Edgar Filing: UNITED STATES CELLULAR CORP

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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

For the transition period from to

Commission File Number 1-9712

UNITED STATES CELLULAR CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (773) 399-8900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer x Accelerated filer o Accelerated filer o

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

Yes o No x

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

Class		Outstanding at September 30, 2006
Common Shares, $1 par value		54,197,834 Shares
Series A Common Shares, $1 par value		33,005,877 Shares

UNITED STATES CELLULAR CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2006

INDEX

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Operations
	Three and Nine Months Ended September 30, 2006 and 2005	3

	Consolidated Statements of Cash Flows
	Nine Months Ended September 30, 2006 and 2005	4

	Consolidated Balance Sheets
	September 30, 2006 and December 31, 2005	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

	Summary of Holdings	36
	Overview	37
	Results of Operations
	Nine Months Ended September 30, 2006 and 2005	39
	Three Months Ended September 30, 2006 and 2005	48
	Recent Accounting Pronouncements	52
	Financial Resources	53
	Liquidity and Capital Resources	55
	Application of Critical Accounting Policies and Estimates	60
	Certain Relationships and Related Transactions	66
	Other Matters	67
	Safe Harbor Cautionary Statement	68

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71

Item 4.	Controls and Procedures	73

Part II. Other Information

Item 1.	Legal Proceedings	77

Item 1A.	Risk Factors	77

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 4.	Submission of Matters to a Vote of Security-Holders	79

Item 5.	Other Information	79

Item 6.	Exhibits	80

Signatures

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005 (As Restated)			2006			2005 (As Restated)
	(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Service	$	821,820		$	729,005		$	2,382,747		$	2,089,232
Equipment sales	66,703			66,095			188,289			156,294
Total Operating Revenues	888,523			795,100			2,571,036			2,245,526

OPERATING EXPENSES
System operations (excluding Depreciation, amortization and accretion shown separately below)	165,107			159,335			468,980			446,278
Cost of equipment sold	140,757			130,823			417,489			374,882
Selling, general and administrative (including charges from affiliates of $28.2 million and $22.9 million for the three months ended September 30, 2006 and 2005, respectively, and $77.8 million and $64.1 million for the nine months ended 2006 and 2005, respectively)	358,392			313,374			1,028,865			877,116
Depreciation, amortization and accretion	146,940			128,238			429,451			382,244
Total Operating Expenses	811,196			731,770			2,344,785			2,080,520

OPERATING INCOME	77,327			63,330			226,251			165,006

INVESTMENT AND OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated entities	23,483			17,416			64,923			49,231
Fair value adjustment of derivative instruments	(21,285		)	(14,241		)	(17,392		)	9,938
Interest and dividend income	601			384			10,996			6,884
Gain on investments	—			—			—			551
Interest expense	(23,974		)	(21,122		)	(70,189		)	(63,304		)
Other expense, net	(225		)	(691		)	(163		)	(536		)
Total Investment and Other Income (Expense)	(21,400		)	(18,254		)	(11,825		)	2,764

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST	55,927			45,076			214,426			167,770
Income tax expense	15,510			17,966			77,903			65,955

INCOME BEFORE MINORITY INTEREST	40,417			27,110			136,523			101,815
Minority share of income	(4,542		)	(3,438		)	(11,138		)	(8,034		)

NET INCOME	$	35,875		$	23,672		$	125,385		$	93,781

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (000s)	87,281			86,904			87,258			86,674
BASIC EARNINGS PER SHARE (Note 6)	$	0.41		$	0.27		$	1.44		$	1.08

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (000s)	88,092			87,661			88,071			87,390
DILUTED EARNINGS PER SHARE (Note 6)	$	0.41		$	0.27		$	1.42		$	1.07

The accompanying notes to consolidated financial statements are an integral part of these statements.

UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Nine Months Ended September 30,
	2006			2005 (As Restated)
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	125,385		$	93,781
Add (deduct) adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion	429,451			382,244
Bad debts expense	43,787			25,417
Stock-based compensation expense	16,134			5,764
Deferred income taxes, net	(30,714		)	47,987
Equity in earnings of unconsolidated entities	(64,923		)	(49,231		)
Distributions from unconsolidated entities	39,374			30,809
Minority share of income	11,138			8,034
Fair value adjustment of derivative instruments	17,392			(9,938		)
Gain (loss) on investments	—			(551		)
Noncash interest expense	1,335			1,335
Other operating activities	244			—
Changes in assets and liabilities from operations
Change in accounts receivable	(74,401		)	(34,908		)
Change in inventory	16,084			21,694
Change in accounts payable	(48,926		)	(43,787		)
Change in customer deposits and deferred revenues	7,813			3,937
Change in accrued taxes	9,145			18,739
Change in accrued interest	9,226			8,383
Change in other assets and liabilities	(7,906		)	(213		)
	499,638			509,496

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment	(421,378		)	(379,088		)
Cash received from divestitures	—			551
Cash paid for acquisitions	(98,581		)	(126,160		)
Return of investment	28,650			—
Other investing activities	(3,256		)	(4,994		)
	(494,565		)	(509,691		)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable	390,000			350,000
Repayment of notes payable	(375,000		)	(380,000		)
Common shares reissued	3,856			22,228
Capital (distributions) to minority partners	(14,371		)	(1,831		)
Other financing activities	349			(195		)
	4,834			(9,798		)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	9,907			(9,993		)

CASH AND CASH EQUIVALENTS
Beginning of period	29,003			41,062
End of period	$	38,910		$	31,069

The accompanying notes to consolidated financial statements are an integral part of these statements.

UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

Unaudited

	September 30, 2006		December 31, 2005 (As Restated)
	(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents	$	38,910	$	29,003
Accounts receivable
Customers, less allowance of $13,625 and $11,410, respectively	298,018		278,170
Roaming	39,178		27,178
Other	56,324		57,011
Marketable equity securities	204,933		—
Inventory	76,925		92,748
Prepaid expenses	36,605		32,068
Deferred income tax asset	—		8,218
Other current assets	21,160		15,489
	772,053		539,885
INVESTMENTS
Licenses	1,447,569		1,362,263
Goodwill	485,485		481,235
Customer lists, net of accumulated amortization of $62,259 and $44,616, respectively	32,048		47,649
Marketable equity securities	3,572		225,387
Investments in unconsolidated entities	197,817		172,093
Notes and interest receivable	4,767		4,707
	2,171,258		2,293,334
PROPERTY, PLANT AND EQUIPMENT
In service and under construction	4,981,963		4,615,234
Less accumulated depreciation	2,382,414		2,062,205
	2,599,549		2,553,029

OTHER ASSETS AND DEFERRED CHARGES	30,647		29,985

TOTAL ASSETS	$	5,573,507	$	5,416,233

The accompanying notes to consolidated financial statements are an integral part of these statements.

UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

Unaudited

	September 30, 2006			December 31, 2005 (As Restated)
	(Dollars in thousands)
CURRENT LIABILITIES
Forward contracts	$	159,856		$	—
Notes payable	150,000			135,000
Accounts payable
Affiliated	11,065			7,239
Trade	248,805			301,058
Customer deposits and deferred revenues	119,782			111,407
Accrued taxes	42,324			36,748
Accrued compensation	42,504			42,865
Derivative liability	43,210			—
Deferred income tax liability	28,681			—
Other current liabilities	47,822			28,404
	894,049			662,721

DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability	582,328			647,086
Derivative liability	—			25,818
Asset retirement obligation	115,998			90,224
Other deferred liabilities and credits	57,462			46,234
	755,788			809,362

LONG-TERM DEBT
Long-term debt	1,001,725			1,001,385
Forward contracts	—			159,856
	1,001,725			1,161,241

COMMITMENTS AND CONTINGENCIES (SEE NOTE 19)

MINORITY INTEREST	38,741			41,871

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
Capital in excess of par value	1,289,802			1,286,964
Treasury Shares, at cost, 847,851 and 962,863 Common Shares, respectively	(40,594		)	(47,088		)
Accumulated other comprehensive income	51,571			44,122
Retained earnings	1,494,373			1,368,988
	2,883,204			2,741,038
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,573,507		$	5,416,233

The accompanying notes to consolidated financial statements are an integral part of these statements.

UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

The consolidated financial statements included herein have been prepared by U.S. Cellular, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, U.S. Cellular believes that the information and disclosures included herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K/A for the year ended December 31, 2005 (“Form 10-K/A”).

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items unless otherwise disclosed) necessary to present fairly the financial position as of September 30, 2006 and December 31, 2005, the results of operations for the three and nine months ended September 30, 2006 and 2005, and the cash flows for the nine months ended September 30, 2006 and 2005. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.

Restatement

U.S. Cellular and its audit committee concluded on November 6, 2006, that U.S. Cellular would amend its Annual Report on Form 10-K for the year ended December 31, 2005 to restate its consolidated financial statements and financial information for each of the three years in the period ended December 31, 2005, including quarterly information for 2005 and 2004, and certain selected financial data for 2002. U.S. Cellular and its audit committee also concluded that U.S. Cellular would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006 to restate the consolidated financial statements and financial information included therewith.

The restatement adjustments are described below.

· Forward contracts and related derivative instruments - In reviewing the accounting and disclosure of its prepaid forward contracts, U.S. Cellular concluded that its continued designation of the embedded collars within the forward contracts as cash flow hedges of marketable equity securities was not appropriate. U.S. Cellular did not contemporaneously de-designate, re-designate, and assess hedge effectiveness when the embedded collars were contractually modified for differences between the actual and expected dividend rates on the underlying securities in 2002. As a result, the embedded collars no longer qualified for cash flow hedge accounting treatment upon the modification of the terms of the collars for changes in dividend rates and, from that point forward, must be accounted for as derivative instruments that do not qualify for cash flow hedge accounting treatment. Accordingly, all changes in the fair value of the embedded collars from the time of the contractual modification of each collar must be recognized in the statement of operations. The restatement adjustments represent reclassifications of unrealized gains or losses related to changes in the fair value of the embedded collars from other comprehensive income or loss, included in common stockholders’ equity, to the statement of operations.

· Contracts with maintenance and support services — U.S. Cellular entered into certain equipment and software contracts that included maintenance and support services. In one case, U.S. Cellular did not properly allocate expenditures between equipment purchases and maintenance and support services. In other cases, U.S. Cellular did not properly record fees for maintenance and support services over the specified term of the agreement. The restatement adjustments properly record property, plant and equipment, related depreciation expense and fees for maintenance and support services in the correct periods.

· Classification of Asset Retirement Obligation on the Statement of Cash Flows – The additions to property, plant and equipment and other deferred liabilities representing additional asset retirement obligations (“ARO”) should be treated as non-cash items in the statement of cash flows. From 2004 through the second quarter of 2006, U.S. Cellular included additional ARO liabilities as a change in other assets and liabilities in cash flows from operating activities and the increase in the ARO asset balance as a capital expenditure in cash flows from investing activities resulting in an overstatement of cash flows from operating activities and an overstatement of cash flows required by investing activities. In the restatement, adjustments were recorded in the statement of cash flows to offset the change in ARO liabilities against the ARO asset. The reduction in the change in other assets and liabilities in cash flows from operating activities and the reduction in additions to property, plant and equipment in cash flows from investing activities totaled $4.7 million in the nine months ended September 30, 2005.

· Income taxes – U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. In the restatement, U.S. Cellular adjusted its income tax expense, income taxes payable, goodwill, deferred income tax assets and liabilities and related disclosures for the years ended December 31, 2005, 2004, 2003 and 2002 for items identified based on its annual analysis reconciling its 2005 income tax expense and income tax balance sheet accounts as determined in its comparison of the 2005 year-end income tax provision to the 2005 federal and state income tax returns. These adjustments included corrections for certain accounts that had not previously been included in the financial reporting basis used in determining the cumulative temporary differences in computing deferred income tax assets and liabilities, as well as adjustments to certain cumulative temporary differences that had historically been incorrectly associated with operating license assets which, in this restatement, have been correctly classified as investments in partnership assets. Accordingly, the company has adjusted the deferred tax liabilities related to these assets. Goodwill was adjusted by $9.6 million to record the income tax effect of the difference between the financial reporting basis and the income tax basis of certain acquisitions made prior to 2004.

· Property, plant and equipment – U.S. Cellular did not properly record certain transfers and disposals of equipment removed from service. Also, U.S. Cellular did not properly record depreciation expense for certain leasehold improvements and other equipment due to the use of incorrect asset lives. The restatement adjustments properly record equipment disposals and depreciation expense in the correct amounts and periods.

· Other items – In addition to the adjustments described above, U.S. Cellular recorded a number of other adjustments to correct and record revenues, expenses and equity in earnings of unconsolidated entities in the periods in which such revenues, expenses and equity in earnings of unconsolidated entities were earned or incurred. Adjustments were also made to certain balance sheet amounts. These individual adjustments were not material.

The table below summarizes the impacts of the restatement on income before income taxes and minority interest.

	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
	(Increase (decrease), dollars in thousands)
Income Before Income Taxes and Minority Interest, as previously reported	$	62,536		$	166,149
Forward contracts and related derivative instruments	(14,241		)	9,938
Contracts with maintenance and support services	(123		)	(458		)
Property, plant and equipment	(1,827		)	(1,750		)
Other items	(1,269		)	(6,109		)
Total adjustment	(17,460		)	1,621
Income Before Income Taxes and Minority Interest, as restated	$	45,076		$	167,770

The table below summarizes the net income and diluted earnings per share impacts from the restatement.

	Three Months Ended September 30, 2005						Nine Months Ended September 30, 2005
	Net Income			Diluted Earnings Per Share			Net Income			Diluted Earnings Per Share
	(Increase (decrease), dollars in thousands, except per share amounts)
As previously reported	$	34,620		$	0.39		$	92,262		$	1.06
Forward contracts and related derivative instruments	(9,006		)	(0.10		)	6,285			0.07
Contracts with maintenance and support services	(59		)	—			(231		)	—
Income taxes	—			—			—			—
Property, plant and equipment	(1,127		)	(0.01		)	(1,075		)	(0.01		)
Other items	(756		)	(0.01		)	(3,460		)	(0.05		)
Total adjustment	(10,948		)	(0.12		)	1,519			0.01
As restated	$	23,672		$	0.27		$	93,781		$	1.07

The effect of the restatement on the previously reported Consolidated Statements of Operations is as follows:

	Three Months Ended September 30, 2005						Nine Months Ended September 30, 2005
	As Previously Reported			As Restated			As Previously Reported			As Restated
	(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Service	$	729,504		$	729,005		$	2,092,889		$	2,089,232
Equipment sales	66,002			66,095			155,653			156,294
Total Operating Revenues	795,506			795,100			2,248,542			2,245,526

OPERATING EXPENSES
System operations (excluding Depreciation, amortization and accretion shown separately below)	159,102			159,335			444,811			446,278
Cost of equipment sold	130,823			130,823			374,882			374,882
Selling, general and administrative	312,777			313,374			875,316			877,116
Depreciation, amortization and accretion	126,583			128,238			380,860			382,244
Total Operating Expenses	729,285			731,770			2,075,869			2,080,520

OPERATING INCOME	66,221			63,330			172,673			165,006

INVESTMENT AND OTHER INCOME (EXPENSE)
Equity in earnings of unconsolidated entities	17,744			17,416			50,009			49,231
Fair value adjustment of derivative instruments	—			(14,241		)	—			9,938
Interest and dividend income	384			384			6,756			6,884
Gain on investments	—			—			551			551
Interest expense	(21,122		)	(21,122		)	(63,304		)	(63,304		)
Other expense, net	(691		)	(691		)	(536		)	(536		)
Total Investment and Other Income (Expense)	(3,685		)	(18,254		)	(6,524		)	2,764

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST	62,536			45,076			166,149			167,770
Income tax expense	24,471			17,966			65,445			65,955

INCOME BEFORE MINORITY INTEREST	38,065			27,110			100,704			101,815
Minority share of income	(3,445		)	(3,438		)	(8,442		)	(8,034		)

NET INCOME	$	34,620		$	23,672		$	92,262		$	93,781

BASIC EARNINGS PER SHARE	$	0.40		$	0.27		$	1.06		$	1.08

DILUTED EARNINGS PER SHARE	$	0.39		$	0.27		$	1.06		$	1.07

The effect of the restatement on the previously reported Consolidated Statements of Cash Flows is as follows:

	Nine Months Ended September 30, 2005
	As Previously Reported			As Restated
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	92,262		$	93,781
Add (deduct) adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion	380,860			382,244
Bad debts expense	25,417			25,417
Stock-based compensation expense	5,764			5,764
Deferred income taxes, net	47,475			47,987
Equity in earnings of unconsolidated entities	(50,009		)	(49,231		)
Distributions from unconsolidated entities	31,104			30,809
Minority share of income	8,442			8,034
Fair value adjustment of derivative instruments	—			(9,938		)
Gain (loss) on investments	(551		)	(551		)
Noncash interest expense	1,335			1,335
Changes in assets and liabilities from operations
Change in accounts receivable	(34,676		)	(34,908		)
Change in inventory	21,694			21,694
Change in accounts payable	(43,787		)	(43,787		)
Change in customer deposits and deferred revenues	360			3,937
Change in accrued taxes	18,739			18,739
Change in accrued interest	8,383			8,383
Change in other assets and liabilities	2,440			(213		)
	515,252			509,496

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment	(384,844		)	(379,088		)
Cash received from divestitures	—			551
Cash paid for acquisitions	(125,609		)	(126,160		)
Return of investment	—			—
Other investing activities	(4,994		)	(4,994		)
	(515,447		)	(509,691		)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of notes payable	350,000			350,000
Repayment of notes payable	(380,000		)	(380,000		)
Common shares reissued	22,228			22,228
Capital (distributions) to minority partners	—			(1,831		)
Other financing activities	(2,026		)	(195		)
	(9,798		)	(9,798		)

NET DECREASE IN CASH AND CASH EQUIVALENTS	(9,993		)	(9,993		)

CASH AND CASH EQUIVALENTS-
Beginning of period	41,062			41,062
End of period	$	31,069		$	31,069

The effect of the restatement on the previously reported Consolidated Balance Sheets is as follows:

	December 31,
	2005		2005
	As Previously Reported		As Restated
CURRENT ASSETS
Cash and cash equivalents	$	29,003	$	29,003
Accounts Receivable
Customers, less allowance	281,896		278,170
Roaming	27,178		27,178
Other	58,436		57,011
Marketable equity securities	—		—
Inventory	92,748		92,748
Prepaid expenses	31,026		32,068
Deferred income tax asset	8,218		8,218
Other current assets	15,145		15,489
	543,650		539,885
INVESTMENTS
Licenses	1,362,263		1,362,263
Goodwill	471,617		481,235
Customer lists, net of accumulated amortization	49,318		47,649
Marketable equity securities	225,387		225,387
Investments in unconsolidated entities	170,337		172,093
Notes and interest receivable	4,707		4,707
	2,283,629		2,293,334
PROPERTY, PLANT AND EQUIPMENT
In service and under construction	4,653,292		4,615,234
Less accumulated depreciation	2,076,528		2,062,205
	2,576,764		2,553,029

OTHER DEFERRED CHARGES	29,985		29,985

TOTAL ASSETS	$	5,434,028	$	5,416,233

	December 31,
	2005			2005
	As Previously Reported			As Restated
CURRENT LIABILITIES
Forward contracts	$	—		$	—
Notes payable	135,000			135,000
Accounts payable
Affiliated	7,239			7,239
Trade	298,397			301,058
Customer deposits and deferred revenues	106,180			111,407
Accrued taxes	38,627			36,748
Accrued compensation	42,865			42,865
Derivative liability	—			—
Deferred income tax liability	—			—
Other current liabilities	25,952			28,404
	654,260			662,721

DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability	660,667			647,086
Derivative liability	25,818			25,818
Asset retirement obligation	90,224			90,224
Other deferred liabilities and credits	44,636			46,234
	821,345			809,362

LONG-TERM DEBT
Long-term debt	1,001,385			1,001,385
Forward contracts	159,856			159,856
	1,161,241			1,161,241

COMMITMENTS AND CONTINGENCIES

MINORITY INTEREST	46,442			41,871

COMMON SHAREHOLDERS’ EQUITY
Common Shares, par value $1 per share	55,046			55,046
Series A Common Shares, par value $1 per share	33,006			33,006
Capital in excess of par value	1,286,964			1,286,964
Treasury Shares, at cost	(47,088		)	(47,088		)
Accumulated other comprehensive income	24,944			44,122
Retained earnings	1,397,868			1,368,988
	2,750,740			2,741,038
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,434,028		$	5,416,233

2. Summary of Significant Accounting Policies

Change in Accounting Principle — Stock-Based Compensation

U.S. Cellular has established the following stock-based compensation plans: a long-term incentive plan, an employee stock purchase plan and a non-employee director compensation plan. Also, U.S. Cellular employees are eligible to participate in the Telephone and Data Systems, Inc. (TDS) employee stock purchase plan; TDS is U.S. Cellular’s parent organization. These plans are described more fully in Note 3 - Stock-Based Compensation. Prior to January 1, 2006, U.S. Cellular accounted for these plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, as permitted by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS 123”), “Accounting for Stock-BasedCompensation”. Total stock-based employee compensation cost recognized in the Consolidated Statements of Operations under APB 25 was $2.2 million and $5.8 million for the three and nine months ended September 30, 2005, respectively, primarily for restricted stock unit and deferred compensation stock unit awards. No compensation cost was recognized in the Consolidated Statements of Operations under APB 25 for stock option awards for the three and nine months ended September 30, 2005, because all outstanding options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The employee stock purchase plans qualified as non-compensatory plans under APB 25; therefore, no compensation cost was recognized for these plans during the three and nine months ended September 30, 2005.

Effective January 1, 2006, U.S. Cellular adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. In addition, U.S. Cellular applied the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”), issued by the SEC in March 2005 in its adoption of SFAS 123(R). Under the modified prospective transition method, compensation cost recognized during the three and nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

Under SFAS 123(R), the long-term incentive plan is considered a compensatory plan; therefore, recognition of compensation cost for grants made under this plan is required.

Under SFAS 123(R), the employee stock purchase plan is considered a compensatory plan; therefore, recognition of compensation cost for grants made under this plan is required. However, due to restrictions on activity under this plan that were in place during the nine months ended September 30, 2006, no compensation cost was recognized during this period.

Upon adoption of SFAS 123(R), U.S. Cellular elected to continue to value its share-based payment transactions using a Black-Scholes valuation model, which was previously used by U.S. Cellular for purposes of preparing the pro forma disclosures under SFAS 123. Under the provisions of SFAS 123(R), stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that is ultimately expected to vest. Accordingly, stock-based compensation cost recognized in 2006 has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. U.S. Cellular believes that its historical experience is the best estimate of future expected life. In U.S. Cellular’s pro forma information required under SFAS 123, U.S. Cellular also reduced stock-based compensation cost for estimated forfeitures. The expected life assumption was determined based on U.S. Cellular’s historical experience. For purposes of both SFAS 123 and SFAS 123(R), the expected volatility assumption was based on the historical volatility of U.S. Cellular’s common stock. The dividend yield assumption was zero because U.S. Cellular has never paid a dividend and has expressed its intention to retain all future earnings in the business. The risk-free interest rate assumption was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock options.

Compensation cost for stock option awards granted after January 1, 2006 will be recognized over the respective requisite service period of the awards, which is generally the vesting period, on a straight-line basis over the requisite service period for each separately vesting portion of the awards as if the awards were, in-substance, multiple awards (graded vesting attribution method), which is the same attribution method that was used by U.S. Cellular for purposes of its pro forma disclosures under SFAS 123.

Certain employees were eligible for retirement at the time that compensatory stock options and restricted stock units were granted to them. Under the terms of the U.S. Cellular option and restricted stock unit agreements, options and restricted stock units granted retirement-eligible employees will fully vest upon their retirement if the employees have reached the age of 65. Prior to the adoption of SFAS 123(R), U.S. Cellular used the “nominal vesting method” to recognize the pro forma stock-based compensation cost related to options and restricted stock units awarded to retirement-eligible employees. This method does not take into account the effect of early vesting due to the retirement of eligible employees. Upon adoption of SFAS 123(R), U.S. Cellular adopted the “non-substantive vesting method”, which requires recognition of the cost of options and restricted stock units granted to retirement-eligible employees over the period from the date of grant to the date such employees reach age 65. If the non-substantive vesting method had been applied in prior periods, the effect on previously disclosed pro forma stock-based compensation cost would not have been material.

On March 7, 2006, the U.S. Cellular Compensation Committee approved amendments to stock option award agreements. The amendments modify current and future options to extend the exercise period until 30 days following: (i) the lifting of a "suspension" if options otherwise would expire or be forfeited during the suspension period; and (ii) the lifting of a blackout if options otherwise would expire or be forfeited during a blackout period. U.S. Cellular temporarily suspended issuances of shares under the 2005 Long Term Incentive Plan between March 17, 2006 and October 10, 2006 as a consequence of late SEC filings. U.S. Cellular became current with respect to its Form 10-K for the year ended December 31, 2005 and other periodic SEC filings upon the filing of its Form 10-Q for the quarter ended June 30, 2006, on October 10, 2006. As required under the provisions of SFAS 123(R), U.S. Cellular evaluated the impact of this plan modification and originally determined that the adjustment to stock based compensation was not material. However, in connection with the restatement discussed above, U.S. Cellular further reviewed the accounting for the plan modification. Upon such further review, U.S. Cellular determined that it should have recognized Stock-Based compensation expense of $1.5 million in the three months ended March 31, 2006 as a result of this modification. U.S. Cellular recognized $0.0 and $1.5 million in stock-based compensation expense in the three and nine months ended September 30, 2006 as a result of this modification.

Pension Plan

U.S. Cellular participates in a qualified noncontributory defined contribution pension plan sponsored by TDS. The plan provides pension benefits for the employees of U.S. Cellular and its subsidiaries. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $2.1 million and $6.5 million for the three and nine months ended September 30, 2006, respectively, and $1.7 million and $5.2 million for the three and nine months ended September 30, 2005, respectively.

Recent Accounting Pronouncements

The Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), in September 2006. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (“rollover method”) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (“iron curtain method”). Reliance on one method or the other in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the nature and amount of each individual error corrected in the cumulative adjustment, as well as a disclosure of the cause of the error and that the error had been deemed to be immaterial in the past. SAB 108 is effective for U.S. Cellular’s opening balance sheet in 2007. U.S. Cellular is currently evaluating the impact this Bulletin might have on its financial position or results of operations.

In September 2006, the FASB released Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). Under SFAS 158, companies must recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. The recognition, measurement and disclosure provisions of SFAS 158 are effective for U.S. Cellular as of December 31, 2006. However, because U.S. Cellular currently does not have any defined benefit pension or other postretirement plans, SFAS 158 will have no immediate impact on its financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The Statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. The Statement is effective for U.S. Cellular’s 2008 quarterly and annual financial statements; however, earlier application is encouraged. U.S. Cellular is currently evaluating the timing of adoption and the impact that adoption might have on its financial position or results of operations.

The FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes -an interpretation of FASB Statement No. 109” (“FIN 48”) in July 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). The interpretation applies to all tax positions accounted for in accordance with SFAS 109 and changes how tax positions are recognized and measured and how uncertainties related to income tax positions are disclosed. It provides guidance on recognition, derecognition and measurement of uncertain tax positions in a period subsequent to that in which a position is taken; the accounting for interest and penalties; the classification and presentation of recorded amounts; and disclosure requirements. U.S. Cellular will adopt the provisions of FIN 48effective January 1, 2007. Under FIN 48, U.S. Cellular will evaluate the tax uncertainty, assess the probability of the ultimate settlement with the applicable taxing authority and record an amount based on that assessment. U.S. Cellular had previously set up tax accruals, as needed, to cover its potential liability for income tax uncertainties pursuant to FASB Statement No. 5 “Accounting for Contingencies”. The FASB has issued preliminary guidance regarding ultimate settlement of tax uncertainties. This guidance, in the form of a FASB Staff Position, is not yet finalized. U.S. Cellular will use the finalized guidance to determine the amount of its cumulative effect adjustment to be recorded to opening retained earnings upon adoption of FIN 48 effective January 1, 2007. U.S. Cellular is currently reviewing the requirements of FIN 48 to determine the impact on its financial position or results of operations. The primary impact of FIN 48 on U.S. Cellular’s existing tax accounting policies and practices will be the documentation of all tax positions rather than only tax positions that U.S. Cellular considers probable of incurring a loss.

3. Stock-Based Compensation

Stock-Based Compensation Plans

U.S. Cellular has established the following stock-based compensation plans: a long-term incentive plan, an employee stock purchase plan, and a non-employee director compensation plan.

Under the U.S. Cellular 2005 Long-Term Incentive Plan, U.S. Cellular may grant fixed and performance-based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees. At September 30, 2006, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and deferred compensation stock unit awards.

At September 30, 2006, U.S. Cellular had reserved 5,403,000 Common Shares for equity awards granted and to be granted under the long-term incentive plan, and also had reserved 110,000 Common Shares for issuance to employees under an employee stock purchase plan. The maximum number of U.S. Cellular Common Shares that may be issued to employees under all stock-based compensation plans in effect at September 30, 2006 was 5,513,000 shares. U.S. Cellular currently utilizes treasury stock to satisfy stock option exercises, issuances under its employee stock purchase plan, restricted stock unit awards and deferred compensation stock unit awards.

U.S. Cellular also has established a Non-Employee Director Compensation Plan under which it has reserved 4,900 Common shares of U.S. Cellular stock for issuance as compensation to members of the board of directors who are not employees of U.S. Cellular.

Long-Term Incentive Plan — Stock Options— Stock options granted to key employees are exercisable over a specified period not in excess of ten years. Stock options generally vest over periods up to four years from the date of grant. Stock options outstanding at September 30, 2006 expire between 2006 and 2016. However, vested stock options typically expire 30 days after the effective date of an employee’s termination of employment for reasons other than retirement. Employees who leave at the age of retirement have 90 days (or one year if they satisfy certain requirements) within which to exercise their vested stock options. The exercise price of the option generally equals the market value of U.S. Cellular Common Shares on the date of grant.

U.S. Cellular did not grant any stock options during the three months ended September 30, 2006 and September 30, 2005, respectively. U.S. Cellular granted 551,000 and 757,000 stock options during the nine months ended September 30, 2006 and September 30, 2005, respectively. U.S. Cellular estimates the fair value of stock options granted using the Black-Scholes valuation model. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the awards as if the awards were, in-substance, multiple awards, which is the same attribution method that was used by U.S. Cellular for purposes of its pro forma disclosures under SFAS 123. U.S. Cellular used the assumptions shown in the table below in valuing the options granted in 2006:

Expected Life		3.0 Years
Expected Volatility		25.2%
Dividend Yield		—
Risk-free Interest Rate		4.7%
Estimated Annual Forfeiture Rate		4.4%

A summary of U.S. Cellular stock options outstanding (total and portion exercisable) at September 30, 2006 and changes during the nine months then ended is presented in the table below:

		Weighted		Weighted Average
		Average		Remaining
	Number of	Exercise		Contractual	Aggregate
	Options	Prices		Term	Intrinsic Value
Outstanding at December 31, 2005 (877,000 exercisable)	2,701,000	$	38.80	7.5 Years	$	56,469,000
Granted	551,000	$	59.46		$	132,000
Exercised	107,000	$	34.51		$	2,259,000
Forfeited	37,000	$	38.65		$	809,000
Expired	1,000	$	32.23		$	33,000
Outstanding at September 30, 2006 (1,543,000 exercisable)	3,107,000	$	42.62	7.1 Years	$	53,083,000

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between U.S. Cellular’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2006. This amount will change in future periods based on the market price of U.S. Cellular’s stock. U.S. Cellular received $0 and $3.7 million in cash from the exercise of stock options during the three and nine months ended September 30, 2006.

A summary of U.S. Cellular nonvested stock options at September 30, 2006 and changes during the nine months then ended is presented in the table that follows:

		Weighted Average
	Number of	Fair Values of
	Stock Options	Stock Options
Nonvested at December 31, 2005	1,824,000	$	14.19
Granted	551,000	$	14.06
Vested	777,000	$	14.49
Forfeited	34,000	$	14.49
Nonvested at September 30, 2006	1,564,000	$	13.99

Long-Term Incentive Plan — Restricted Stock Units—U.S. Cellular grants restricted stock unit awards, which generally vest after three years, to key employees.

U.S. Cellular estimates the fair value of restricted stock units based on the closing market price of U.S. Cellular shares on the date of grant, which is not adjusted for any dividends foregone during the vesting period because U.S. Cellular has never paid a dividend and has expressed its intention to retain all future earnings in the business. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Awards granted under this plan prior to 2005 were classified as liability awards due to a plan provision which allowed participants to elect tax withholding in excess of minimum statutory tax rates. In 2005, this provision was removed from the plan and awards after 2005 have been classified as equity awards (except for awards that may be settled in stock or cash at the option of the recipient, which are classified as liability awards).

A summary of U.S. Cellular nonvested restricted stock units at September 30, 2006 and changes during the nine months then ended is presented in the tables that follow:

Liability Classified Awards

		Weighted Average
		Grant-Date
	Number of	Fair Values of
	Restricted Stock Units	Restricted Stock Units
Nonvested at December 31, 2005	193,000	$	30.71
Granted	3,000	$	59.43
Vested	108,000	$	23.73
Forfeited	7,000	$	37.34
Nonvested at September 30, 2006	81,000	$	40.46

Equity Classified Awards

		Weighted Average
		Grant-Date
	Number of	Fair Values of
	Restricted Stock Units	Restricted Stock Units
Nonvested at December 31, 2005	189,000	$	45.63
Granted	125,000	$	59.43
Vested	—	—
Forfeited	24,000	$	47.76
Nonvested at September 30, 2006	290,000	$	51.40

Long-Term Incentive Plan — Deferred Compensation Stock Units—Certain U.S. Cellular employees may elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution on the amount deferred. All bonus compensation that is deferred by employees electing to participate is immediately vested and is deemed to be invested in U.S. Cellular Common Share stock units. Upon distribution of such stock units, participants will receive U.S. Cellular Common Shares. The amount of U.S. Cellular’s matching contribution depends on the portion of the annual bonus that is deferred. Participants receive a 25% match for amounts deferred up to 50% of their total annual bonus and a 33% match for amounts that exceed 50% of their total annual bonus; such matching contributions also are deemed to be invested in U.S. Cellular Common Share stock units. The matching contribution stock units vest ratably at a rate of one-third per year over three years. Upon vesting and distribution of such matching contribution stock units, participants will receive U.S. Cellular Common Shares.

U.S. Cellular estimates the fair value of deferred compensation matching contribution stock units based on the closing market price of U.S. Cellular Common Shares on the date of match. The fair value of such matching contribution stock units is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

A summary of U.S. Cellular nonvested deferred compensation stock units at September 30, 2006 and changes during the nine months then ended is presented in the table below:

Deferred Compensation Awards

		Weighted Average Grant-Date
	Number of	Fair Values
	Stock Units	of Stock Units
Nonvested at December 31, 2005	7,700	$	41.08
Granted	1,700	$	56.71
Vested	3,900	$	42.16
Forfeited	—	—
Nonvested at September 30, 2006	5,500	$	48.92

Employee Stock Purchase Plan—Under the 2003 Employee Stock Purchase Plan, eligible employees of U.S. Cellular and its subsidiaries may purchase a limited number of U.S. Cellular Common Shares on a quarterly basis. U.S. Cellular had reserved 110,000 Common Shares at September 30, 2006 for issuance under this plan. The plan became effective on April 1, 2003 and will terminate on December 31, 2008. U.S. Cellular employees are also eligible to participate in the TDS Employee Stock Purchase Plan. The per share cost to each participant in these plans is 85% of the market value of the Common Shares or Special Common Shares as of the issuance date. Under SFAS 123(R), the employee stock purchase plans are considered compensatory plans; therefore, recognition of compensation cost for stock issued under these plans is required. Compensation cost is measured as the difference between the cost of the shares to plan participants and the fair market value of the shares on the date of issuance. However, due to restrictions on activity under these plans in place during the three and nine months ended September 30, 2006, no compensation expense was recognized during these periods for either plan.

Compensation of Non-Employee Directors — U.S. Cellular issued 0 and 40 shares under its Non-Employee Director Compensation Plan in the three and nine months ended September 30, 2006.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense recognized during the three months and nine months ended September 30, 2006:

	Three Months Ended September 30, 2006			Nine Months Ended September 30, 2006
	(Dollars in thousands)
Stock option awards	$	3,363		$	10,815
Restricted stock unit awards	2,518			6,181
Deferred compensation matching stock unit awards	(204		)	(864		)
Awards under non-employee director compensation plan	—			2
Awards under employee stock purchase plan	—			—
Total stock-based compensation, before income taxes	5,677			16,134
Income tax benefit	(1,715		)	(5,866		)
Total stock-based compensation expense, net of income taxes	$	3,962		$	10,268

All stock-based compensation expense recognized during the three and nine months ended September 30, 2006 was recorded in Selling, general and administrative expense.

As a result of adopting SFAS 123(R) on January 1, 2006, U.S. Cellular’s income before income taxes for the three and nine months ended September 30, 2006 was $3.4 million and $10.8 million lower, respectively, than if it had continued to account for share-based compensation under APB 25. Similarly, as a result of adopting SFAS 123(R) on January 1, 2006, U.S. Cellular’s net income for the three and nine months ended September 30, 2006 was $2.4 million and $6.9 million lower, basic earnings per share for the three and nine months ended September 30, 2006 was $0.03 and $0.08 lower, and diluted earnings per share for the three and nine months ended September 30, 2006 was $0.03 and $0.08 lower, respectively, than if U.S. Cellular had continued to account for stock-based compensation expense under APB 25.

For comparison, the following table illustrates the pro forma effect on net income and earnings per share had U.S. Cellular applied the fair value recognition provisions of SFAS 123(R) to its stock-based employee compensation plans for the three and nine months ended September 30, 2005:

	Three Months Ended September 30, 2005 (As Restated)			Nine Months Ended September 30, 2005 (As Restated)
	(Dollars in thousands, except per share amounts)
Net income, as reported	$	23,672		$	93,781
Add: Stock-based compensation expense included in reported net income, net of related tax effects and minority interest	1,358			3,488
Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects and minority interest	(4,403		)	(11,437		)
Pro forma net income	$	20,627		$	85,832

Earnings per share:
Basic—as reported	$	0.27		$	1.08
Basic—pro forma	0.24			0.99
Diluted—as reported	0.27			1.07
Diluted—pro forma	0.24			0.98

At September 30, 2006, unrecognized compensation cost for all U.S. Cellular stock-based compensation awards was $17.2 million. The unrecognized compensation cost for stock-based compensation awards at September 30, 2006 is expected to be recognized over a weighted average period of 0.9 years.

Prior to the adoption of SFAS 123(R), U.S. Cellular presented all tax benefits resulting from tax deductions associated with the exercise of stock options by employees as cash flows from operating activities in the Consolidated Statements of Cash Flows. SFAS 123(R) requires that “excess tax benefits” be classified as cash flows from financing activities in the Consolidated Statements of Cash Flows. For this purpose, the excess tax benefits are tax benefits related to the difference between the total tax deduction associated with the exercise of stock options by employees and the amount of compensation cost recognized for those options. For the nine months ended September 30, 2006, excess tax benefits of $0.3 million were included in cash flows from financing activities in the Consolidated Statements of Cash Flows pursuant to this requirement of SFAS 123(R).

4. Income Taxes

The following table summarizes the effective income tax rates for the three and nine months ended September 30, 2006 and 2005.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005 (As Restated)		2006		2005 (As Restated)
Effective Tax Rate From
Operations excluding gain on sale of assets and fair value adjustment of derivative instruments	30.2	%	39.1	%	36.4	%	39.5	%
Gain on sale of assets and fair value adjustment of derivative instruments	36.7	%	36.8	%	36.7	%	36.8	%
Income before income taxes and minority interest	27.7	%	39.9	%	36.3	%	39.3	%

The three- and nine-month 2006 effective tax rates are lower as a result of favorable outcomes upon the completion of certain state income tax audits.

In June of 2006, the Internal Revenue Service commenced its audit of the 2002 — 2004 consolidated federal tax returns of TDS and subsidiaries. In October 2006, the Internal Revenue Service added the 2005 consolidated federal tax return to the audit cycle. U.S. Cellular is included in the TDS consolidated federal tax return. The audit is in its preliminary stages.

5. Fair Value Adjustment of Derivative Instruments

Fair value adjustment of derivative instruments totaled a loss of $21.3 million and $17.4 million in the three and nine months ended September 30, 2006, respectively, and a loss of $14.2 million and a gain of $9.9 million in the three and nine months ended September 30, 2005, respectively. Fair value adjustment of derivative instruments reflect the change in the fair value of the bifurcated embedded collars within the forward contracts related to the Vodafone marketable equity securities not designated as a hedge. The changes in fair value of the embedded collars during cash flow hedge designation are recorded to other comprehensive income. When the collars were de-designated in the cash flow hedge, subsequent changes in fair value are recognized in the Consolidated Statements of Operations, along with the related income tax effects. The accounting for the embedded collars as derivative instruments not designated in a hedging relationship results in increased volatility in the results of operations, as fluctuation in the market price of the underlying Vodafone marketable equity securities results in changes in the fair value of the embedded collars being recorded in the Consolidated Statements of Operations.

6. Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities included in diluted earnings per share represent incremental shares issuable upon exercise of outstanding stock options.

The net income amounts used in computing earnings per share and the effects on the weighted average number of common shares and earnings per share of potentially dilutive stock options are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005 (As Restated)		2006		2005 (As Restated)
	(Dollars and shares in thousands, except earnings per share)
Net income	$	35,875	$	23,672	$	125,385	$	93,781

Weighted average number of common shares used in basic earnings per share	87,281		86,904		87,258		86,674
Effect of dilutive stock options (1)	811		757		813		716

Weighted average number of common shares used in diluted earnings per share	88,092		87,661		88,071		87,390

Basic Earnings per Share	$	0.41	$	0.27	$	1.44	$	1.08

Diluted Earnings per Share	$	0.41	$	0.27	$	1.42	$	1.07

(1) Stock options convertible into 200,207 and 764,997 Common Shares were not included in computing diluted earnings per share in the three and nine months ended September 30, 2006, because their effects would have increased earnings per share. Stock options convertible into 175,158 and 181,458 Common Shares were not included in computing diluted earnings per share in the three and nine months ended September 30, 2005 because their effects would have increased earnings per share.

7. Marketable Equity Securities and Forward Contracts

U.S. Cellular holds a substantial amount of marketable equity securities that are publicly traded and can have volatile movements in share prices. U.S. Cellular does not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, trades or reorganizations of other assets.

Information regarding U.S. Cellular’s marketable equity securities is summarized below.

	September 30, 2006			December 31, 2005 (As Restated)
	(Dollars in thousands)
Marketable Equity Securities — Current Assets
Vodafone Group Plc
8,964,698 and 0 American Depositary Receipts, respectively	$	204,933		$	—

Marketable Equity Securities — Investments
Vodafone Group Plc
0 and 10,245,370 American Depositary Receipts, respectively	—			219,968
Rural Cellular Corporation
370,882 Common Shares	3,572			5,419
Total aggregate fair value	208,505			225,387
Accounting cost basis	131,512			160,161
Gross unrealized holding gains	76,993			65,226
Deferred income tax liability	(28,257		)	(23,939		)
Net unrealized holding gains	48,736			41,287
Derivative instruments, net of tax	2,835			2,835
Accumulated other comprehensive income	$	51,571		$	44,122

The investment in Vodafone Group Plc (“Vodafone”) resulted from certain dispositions of non-strategic wireless investments to or settlements with AirTouch Communications, Inc. (“AirTouch”), in exchange for stock of AirTouch, which was then acquired by Vodafone whereby U.S. Cellular received American Depositary Receipts representing Vodafone stock. The investment in Rural Cellular Corporation (“Rural Cellular”) is the result of a consolidation of several wireless partnerships, in which U.S. Cellular subsidiaries held interests, into Rural Cellular and the distribution of Rural Cellular stock in exchange for those interests.

U.S. Cellular has entered into a number of forward contracts related to over 97% of the market value of the marketable equity securities that it holds. The economic hedge risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities while retaining a share of gains from increases in the market prices of such securities. The downside risk is hedged at or above the accounting cost basis of the securities.

The forward contracts related to the Vodafone American Depositary Receipts (“ADRs”) mature in May 2007. Accordingly, the Vodafone ADRs are classified as Current Assets and the related forward contracts and derivative liability are classified as Current Liabilities in the Consolidated Balance Sheets at September 30, 2006.

Vodafone Special Distribution and Share Consolidation

At an Extraordinary General Meeting held on July 25, 2006, shareholders of Vodafone approved a Special Distribution of £0.15 per share (£1.50 per ADR) and a Share Consolidation under which every 8 ADRs of Vodafone were consolidated into 7 ADRs. As a result of the Special Distribution which was paid on August 18, 2006, U.S. Cellular received approximately $28.6 million in cash; this amount, representing a return of capital for financial statement purposes, was recorded as a reduction in the accounting cost basis of the marketable equity securities. Also, as a result of the Share Consolidation which was effective on July 28, 2006, U.S. Cellular’s previous 10,245,370 Vodafone ADRs were consolidated into 8,964,698 Vodafone ADRs.

Pursuant to terms of the Vodafone forward contracts, the Vodafone contract collars were adjusted and substitution payments were made to reflect the Special Distribution and the Share Consolidation. After adjustment, the collars had downside limits (floor) ranging from $17.22 to $18.37 and upside potentials (ceiling) ranging from $17.22 to $19.11. In the case of one forward contract, U.S. Cellular made a dividend substitution payment in the amount of $0.2 million to the counterparty in lieu of further adjustments to the collars of such forward contract. The dividend substitution payment was recorded in Other expense, net in the Consolidated Statements of Operations.

See Note 14 — Long-term Debt and Forward Contracts for additional information related to U.S. Cellular’s forward contracts.

8. Licenses and Goodwill

U.S. Cellular has substantial amounts of licenses and goodwill as a result of the acquisition of wireless markets. The changes in licenses and goodwill result primarily from acquisitions, divestitures and impairments.

A summary of activity in licenses and goodwill for the nine months ended September 30, 2006 and 2005 is provided below:

	September 30, 2006		September 30, 2005
	(Dollars in thousands)
Licenses
Balance, beginning of period	$	1,362,263	$	1,228,801
Acquisitions	5,534		133,633
Assets of Operations Held for Sale	—		(21,945		)
Other (1)	79,772		—
Balance, end of period	$	1,447,569	$	1,340,489

(1) Includes $80 million representing deposits made to the FCC for Barat Wireless licenses with respect to which Barat Wireless was the high bidder in Auction 66. See Note 17 — Acquisitions, Divestitures and Exchanges for more information related to Barat Wireless.

	September 30, 2006		September 30, 2005
			(As Restated)
	(Dollars in thousands)
Goodwill
Balance, beginning of period	$	481,235	$	454,830
Acquisitions	3,932		237
Assets of Operations Held for Sale (1)	—		(2,741		)
Other	318		(10		)
Balance, end of period	$	485,485	$	452,316

(1) As a result of the exchange agreement entered into with ALLTEL during 2005, U.S. Cellular reclassified $2.7 million of goodwill to Assets of Operations Held for Sale as of September 30, 2005. The transaction closed in the fourth quarter of 2005.

See Note 17 — Acquisitions, Divestitures and Exchanges below for additional information related to transactions which affected licenses and goodwill.

Licenses and goodwill must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. U.S. Cellular performs the annual impairment review on licenses and goodwill during the second quarter of its fiscal year. Accordingly, the annual impairment tests for licenses and goodwill for 2006 and 2005 were performed in the second quarter of 2006 and 2005. Such impairment tests indicated that there was no impairment of licenses or goodwill in either year.

9. Unconsolidated Entities

Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a minority interest. These investments are accounted for using either the equity or cost method.

U.S. Cellular’s significant investments in unconsolidated entities included the following:

	September 30, 2006		September 30, 2005
Los Angeles SMSA Limited Partnership	5.5	%	5.5	%
Midwest Wireless Communications, L.L.C. (1)	14.2	%	14.2	%
North Carolina RSA 1 Partnership	50.0	%	50.0	%
Oklahoma City SMSA Limited Partnership	14.6	%	14.6	%

(1) In addition, at September 30, 2006 and 2005, U.S. Cellular owned a 49% interest in an entity which owned an interest of approximately 2.9% in Midwest Wireless Holdings, L.L.C, the parent company of Midwest Wireless Communications, L.L.C. See Note 21 — Subsequent Events for information about the disposition of this interest.

Based primarily on data furnished to U.S. Cellular by third parties, the following summarizes the combined results of operations of U.S. Cellular’s equity method investments:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2006

2005

2006

2005

(Dollars in thousands)

Results of Operations