use of U.S. Cellular’s network by other carriers’customers who travel within U.S. Cellular coverage areas.  Such roaming revenues were $93.5 million and$250.4 million for the three and nine months ended September 30, 2008,respectively.  A significant portion ofthese roaming revenues is derived from Verizon Wireless (“Verizon”) and AlltelCorporation (“Alltel”).  During June 2008,Verizon and Alltel entered into an agreement pursuant to which Verizon willacquire Alltel, subject to certain conditions. This transaction is expected to close later in 2008 or in 2009.  As a result of this transaction, the networkfootprints of Verizon and Alltel will be combined.  This is expected to result in significantdecreases in roaming revenues for U.S. Cellular, since the combined Verizon andAlltel entity is expected to almost cease using U.S. Cellular’s network incertain coverage areas that are currently used by Verizon and Alltel (as separateentities).  Additional changes in thenetwork footprints of other carriers could have an adverse effect on U.S.Cellular’s roaming revenues.  Forexample, consolidation among other carriers which have network footprints thatcurrently overlap U.S. Cellular’s network could further decrease the amount ofroaming revenues for U.S. Cellular.  Theforegoing could have an adverse effect on U.S. Cellular’s business, financialcondition or results of operations.

 

***Recent market events and conditions,including disruption in credit and other financial markets and thedeterioration of U.S. and global economic conditions, could, among otherthings, impede U.S. Cellular’s access to or increase the cost of financing itsoperating and investment activities and/or result in reduced revenues and loweroperating income and cash flows, which would have an adverse effect on U.S.Cellular’s financial condition or results of operations.***

 

Therecent disruption in the credit and financial markets, decline in consumerconfidence, increase in unemployment, decline in economic growth anduncertainty about corporate earnings have had a significant negative impact onthe U.S. and global financial and credit markets and the overall economy. Theseevents have had an adverse impact on financial institutions resulting inlimited access to capital and credit for many companies. These conditionscould make it more difficult for U.S. Cellular to obtain financing for itsoperations or investments or increase its cost of obtaining financing. Inaddition, in December 2009, the U.S. Cellular revolving credit facilitywill expire. These disruptions could adversely affect U.S. Cellular’s abilityto renew this credit facility and any renewed facility may be under terms thatare not as favorable as past credit facilities. Finally, other types offinancing such as bond financing may be unavailable or only be available underunfavorable terms.

 

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AlthoughU.S. Cellular is not currently experiencing any limitation of access to itsrevolving credit facility and is not aware of any issues currently impactingthe ability of the lenders under its revolving credit facility to honor theircommitments to extend credit, there is no assurance that the U.S. and globalcredit crisis will not adversely affect U.S. Cellular’s ability to borrow onits revolving credit facility in the future.

 

Theseeconomic uncertainties make it very difficult to accurately forecast and planfuture business activities. If the current uncertain economic conditionscontinue or deteriorate, there could be a material adverse impact on U.S.Cellular’s financial position, revenues, results of operations and cash flows.

 

***Changes in USF funding and/or intercarrier compensation could have amaterial adverse impact on U.S. Cellular’s financial position, results ofoperations, and cash flows.***

 

Before the FCC for comment are proposals made by the Federal-StateJoint Board and by the FCC itself to change the universal service fund (“USF”)high cost program in various ways. On April 29, 2008, the FCC adopted aninterim “cap” on the USF high cost funding that goes to competitive ETCs,limiting such funding for the state to the levels provided to all such carriersin that state in March 2008, with an exemption from the cap for carriersserving tribal lands and Alaskan Native Lands. While the cap is in effect,which will be of indefinite duration, wireless ETCs such as U.S. Cellular willreceive less support than they would have been otherwise eligible to receivebefore the cap was in effect, because overall support will not increase as acarrier adds customers or as new competitive carriers are granted ETC status inthe state. The FCC order imposing the cap was published on July 1, 2008 andbecame effective on August 1, 2008. The FCC also is considering othersignificant changes in the USF as well as in intercarrier compensation.

 

Also, on July 28, 2008, at least 24 companies, including TDS, U.S.Cellular’s parent company, were sent a letter relating to USF from acongressional committee. The letter states that the committee is investigatingthe USF High Cost Program, focusing on how the recipients of support funds usethe funds they receive, and requested information regarding these supportfunds.  TDS and U.S. Cellular haveprovided or will provide the information requested and intend to fullycooperate with regard to all such requests.

 

U.S. Cellular is not able to predict what, if any, changes ultimatelywill be adopted by the FCC or any action that may be taken as a result of theforegoing requests. Such changes could have a material adverse impact on U.S.Cellular’s financial condition and 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 September 30, 2008, U.S. Cellular repurchased 150,000 Common Sharesfor $8.6 million, or an average of $57.53 per share pursuant to thisauthorization.

 

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

 
| ** **                                                           | ** ** | ** **               | ** ** | ** **             | ** ** | **(c)**                                 | ** ** | **(d)**                                 | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | ** **               | ** ** | ** **             | ** ** | **Total Number of**           | ** ** | **Maximum Number of**         | ** ** |
| ** **                                                           | ** ** | **(a)**                  | ** ** | **(b)**                | ** ** | **Common Shares**                  | ** ** | **Common Shares that**        | ** ** |
| ** **                                                           | ** ** | **Total Number**    | ** ** | **Average Price** | ** ** | **Purchased as Part of** | ** ** | **May Yet Be Purchased** | ** ** |
| ** **                                                           | ** ** | **of Common**       | ** ** | **Paid per**      | ** ** | **Publicly Announced**             | ** ** | **Under the**                      | ** ** |
| **Period**                                                           | ** ** | **Shares  Purchased(1)** | ** ** | **Common  Share**      | ** ** | **Plans or  Programs(2)**               | ** ** | **Plans or  Programs (3)**              | ** ** |
| July 1 – 31, 2008                                          |       | 150,000                  |       | $                      | 57.53      |                                    | 150,000    |                                    | 17,000     |   |
| August 1 – 31, 2008                                        |       | —                   |       | —                 |       | —                                  |       | 17,000                                  |       |
| September 1 – 30, 2008                                     |       | —                   |       | —                 |       | —                                  |       | 17,000                                  |       |
| Total for or as of end of the quarter ended  September 30, 2008 |       | 150,000                  |       | $                      | 57.53      |                                    | 150,000    |                                    | 17,000     |   |

 

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

(2)          In July 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 167,000.

(3)          Represents the remainingnumber of shares that could have been purchased during the period from October 1,2008 to October 17, 2008 pursuant to the Limited Authorization applicableto the three-month period from July 18, 2008 to October 17, 2008. Noadditional shares were purchased during this period.

 

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 September 30, 2008, this permitted U.S. Cellularto acquire slightly less than 17,000 Common Shares by October 17, 2008based on the number of unaffiliated Common Shares outstanding on such date,reflecting the fact that 150,000 shares were purchased within thepreceding three months.

 

iii.            Thereis no expiration date for the program.

 

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

 

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

 

**Item 5. Other Information.**

 
| The  following information is being provided to update prior disclosures made  pursuant to the requirements of Form 8-K, Item 2.03 - Creation of a Direct  Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement  of a Registrant.                                                                                                                                                      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                           |
| U.S.  Cellular did not borrow additional amounts under its revolving credit  facility in the third quarter of 2008. U.S. Cellular has no borrowings  outstanding under its Revolving Credit Agreement as of September 30, 2008.                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                           |
| The  foregoing description is qualified by reference to the description of the  Revolving Credit Facility under Item 1.01 in U.S. Cellular’s Current Report  on Form 8-K dated December 9, 2004, and a copy of the Revolving 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 and is 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 herebyincorporated by reference to U.S. Cellular’s Current Report on Form 8-Kdated March 13, 2008.

 

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

 

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

 

Exhibit 10.5– U.S. Cellular Compensation Plan for Non-Employee Directors, as amended May 20,2008.

 

Exhibit 10.6– U.S. Cellular 2008 Executive Officer Annual Incentive Plan, is herebyincorporated by reference to U.S. Cellular’s Current Report on Form 8-Kdated June 30, 2008.

 

Exhibit 10.7– TDS’ Supplemental Executive Retirement Plan (As Amended and Restated,Effective January 1, 2009), is hereby incorporated by reference to TDS’Current Report on Form 8-K dated August 27, 2008.

 

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

 

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

 

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

 

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

 

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

 

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

 

Theforegoing exhibits include only the exhibits that relate specifically to this Form 10-Qor that supplement the exhibits identified in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2007. Reference is made to U.S. Cellular’sForm 10-K for the year ended December 31, 2007 for a complete list ofexhibits, which are incorporated herein except to the extent supplemented orsuperseded 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:  November 5, 2008 | /s/  John E. Rooney                    |
|------------------------------|----------------------------------------|
|                         | John  E. Rooney                        |
|                         | President  and Chief Executive Officer |
|                         | (Principal  Executive Officer)         |
|                         |                                   |
|                         |                                   |
| Date:  November 5, 2008 | /s/  Steven T. Campbell                |
|                         | Steven  T. Campbell                    |
|                         | Executive  Vice President-Finance,     |
|                         | Chief  Financial Officer and Treasurer |
|                         | (Principal  Financial Officer)         |
|                         |                                   |
|                         |                                   |
| Date:  November 5, 2008 | /s/  Kenneth R. Meyers                 |
|                         | Kenneth  R. Meyers                     |
|                         | Chief  Accounting Officer              |
|                         | (Principal  Accounting Officer)        |

 

 

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

 

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