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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K



(Mark One)

 

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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIESTHE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20022003

OR

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

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 incorporation or organization) (IRS Employer Identification No.)

8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
(Address of principal executive offices) (Zip code)

Registrant's Telephone Number: (773) 399-8900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 Name of each exchange on which registered
Common Shares, $1 par value American Stock Exchange
Liquid Yield Option Notes
Due 2015
 American Stock Exchange
8.75% Senior Notes Due 2032 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None


        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            

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                   X    

        IndicatedIndicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes     X          No            

        As of February 28,June 30, 2003, the aggregate market value of registrant's Common Shares held by nonaffiliates was approximately $365.1$381.6 million (based upon the closing price of the Common Shares on February 28,June 30, 2003, of $24.35,$25.45, as reported by the American Stock Exchange). For purposes hereof, it was assumed that each director, executive officer and holder of 10% or more of the voting power of the CompanyU.S. Cellular is an affiliate.

        The number of shares outstanding of each of the registrant's classes of common stock, as of February 28, 2003,January 31, 2004, is 53,113,99153,146,539 Common Shares, $1 par value, and 33,005,877 Series A Common Shares, $1 par value.

DOCUMENTS INCORPORATED BY REFERENCE

        Those sections or portions of the registrant's 20022003 Annual Report to Shareholders and of the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its 2004 Annual Meeting of Shareholders to be held May 6, 2003, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Parts II and III of this report.



CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS





 

 


 

Page Number
or Reference(1)


 

 

 


 

Page Number
or Reference(1)


 
Item 1. Business 3  Business 3 
Item 2. Properties 30  Properties 31 
Item 3. Legal Proceedings 30  Legal Proceedings 31 
Item 4. Submission of Matters to a Vote of Security Holders 30  Submission of Matters to a Vote of Security Holders 31 
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 31(2) Market for Registrant's Common Equity and Related Stockholder Matters 32(2)
Item 6. Selected Financial Data 31(3) Selected Consolidated Financial Data 32(3)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 31(4) Management's Discussion and Analysis of Results of Operations and Financial Condition 32(4)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31(4) Quantitative and Qualitative Disclosures About Market Risk 32(4)
Item 8. Financial Statements and Supplementary Data 31(5) Financial Statements and Supplementary Data 32(5)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 33 
Item 9A. Controls and Procedures 33 
Item 10. Directors and Executive Officers of the Registrant 33(6) Directors and Executive Officers of the Registrant 34(6)
Item 11. Executive Compensation 33(7) Executive Compensation 34(7)
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33(8) Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 34(8)
Item 13. Certain Relationships and Related Transactions 33(9) Certain Relationships and Related Transactions 34(9)
Item 14. Controls and Procedures 33  Principal Accountant Fees and Services 34(10)
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34  Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35 

(1)
Parenthetical references are to information incorporated by reference from Exhibit 13 to this document, which includes portions of the registrant's Annual Report to Shareholders for the year ended December 31, 20022003 ("Annual Report") and from the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its 2004 Annual Meeting of Shareholders to be held on May 6, 2003 (the "Proxy Statement").

(2)
Annual Report section entitled "United States Cellular Stock and Dividend Information."

(3)
Annual Report section entitled "Selected Consolidated Financial Data."

(4)
Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition."

(5)
Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes in Common Shareholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)," "Report of Independent Accountants"Auditors" and "Copy of Previously Issued Report of Independent Accountants."

(6)
Proxy Statement sections entitled "Election of Directors"Directors," "Executive Officers" and "Executive Officers."Section 16(a) Beneficial Ownership Reporting Compliance."

(7)
Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

(8)
Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and "Securities Authorized for Issuance under Equity Compensation Plans."

(9)
Proxy Statement section entitled "Certain Relationships and Related Transactions."

(10)
Proxy Statement section entitled "Fees Paid to Principal Accountants."



United States Cellular Corporation

8410 WEST BRYN MAWR        •        CHICAGO, ILLINOIS 60631
TELEPHONE (773) 399-8900



PART I



Item 1. Business

The Company

        United States Cellular Corporation (the "Company"("U.S. Cellular") provides wireless telephone service to 4,103,0004,409,000 customers through the operations of 149182 majority-owned ("consolidated") wireless systems serving approximately 18% of the geography and approximately 13% of the population oflicenses throughout the United States. Since 1985, when the Companyit began providing cellular service in Knoxville, Tennessee and Tulsa, Oklahoma, the CompanyU.S. Cellular has expanded its wireless networks and customer service operations to cover eightseven market areas in 2528 states as of December 31, 2002. The Company owns2003. Through a 2003 exchange transaction, U.S. Cellular has rights to wireless licenses covering territories in two additional states and has the rights to commence service in those licensed areas in the future. The wireless licenses that the CompanyU.S. Cellular currently managesincludes in its consolidated operations cover a total population of more than one million in each market area.

        The Company'sU.S. Cellular's ownership interests in wireless licenses include interests in licenses covering 175165 cellular MSAsmetropolitan statistical areas (as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas) or RSAsrural service areas (as used by the FCC in designating non-metropolitan statistical area cellular market areas) ("cellular licenses") and 3570 personal communication service ("PCS") BTAs.basic trading areas (used by the FCC in dividing the United States into personal communication service market areas for licenses in Blocks C through F). Of those interests, the CompanyU.S. Cellular owns controlling interests in 133 cellular licenses covering 143 MSAs or RSAs and all 35 PCS BTAs. The Company's49 personal communication service basic trading areas. U.S. Cellular also owns rights to acquire controlling interests in 21 additional personal communication service licenses covering six PCS BTAs are owned exclusively through an acquisition agreement with AT&T Wireless Services, Inc. ("AT&T Wireless"). See "Wireless Systems Development—Asset Exchange with AT&T Wireless."

        At December 31, 2003, U.S. Cellular has consolidated four interests in joint ventures ("JVs") in which the Company ownsit has a limited partner interest; the Companypartnership interest because it is considereddeemed to have thea controlling financial interest for financial reporting purposesinterest. In January 2004, U.S. Cellular acquired the remaining partnership interests in three of these entities and now owns 100% of the interests in these PCS BTAs.licenses.

        The CompanyIn November 2003, U.S. Cellular agreed to sell its controlling interests in six cellular licenses in southern Texas to AT&T Wireless Services, Inc. ("AT&T Wireless") for cash. This transaction was completed in February 2004. Subsequent to the completion of this transaction, in which one entire market area was divested, U.S. Cellular's operations will cover six market areas.

        U.S. Cellular manages the operations of all but two of the cellular licenses in which it owns a controlling interest; the CompanyU.S. Cellular has contracted with another wireless operator to manage the operations of the other two markets. The Companylicenses. U.S. Cellular also manages the operations of four additional cellular licenses in which it does not own a controlling interest, through an agreement with the controlling interest holder or holders. The CompanyU.S. Cellular manages or has the rights to manage the operations of 29all except one of the 35 PCS BTAs70 personal communication service licenses in which it owns licenses. As of year-end 2002, six of these BTAs were operational; marketing activities had not yet begun in the other 29 BTAs.an interest. In the six PCS BTAsremaining personal communication service license in which the CompanyU.S. Cellular owns a limited partner interest, the general partner has the authority to select the manager of these operations. None of these six PCS BTAs were operational at year-end 2002.this operation.

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        The following table summarizes the status of the Company'sU.S. Cellular's interests in wireless markets at December 31, 2002.2003. Personal communication service markets are designated as "PCS".

 
 Total
 Cellular
 PCS
Included in Consolidated Operations (1) 178 143 35
Accounted for Using Equity Method (2) 26 26 
Accounted for Using Cost Method (3) 6 6 
  
 
 
Total Markets 210 175 35
  
 
 
 
 Total
 Cellular
 PCS
Consolidated markets (1) 182 133 49
Consolidated markets to be acquired pursuant to existing
agreements (2)
 21  21
Minority interests accounted for using equity method (3) 26 26 
Minority interests accounted for using cost method (4) 6 6 
  
 
 
Total markets currently owned 235 165 70
Consolidated markets to be divested pursuant to existing
agreements (5)
 (6)(6)
  
 
 
Total markets to be owned after completion of pending transactions 229 159 70
  
 
 

(1)
The CompanyU.S. Cellular owns a controlling interest in each of the 143133 cellular markets and 35 PCS49 personal communication service markets. The CompanyIncluded in the 49 consolidated personal communication service markets are four markets in which U.S. Cellular owns a limited partner interest, in six PCS markets, and U.S. Cellular includes the operations of these marketslicenses in its consolidated results because the Companyit is considered to have the controlling financial interest for financial reporting purposes. Six PCS markets were operational at year-end 2002 and

(2)
U.S. Cellular owns rights to acquire controlling interests in 21additional personal communication service licenses through an acquisition agreement with AT&T Wireless which was closed in August 2003. U.S. Cellular has up to five years from the customer activity fortransaction closing date to exercise its rights to acquire these markets is included in the Company's consolidated results in 2002.licenses. See "Wireless Systems Development—Asset Exchange with AT&T Wireless."

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(2)(3)
Represents cellular marketslicenses in which the CompanyU.S. Cellular owns an interest that is not a noncontrollingcontrolling financial interest and which are accounted for using the equity method. The Company'sU.S. Cellular's investments in these marketslicenses are included in investment in unconsolidated entities onin its balance sheet and its proportionate share of the net income of these marketslicenses is included in investment income onin its statement of operations.

(3)(4)
Represents cellular marketslicenses in which the CompanyU.S. Cellular owns an interest that is not a noncontrollingcontrolling financial interest and which are accounted for using the cost method. The Company'sU.S. Cellular's investments in these marketslicenses are included in investment in unconsolidated entities onin its balance sheet.

(5)
U.S. Cellular had agreed to sell these markets, which are included in "Consolidated Markets," to AT&T Wireless as of December 31, 2003. The transaction was completed in February 2004.

        Some of the territory covered by the PCS BTApersonal communication service licenses the CompanyU.S. Cellular operates overlaps with territory covered by the cellular licenses the Companyit operates. In other cases, the Company owns a controlling interest in one license and a limited partner interest in another license which covers the same PCS BTA. For the purpose of tracking population counts in order to calculate market penetration, when the CompanyU.S. Cellular acquires a licensed area that overlaps a licensed area it already owns, it does not duplicate the number of population equivalentscounts for any overlapping licensed area. Only non-overlapping, incremental population equivalentscounts are added to the reported amount of total population equivalents in the case of an acquisition of a licensed area that overlaps a previously owned licensed area. The incremental population equivalentscounts that are added in such event are referred to throughout this Form 10-K as "incremental" population measurements. Amounts reported in this Form 10-K as "total market population" and "population equivalents" do not duplicate any population equivalentscounts in the case of any overlapping licensed areas the CompanyU.S. Cellular owns.

        The Company'sU.S. Cellular owns interests in consolidated wireless licenses which cover a total population of 46.3 million as of December 31, 2003. U.S. Cellular also owns investment interests in wireless licenses which represent 42.02.1 million incremental population equivalents as of December 31, 2002. Overall, 95%that date. "Population equivalents" represent the population of the Company's incremental population equivalents are in consolidated markets and 5% are in markets in which the Company holds an investment interest.

        The Company is a limited partner in a JV which was a successful bidder for 17 PCS licenses in 13 markets in the January 2001 Federal Communications Commission ("FCC") spectrum auction ("Auction 35"). The JV has acquired five of such licenses in four markets, which are included in the 35 PCS BTAs discussed above. With respect to the remaining licenses, such licenses had been reauctionedwireless licensed area, based on 2002 Claritas estimates, multiplied by the FCC after defaults by winning bidderspercentage interest that U.S. Cellular owns in a prior auction and were made subject by the FCCan entity licensed to the final outcome of certain legal proceedings initiated by the prior winning bidders. During 2002, the FCC allowed all successful bidders to opt out of any pending applications to purchase licenses resulting from Auction 35. The FCC approved the dismissal of the JV's pending applications and all amounts deposited with the FCC have been returned to the JV.operate such wireless license.

        The CompanyU.S. Cellular believes that it is the eighth largest wireless company in the United States, based on internally prepared calculations of the aggregate number of customers in its consolidated markets compared to the number of customers disclosed by other wireless companies in their publicly released information. The Company'sU.S. Cellular's business development strategy is to operate controlling interests in wireless licenses in areas adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas. The CompanyU.S. Cellular anticipates that grouping its operations into market areas will continue to provide the Companyit with certain economies in its capital and operating costs. As the number of opportunities for outright acquisitions has decreased inIn recent years, and as the Company's regions have grown, the Company'sU.S. Cellular's focus has broadened to include exchanges and divestitures of managedconsolidated and investment interests which are considered less essential to the Company'sits operating strategy.

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        Wireless systems in the Company's 149 operationalU.S. Cellular's consolidated markets served 4,103,0004,409,000 customers at December 31, 2002,2003, and contained 3,9144,184 cell sites. The average penetration rate in the Company's operationalU.S. Cellular's consolidated markets was 11.22%9.53% at December 31, 2002,2003, and the churn ratenumber of customers who discontinued service (the "churn rate") in these markets averaged 2.1%1.78% per month for the twelve months ended December 31, 2002.2003.

        The CompanyU.S. Cellular was incorporated in Delaware in 1983. The Company'sU.S. Cellular's executive offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its telephone number is 773-399-8900. The Common Shares of the CompanyU.S. Cellular are listed on the American Stock Exchange under the symbol "USM." The Company'sU.S. Cellular's Liquid Yield Option Notes ("LYONs") are also listed on the American Stock Exchange under the symbol "USM.B". The Company's"USM.B." U.S. Cellular's 8.75% Senior Notes are listed on the New York Stock Exchange under the symbol "UZG". The Company"UZG." U.S. Cellular is a majority-owned subsidiary of Telephone and Data Systems, Inc. ("TDS"(AMEX symbol "TDS"). TDS owns 82.2%82.1% of the combined total of the outstanding Common Shares and Series A Common Shares of the CompanyU.S. Cellular and controls 96.0% of the combined voting power of both classes of common stock.

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        Unless the context indicates otherwise, references to:

Available Information

        The Company'sU.S. Cellular's website is http://www.uscellular.com. Investors may access, free of charge, through the About Us / Investor Relations portion of the website, the Company'sU.S. Cellular's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after such material is electronically filed with the Securities and Exchange Commission.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT

        This Annual Report on Form 10-K, including exhibits, contains statements that are not based on historical fact, including the words "believes", "anticipates", "intends", "expects", and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following risks:

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        The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.

Wireless Telephone Operations

        The Wireless Telephone Industry.    Wireless telephone technology provides high-quality, high-capacity communications services to hand-held portable and in-vehicle wireless telephones. Wireless telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Wireless telephone systems also offer a full range of ancillary services, such as conference calling, call-waiting, call-forwarding, voice mail, facsimile andsimilar to those offered by conventional ("landline") telephone services. Data transmission capabilities offered by wireless telephone systems may be at slower speeds than those offered by landline telephone or other data transmission; those systems which have digital radio capabilities may offer additional features such as caller ID, short messaging services and certain data transmission services.service providers.

        Wireless telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers which operate on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSOmobile telephone switching office. Each mobile telephone switching office is connected to the conventional ("landline")landline telephone network and potentially other MTSOs.mobile telephone switching offices. Each conversation on a wireless phone involves a transmission over a specific set of radio frequencies from the wireless phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSOmobile telephone switching office and from there may be forwarded to the landline telephone network or to another wireless phone to complete the call. As the wireless telephone moves from one cell to another, the MTSOmobile telephone switching office determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call.

        The FCC currently grants two licenses to provide cellular telephone service in each cellular licensed area. Multiple licenses have been granted in each PCSpersonal communication service licensed area, and PCSthese licensed areas (BTAs and MTAs) overlap with cellular licensed areas. As a result, PCSpersonal communication services license holders can and do compete with cellular license holders for customers. In addition, specialized mobile radio systems operators such as Nextel are providing wireless services similar to those offered by U.S. Cellular. Competition for customers also includes competing communications technologies, such as:

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        PCSPersonal communication service licensees have initiated service in nearly all areas of the United States, including substantially all of the Company'sU.S. Cellular's licensed areas, and the CompanyU.S. Cellular expects other wireless operators to continue deployment of PCS in all of the Company'sU.S. Cellular's operating regions throughout 2003.2004 and beyond. Additionally, technologies such as Enhanced Specialized Mobile Radio ("ESMR") andenhanced specialized mobile satellite communication systemsradio are proving to be competitive with wireless service in many of the Company'sU.S. Cellular's markets.

        The services available to wireless customers and the sources of revenue available to wireless system operators are similar to those provided by conventional landline telephone companies. Customers may be charged a separate fee for system access, airtime, long-distance calls and ancillary services. Wireless system operators also provide service to customers of other operators' wireless systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." Roaming is available because technical standards require that analog wireless telephones be compatible in all market areas in the United States. Additionally, because the CompanyU.S. Cellular has deployed digital radio technologies in substantially all of its service areas, its customers with digital, dual-mode (both analog and digital capabilities) or tri-mode (analog plus digital capabilities at both the cellular and PCSpersonal communication service radio frequencies) wireless telephones can roam in other companies' service areas which have a compatible digital technology in place. Likewise, the CompanyU.S. Cellular can provide roaming service to other companies' customers who have compatible digital wireless telephones. In all cases, the

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system that provides the service to roamers will generate usage revenue, at rates that have been negotiated between the serving carrier and the customer's carrier.

        There have been a number of technical developments in the wireless industry since its inception. Currently, while substantially all companies' MTSOsmobile telephone switching offices process information digitally, on certain cellular systems the radio transmission uses analog technology. All PCSpersonal communication service systems utilize digital radio transmission. Several years ago, certain digital transmission techniques were approved for implementation by the wireless industry.industry in the United States. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the wireless industry and has been deployed by many wireless operators, including the Company'sU.S. Cellular's operations in a substantial portion of its markets. Another digital technology, Code Division Multiple Access ("CDMA"), iswas also being deployed by the CompanyU.S. Cellular in its remaining markets.

        In late 2001, U.S. Cellular announced its plans to migrate to a single digital technology, CDMA for its customers, in all of its markets. U.S. Cellular believes that a single digital technology platform represents the best network strategy to foster its future growth. In 2002, the CompanyU.S. Cellular began its plans to deploy CDMA 1XRTT technology, which improves capacity and allows for higher speed data transmission than basic CDMA, throughout all of its markets, over a three-year period ending in 2004. As of December 31, 2002, the Company2003, U.S. Cellular had deployed CDMA 1XRTT technology in a substantial portion of its Midwest market area,licensed areas, including areas where it had previously deployed TDMA technology, as part of its technology conversion plans.

        The Company will continue to deploy the TDMA technology currently in place for the next few years. Migration of the Company'sU.S. Cellular's customers to CDMA handsets in these markets is expected to take a few years; in addition, continuing to deploy its current TDMAyears.

        U.S. Cellular believes CDMA technology will enableis the Company to use both CDMA and TDMA to serve roaming customers in these markets.

        Digitalbest digital radio technology offers several advantages, includingchoice for its operations for the following:following reasons:

        The main disadvantage of U.S. Cellular's conversion from analog to digital radioCDMA technology is continuing on an industry-wide basis; however, this processthat it is expected to continue for a few more years. Wireless operators ingenerally not used outside of the United States have deployed TDMA, CDMA and aStates. A third digital technology, Global System for Mobile Communication ("GSM"), is the standard technology in Europe and most other areas outside the United States. GSM technology, which is used by certain wireless companies in the licensedUnited States, has certain advantages over CDMA in that GSM phones can be used more widely outside of the

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United States and GSM has a larger installed worldwide customer base. Also, TDMA technology is used in many parts of the United States and in other countries as well. Since CDMA technology is not compatible with GSM or TDMA technology, U.S. Cellular customers with CDMA-based handsets may not be able to use all of their handset features when traveling through GSM- and TDMA-based networks. Through roaming agreements with other CDMA-based wireless carriers, U.S. Cellular's customers may access CDMA service in virtually all areas where theyof the United States.

        U.S. Cellular will continue to retain TDMA technology for the next several years in markets in which such technology is in use today. This will enable U.S. Cellular to provide TDMA-based service to its customers who still choose to use TDMA-based handsets and to roamers from other wireless providers who have begun operations.TDMA-based networks. Also, since the TDMA equipment has analog capabilities embedded, U.S. Cellular will maintain the TDMA network in order to be able to meet the FCC mandate of retaining analog capability through 2008.

        The Company'sU.S. Cellular's Operations.    From its inception in 1983 until 1993, the Company was principally in a start-up phase. Until 1993, the Company's activities had been concentrated significantly on the acquisition of interests in cellular licenses and on the construction and initial operation of wireless systems. The development of a wireless system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. The Company experienced operating losses and net losses from its inception until 1993. In the years since 1993, the Company has produced operating income and net income, except in 2002 when higher operating expenses and losses on investments resulted in a net loss for the year.

    Management anticipates further growth in wireless units in service and revenues in 2004 as the Companyit continues to expand through internal growth and as the PCS licenses acquired in 2001, 2002 and 20022003 become fully integrated into the Company'sits operations.

        Expenses associated with this expansioncustomer and revenue growth may reduce the rateamount of growth in cash flows from operating activities and operating income during the period of additional growth.2004. In addition, the CompanyU.S. Cellular anticipates that the seasonality of revenue streams and operating expenses may cause the Company'sU.S. Cellular's cash flows from operating activities and operating income to vary from quarter to quarter.

        While the Company has produced operating income and net income since 1993 (except the net loss in 2002), changesChanges in any of several factors may reduce the Company'sU.S. Cellular's growth in operating income and net income over the next few years. These factors include:include but are not limited to:

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        The CompanyU.S. Cellular is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage wireless telephone systems. Its wireless interests include eight operatingincluded seven market areas.areas as of December 31, 2003. See "The Company's"U.S. Cellular's Wireless Interests."

        The Company has acquired its wireless interests through the wireline application process for MSAs and RSAs, including settlements and exchanges with other applicants, and through acquisitions, including acquisitions from TDS and third parties.

Wireless Systems Development

        Acquisitions, Divestitures and Exchanges.    The CompanyU.S. Cellular assesses its wireless holdings on an ongoing basis in order to maximize the benefits derived from grouping its marketslicenses geographically. The CompanyU.S. Cellular also reviews attractive opportunities for the acquisition of additional wireless spectrum. Over the past few years, the CompanyU.S. Cellular has completed exchanges of minority interests or controlling interests in its less strategic markets for controlling interests in markets which better complement its operating market areas. The Companyareas, such as the 2003 Georgia and Florida exchange transaction with AT&T Wireless. U.S. Cellular has also completed outright sales of other less strategic markets,licenses, such as

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the transaction completed in February 2004 pursuant to which U.S. Cellular sold certain licenses and operations in southern Texas to AT&T Wireless, and has purchased controlling interests in marketslicenses which enhance its operating market areas. In 2001, the CompanyU.S. Cellular began acquiring interests in PCS markets.personal communication service licenses. These licenses are in markets which are either adjacent to the Company'sU.S. Cellular's current operations, thus expanding its current operating market areas, or are in territories in which the CompanyU.S. Cellular currently operates, and will add spectrum capacity to those operations. As a result of its acquisition activities, currently 95% of the Company's interests are in markets where it is the operator or expects to manage.

        The CompanyU.S. Cellular may continue to make opportunistic acquisitions or exchanges in markets that further strengthen its operating market areas and in other attractive markets. The CompanyU.S. Cellular also seeks to acquire minority interests in marketslicenses where it already owns the majority interest and/or operates the market.license. There can be no assurance that the Company, or TDS for the benefit of the Company,U.S. Cellular will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. The CompanyU.S. Cellular plans to retain minority interests in certain wireless marketslicenses which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in marketslicenses which enhance the Company'sU.S. Cellular's operations or may be sold for cash or other consideration. The CompanyU.S. Cellular also continues to evaluate the disposition of certain controlling interests in wireless licenses which are not essential to its corporate development strategy.

        Acquisition of Chicago 20MHz.    On August 7, 2002, the Company completed the acquisition of all of the assets and certain liabilities of in Chicago 20MHz, LLC ("Chicago 20MHz") from PrimeCo Wireless Communications LLC ("PrimeCo"). The purchase price was approximately $618 million, including working capital and other adjustments. Chicago 20MHz operated the PrimeCo wireless system in the Chicago Major Trading Area ("MTA"), and is the holder of certain FCC licenses, including a 20 megahertz ("MHz") PCS license in the Chicago MTA (excluding Kenosha County, Wisconsin) covering a total population of 13.2 million.

        The Company financed the Chicago 20MHz purchase using $175 million from the Company's 9% Series A Notes due 2032 issued to PrimeCo, $105 million from an intercompany note with TDS and the remaining amount from the Company's $500 million revolving credit facility with a series of banks. Net of cash acquired in the transaction and bonds issued to the sellers of Chicago 20MHz, the Company used cash totaling $431.9 million for the acquisition of Chicago 20MHz.

9



        Other Acquisitions.    Additionally in 2002, the Company, through JVs, acquired majority interests in 10 MHz licenses in three PCS markets. The interests the Company acquired are 100% owned by the joint ventures, and the Company is considered to have the controlling financial interest in these joint ventures for financial reporting purposes. The Company also acquired the remaining minority interests in three other PCS markets in which it previously owned an interest, resulting in 100% ownership in those markets. The aggregate amount paid by the Company to acquire the interests in these transactions, which represented 1.4 million population equivalents (684,000 incremental population equivalents), was $21.1 million.

        The Company        U.S. Cellular has an effective shelf registration for its Common Shares and Preferred Stock under the Securities Act of 1933 for issuance specifically in connection with acquisitions.

        Pending Acquisition—Subsequent Event.Asset Exchange with AT&T Wireless.    On March 10, 2003, the CompanyU.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless ("AWE") to exchange wireless properties. The CompanyWhen this transaction is fully consummated, U.S. Cellular will receive 10 and 20 MHz PCSmegahertz personal communication service licenses in 13 states representing 12.2 million incremental population equivalents contiguous to existing properties and 4.4 million population equivalents that overlap existing properties in the Midwest and Northeast. The Company will also receivethe Northeast; approximately $31$34 million in cashcash; and minority interests in six marketslicenses it currently controls. The Company willOn August 1, 2003, U.S. Cellular completed the transfer of wireless assets and approximately 141,000 customers in 10 markets representing 1.5 million population equivalents, in Florida and Georgia, representing the majority of U.S. Cellular's operations in these states, to AWE. Total Company revenue in 2002AT&T Wireless and the assignments to it from AT&T Wireless of $107 million and operating income, excluding shared services costs, of $25 million was attributable to these markets. The transaction is subject to regulatory approvals. The closinga portion of the transfer of the Company's properties and the assignment to the Company of most of the PCS licenses is expected to occur in the third quarter of 2003.personal communication service licenses. The assignment and development of certain21 licenses will behas been deferred by U.S. Cellular for a period of up to five years from the Company until later periods.closing date, in accordance with the agreement. U.S. Cellular will take possession of the licenses in staggered closings over that five-year period to comply with the service requirements of the FCC. On August 1, 2003, U.S. Cellular also received the $34 million in cash and the minority interests. The acquisition of the licenses in the exchange will bewas accounted for as a purchase by the CompanyU.S. Cellular and the transfer of the properties by the Company will beU.S. Cellular to AT&T Wireless was accounted for as a sale. The buildout of the licenses could require substantial capital investment by the Company over the next several years. The Company is currently working on a buildout and financing plan for these markets.

        The following table summarizes by major classes,15 licenses that have been transferred to U.S. Cellular as of December 31, 2003, with a fair value totaling $136.6 million, are accounted for in Licenses on the consolidated balance sheet. The 21 licenses that have not yet been assigned to U.S. Cellular, with a fair value totaling $42.0 million, are accounted for in License rights on the consolidated balance sheet. All asset values related to the properties acquired or pending, including license values, were determined using an independent valuation.

        Prior to the close of the AT&T Wireless exchange, U.S. Cellular allocated $93.7 million of goodwill related to the properties transferred to AT&T Wireless to assets of operations held for sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." A loss of $25.8 million was recorded in 2003 as a loss on assets held for sale (included in operating expenses), representing the difference between the book value of the assetsmarkets transferred to AT&T Wireless and liabilities of the 10 markets that U.S. Cellular will be transferring.

 
 December 31, 2002
 
 
 (Dollars in millions)
 
Current assets $16.8 
Net property, plant and equipment  86.0 
Licenses  53.1 
Goodwill  78.2 
Other  .6 
  
 
 Total assets  234.7 
Current liabilities  (13.4)
  
 
Net assets to be transferred $221.3 
  
 

        The Company is currently evaluating the fair value of the assets involvedreceived or to be received in thisthe transaction. No determination

        Pending Divestiture of gainMarkets to AT&T Wireless.    On November 26, 2003, U.S. Cellular entered into an agreement with AT&T Wireless, pursuant to which U.S. Cellular would sell its majority interests and operations in six cellular markets to AT&T Wireless for $95 million in cash, excluding a working capital adjustment. These six markets represent U.S. Cellular's entire southern Texas market area. As of the date of the agreement, U.S. Cellular accounted for the assets and liabilities to be sold as assets and liabilities of operations held for sale in accordance with SFAS No. 144

8



"Accounting for the Impairment or Disposal of Long-Lived Assets." The results of operations of the markets held for sale to AT&T Wireless at December 31, 2003 were included in results of operations through the transaction closing date in February 2004.

        A loss related to this transaction has been made. Asof $22.0 million was recorded in 2003 as a result of signingLoss on assets held for sale (included in operating expenses), representing the definitive agreement for this transaction,difference between the Company will reclassify the net assetsbook value of the markets to be transferred as assets held for salesold to AT&T Wireless and will report their operations as discontinued operationsthe cash to be received in the first quarter of 2003.transaction.

Wireless Interests and Operating Market Areas

        The CompanyU.S. Cellular operates its adjacent wireless systems under an organization structure in which it groups its markets into geographic market areas to offer customers large local service areas which primarily utilize the Company'sU.S. Cellular's network. Customers may make outgoing calls and receive incoming calls within each market area without special roaming arrangements. In addition to benefits to customers, its operating strategy also has provided to the CompanyU.S. Cellular certain economies in its capital and operating costs. These economies are made possible through the elimination of outbound roaming costs and increased sharing of facilities, personnel and other costs, and enable the Companyenabling U.S. Cellular to maintain a relatively low per customer cost of service. The extent to which the CompanyU.S. Cellular benefits from these revenue

10



enhancements and economies of operation is dependent on market conditions, population size of each market area and network engineering considerations.

        The Company may continue to make opportunistic acquisitions and exchanges which will complement its established operating market area. From time to time, the Company may also consider exchanging or selling its interests in markets which do not fit well with its long-term strategies.

        The Company owned interests in wireless telephone systems in 175 cellular markets and 35 PCS markets at December 31, 2002, representing 42.0 million incremental population equivalents. The following table summarizes the changes in the Company's incremental population equivalents in recent years.

 
 December 31,
 
 2002
 2001
 2000
 1999
 1998
 
 (Thousands of population equivalents) (1)

Included in Consolidated Operations (2)          
 Cellular 25,589 25,546 25,133 25,172 24,911
 PCS 14,378 2,903   

To Be Included in Consolidated Operations (3)

 

 

 

 

 

 

 

 

 

 
 Cellular   133  
 PCS  655   
  
 
 
 
 
Total Markets To Be Included in Consolidated Operations          
 Cellular 25,589 25,546 25,266 25,172 24,911
 PCS 14,378 3,558   
Accounted for Using Equity Method (cellular only) (4) 2,005 2,077 2,348 2,333 2,601
Accounted for Using Cost Method (cellular only) (5) 73 76 45 45 46
  
 
 
 
 
Total          
 Cellular 27,667 27,699 27,659 27,550 27,558
 PCS 14,378 3,558   
  
 
 
 
 
 Total wireless population equivalents 42,045 31,257 27,659 27,550 27,558
  
 
 
 
 

(1)
Based on 2002 Claritas estimates for all years.

(2)
Includes incremental population equivalents in markets in which the Company owns a controlling interest at the end of each respective year, and in 2002 and 2001 also includes incremental population equivalents in PCS markets in which the Company owns a noncontrolling limited partner interest but the Company is considered to have the controlling financial interest for financial reporting purposes.

(3)
In 2001, includes incremental population equivalents in markets in which the Company has the right to acquire noncontrolling limited partner interests in PCS markets in which the Company will be considered to have the controlling financial interest for financial reporting purposes. In 2000, includes population equivalents in a market in which the Company had the right, pursuant to agreements pending at the end of the year, to acquire a controlling interest.

(4)
Includes population equivalents in markets in which the Company owns noncontrolling interests at the end of each respective year, and which are accounted for using the equity method.

(5)
Includes population equivalents in markets in which the Company owns noncontrolling interests at the end of each respective year, and which are accounted for using the cost method.

        The following section details the Company'sU.S. Cellular's wireless interests, including those it owned or had the right to acquire as of December 31, 2002.2003. The table presented therein lists the cellular and PCS markets that the CompanyU.S. Cellular manages or has the right to manage, grouped according to operating market area. The Company'sU.S. Cellular's operating structure shows the areas in which the CompanyU.S. Cellular is currently focusing its development efforts. These market areas have been devised with a long-term goal of allowing delivery of wireless service to areas of economic interest and along corridors of economic activity.

        The numbertable aggregates the total population of incrementalthe consolidated licenses within each operating market area, regardless of U.S. Cellular's percentage ownership in the licenses included in such operating market areas. Those markets in which U.S. Cellular owns less than 100% of the license show U.S. Cellular's ownership percentage; in all others, U.S. Cellular owns 100% of the license. For licenses in which U.S. Cellular owns an investment interest, the related population equivalents representedare shown, defined as the total population of each licensed area multiplied by U.S. Cellular's ownership interest in each such license.

        The total population and population equivalents measures are provided to enable comparison of the Company's wirelessrelative size of each operating market area to U.S. Cellular's consolidated operations and to enable comparison of the relative size of U.S. Cellular's consolidated markets to its investment interests, respectively. The total population of U.S. Cellular's consolidated markets may have no direct relationship to the number of potential wireless customers or the revenues that may be realized from the operation of the related wireless systems.

119



THE COMPANY'SU.S. CELLULAR'S WIRELESS INTERESTS

        The table below sets forth certain information with respect to the interests in wireless markets which the CompanyU.S. Cellular owned or had the right to acquire pursuant to definitive agreements as of December 31, 2002.2003.

        Some of the territory covered by the PCS BTApersonal communication service licenses the CompanyU.S. Cellular owns overlaps with territory covered by the cellular licenses the Companyit owns. In other cases, the Company owns a controlling interest in one license and a limited partner interest in another license which covers the same PCS BTA. For the purpose of tracking amounts in the "Incremental Current and Acquirable Population Equivalents""2002 Total Population" column in the table below, when the CompanyU.S. Cellular acquires or agrees to acquire a licensed area that overlaps a licensed area it already owns, it does not duplicate the number oftotal population equivalents for any overlapping licensed area. Only non-overlapping, incremental population equivalentsamounts are added to the amounts in the "Incremental Current and Acquirable Population Equivalents""2002 Total Population" column in the table below, in the case of an acquisition of a licensed area that overlaps a previously owned licensed area.

Market Area/Market
 2002
Population (1)

 Current
Percentage
Interest

 Percentage
Change
Pursuant To
Definitive
Agreements (2)

 Total
 Total
Current
and
Acquirable
Population
Equivalents (1)

 Incremental
Current
and
Acquirable
Population
Equivalents (1)

Markets Currently Managed or Which May Be Managed by the Company:            
MIDWEST MARKET AREA:            
 Chicago MTA            
  Chicago, IL-IN-MI-OH 20MHz B Block MTA # (3) (4) 13,181,000 100.00%  100.00%13,181,000 12,037,000
            
 Wisconsin/Minnesota            
  Milwaukee, WI 1,506,000 100.00   100.00 1,506,000 1,506,000
  Columbia (WI 9) 411,000 100.00   100.00 411,000 411,000
  Madison, WI 434,000 92.50   92.50 402,000 402,000
  Appleton, WI 364,000 100.00   100.00 364,000 364,000
  Wood (WI 7) 299,000 100.00   100.00 299,000 299,000
  Rochester, MN 10MHz F Block # (5) 260,000 85.00 15.00%100.00 260,000 260,000
  Vernon (WI 8) 243,000 100.00   100.00 243,000 243,000
  Green Bay, WI 231,000 100.00   100.00 231,000 231,000
  Racine, WI 190,000 92.15   92.15 175,000 175,000
  Janesville-Beloit, WI 153,000 100.00   100.00 153,000 153,000
  Kenosha, WI 154,000 99.32   99.32 153,000 153,000
  Door (WI 10) 131,000 100.00   100.00 131,000 131,000
  Sheboygan, WI 114,000 100.00   100.00 114,000 114,000
  La Crosse, WI 108,000 95.11   95.11 103,000 103,000
  Trempealeau (WI 6) (3) 88,000 100.00   100.00 88,000 88,000
  Pierce (WI 5) (3) 14,000 100.00   100.00 14,000 14,000
  Madison, WI 10MHz F Block # 694,000 100.00   100.00 694,000 
            
            4,647,000
            
 Iowa            
  Des Moines, IA 463,000 100.00   100.00 463,000 463,000
  Davenport, IA-IL 358,000 97.37   97.37 348,000 348,000
  Humboldt (IA 10) 188,000 100.00   100.00 188,000 188,000
  Cedar Rapids, IA 194,000 96.43   96.43 187,000 187,000
  Iowa (IA 6) 158,000 100.00   100.00 158,000 158,000
  Muscatine (IA 4) 154,000 100.00   100.00 154,000 154,000
  Waterloo-Cedar Falls, IA 151,000 93.03   93.03 140,000 140,000
  Hardin (IA 11) 114,000 100.00   100.00 114,000 114,000
  Iowa City, IA 113,000 100.00   100.00 113,000 113,000
  Jackson (IA 5) 108,000 100.00   100.00 108,000 108,000
  Kossuth (IA 14) 105,000 100.00   100.00 105,000 105,000
  Lyon (IA 16) 103,000 100.00   100.00 103,000 103,000
  Dubuque, IA 89,000 95.51   95.51 85,000 85,000
  Mitchell (IA 13) 65,000 100.00   100.00 65,000 65,000
  Audubon (IA 7) 55,000 100.00   100.00 55,000 55,000
  Union (IA 2) 51,000 100.00   100.00 51,000 51,000
  Monroe (IA 3) 90,000 49.00   49.00 44,000 44,000
  Winneshiek (IA 12) 116,000 24.50   24.50 28,000 28,000
  Ida (IA 9) * 61,000 16.67   16.67 10,000 10,000
  Des Moines, IA 10MHz D Block # 811,000 100.00   100.00 811,000 
  Davenport, IA-IL 10MHz E Block # 428,000 100.00   100.00 428,000 
  Clinton, IA-IL 10MHz E Block # 146,000 100.00   100.00 146,000 
  Burlington, IA-IL-MO 10MHz E Block # 135,000 100.00   100.00 135,000 
  Iowa City, IA 10MHz E Block # 134,000 100.00   100.00 134,000 
  Ottumwa, IA 10MHz E Block # 123,000 100.00   100.00 123,000 
            
            2,519,000
            

Market Area/Market


Current or
Future Percentage
Interest (1)



2002
Total
Population (2)

Markets Currently Consolidated or Which Are Expected To Be Consolidated

MIDWEST MARKET AREA:




Chicago Major Trading Area/Michigan
Chicago, IL-IN-MI-OH 20MHz B Block MTA # (3) (4)
Battle Creek, MI 20MHz A Block # (5)
Jackson, MI 10MHz A Block # (5)
Kalamazoo, MI 20MHz A Block # (5)
Total Chicago Major Trading Area/Michigan12,865,000
Wisconsin/Minnesota
Milwaukee, WI
Madison, WI92.50%
Columbia (WI 9)
Appleton, WI
Wood (WI 7)
Rochester, MN 10MHz F Block #
Vernon (WI 8)
Green Bay, WI
Racine, WI92.15%
Kenosha, WI99.32%
Janesville-Beloit, WI
Door (WI 10)
Sheboygan, WI
La Crosse, WI95.11%
Trempealeau (WI 6) (3)
Pierce (WI 5) (3)
Milwaukee, WI 10MHz D Block #
Madison, WI 10MHz F Block #
Total Wisconsin/Minnesota4,700,000
Iowa/Nebraska/South Dakota
Des Moines, IA
Davenport, IA-IL97.37%
Sioux City, IA-NE-SD 10MHz F Block # (5)
Cedar Rapids, IA96.43%
Iowa (IA 6)
Muscatine (IA 4)
Waterloo-Cedar Falls, IA93.03%
Hardin (IA 11)
Iowa City, IA
Jackson (IA 5)
Kossuth (IA 14)
Lyon (IA 16)
Dubuque, IA95.51%
Mitchell (IA 13)
Audubon (IA 7)
Union (IA 2)
Fort Dodge, IA 10MHz D Block # (5)
Des Moines, IA 10MHz D Block #
Davenport, IA-IL 10MHz E Block #
Clinton, IA-IL 10MHz E Block #
Burlington, IA-IL-MO 10MHz E Block #
Iowa City, IA 10MHz E Block #
Ottumwa, IA 10MHz E Block #
Total Iowa/Nebraska/South Dakota2,727,000

10


Markets Currently Consolidated or Which Are Expected To Be Consolidated
MIDWEST MARKET AREA(continued):
Illinois/Indiana
Indianapolis, IN 10MHz F Block # (5) (6)
Peoria, IL
Jo Daviess (IL 1)
Rockford, IL
Bloomington-Bedford, IN 10MHz B Block # (5)
Terre Haute, IN-IL 20MHz B Block #
Adams (IL 4) *
Carbondale-Marion, IL 10MHz A Block/10MHz D Block # (5)
Mercer (IL 3)
Miami (IN 4) *85.71%
Muncie, IN 10MHz B Block # (5)
Anderson, IN 10MHz B Block # (5)
Lafayette, IN 10MHz B Block #
Columbus, IN 10MHz B Block # (5)
Warren (IN 5) *33.33%
Mount Vernon-Centralia, IL 10MHz A Block #
Kokomo-Logansport, IN 10MHz B Block #
Richmond, IN 10MHz B Block # (5)
Vincennes-Washington, IN-IL 10MHz B Block # (5)
Marion, IN 10MHz B Block #
Alton, IL *
Rockford, IL 10MHz E Block #
Peoria, IL 10MHz C Block # (7)85.00%
Peoria, IL 10MHz E Block #
Springfield, IL 10MHz E Block/10MHz F Block #
Decatur-Effingham, IL 10MHz E Block/10MHz F Block #
Bloomington, IL 10MHz E Block/10MHz F Block #
Champaign-Urbana, IL 10MHz E Block/F Block #
LaSalle-Peru-Ottawa-Streator, IL 10MHz C Block # (7)85.00%
LaSalle-Peru-Ottawa-Streator, IL 10MHz F Block #
Danville, IL-IN 15MHz C Block # (7)85.00%
Galesburg, IL 30MHz C Block #
Jacksonville, IL 10MHz F Block #
Mattoon, IL 10MHz E Block/10MHz F Block #
Total Illinois/Indiana5,183,000
Nebraska/Iowa/Missouri/Kansas
Omaha, NE-IA 10 MHz A Block/10MHz E Block #
Lincoln, NE 10MHz F Block #
St. Joseph, MO-KS 10MHz E Block #
Mills (IA 1)
Total Nebraska/Iowa/Missouri/Kansas1,558,000
Missouri/Illinois/Arkansas
St. Louis, MO/IL 10MHz A Block #
Springfield, MO 20MHz A Block #
Cape Girardeau-Sikeston, MO/IL 10MHz A Block/10MHz D Block # (5)
Moniteau (MO 11)
Columbia, MO *
Poplar Bluff, MO/AR 10MHz A Block # (5)
Stone (MO 15)
Jefferson City, MO 10MHz A Block #
Laclede (MO 16)
Rolla, MO 10MHz A Block #
Washington (MO 13)
Callaway (MO 6) *
Sedalia, MO 10MHz C Block # (8)
Schuyler (MO 3)
Shannon (MO 17)
Linn (MO 5) (3)
Columbia, MO 10MHz A Block #
Harrison (MO 2) (3)
Total Missouri/Illinois/Arkansas4,637,000

TOTAL MIDWEST MARKET AREA31,670,000

11



Markets Currently Consolidated or Which Are Expected To Be Consolidated




MID-ATLANTIC MARKET AREA:
Eastern North Carolina/South Carolina
Harnett (NC 10)
Rockingham (NC 7)
Northampton (NC 8)
Greenville (NC 14)
Greene (NC 13)
Hoke (NC 11)
Wilmington, NC98.83%
Chesterfield (SC 4)
Chatham (NC 6)
Jacksonville, NC97.57%
Sampson (NC 12)
Camden (NC 9)
Total Eastern North Carolina/South Carolina2,793,000
Virginia/North Carolina
Roanoke, VA
Giles (VA 3)
Bedford (VA 4)
Ashe (NC 3)
Lynchburg, VA
Charlottesville, VA95.37%
Buckingham (VA 7)
Tazewell (VA 2) (3)
Bath (VA 5)
Total Virginia/North Carolina1,457,000
West Virginia/Maryland/Pennsylvania/Ohio
Monongalia (WV 3) *
Raleigh (WV 7) *
Grant (WV 4) *
Tucker (WV 5) *
Hagerstown, MD *
Cumberland, MD *
Bedford (PA 10) * (3)
Garrett (MD 1) *
Total West Virginia/Maryland/Pennsylvania/Ohio1,155,000

TOTAL MID-ATLANTIC MARKET AREA5,405,000

TEXAS/OKLAHOMA/MISSOURI/KANSAS/ARKANSAS MARKET AREA:
Oklahoma City, OK 10MHz F Block #
Tulsa, OK * (8)
Wichita, KS 10MHz A Block # (5)
Fayetteville-Springdale, AR 10MHz A Block # (5)
Fort Smith, AR-OK 10MHz A Block # (5)
Seminole (OK 6) (8)
Garvin (OK 9)
Joplin, MO *
Elk (KS 15) *75.00%
Wichita Falls, TX *78.46%
Lawton, OK *78.46%
Nowata (OK 4) * (3) (8)
Lawrence, KS 10MHz E Block # (5)
Jackson (OK 8) *78.46%
Enid, OK 10MHz C Block # (8)
Haskell (OK 10)
Stillwater, OK 10MHz F Block #
Ponca City, OK 30MHz C Block #
Hardeman (TX 5) * (3)78.46%
Briscoe (TX 4) * (3)78.46%
Beckham (OK 7) * (3)78.46%
TOTAL TEXAS/OKLAHOMA/MISSOURI//KANSAS/ARKANSAS MARKET AREA5,177,000

12


Market Area/Market
 2002
Population (1)

 Current
Percentage
Interest

 Percentage
Change
Pursuant To
Definitive
Agreements (2)

 Total
 Total
Current
and
Acquirable
Population
Equivalents (1)

 Incremental
Current
and
Acquirable
Population
Equivalents (1)

 Western Illinois            
  Peoria, IL 346,000 100.00%  100.00%346,000 346,000
  Jo Daviess (IL 1) 326,000 100.00   100.00 326,000 326,000
  Rockford, IL 324,000 100.00   100.00 324,000 324,000
  Adams (IL 4) * (3) 215,000 100.00   100.00 215,000 215,000
  Mercer (IL 3) 196,000 100.00   100.00 196,000 196,000
  Alton, IL * 22,000 100.00   100.00 22,000 22,000
  Rockford, IL 10MHz E Block # 460,000 100.00   100.00 460,000 
  Peoria, IL 10MHz E Block # 459,000 100.00   100.00 459,000 
  Peoria, IL 10MHz C Block # (5) 459,000 85.00   85.00 390,000 
  LaSalle-Peru-Ottawa-Streator, IL 10MHz F Block # (6) 153,000 85.00 15.00%100.00 153,000 
  LaSalle-Peru-Ottawa-Streator, IL 10MHz C Block # (5) 153,000 85.00   85.00 130,000 
  Galesburg, IL 30MHz C Block # (6) 74,000 85.00 15.00 100.00 74,000 
  Jacksonville, IL 10MHz F Block # (6) 70,000 85.00 15.00 100.00 70,000 
            
            1,429,000
            
 Nebraska/Missouri/Iowa            
  Omaha, NE-IA 10MHz E Block # 999,000 100.00   100.00 999,000 948,000
  St. Joseph, MO-KS 10MHz E Block # 197,000 100.00   100.00 197,000 197,000
  Mills (IA 1) 62,000 100.00   100.00 62,000 62,000
            
            1,207,000
            
 Missouri            
  Moniteau (MO 11) 160,000 100.00   100.00 160,000 160,000
  Columbia, MO * 138,000 100.00   100.00 138,000 138,000
  Stone (MO 15) 133,000 100.00   100.00 133,000 133,000
  Laclede (MO 16) 107,000 100.00   100.00 107,000 107,000
  Washington (MO 13) 98,000 100.00   100.00 98,000 98,000
  Callaway (MO 6) * 92,000 100.00   100.00 92,000 92,000
  Sedalia, MO 10MHz C Block # (5) 94,000 85.00   85.00 80,000 63,000
  Schuyler (MO 3) 56,000 100.00   100.00 56,000 56,000
  Shannon (MO 17) 56,000 100.00   100.00 56,000 56,000
  Linn (MO 5) (3) 55,000 100.00   100.00 55,000 55,000
  Harrison (MO 2) (3) 13,000 100.00   100.00 13,000 13,000
            
            971,000
            
 Central Illinois/Indiana            
  Miami (IN 4) * 187,000 85.71   85.71 160,000 160,000
  Warren (IN 5) * 128,000 33.33   33.33 43,000 43,000
  Springfield, IL 10MHz E Block # 267,000 100.00   100.00 267,000 
  Springfield, IL 10MHz F Block # (6) 267,000 85.00 15.00 100.00 267,000 
  Decatur-Effingham, IL 10MHz E Block # 247,000 100.00   100.00 247,000 
  Decatur-Effingham, IL 10MHz F Block # (6) 247,000 85.00 15.00 100.00 247,000 
  Bloomington, IL 10MHz E Block # 241,000 100.00   100.00 241,000 
  Bloomington, IL 10MHz F Block # (6) 241,000 85.00 15.00 100.00 241,000 
  Champaign-Urbana, IL 10MHz E Block # 231,000 100.00   100.00 231,000 
  Champaign-Urbana, IL 10MHz F Block # (6) 231,000 85.00 15.00 100.00 231,000 
  Danville, IL-IN 15MHz C Block # (5) 109,000 85.00   85.00 92,000 
  Mattoon, IL 10MHz E Block # 64,000 100.00   100.00 64,000 
  Mattoon, IL 10MHz F Block # (6) 64,000 85.00 15.00 100.00 64,000 
            
            203,000
            
  TOTAL MIDWEST MARKET AREA           23,013,000
            

Markets Currently Consolidated or Which Are Expected To Be Consolidated




MAINE/NEW HAMPSHIRE/VERMONT MARKET AREA:
Portland-Brunswick, ME 10MHz A Block #
Burlington, VT 10MHz Block #
Manchester-Nashua, NH94.10%
Carroll (NH 2)
Coos (NH 1) *
Kennebec (ME 3)
Bangor, ME91.88%
Somerset (ME 2)
Addison (VT 2) * (3)
Lewiston-Auburn, ME83.63%
Washington (ME 4) *
Oxford (ME 1)
Rutland-Bennington, VT 10MHz Block #
Lebanon-Claremont, NH-VT 10MHz A Block # (5)
Burlington, VT 10MHz E Block # (5)
TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET AREA
2,781,000

NORTHWEST MARKET AREA:
Washington/Oregon/Idaho
Clark (ID 6)
Yakima, WA *87.81%
Richland-Kennewick-Pasco, WA *
Pacific (WA 6) *
Butte (ID 5) (9)
Umatilla (OR 3) *
Okanogan (WA 4)
Hood River (OR 2) *
Kittitas (WA 5) * (3)98.24%
Skamania (WA 7) *
Total Washington/Oregon/Idaho1,568,000
Oregon/California
Coos (OR 5)
Crook (OR 6) *
Del Norte (CA 1)
Medford, OR *
Mendocino (CA 9)
Modoc (CA 2)
Total Oregon/California1,098,000

TOTAL NORTHWEST MARKET AREA2,666,000

EASTERN TENNESSEE/WESTERN
NORTH CAROLINA MARKET AREA:
Knoxville, TN *96.03%
Asheville, NC *
Henderson (NC 4) * (3)
Bledsoe (TN 7) * (3)96.03%
Hamblen (TN 4) * (3)
Cleveland, TN 10MHz C Block # (8)
Yancey (NC 2) * (3)
TOTAL EASTERN TENNESSEE/WESTERN
NORTH CAROLINA MARKET AREA
1,490,000

SOUTHERN TEXAS MARKET AREA:
Corpus Christi, TX (10)
Atascosa (TX 19) (9) (10)
Edwards (TX 18) (10)
Laredo, TX (10)
Wilson (TX 20) (10)
Victoria, TX (10)
TOTAL SOUTHERN TEXAS MARKET AREA1,347,000

13


Market Area/Market
 2002
Population (1)

 Current
Percentage
Interest

 Percentage
Change
Pursuant To
Definitive
Agreements (2)

 Total
 Total
Current
and
Acquirable
Population
Equivalents (1)

 Incremental
Current
and
Acquirable
Population
Equivalents (1)

MID-ATLANTIC MARKET AREA:            
 Eastern North Carolina/South Carolina            
  Harnett (NC 10) 339,000 100.00%  100.00%339,000 339,000
  Rockingham (NC 7) 316,000 100.00   100.00 316,000 316,000
  Northampton (NC 8) 299,000 100.00   100.00 299,000 299,000
  Greenville (NC 14) 263,000 100.00   100.00 263,000 263,000
  Greene (NC 13) 255,000 100.00   100.00 255,000 255,000
  Hoke (NC 11) 249,000 100.00   100.00 249,000 249,000
  Wilmington, NC 243,000 98.83   98.83 240,000 240,000
  Chesterfield (SC 4) 225,000 100.00   100.00 225,000 225,000
  Chatham (NC 6) 178,000 100.00   100.00 178,000 178,000
  Jacksonville, NC 150,000 97.57   97.57 147,000 147,000
  Sampson (NC 12) 155,000 100.00   100.00 155,000 155,000
  Camden (NC 9) 121,000 100.00   100.00 121,000 121,000
            
            2,787,000
            
 Virginia/North Carolina            
  Roanoke, VA 244,000 100.00   100.00 244,000 244,000
  Giles (VA 3) 219,000 100.00   100.00 219,000 219,000
  Bedford (VA 4) 192,000 100.00   100.00 192,000 192,000
  Ashe (NC 3) 175,000 100.00   100.00 175,000 175,000
  Lynchburg, VA 164,000 100.00   100.00 164,000 164,000
  Charlottesville, VA 165,000 95.37   95.37 157,000 157,000
  Buckingham (VA 7) 96,000 100.00   100.00 96,000 96,000
  Tazewell (VA 2) (3) 139,000 100.00   100.00 139,000 139,000
  Bath (VA 5) 63,000 100.00   100.00 63,000 63,000
            
            1,449,000
            
 West Virginia/Maryland/Pennsylvania/Ohio            
  Monongalia (WV 3) * 268,000 100.00   100.00 268,000 268,000
  Raleigh (WV 7) * 251,000 100.00   100.00 251,000 251,000
  Grant (WV 4) * 191,000 100.00   100.00 191,000 191,000
  Salisbury, MD 20MHz C Block # (5) 192,000 85.00   85.00 163,000 163,000
  Tucker (WV 5) * 128,000 100.00   100.00 128,000 128,000
  Hagerstown, MD * 135,000 100.00   100.00 135,000 135,000
  Ross (OH 9) * 244,000 49.00   49.00 119,000 119,000
  Cumberland, MD * 102,000 100.00   100.00 102,000 102,000
  Bedford (PA 10) * (3) 50,000 100.00   100.00 50,000 50,000
  Garrett (MD 1) * 30,000 100.00   100.00 30,000 30,000
            
            1,437,000
            
  TOTAL MID-ATLANTIC MARKET AREA           5,673,000
            

NORTHWEST MARKET AREA:

 

 

 

 

 

 

 

 

 

 

 

 
 Washington/Oregon/Idaho            
  Clark (ID 6) 307,000 100.00   100.00 307,000 307,000
  Yakima, WA * 223,000 87.81   87.81 196,000 196,000
  Richland-Kennewick-Pasco, WA * 198,000 100.00   100.00 198,000 198,000
  Pacific (WA 6) * 190,000 100.00   100.00 190,000 190,000
  Butte (ID 5) (7) 176,000 100.00   100.00 176,000 176,000
  Umatilla (OR 3) * 162,000 100.00   100.00 162,000 162,000
  Okanogan (WA 4) 117,000 100.00   100.00 117,000 117,000
  Hood River (OR 2) * 82,000 100.00   100.00 82,000 82,000
  Kittitas (WA 5) * (3) 83,000 98.24   98.24 81,000 81,000
  Skamania (WA 7) * 30,000 100.00   100.00 30,000 30,000
            
            1,539,000
            

14


Market Area/Market
 2002
Population (1)

 Current
Percentage
Interest

 Percentage
Change
Pursuant To
Definitive
Agreements (2)

 Total
 Total
Current
and
Acquirable
Population
Equivalents (1)

 Incremental
Current
and
Acquirable
Population
Equivalents (1)

 Oregon/California            
  Coos (OR 5) 262,000 100.00%  100.00%262,000 262,000
  Crook (OR 6) * 221,000 100.00   100.00 221,000 221,000
  Del Norte (CA 1) 216,000 100.00   100.00 216,000 216,000
  Medford, OR * 186,000 100.00   100.00 186,000 186,000
  Mendocino (CA 9) 148,000 100.00   100.00 148,000 148,000
  Modoc (CA 2) 65,000 100.00   100.00 65,000 65,000
            
            1,098,000
            
  TOTAL NORTHWEST MARKET AREA           2,637,000
            

FLORIDA/GEORGIA MARKET AREA:

 

 

 

 

 

 

 

 

 

 

 

 
  Daytona Beach, FL 20MHz C Block # (5) 511,000 85.00   85.00 434,000 434,000
  Fort Pierce, FL * 335,000 100.00   100.00 335,000 335,000
  Tallahassee, FL 328,000 100.00   100.00 328,000 328,000
  Worth (GA 14) 275,000 100.00   100.00 275,000 275,000
  Gainesville, FL 257,000 100.00   100.00 257,000 257,000
  Toombs (GA 11) 166,000 100.00   100.00 166,000 166,000
  Walton (FL 10) 135,000 100.00   100.00 135,000 135,000
  Harrison (FL 7) (7) 133,000 100.00   100.00 133,000 133,000
  Putnam (FL 5) (3) 71,000 100.00   100.00 71,000 71,000
  Dixie (FL 6) 66,000 100.00   100.00 66,000 66,000
  Jefferson (FL 8) (3) 54,000 100.00   100.00 54,000 54,000
  Calhoun (FL 9) 47,000 100.00   100.00 47,000 47,000
            
  TOTAL FLORIDA/GEORGIA MARKET AREA           2,301,000
            

TEXAS/OKLAHOMA/MISSOURI/KANSAS
MARKET AREA:

 

 

 

 

 

 

 

 

 

 

 

 
  Tulsa, OK * 853,000 55.06   55.06 470,000 470,000
  Garvin (OK 9) 211,000 100.00   100.00 211,000 211,000
  Joplin, MO * 161,000 100.00   100.00 161,000 161,000
  Seminole (OK 6) 223,000 55.06   55.06 123,000 123,000
  Elk (KS 15) * 153,000 75.00   75.00 115,000 115,000
  Wichita Falls, TX * 144,000 78.46   78.46 113,000 113,000
  Lawton, OK * 115,000 78.46   78.46 90,000 90,000
  Haskell (OK 10) 84,000 100.00   100.00 84,000 84,000
  Stillwater, OK 10MHz F Block # 80,000 100.00   100.00 80,000 80,000
  Jackson (OK 8) * 93,000 78.46   78.46 73,000 73,000
  Enid, OK 10MHz C Block # (5) 85,000 85.00   85.00 72,000 72,000
  Nowata (OK 4) * (3) 108,000 55.06   55.06 60,000 60,000
  Ponca City, OK 30MHz C Block # 48,000 100.00   100.00 48,000 48,000
  Hardeman (TX 5) * (3) 38,000 78.46   78.46 30,000 30,000
  Briscoe (TX 4) * (3) 12,000 78.46   78.46 10,000 10,000
  Beckham (OK 7) * (3) 9,000 78.46   78.46 7,000 7,000
            
  TOTAL TEXAS/OKLAHOMA/MISSOURI/KANSAS MARKET AREA           1,747,000
            

MAINE/NEW HAMPSHIRE/VERMONT MARKET AREA:

 

 

 

 

 

 

 

 

 

 

 

 
  Manchester-Nashua, NH 393,000 94.10   94.10 369,000 369,000
  Carroll (NH 2) 245,000 100.00   100.00 245,000 245,000
  Coos (NH 1) * 234,000 100.00   100.00 234,000 234,000
  Kennebec (ME 3) 230,000 100.00   100.00 230,000 230,000
  Somerset (ME 2) 141,000 100.00   100.00 141,000 141,000
  Bangor, ME 146,000 91.88   91.88 134,000 134,000
  Addison (VT 2) * (3) 111,000 100.00   100.00 111,000 111,000
  Lewiston-Auburn, ME 104,000 83.63   83.63 87,000 87,000
  Washington (ME 4) * 87,000 100.00   100.00 87,000 87,000
  Oxford (ME 1) 85,000 100.00   100.00 85,000 85,000
            
  TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET AREA           1,723,000
            

15


Market Area/Market
 2002
Population (1)

 Current
Percentage
Interest

 Percentage
Change
Pursuant To
Definitive
Agreements (2)

 Total
 Total
Current
and
Acquirable
Population
Equivalents (1)

 Incremental
Current
and
Acquirable
Population
Equivalents (1)

EASTERN TENNESSEE/WESTERN NORTH
CAROLINA MARKET AREA:
            
 Knoxville, TN * 583,000 96.03%  96.03%560,000 560,000
 Asheville, NC * 230,000 100.00   100.00 230,000 230,000
 Henderson (NC 4) * (3) 218,000 100.00   100.00 218,000 218,000
 Bledsoe (TN 7) * (3) 180,000 96.03   96.03 173,000 173,000
 Hamblen (TN 4) * (3) 156,000 100.00   100.00 156,000 156,000
 Cleveland, TN 10MHz C Block # (5) 106,000 85.00   85.00 90,000 76,000
 Yancey (NC 2) * (3) 34,000 100.00   100.00 34,000 34,000
            
 TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET AREA           1,447,000
            

SOUTHERN TEXAS MARKET AREA:

 

 

 

 

 

 

 

 

 

 

 

 
 Corpus Christi, TX 385,000 100.00   100.00 385,000 385,000
 Atascosa (TX 19) (7) 273,000 100.00   100.00 273,000 273,000
 Edwards (TX 18) 236,000 100.00   100.00 236,000 236,000
 Laredo, TX 204,000 100.00   100.00 204,000 204,000
 Wilson (TX 20) 163,000 100.00   100.00 163,000 163,000
 Victoria, TX 86,000 100.00   100.00 86,000 86,000
            
 TOTAL SOUTHERN TEXAS MARKET AREA           1,347,000
            

Other Markets:

 

 

 

 

 

 

 

 

 

 

 

 
 Jefferson (NY 1) * 248,000 60.00   60.00 149,000 149,000
 Franklin (NY 2) * 230,000 57.14   57.14 131,000 131,000
            
            280,000
            
  
Total Managed Markets

 

 

 

 

 

 

 

 

 

 

 

40,168,000
            
Cluster/Market
 2002
Population (1)

 Current
Percentage
Interest

 Percentage
Change
Pursuant To
Definitive
Agreements (2)

 Total
 Total
Current
and
Acquirable
Population
Equivalents (1)

 Incremental
Current
and
Acquirable
Population
Equivalents (1)

Markets Managed by Others:            
 Los Angeles/Oxnard, CA * 16,841,000 5.50   5.50 926,000 926,000
 Oklahoma City, OK * 1,061,000 14.60   14.60 155,000 155,000
 Rochester, MN/Chippewa (MN 7)/Lac Qui Parle (MN 8)/Pipestone (MN 9)/Le Sueur (MN 10)/Goodhue (MN 11) * 960,000 15.74   15.74 152,000 152,000
 Raleigh-Durham/Fayetteville/Burlington, NC * 1,452,000 7.98   7.98 116,000 116,000
 Cherokee (NC 1) * 205,000 50.00   50.00 103,000 103,000
 Others (Fewer than 100,000 population equivalents each)         425,000 425,000
            
  Total Population Equivalents of Markets
Managed by Others
           1,877,000
            
  Total Population Equivalents           42,045,000
            
Markets Currently Consolidated or Which Are Expected To Be Consolidated
Other Markets:
Daytona Beach, FL 20MHz C Block # (7)85.00%
Fort Pierce, FL *
Jefferson (NY 1) *60.00%
Franklin (NY 2) *57.14%

Total Other Markets1,324,000

Total Markets Currently Consolidated or Which are Expected to Be Consolidated51,860,000


Market Area/Market

 

2002 Total
Population (2)


 

Current
Percentage
Interest (1)


 

Current and
Acquirable
Population
Equivalents (11)

Investment Markets:      
 Los Angeles/Oxnard, CA * 16,841,000 5.50%926,000
 Oklahoma City, OK * 1,061,000 14.60%155,000
 Rochester, MN/Chippewa (MN 7)/Lac Qui Parle (MN 8)/ Pipestone
(MN 9)/Le Sueur (MN 10)/ Goodhue (MN 11) *
 960,000 15.74%152,000
 Ross (OH 9) * 244,000 49.00%119,000
 Raleigh-Durham/Fayetteville/Burlington, NC * 1,452,000 7.98%116,000
 Cherokee (NC 1) * 205,000 50.00%103,000
 Others (Fewer than 100,000 population equivalents each)     507,000
      
 Total Population Equivalents in Investment Markets     2,078,000
      

*
Designates wireline cellular licensed area.

#
Designates PCSpersonal communication service licensed area.

(1)
Represents U.S. Cellular's ownership percentage in these licensed areas as of December 31, 2003 or as of the completion of any related transactions pending as of December 31, 2003. U.S. Cellular owns 100% of any licensed areas which do not indicate a percentage.

(2)
"2002 Total Population" represents the total population of the licensed area in which the CompanyU.S. Cellular owns or has rights to own an interest, based on 2002 Claritas estimates. "Total Current and Acquirable Population Equivalents" represents the Company's proportionate shareestimates (without duplication of the population in the "2002 Population" column, based on the percentage in the "Total" column.counts of any overlapping licensed areas). In PCSpersonal communication service licensed areas, "Incremental Current and Acquirable Population Equivalents"this amount represents the population equivalents related to the portion of the PCSpersonal communication service licensed areas owned or to be acquired that is not already served by a cellular licensed area in which the CompanyU.S. Cellular owns an interest in and manages.

16


(2)
Interests under these agreementsa controlling interest. The "2002 Total Population" of Total Markets Currently Consolidated or which are expected to be consolidated includes rights to acquire licensed areas with a total population of 5,593,000. Excluding the population of these licensed areas to be acquired, U.S. Cellular's total population was 46,267,000 at the time specified therein, following the satisfaction of customary closing conditions.December 31, 2003.

(3)
These markets have been partitioned into more than one licensed area. The 2002 population, percentage ownership and number of population equivalents shown are for the licensed areas within the markets in which the CompanyU.S. Cellular owns an interest.

(4)
This PCSpersonal communication service licensed area is made up of 18 BTAs,basic trading areas, as follows: Benton Harbor, MI; Bloomington, IL; Champaign-Urbana, IL; Chicago, IL (excluding Kenosha County, WI); Danville, IL-IN; Decatur-Effingham, IL; Elkhart, IN-MI; Fort Wayne, IN-OH; Galesburg, IL; Jacksonville, IL; Kankakee, IL; LaSalle-Peru-Ottawa-Streator, IL; Mattoon, IL; Michigan City, IN; Peoria, IL; Rockford, IL; South Bend-Mishawaka, IN; and Springfield, IL.

(5)
U.S. Cellular acquired the rights to these licensed areas during 2003. Pursuant to an agreement with the seller of these licensed areas, U.S. Cellular has deferred the assignment and development of these licensed areas until up to five years from the closing date of the original transaction.

(6)
U.S. Cellular acquired the rights to this licensed area during 2003. The Company'sassignment to U.S. Cellular of this licensed area will not occur until certain conditions are met which are dependent on the actions of third parties.

(7)
U.S. Cellular's interests in these licensed areas have been acquired through JVjoint venture agreements with third parties. The CompanyU.S. Cellular owns limited partnership interests in these JVs, which are controlled by the third parties, who own general partner interests. The general partner in each JV has sole authority to select the manager of these licensed areas.

(6)
The Company's interests in these licensed areas have been acquired through JV agreements with third parties. The Company owns limited partnership interests in these JVs,joint ventures, which are controlled by the third parties, who own the general partner interests. The Company will manageU.S. Cellular includes the operations of these licensed areas through management agreements within its consolidated results because it is considered to have the general partners.controlling financial interest for financial reporting purposes.

(7)(8)
U.S. Cellular's owned less than 100% of these licensed areas as of December 31, 2003. Pursuant to an agreement entered into during 2003, it acquired the remaining interests in these licensed areas in January 2004, and thereafter will own 100% of such licensed areas.

14


(9)
These licensed areas include territory and population equivalents of fill-in areas which were annexed from adjacent MSAs or RSAs.cellular licensed areas.

(10)
U.S. Cellular will divest its interests in these licensed areas, pursuant to an agreement entered into during 2003. The transfer of these interests to the acquiring party occurred in February 2004.

(11)
"Current and Acquirable Population Equivalents" are derived by multiplying the amount in the "2002 Total Population" column by the percentage interest indicated in the "Current Percentage Interest" column.

        System Design and Construction.    The CompanyU.S. Cellular designs and constructs its systems in a manner it believes will permit it to provide high-quality service to substantially all types of wireless telephones which are compatible with its network technology, based on market and engineering studies which relate to specific markets. Such engineering studies are performed by CompanyU.S. Cellular personnel or independentthird party engineering firms. The Company'sU.S. Cellular's switching equipment is digital, which improves transmission qualityprovides high-quality transmissions and is capable of interconnecting in a manner which reducesminimizes costs of operation. Both analog and digital radio transmissions are made between cell sites and the wireless telephones. During 2002, approximately 85%2003, over 90% of this traffic utilized digital radio transmissions. Network reliability is given careful consideration and extensive redundancy is employed in many aspects of the Company'sU.S. Cellular's network design, though not all of the Company's MTSOs and cell sites have backup power capabilities, nor does all of its Wide Area Network ("WAN").design. Route diversity, ring topology and extensive use of emergency standby power are also utilized to enhance network reliability and minimize service disruption from any particular network failure.

        In accordance with its strategy of building and strengthening its operating market areas, the CompanyU.S. Cellular has selected high-capacity digital wireless switching systems that are capable of serving multiple markets through a single MTSO. The Company'smobile telephone switching office. U.S. Cellular's wireless systems are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSOmobile telephone switching office and the cell site. The CompanyU.S. Cellular has implemented such microwave interconnection in many of the wireless systems it operates. In other areas, the Company'sU.S. Cellular's systems rely upon landline telephone connections to link cell sites with the MTSO.mobile telephone switching office. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company. In addition, microwave facilities can be used to connect separate wireless systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate multiple systems. Microwave facilities can also be used to carry long-distance calls, which reduces the costs of interconnecting to the landline network.

        The CompanyU.S. Cellular has continued to expand its WANwide area network to accommodate various business functions, including:

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        In addition, the WANwide area network accommodates virtually all internal data communications between various CompanyU.S. Cellular office locations and the Company's retail locations to process customer activations. The WANwide area network is deployed in the Company'sU.S. Cellular's six customer service centers ("Customer Care Centers") for all customer service functions using the Company's mainU.S. Cellular's billing and information system. The Company is in the process of evaluating the customer service and other communications systems acquired in the Chicago 20MHz transaction and is developing plans to integrate all of its systems as soon as is practicable.

        Management believes that currently available technologies will allow sufficient capacity on the Company'sU.S. Cellular's networks to meet anticipated demand for voice services over the next few years.

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High-speed data and video services may require the acquisition of additional licenses to provide sufficient capacity in markets where U.S. Cellular offers these services.

Costs of System Construction and Financing

        Construction of wireless systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, MTSOs,mobile telephone switching offices, cell site equipment, microwave equipment, engineering and installation. The Company,U.S. Cellular, consistent with FCC control requirements, uses primarily its own personnel to engineer each wireless system it owns and operates, and engages contractors to construct and maintain the facilities.

        The costs (exclusive of the costs to acquire licenses) to develop the systems in which the CompanyU.S. Cellular owns ana controlling interest have historically been financed through capital contributions or through certain vendor financing. In recent years, the Company has met these funding requirements with cash generated by operations,financing, proceeds from debt and equity offerings and, in recent years, with cash generated by operations and proceeds from the sales of wireless interests. The CompanyU.S. Cellular expects to meet its future funding requirements with cash generated by operations and borrowings under its revolving credit facilities. U.S. Cellular also may have access to public and private capital markets to help meet its long-term financing needs. In 2004, U.S. Cellular estimates its capital expenditures will total between $610 million and $630 million.

Marketing

        The Company'sU.S. Cellular's marketing plan is centeredfocused on acquiring, retaining and growing customer relationships by offering high-quality products and services—built around increasing penetration of its markets, increasing customer awareness ofneeds—at fair prices, supported by outstanding customer service. U.S. Cellular's brand of wireless service and reducing churn. The CompanyCellular increases customer awareness through the use of traditional media such as TV, radio, newspaper and printdirect mail advertising. Recently, the Company has increased its use of other media such as the Internet, direct marketing and telemarketing. The CompanyU.S. Cellular has achieved its current level of penetration of its markets through a combination of promotional advertising and broad distribution. The Companydistribution, and has been able sustain a high customer retention rate based on its high-quality wireless network and outstanding customer service. U.S. Cellular supports a multi-faceted distribution program, including direct sales, agents and retail sales and service/service centers in the vast majority of its markets, plus the Internet and telesales for customers who wish to contact the CompanyU.S. Cellular through those media. The Companychannels. U.S. Cellular maintains a relatively low customer churn rate (relative to other wireless carriers) by executing a vision centered aroundfocusing on customer satisfaction, development of processes that are more customer-friendly, extensive training of frontline sales and support associates and the implementation of retention programs. The marketing plan stresses the value of the Company'sU.S. Cellular's service offerings and incorporates combinations of rate plans, additional value-added features and services and wireless telephone equipment which are designed to meet the needs of defined customer segments and their usage patterns.

        Company-owned and managed locations are designed to market wireless service to the consumer and small business segments in a familiar setting. The CompanyU.S. Cellular has expanded its e-commerce site to enable customers to purchase a broad range of accessories online, and this site is continually evolving to address customers' current needs. The CompanyU.S. Cellular anticipates that as customers become increasingly comfortable with e-commerce, the Internet will become a more robust marketing channel for sales of rate plans as well as accessories. Traffic on itsU.S. Cellular's Web site is continually increasing as customers use the site for gathering information, purchasing handsets and accessories, signing up for service and finding the locations of its stores and agents.

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        The Company        U.S. Cellular believes that operating decisions should be made close to the customer. Itcustomer, and accordingly, it manages its operating market areas with a localdecentralized staff, including sales, marketing, network operations, engineering and finance personnel. The CompanyU.S. Cellular operates six regional Customer Care Centers whose personnel are responsible for customer service and certain other functions. Direct sales consultants market wireless service to business customers. Retail sales associates work out of the Company's approximately 500U.S. Cellular's nearly 450 Company-owned retail stores and kiosks and market wireless service primarily to the consumer and small business segments. The CompanyU.S. Cellular maintains an ongoing training program to improve the effectiveness of sales consultants and retail associates by focusing their efforts on obtaining customers and maximizing the sale of high-use packages. These packages enable customers to buy packages of minutes for a fixed monthly rate.

        The Company16



        U.S. Cellular continues to expand its relationships with agents, dealers and non-Company retailers to obtain customers, and at year-end 20022003 had contracts with approximately 900over 800 of these businesses aggregating approximately 1,800 locations. Agents and dealers are independent business people who obtain customers for the CompanyU.S. Cellular on a commission basis. The CompanyU.S. Cellular has provided additional support and training to its exclusive agents to increase customer satisfaction for customers they serve. The Company'sU.S. Cellular's agents are generally in the business of selling wireless telephones, wireless service packages and other related products. The Company'sU.S. Cellular's dealers include major appliance dealers, office supply dealers, car stereo companies and mass merchants including national companies such as Wal-Mart, Staples,Radio Shack, Best Buy and American TV. Additionally, in support of its overall Internet initiatives, the CompanyU.S. Cellular has recruited agents who provide services exclusively through the Internet. No single agent, dealer or other non-Company retailer accounted for 10% or more of the Company'sU.S. Cellular's operating revenues during the past three years.

        The Company        U.S. Cellular uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in purchasing the Company'sU.S. Cellular's wireless service and to establish familiarity with the Company'sU.S. Cellular's name. The CompanyU.S. Cellular operates under a unified brand name and logo, U.S. CellularSMCellular®, across all its markets, and uses the tag line, "We Connect With You"SM®.

        The Company continues to actively advertise its digital service offerings through both television and radio        U.S. Cellular's advertising resulting in a significant increase in the number of customers on digital rate plans during 2002, and as of year-end 2002 over 80% of the Company's customers were using the Company's digital services. Advertising is directed at gaining customers, improving customers' awareness of the U.S. CellularSMCellular® brand, increasing existing customers' usage of the Company'sU.S. Cellular's services and increasing the public awareness and understanding of the wireless services offered by the Company. The Companyit offers. U.S. Cellular attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. The CompanyU.S. Cellular supplements its advertising with a focused public relations program. This program combines nationally supported activities and unique local activities, events, and sponsorships to enhance public awareness of the Company.U.S. Cellular and its brand. These programs are aimed at supporting the communities in which the CompanyU.S. Cellular serves. The programs range from loaning phones to public service operations in emergencies, to assisting victims of domestic abuse through the Company'sU.S. Cellular's Stop Abuse From Existing programs, to supporting safe driving programs.

        U.S. Cellular continues to migrate customers in its cellular licensed areas from analog to digital service plans, and as of year-end 2003 over 85% of U.S. Cellular's customers were using U.S. Cellular's digital services. Additionally, during the second half of 2003, U.S. Cellular began offering itseasyedgeSM brand of enhanced data services in many of its operating market areas where it has implemented CDMA 1XRTT digital radio technology, supporting that effort using a wide variety of media. The initial results of theeasyedgeSM rollout have been encouraging, as both new customers and existing customers have signed up for data service plans. These enhanced data services include downloading news/weather/sports information/games, ringtones and other consumer services as well as wireless modem capabilities to use with personal computers. U.S. Cellular plans on expanding itseasyedgeSM services in 2004 and beyond. In October 2003, Edge Wireless, LLC ("Edge Wireless") filed a complaint against U.S. Cellular for trademark infringement alleging that theeasyedgeSM mark infringes certain of Edge Wireless's marks. In December 2003, a court preliminarily enjoined U.S. Cellular from marketing or offering theeasyedgeSM service in the markets in which it competes with Edge Wireless, which include portions of U.S. Cellular's service areas in California, Oregon and Idaho. A trial is scheduled for May 2004. U.S. Cellular intends to vigorously contest this matter.

        In late 2002, after acquiring the Chicago license from PrimeCo, the Company launched its U.S. Cellular brandThe FCC mandated that all wireless carriers that provide service in the Chicago market. The Company developed a new seriestop 100 metropolitan statistical areas had to be capable of locally focused TV and radio commercials, featuring actress Joan Cusack,facilitating wireless number portability beginning on November 24, 2003. Carriers that provide service outside the top 100 metropolitan statistical areas are required to convey its customer satisfaction strategy to a new marketplace.facilitate number portability beginning on May 24, 2004. See "Regulation." In conjunction with the brand launch, the Company created a one-time price plan promotion while opening new retail and agent locations, rebranding the former PrimeCo locations and designating a customer service team to work with current and potential customers in the Chicago market to familiarize them with U.S. Cellular's brand of customer service. Initial reactions to the brand launch have been favorable, generating a high volume of traffic in the Company's Chicago area locations. Also, in January 2003, the Company signed a naming rights contract with the Chicago White Sox baseball team to rename their ballparkthis mandate, U.S. Cellular Field.began tailoring certain of its advertising to those customers who may be interested in switching wireless carriers and keeping their current wireless telephone number. To date, U.S. Cellular has been successful in accommodating those customers who switch to U.S. Cellular service from other carriers and wish to keep their wireless telephone numbers. U.S. Cellular has also been successful in accommodating those customers who wish to change from U.S. Cellular to another carrier and keep their wireless telephone number.

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        The following table summarizes, by operating market area, the total population, the Company'sU.S. Cellular's customer units and penetration for the Company's majority-ownedU.S. Cellular's consolidated markets that were operational and had begun marketing activities as of December 31, 2002.2003.

Operating Market Areas
 Population (1)
 Customers
 Penetration
  Population (1)
 Customers
 Penetration
 
Midwest Market Area 19,627,000 2,039,000 10.39% 27,536,000 2,296,000 8.34%
Mid-Atlantic Market Area 5,310,000 591,000 11.13% 5,405,000 669,000 12.38%
Northwest Market Area 2,639,000 370,000 14.02%
Florida/Georgia Market Area 1,806,000 167,000 9.25%
Texas/Oklahoma/Missouri/Kansas Market Area 2,250,000 324,000 14.40% 3,747,000 342,000 9.13%
Maine/New Hampshire/Vermont Market Area 1,751,000 293,000 16.73% 2,752,000 334,000 12.14%
Northwest Market Area 2,666,000 414,000 15.53%
Eastern Tennessee/Western North Carolina Market Area 1,377,000 177,000 12.85% 1,490,000 180,000 12.08%
Southern Texas Market Area 1,326,000 78,000 5.88%
Southern Texas Market Area (2) 1,347,000 74,000 5.49%
Other Markets 482,000 64,000 13.28% 1,324,000 100,000 7.55%
 
 
 
  
 
 
 
 36,568,000 4,103,000 11.22% 46,267,000 4,409,000 9.53%
 
 
 
  
 
 
 

(1)
Represents 100% of the population of the licensed areas that were operational and in which the Company had begun marketing activities andU.S. Cellular has a controlling financial interest for financial reporting purposes, based on 20012002 Claritas population estimates. "Population" in this context includes only the areas covering such markets and is only used for the purposes of calculating market penetration and is not related to "population equivalents," as previously defined.

(2)
U.S. Cellular has entered into an agreement to divest each of the licensed areas and associated customer base included in this market area.

Customers and System Usage

        The CompanyU.S. Cellular provides service to a broad range of customers from a wide spectrum of demographic segments. The CompanyU.S. Cellular uses a segmentation model to classify businesses and consumers into logical groupings for developing new products and services, direct marketing campaigns, and retention efforts. Business users typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses andas well as various professionals. Increasingly, the CompanyU.S. Cellular is providing wireless service to consumers and to customers who use their wireless telephones for mixed business and personal use as well as for security purposes. A major portion of the Company'sU.S. Cellular's recent customer and revenue growth is from these users.

        The Company's wireless systems are used most extensively during normal business hours. On average, the retail customers in the Company'sU.S. Cellular's consolidated markets used their wireless systems approximately 304422 minutes per unit each month and generated retail service revenue of approximately $39 per month during 2003, compared to 304 minutes and $38 per month during 2002, compared to 216 minutes and $36 per month in 2001.2002. Revenue generated by roamers using the Company'sU.S. Cellular's systems ("inbound roaming"), together with local retail, toll and other revenues, brought the Company'sU.S. Cellular's total average monthly service revenue per customer unit in consolidated markets to $47 during 2002.2003. Average monthly service revenue per customer unit increased approximately 2%less than 1% during 2002, the first year of such an increase since 1995.2003. This increaseresult was primarily due to an increase in the number of minutes used by both retail customers and roamers, partiallyalmost fully offset by decreases in average revenue per minute of use from both retail customers and roamers. Competitive pressures, continued penetration of the consumer market and the Company'sU.S. Cellular's increasing use of pricing and other incentive programs to stimulate overall usage resulted in a decrease in average retail service revenue per minute of use in 2002.2003. The decrease in inbound roaming revenue per minute was primarily due to the general downward trend in per minute prices for roaming negotiated between the CompanyU.S. Cellular and other wireless operators. The CompanyU.S. Cellular anticipates that average monthly retail service revenue per customer unit will remain relatively constantnot change significantly in the near future, while total monthly service revenue per customer is expected to decline slightly in the future.future, primarily due to the decline in inbound roaming revenues. However, this effect is anticipated to be more than offset by increases in the Company'sU.S. Cellular's customer base; therefore, the CompanyU.S. Cellular anticipates that total revenues will continue to grow for the next few years.

        The Company'sU.S. Cellular's main sources of revenue are from its own customers and from inbound roaming customers. The interconnectivity of wireless service enables a customer to place or receive a call in a wireless service area away from the customer's home service area. The CompanyU.S. Cellular has

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entered into roaming agreements with operators of other wireless systems covering virtually all systems in the

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United States, Canada and Mexico, including most major PCS operators.Mexico. Roaming agreements offer customers the opportunity to roam on these systems. These reciprocal agreements automatically pre-register the customers of the Company'sU.S. Cellular's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e., traveling) in a CompanyU.S. Cellular market where this arrangement is in effect is able to make and receive calls on the Company'sU.S. Cellular's system. The charge for this service is negotiated as part of the roaming agreement between the CompanyU.S. Cellular and the roaming customer's carrier. TheU.S. Cellular bills this charge is billed by the Company to the customer's home system,carrier, which then bills the customer. In some instances, based on competitive factors, many carriers, including the Company,U.S. Cellular, may charge lower amounts to their customers than the amounts actually charged to the carriers by other wireless carriers for roaming.

        The following table summarizes certain information about customers and market penetration in the Company'sU.S. Cellular's consolidated operations.



 Year Ended or At December 31,
 
 Year Ended or At December 31,
 


 2002
 2001
 2000
 1999
 1998
 
 2003
 2002
 2001
 2000
 1999
 
Majority-owned and managed markets:Majority-owned and managed markets:           Majority-owned and managed markets:           
Wireless markets in operation (1) 149 142 139 139 138 Wireless markets included in consolidated operations (1) 182 178 168 139 139 
Total population of markets in service (000s) 36,568 25,670 24,912 24,861 24,370 Total population of markets in service (000s) 46,267 41,048 28,632 24,912 24,861 
Customer Units:           Customer Units:           
 at beginning of period (2) 3,461,000 3,061,000 2,602,000 2,183,000 1,710,000  at beginning of period (2) 4,103,000 3,461,000 3,061,000 2,602,000 2,183,000 
 acquired (divested) during period (3) 332,000 46,000 (24,000) 15,000 19,000  acquired (divested) during period (3) (141,000)332,000 46,000 (24,000)15,000 
 additions during period (2) 1,244,000 1,095,000 1,154,000 1,000,000 896,000  additions during period (2) 1,357,000 1,244,000 1,095,000 1,154,000 1,000,000 
 disconnects during period (2) 934,000 741,000 671,000 596,000 442,000  disconnects during period (2) (910,000)(934,000)(741,000)(671,000)(596,000)
 at end of period (2) 4,103,000 3,461,000 3,061,000 2,602,000 2,183,000  at end of period (2) 4,409,000 4,103,000 3,461,000 3,061,000 2,602,000 
Market penetration at end of period (4)Market penetration at end of period (4) 11.22%13.48%12.29%10.47%8.96%Market penetration at end of period (4) 9.53 %10.00 %12.09 %12.29 %10.47 %

(1)
Represents the number of cellular or PCS licensed areas in which the CompanyU.S. Cellular owned a controlling financial interest and which was operational at the end of each respective period. The revenues and expenses of these licensed areas are included in the Company'sU.S. Cellular's consolidated revenues and expenses for each period.

(2)
Represents the approximate number of revenue-generating wireless telephones served by the CompanyU.S. Cellular in the licensed areas referred to in footnote (1). The revenue generated by such wireless telephones is included in consolidated revenues.

(3)
Represents the approximate number of revenue-generating wireless telephones added to or subtracted from the Company'sU.S. Cellular's customer base during the period due to acquisitions or divestitures of wireless licenses.

(4)
Computed by dividing the number of customer units at the end of the period by the total population of consolidated markets in service as estimated by Claritas (1997-2001)(1998-2002) for the years 1998-2002,1999-2003, respectively.

Products and Services

        Wireless Telephones and Installation.    The CompanyU.S. Cellular offers a full range of wireless telephones for use by its customers, including both analog and digital handsets. Features offered in some of the wireless telephones include hands-free calling, repeat dialing and others. The Company'sU.S. Cellular's digital service offerings include additional features such as caller ID, short messaging services and data transmission, and ain certain markets it offers enhanced data services which include camera features, downloading and wireless modem capabilities. A majority of new customers are selecting dual-mode or tri-mode wireless telephones, which can be used on analog and digital networks, to fully utilize these features. Dual-mode and tri-modeThese types of wireless telephones also enable customers to enjoy virtually seamless roaming regardless of their travel patterns. New customers are selecting from a variety of wireless telephones. These units are stylish, compact, fully featured and attractively priced. Theyassociated features appeal to newer segments of the customer population, especially a younger demographic group which has become a fast-growing portion of the wireless user population. Dual-mode and tri-mode wireless telephones also enable customers to enjoy virtually seamless roaming regardless of their travel patterns. U.S. Cellular emphasizes these types of wireless telephones in its marketing efforts.

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        The Company        U.S. Cellular negotiates volume discounts with its wireless telephone suppliers. The CompanyU.S. Cellular significantly increased its purchasing power in 2002 by implementing a new distribution software system that enables the Companyit to sell and distribute handsets to its agents. The Companyagents, and has expanded its sales of handsets to agents throughout 2003. U.S. Cellular discounts wireless telephones sold to customers to meet competition or to stimulate sales by reducing the cost of becoming a wireless customer. In most instances, where permitted by law, customers are generally required to sign a service contract with

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U.S. Cellular at the Company. The Companytime the handset sale takes place. U.S. Cellular also works with wireless equipment manufacturers in promoting specific equipment in its local advertising.

        The CompanyU.S. Cellular has established service facilities in many of its local markets to ensure quality service of the wireless telephones it sells. These facilities allow the CompanyU.S. Cellular to improve its service by promptly assisting customers who experience equipment problems. Additionally, the CompanyU.S. Cellular employs a repair facility in Tulsa, Oklahoma, to handle more complex service and repair issues.

        Wireless Services.    The Company'sU.S. Cellular's customers are able to choose from a variety of packaged voice and data pricing plans which are designed to fit different callingusage patterns and customer needs. The ability to help a customer find the right technology and the right pricing plan is central to the Company'sU.S. Cellular's brand positioning. The CompanyU.S. Cellular generally offers local, regional and national consumer plans that can be tailored to a customer's needs by the addition of features or feature packages. Many consumer plans enable small work groups or families to share the plan minutes, enabling the customer to get more value for their money. Business rate plans are offered to companies to meet their unique needs. The Company'sU.S. Cellular's national rate plan, SpanAmericaSM, prices all calls, regardless of where they are made or received, as local calls with no long distance or roaming charges. Additionally, the CompanyU.S. Cellular is continually reviewing its prepaid offerings, including its traditional TalkTracker® offering and the prepaid services offered in the Chicago market, to streamline themit and make themit more compatible with the lifestyles of the customers who want to buy this product. U.S. Cellular also has a small number of reseller customers who purchase blocks of minutes and resell them to their customers.

        The Company'sU.S. Cellular's customer bills typically show separate charges for custom-callingcustom usage features, airtime in excess of the packaged amount (such packages may include roaming and toll calls. Custom-callingusage), roaming and toll calls and data usage. Custom usage features provided by the CompanyU.S. Cellular include wide-area call delivery, call forwarding, voice mail, call waiting, three-way calling and no-answer transfer.

Regulation

        Regulatory Environment.    The Company'sU.S. Cellular's operations are subject to FCC and state regulation. The wireless telephone licenses the CompanyU.S. Cellular holds are granted by the FCC for the use of radio frequencies in the 850800 megahertz (MHz) band ("cellular" licenses), and in the 1900 MHzmegahertz band ("PCS"personal communication service" licenses), and are an important component of the overall value of the Company'sU.S. Cellular's assets. The construction, operation and transfer of wireless systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934 ("Communications Act"). In 1996, Congress enacted the Telecommunications Act of 1996 ("Telecommunications Act"), which amended the Communications Act. The Telecommunications Act mandated significant changes in telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the United States and to streamline regulation of the telecommunications industry to remove regulatory burdens, as competition develops. The FCC has promulgated regulations governing construction and operation of wireless systems, licensing (including renewal of licenses) and technical standards for the provision of wireless telephone service under the Communications Act, and is implementing the legislative objectives of the Telecommunications Act, as discussed below.

        Licensing.Licensing—Wireless Service.    For cellular telephone licensing purposes, the FCC has divided the United States into separate geographic markets (MSAs(metropolitan statistical areas and RSAs)rural service areas). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, in the early 1980s, the FCC reserved one block of frequencies for non-wireline applicants and another block for wireline applicants.

        Since January 1, 2002, an entity which controls one cellular system in an MSAa metropolitan statistical area has been able to control the competing cellular system in that MSA.metropolitan statistical area. The FCC determined that wireless competition in MSAsmetropolitan statistical areas among cellular, PCSpersonal communication service and certain SMRspecialized mobile radio carriers, such as Nextel, which interconnect with the

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public switched telephone network, was sufficient to permit relaxation of the former prohibition on MSAmetropolitan statistical area cross-ownership. However, the FCC has retained the rule which prohibits any entity which controls a cellular system in an RSAa rural service area from owning an interest exceeding five percent in another cellular system in the same RSA,rural service area, though that rule may be waived in appropriate circumstances.

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        The FCC commenced a rulemaking proceeding in which it tentatively concluded to retain the current cellular cross-ownership rule in rural service areas with three or fewer commercial mobile radio service competitors, but is considering whether to remove the rule as it applies to other rural service areas and to non-controlling investments in all rural service area licensees. The timing and possible outcome of this proceeding cannot be predicted at this time.

        The FCC has also allocated a total of 140 MHzmegahertz for broadband PCS,personal communication service, 20 MHzmegahertz to unlicensed operations and 120 MHzmegahertz to licensed operations, originally consisting of two 30 MHzmegahertz blocks in each of 51 Major Trading Areas ("MTAs")major trading areas and one 30 MHzmegahertz block and three 10 MHzmegahertz blocks in each of 493 Basic Trading Areas ("BTAs").basic trading areas. Certain of the 30 megahertz basic trading area frequency blocks were split into 15 megahertz segments when the original licensees, unable to pay their installment payments in full to the FCC, returned part of their assigned spectrum to the FCC and it was subsequently reauctioned. Subject to some conditions, the FCC also permits licensees to split their licenses and assign a portion, on either a geographic or frequency basis, or both, to a third party.

        Between January 1, 2002 andPrior to January 1, 2003, no entity was allowed to have a controlling interest in more than 55 MHzmegahertz of cellular, PCS,personal communication service, or "covered" SMRspecialized mobile radio spectrum in a given MTAmajor trading area or BTA.basic trading area. Cellular systems have 25 MHzmegahertz of spectrum, and PCSpersonal communication service systems may have 10, 15, or 30 MHzmegahertz of spectrum. As of January 1, 2003, this "spectrum cap" has been eliminated, and the FCC will determinenow determines whether acquisition of wireless licenses are in the public interest on a case-by-case basis under criteria which have not yet been specified.are being developed on a case-by-case basis.

        The completion of acquisitions involving the transfer of control of a wireless system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the application for approval of the proposed transfer.

        Licensing—Facilities.    The FCC must be notified each time an additional cell site is constructed which enlarges the service area of a given cellular market. The FCC's rules also generally require persons or entities holding wireless construction permits or licenses to coordinate their proposed frequency usage with neighboring wireless licensees in order to avoid electrical interference between adjacent systems. The coordination process has become more complex as neighboring systems have begun to employ differing digital technologies. The height and power of base stations in wireless systems are regulated by FCC rules, as are the types of signals emitted by these stations. The FCC also regulates tower construction in accordance with its regulations, which carry out its responsibilities under the National Environmental Policy Act and Historic Preservation Act. In addition to regulation by the FCC, wireless systems are subject to certain Federal Aviation Administration ("FAA") regulations with respect to the siting, construction, painting and lighting of wireless transmitter towers and antennas as well as local zoning requirements.

        Beginning in 1996, the FCC also imposed a requirement that all wireless licensees register and obtain FCC registration numbers for all of their antenna towers which require prior FAA clearance. All new towers must be registered at the time of construction and existing towers were required to be registered by May 1998 on a staggered state-by-state basis. The CompanyU.S. Cellular believes that it is in compliance with the FCC's tower registration requirements.

        Beginning in October 1997, wireless systems, which previously were "categorically excluded"excluded from having to evaluate their facilities to ensure their compliance with federal "radio frequency" radiation requirements, were made subject to those requirements. As a result, all wireless towers of less than 10 meters in height, building-mounted antennas and wireless telephones must comply with radio frequency radiation guidelines. Since October 1997, all new wireless facilities have had to be in compliance when they are brought into service. Since September 1, 2000, all existing facilities have had to be brought into compliance. The CompanyU.S. Cellular believes that its facilities are in compliance with these requirements. The FCC is currently considering changes to its rules to subject more proposed towers to environmental evaluation.

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        Licensing—Commercial Mobile Radio Service.    Pursuant to 1993 amendments to the Communications Act, cellular and PCSpersonal communication services are classified as Commercial Mobile Radio Service ("CMRS"),commercial mobile radio service, in that they are services offered to the public, for a fee, which isand are interconnected to the public switched telephone network. The FCC has determined that it will forebear from requiring such carriers to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs.

        All CMRScommercial mobile radio service wireless licensees must satisfy specified coverage requirements. Cellular licensees were required, during the five years following the initial grant of the respective license, to construct their systems to provide service (at a specified signal strength) to the territory encompassed by

23



their service area. Failure to provide such coverage resulted in reduction of the relevant license area by the FCC. All 30 megahertz block PCSpersonal communication service licensees must construct facilities that provide coverage to one-third of the population of the service area within five years of the initial license grants and to two-thirds of the population within ten years. All other licensees and certain 10 and 15 megahertz block licensees must construct facilities that provide coverage to one-fourth of the population of the licensed area or "make a showing of substantial service in their license area" within five years of the original license grants. Licensees that fail to meet the coverage requirements may be subject to forfeiture of the license. In a pending rulemaking proceeding, the FCC is considering replacing those percentage coverage requirements for personal communication service carriers with a requirement that carriers provide substantial service to their licensed service areas, which would give carriers greater flexibility in providing service in accordance with customer demand.

        Cellular and PCSpersonal communication service licenses are granted for ten-year periods. The FCC has established standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. The FCC has: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a renewal expectancy will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) provided "substantial" performance, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal," and (ii) complied with FCC rules, policies and the Communications Act. If renewal expectancy is awarded to an existing licensee, its license is renewed and competing applications are not considered. All of the Company'sU.S. Cellular's licenses which it applied to have renewed between 1994 and 2002 were2003 have been renewed.

        All of the Company'sU.S. Cellular's approximately 1,100 FCC licenses for the microwave radio stations it uses to link its cell sites with each other and with its MTSOsmobile telephone switching offices were required to be renewed in 2001. All of those licenses were renewed for ten-year terms. All newly obtained microwave licenses receive ten-year terms as well. Over the next few years, due to the licensing of new satellite services in the relevant frequency bands, it is likely that certain of U.S. Cellular's remaining microwave facilities will have to be shifted to other frequencies. It is anticipated that those changes will be made without affecting service to customers.

        The CompanyU.S. Cellular conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for renewal expectancy in its upcoming renewal filings. Accordingly, the CompanyU.S. Cellular believes that current regulations will have no significant effect on the renewal of its licenses. However, changes in the regulation of wireless operators or their activities and of other mobile service providers could have a material adverse effect on the Company'sU.S. Cellular's operations.

        Recent Events.Events—E-911.    There are certain regulatory proceedings currently pending before the FCC which are of particular importance to the wireless industry. In one proceeding, the FCC has imposed new "enhanced 911"enhanced 911 regulations on wireless carriers. The rules require wireless carriers to provide increasingly detailed information about the location of wireless 911 callers in two phases. The obligation of a wireless carrier to provide this information is triggered by a qualifying request from state or local agencies that handle 911 calls in the markets served by the wireless carrier. In

22



phase one, which has been required since April 1998, wireless carriers are required to identify the location of the cell site from which a wireless call has been made and the wireless 911 caller's phone number. The CompanyU.S. Cellular has timely provided this information in compliance with the FCC's rules in most but not all of its markets.

        In 2001, the CompanyU.S. Cellular filed a request for a waiver of phase two of the FCC's E-911 rules that required wireless carriers to provide more precise latitude and longitude location information about wireless 911 callers by October 1, 2001. In July 2002, the FCC released an order that delayed until March 1, 2003, the deadline by which certain medium-sized wireless carriers, including the Company,U.S. Cellular, were required to provide more precise phase two location information in response to qualifying requests from state or local 911 agencies. The CompanyU.S. Cellular is in compliance with the revised phase two enhanced 911 requirements in most of its markets. However, there is no guarantee that the CompanyU.S. Cellular will not be subject to sanctions, including monetary forfeitures, for failure to comply with the FCC's phase one or phase two requirements in all its markets.

        Recent Events—Wireless Number Portability.    The FCC has adopted a limited expansion of the obligation of cellularmandated that all wireless carriers to serve the roaming subscribers of broadband PCS providers, among others, even though the subscribers involved have no pre-existing service relationship with that carrier. Under these policies, broadband

24



PCS providers may offer their subscribers handsets which aremust be capable of operating over broadband PCS and cellular networks so that when their subscribers are outfacilitating wireless number portability beginning in November 2003. As of range of broadband PCS networks, they will be ableNovember 24, 2003, all wireless providers had to obtain non-automatic access to cellular networks. The FCC expects that implementation of these roaming capabilities will promote competition between broadband PCS and cellular service providers.

        Currently pending before the FCC isallow a proposal to require all CMRS carriers to provide "automatic" roaming capabilities to customers of other systems, presumably with FCC regulation of rates and other terms and conditions. The Company, along with most wireless carriers, has opposed this proposal as presently unnecessary, though the Company has urged the FCC to scrutinize the roaming practices of large national carriers.

        The FCC has adopted requirements which will make it possible for subscriberscustomer to retain, subject to certain geographic and othergeographical limitations, their existing telephone numbersnumber when they switchswitching from one service providertelecommunications carrier to another. ThisAs a result, any wireless customer in the largest 100 Metropolitan Statistical Areas in the United States may switch carriers and keep their current wireless telephone number. U.S. Cellular had the infrastructure in place to accommodate wireless number portability will include switching between Local Exchange Carriers ("LECs") and other wireline providers, betweenprior to the November 2003 deadline.

        Now that wireless servicenumber portability has been implemented, FCC rules require that wireless providers and between LEC/wireline andlocal exchange carriers, subject to certain exceptions, provide such wireless providers. LECs,number portability in the 100 largest MSAs, hadmetropolitan statistical areas in compliance with certain FCC performance criteria, upon request from another carrier. For metropolitan statistical areas outside the largest 100, wireless providers that receive a request to allow an end user to port their number must be capable of doing so within six months of receiving the request or within six months after November 24, 2003, whichever is later. As of May 24, 2004, wireless carriers will be subject to number portability requirements throughout the entire country.

        U.S. Cellular is unable to predict the impact that the implementation deadlines byof wireless number portability will have on its overall business. The implementation of wireless number portability will likely increase churn rates for U.S. Cellular and other wireless companies, as the endability of 1998 at those switches which received specific requestscustomers to retain their wireless telephone numbers removes a barrier for customers who wish to change wireless carriers. U.S. Cellular believes that it may be able to obtain additional new customers that wish to change their service from other wireless carriers as a result of wireless number portability. The FCC has extendedfuture volume of any porting requests, and the compliance date for cellular, broadband PCS,processing costs related thereto, may increase U.S. Cellular's operating costs in the future. Any of the above factors could have an adverse affect on U.S. Cellular's competitive position, costs of obtaining new subscribers, liquidity, financial position and certain other wireless providers to November 2003.results of operations.

        Recent Events—Number Pooling.    Cellular and broadband PCSpersonal communication service providers also had to be capable, by November 2002, of receiving from the numbering authorities telephone numbers in "blocks"blocks of 1,000, rather than 10,000, as has been the case previously. This action is intended to conserve telephone numbers and extend the life of the current numbering system.

        The CompanyU.S. Cellular is now in compliance with the FCC's thousands block number "pooling"pooling requirements and is working to comply with the FCC's current number portability requirements. Both requirements are complex and will requirehave required extensive capital investment. A substantial portion of this investment has been made as of December 31, 2002.2003.

        Recent Events—Reciprocal Compensation.    In another proceeding, the FCC in 1996 adopted rules regarding the method by which wireless carriers and LECslocal exchange carriers shall compensate each other for interconnecting wireless and local exchange facilities. The FCC rules provided for symmetrical and reciprocal compensation between LECslocal exchange carriers and

23



wireless carriers, and also prescribed interim interconnection proxy rates, which are much lower than the rates formerly paid by wireless carriers to LECs.local exchange carriers. Symmetrical and reciprocal compensation means wireless carriers and LECslocal exchange carriers must pay each other at the same rate. Interconnection rate issues will be decided by the states. Wireless carriers are now paying and in the future can be expected to pay lower rates to LECslocal exchange carriers than they previously paid. This result was favorable to the wireless industry and somewhat unfavorable to LECs.local exchange carriers.

        The FCC is currently considering a proposal to eliminate reciprocal compensation between wireless carriers and LECslocal exchange carriers and to move toward a so-called "bill and keep" system. If adopted, this change in the rules would also be favorable to wireless carriers, as wireless customers currently make more calls to wireline customers thanvice versa.

        Telecommunications Act—General.    The primary purpose and effect of the new lawTelecommunications Act is to open all telecommunications markets to competition. The Telecommunications Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries.

        Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the Telecommunications Act's universal service provisions and necessary for universal services, public safety and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, it retains limited authority to regulate certain competitive practices in rural telephone company service areas.

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        Telecommunications Act—Universal Service.    The Telecommunications Act establishes principles and a process for implementing a modified "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The Telecommunications Act also requires universal service to schools, libraries and rural health facilities at discounted rates. Wireless carriers must provide such discounted rates to such organizations in accordance with federal regulations. The FCC has implemented the mandate of the Telecommunications Act to create a new universal service support mechanism "to ensure that all Americans have access to telecommunications services." The Telecommunications Act requires all interstate telecommunications providers, including wireless service providers, to "make an equitable and non-discriminatory contribution" to support the cost of providing universal service, unless their contribution would bede minimis. At present, the provision of landline telephone service in high cost areas is subsidized by support from the "universal service" fund, to which, as noted above, all carriers with interstate and international revenues must contribute. Such payments which were based on a percentage of the total "billed revenue" of carriers for a given previous period of time, began in 1998.

        Beginning inSince February 2003, such payments will behave been based on estimates of future revenues. Previously, these payments were based on historical revenues. Carriers are free to pass such charges on to their customers. Wireless carriers are also eligible to receive universal service support payments in certain circumstances under the new system if they provide specified services in "high cost" areas. The CompanyU.S. Cellular has sought designation as an "eligible telecommunications carrier" qualified to receive universal service support in certain states, has been designated as such a carrier in the states of Washington, Iowa, and Wisconsin and has received payments for services provided to high cost areas within the state of Washington.those states.

        Communications Assistance to Law Enforcement Act.    Under a 1994 federal law, the Communications Assistance to Law Enforcement Act, ("CALEA"), all telecommunications carriers, including the CompanyU.S. Cellular and other wireless licensees, have been required to implement certain equipment changes necessary to assist law enforcement authorities in achieving an enhanced ability to conduct electronic surveillance of those suspected of criminal activity. The CompanyU.S. Cellular is now

24



substantially in compliance with CALEA requirements. The Company has, however, sought from the FCC an extensionrequirements of time until July 1, 2003such act. However, issues exist as to the applicability of such act to transmissions of "packet data" and other "information services." U.S. Cellular will attempt to comply with certain CALEAthe act's "information service" requirements in its newly acquired PCS system in the Chicago MTA.as they are clarified and become applicable.

        Other Recent FCC Actions.    The FCC has recentlyalso taken action in proceedings: (1) to ensure that the customers of wireless providers, among other carriers, will receive complete, accurate, and understandable bills; (2) to establish safeguards to protect against unauthorized access to customer information; (3) to require improved access to telecommunications facilities by persons with disabilities; and (4) to set national policy for the allocation by state public utilities commissions of telephone numbers to wireline and wireless carriers.

        The FCC also has pending a proceeding to implement requirements for wireless providers to set interstate interexchange rates in each state at levels no higher than the rates charged to subscribers in any other state. The Company will monitor that proceeding and comply with new federal requirements as they become applicable.

        The FCC has pending two proceedings which may have a considerable impact on wireless carriers. In the first proceeding, the FCC is considering whether CMRShas preliminarily decided that commercial mobile radio service carriers may not obtain the use of certain facilities from wireline carriers, (for example, for telephone lines linking cell sites), at the unbundled network element ("UNE") prices now charged to CLECs,competitive local exchange carriers, which are lower than those charged to CMRScommercial mobile radio service carriers. However, reconsideration is being sought. If the FCC determines that CMRScommercial mobile radio service carriers may obtain the use of wireline facilities at UNEunbundled network element prices, that result would be favorable to wireless carriers. Currently, the CompanyU.S. Cellular predominantly employs microwave facilities, and not leased wireline facilities, to link its cell sites.

        In the second proceeding, the FCC adopted an order in January 2003, pursuant to which the Mobile Satellite Service ("MSS")mobile satellite service will permit its licensees to offer terrestrial wireless service in competition with CMRScommercial mobile radio service carriers, provided the MSSmobile satellite service licensees also offer satellite telephone service, which will involve building their proposed satellite networks. Assuming the MSSmobile satellite service licensees do build their satellite networks and thus obtain "ancillary terrestrial authority," the increased competition could be unfavorable to existing CMRScommercial mobile radio service carriers.

26



        As noted previously, as of January 1, 2003, the FCC's "spectrum cap" has been repealed, with the exception It is anticipated that no one entitythose satellite networks may control the two cellular licenseesgo into service in a single RSA. With that exception, the FCC's rules impose no barrier to wireless acquisition in the same market or nationally. The FCC will now review wireless acquisitions on a case-by-case basis to determine whether they serve the public interest.

        PCS technology is similar in many respects to cellular technology. Where it has become commercially available, this technology is capable of offering increased capacity for wireless two-way and one-way voice, data and multimedia communications services and has resulted in increased competition with the Company's operations in virtually all of its markets. The ability of these PCS licensees to complement or compete with existing cellular licensees will be affected by future FCC rule-makings. These and other future technological and regulatory developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by the Company. There can be no assurance that the Company will not be adversely affected by such technological and regulatory developments.approximately 2005.

        In January 2000, the FCC took an action which may have an impact on both cellular and PCSpersonal communication service licensees. Pursuant to a congressional directive, the FCC adopted service rules for licensing the commercial use of 30 MHzmegahertz of spectrum in the 747-762 MHzmegahertz and 777-792 MHzmegahertz spectrum bands. Subsequently, the FCC adopted service rules for the 688-746 MHzmegahertz band, a portion of which was auctioned in 2002. The majority of the spectrum in these bands is being auctioned in large regional service areas, although there is a portion available which covers individual MSAmetropolitan statistical area and RSArural service area markets. The FCC has conducted an auctiontwo auctions for the MSAmetropolitan statistical area and RSArural service area licensed spectrum and certain other portions of the 688-746 MHzmegahertz spectrum which ended in September 2002.2002 and June 2003, respectively. Additional auctions to license the 688-792 MHzmegahertz spectrum are anticipated in 2003 and 2004.

        There is also pending beforeThe FCC adopted service rules in October 2003 to provide for use of the FCC a proceeding to develop licensing rules90 megahertz of spectrum, 1710-1755/2110-2155 megahertz, for additionaladvanced wireless uses. This advanced wireless spectrum in the 1700 MHz and 2100 MHz for third-generation wireless use. Third-generation wireless is intended to provide high-speed data services as well as full-motion video and other advanced wireless services. The FCC has projected that this spectrum willcould be auctioned in 2004.

        In June of 2002, the FCC created a Spectrum Policy Task Force and commenced proceedings to review and make recommendations on broad categories of possible spectrum policy change. The allocation of additional spectrum for unlicensed services, which has been strongly promoted by various manufacturers of 802.11b devices and Wi-Fi service providers, has emerged from that review process as a potentially significant shift in FCC spectrum policy affecting wireless competition between carriers who paid for spectrum and those who plan to implement networks using unlicensed free spectrum. The FCC commenced proceedings in December 2002 to allocate additional spectrum in the television broadcast bands as well as the 3650-3700 MHzmegahertz band for unlicensed services and is expected to proposewhich remain pending. In November 2003 the FCC approved a significant expansion of the spectrum available for unlicensed uses by permitting 802.11b and Wi-Fi operations in the 5.4-5.7 gigahertz band.

25



        The FCC adopted in May 2003 new spectrum leasing policies which permit licensees of cellular, personal communication service, and specialized mobile radio spectrum, among other bands, to lease to third parties any amount of spectrum in any geographic area encompassed by their licenses, and for any period of time not extending beyond the current term of the license. The FCC has also adopted streamlined processing rules for applications for assignment and transfer of control of telecommunications carrier licenses. These new rules and policies will take effect in 2004.

        The FCC also has pending proceedings commenced in April 2003 to develop service rules for multipoint distribution service, microwave multipoint distribution service and instructional television fixed service spectrum in the 2150-2162 megahertz and 2500-2690 megahertz bands which will foster uses above 5 gigahertz in 2003.of this spectrum for advanced wireless services, including commercial mobile services. This spectrum could create opportunities for new or expanded competition with existing commercial mobile radio service operators.

        State and Local Regulation.    The CompanyU.S. Cellular is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. In 1993, Congress preempted states from regulating the entry of wireless systems into service and the rates charged by wireless systems to customers. The siting and construction of wireless facilities, including transmitter towers, antennas and equipment shelters are still subject to state or local zoning and land use regulations. However, in 1996, Congress amended the Communications Act to provide that states could not discriminate against wireless carriers in tower zoning proceedings and had to decide on zoning requests with reasonable speed. In addition, states may still regulate other terms and conditions of wireless service.

        In 2000, the FCC ruled that the preemption provisions of the Communications Act do not preclude the states from acting under state tort, contract, and consumer protection laws to regulate the practices of CMRScommercial mobile radio service carriers, even if such activities might have an incidental effect on wireless rates. This ruling has led to more state regulation of CMRScommercial mobile radio service carriers, particularly from the standpoint of consumer protection. Although U.S. Cellular intends to vigorously defend its activities, there can be no assurance that potential state regulatory proceedings and/or consumer lawsuits will not have a material adverse effect on its financial condition, results of operations, cash flows, business or prospects.

27



        The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. Further, the FCC is empowered under certain circumstances to preempt state regulatory authorities if a state is obstructing the Communications Act's basic purposes.

        The CompanyU.S. Cellular and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have a significant impact on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. The CompanyU.S. Cellular is unable to predict the scope, pace or financial impact of policy changes which could be adopted in these proceedings.

        The FCC has adopted rules specifying standards and the methods to be used in evaluating radio frequency emissions from radio equipment, including network equipment and handsets used in connection with commercial mobile radio service. These rules were upheld on appeal by the U.S. Court of Appeals for the Second Circuit. The U.S. Supreme Court declined to review the Second Circuit's ruling. The Company'sU.S. Cellular's network facilities and the handsets it sells to customers comply with these standards.

        Radio Frequency Emissions.    Media reports have suggested that radio frequency emissions from handsets, wireless data devices and cell sites may raise various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and

26



pacemakers. Although some studies have suggested that radio frequency emissions may cause certain biological effects, most of the expert reviews conducted to date have concluded that the evidence does not support a finding of adverse health effects but that further research is appropriate. Research and studies are ongoing. These concerns over radio frequency emissions may discourage the use of handsets and wireless data devices and may result in significant restrictions on the location and operation of cell sites, all of which could have a material adverse effect on the Company'sU.S. Cellular's results of operations. Several class action and single-plaintiff lawsuits have been filed against several other wireless service operators and several wireless phone manufacturers, asserting product liability, breach of warranty and other claims relating to radio frequency transmissions to and from handsets and wireless data devices. The lawsuits seek substantial monetary damages as well as injunctive relief. One important case in which the plaintiff alleged that his brain tumor had been caused by his wireless telephone use, Newman v. Verizonet al, was dismissed in the U.S. District Court in Maryland in October 2002.2002, and that ruling was upheld in the U.S. Court of Appeals for the Fourth Circuit in October 2003. There can be no assurance, however, that the outcome of other lawsuits will not have a material adverse effect on the wireless industry, including U.S. Cellular. Currently, U.S. Cellular carries insurance with respect to such matters, but there is no assurance that such insurance will continue to be available or will not be cost-prohibitive in the Company.


future.

Competition

        U.S. Cellular competes directly with several wireless communication service providers, including enhanced specialized mobile radio service providers, in each of its markets. In markets where it ownsgeneral, there are between five and operates cellular licenses,seven competitors in each wireless market. U.S. Cellular generally competes against each of the Company's principalsix near-nationwide wireless companies: Verizon Wireless, Sprint PCS (and affiliates), Cingular Wireless, AT&T Wireless, T-Mobile and Nextel. However, not all six competitors for wireless telephone serviceoperate in each market where U.S. Cellular does business. These competitors have substantially greater financial, technical, marketing, sales, purchasing and distribution resources than U.S. Cellular.

        The use of national advertising and promotional programs by such national wireless operators may be a source of additional competitive and pricing pressures in all U.S. Cellular markets, even if those operators may not provide service in a particular market. U.S. Cellular provides wireless services comparable to the national competitors, but the other wireless companies operate in a wider geographic area and are able to offer no- or low-cost roaming and long-distance calling packages over a wider area on their own networks than U.S. Cellular can offer on its network. If U.S. Cellular offers the licenseessame calling area as one of these competitors, U.S. Cellular will incur roaming charges for calls made in portions of the second cellular systemcalling area which are not part of its network.

        In the Midwest, U.S. Cellular's largest contiguous service area, it can offer larger regional service packages without incurring significant roaming charges than it is able to offer in that marketother parts of its network. U.S. Cellular also employs a customer satisfaction strategy throughout its markets it believes has contributed to a relatively low churn rate and has had a positive impact on its cost to acquire and serve customers.

        Some of U.S. Cellular's competitors bundle other services, such as landline telephone service and internet access, with their wireless communications services, which U.S. Cellular either does not have the PCSability to offer or has chosen not to offer.

        In addition, U.S. Cellular competes against both larger and ESMR licensees.smaller regional wireless companies in certain areas, including ALLTEL, Western Wireless, Rural Cellular Corporation, and against resellers of wireless services. Since each of these competitors operates its systemon systems using spectrum licensed by the FCC and has comparable technology and facilities, competition for customers betweenamong these systems in each market is principally on the basis of quality of service, price, size of area covered, services offered and responsiveness of customer service. The competing entities

        Since U.S. Cellular's competitors do not disclose their subscriber counts in many ofspecific regional service areas, market share for the marketscompetitors in which the Company has an interest have financial resources which are substantially greater than those of the Company and its partners in such markets.each regional market cannot be precisely determined.

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        The FCC's rules require all operational wireless systems to provide, on a nondiscriminatory basis, wireless service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public.

        The Company expects wireless operators to continue deployment of PCS in all of the Company's licensed areas throughout 2003. In recent years, ESMRenhanced specialized mobile radio providers have initiated service in many of the Company'sU.S. Cellular's markets. Although less directly a substitute for other wireless services, wireless data services and paging services may be adequate for those who do not need full two-way voice service. Similar technological advances or regulatory changes in the future may make available other alternatives to wireless service, thereby creating additional sources of competition.

        Continuing technological advances in the communications field make it difficult to predict the extent of additional future competition for wireless systems. For example, the FCC has allocated radio channels to mobile satellite systems in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites. Such systems are designed primarily to serve the communications needs of remote locations and mobile satellite systems could provide viable competition for land-based wireless systems in such areas. Some initial deployments have been made and service is now being provided in certain areas. It is also possible that the FCC may in the future assign additional frequencies to wireless telephone service or ESMRenhanced specialized mobile radio service to provide for more competitors in each market.

Investments

        The Company holds investments in certainU.S. Cellular and its subsidiaries hold marketable equity securities that are publicly traded companies, the majority of which were the result of sales or trades of non-strategic assets.and can have volatile share prices. Minority positions are held in Vodafone AirTouch plc (ticker symbol "VOD"Group Plc ("Vodafone") and Rural Cellular Corporation.Corporation ("Rural Cellular"). In addition, U.S. Cellular holds certain warrants pursuant to which it has the right to purchase shares of Superconductor Technologies Inc.

        U.S. Cellular and its subsidiaries do not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, exchanges or reorganizations of other investments. The investment in Vodafone resulted from certain sales or exchanges of non-strategic wireless investments to or settlements with AirTouch Communications in exchange for stock of AirTouch, which was then acquired by Vodafone for American Depositary Receipts representing Vodafone stock. The investment in Rural Cellular is the result of a consolidation of several cellular partnerships in which U.S. Cellular subsidiaries held interests in Rural Cellular, and the distribution of Rural Cellular stock in exchange for these interests. U.S. Cellular continues to hold these investments because their associated low tax cost basis would trigger a substantial taxable gain upon disposition.

        These assets are classified for financial reporting purposes as available-for-sale securities. The market value of these investments aggregated $260.2 million at December 31, 2003 and $186.0 million at December 31, 2002 and $272.4 million at December 31, 2001.2002. As of December 31, 2002, the2003, U.S. Cellular recorded a net unrealized holding gain, net of tax and minority interest, included in accumulated other comprehensive income (loss) totaledtotaling $60.5 million. This amount was $15.5 million.million at December 31, 2002. In June 2002, the CompanyU.S. Cellular recognized, in the statement of operations, losses of $145.6$244.7 million ($145.6 million net of tax of $99.1 million), related to investments in marketable securities as a result of management's determination that unrealized losses with respect to the investments were "other than temporary." Management continues to review the valuation

        In 2002, subsidiaries of the investments on a periodic basis. If management determines in the future that an unrealized loss is other than temporary, the loss will be recognized and recorded in the statement of operations.

        The Company hasU.S. Cellular entered into variable prepaida number of forward contracts ("forward contracts") related to the VODVodafone marketable equity securities that it holds. U.S. Cellular has provided guarantees to the lenders which provide assurance to the lenders that all principal and interest amounts are paid upon settlement of the contracts by such subsidiaries. The risk management objective of the forward contracts is to hedge the value of the marketable equity securities to protect from losses due to decreases in the market prices of the securities ("downside limit") while retaining a share of gains from increases in the market prices of such securities ("upside potential"). The downside risklimit is hedged at or above the accounting cost basis, thereby eliminating the other than temporary risk on these contracted securities.

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        Under the terms of the forward contracts, the CompanyU.S. Cellular will continue to own the contracted shares and will receive dividends paid on such contracted shares, if any. The forward contracts mature in May 2007 and, at the Company'sU.S. Cellular's option, may be settled in shares of the respective security or in cash, pursuant to formulas that "collar" the price of the shares. The collars effectively limit the Company'sreduce U.S. Cellular's downside risklimit and upside potential on the contracted shares. The collars are typically adjusted for any changes in dividends on the contracted shares. If U.S. Cellular elects to settle in shares, it will be required to deliver the number of shares of the contracted security determined pursuant to the formula. If shares are delivered in the settlement of the forward contract, the CompanyU.S. Cellular would incur current tax liability at the time of delivery based on the difference between the tax basis of the marketable equity securities delivered and the net amount realized though maturity. If the CompanyU.S. Cellular elects to settle in cash, it will be required to pay an amount in cash equal to the fair market value of the number of shares determined pursuant to the formula. If

        Deferred taxes have been provided for the Company elects to settle in shares it will be required to deliverdifference between the number of sharesfinancial reporting basis and the income tax basis of the contracted security determined pursuant tomarketable equity securities and are included in deferred tax liabilities on the formula.balance sheet. Such deferred tax liabilities totaled $86.3 million at December 31, 2003 and $56.9 million at December 31, 2002.

        The following table summarizes certain facts surrounding the contracted securities as of December 31, 2002.2003.


  
 Collar
  
  
 Collar
  
Security
 Shares
 Downside
Limit
(Floor)

 Upside
Potential
(Ceiling)

 Loan
Amount
(000s)

 Shares
 Downside
Limit
(Floor)

 Upside
Potential
(Ceiling)

 Loan
Amount
(000s)

Vodafone 10,245,370 $15.07-$16.07 $22.22-$23.26 $159,856
Vodafone Group Plc 10,245,370 $15.07-$16.07 $21.56-$23.20 $159,856

Employees

        The CompanyU.S. Cellular had 6,1006,225 employees as of December 31, 2002.2003. None of the Company'sU.S. Cellular's employees is represented by a labor organization. The CompanyU.S. Cellular considers its relationship with its employees to be good.

29



PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT

        This Annual Report on Form 10-K, including exhibits, contains statements that are not based on historical fact, including the words "believes", "anticipates", "intends", "expects", and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following risks:

30


        U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.



Item 2.    Properties

        The properties for mobile telephone switching offices, cell sites and retail locations are either owned or leased under long-term leases by the Company,U.S. Cellular, one of its subsidiaries or the partnership or corporation which holds the construction permit or license. The CompanyU.S. Cellular has not experienced major problems with obtaining zoning approval for cell sites or operating facilities and does not anticipate any such problems in the future which are or will be material to the CompanyU.S. Cellular and its subsidiaries as a whole. The Company'sU.S. Cellular's investment in property is small compared to its investment in licenses, goodwill and wireless system equipment. As of December 31, 2003, U.S. Cellular's property, plant and equipment, net of accumulated depreciation, totaled approximately $2,173.9 million.

        The CompanyU.S. Cellular leases an aggregate of approximately 150,000200,000 square feet of office space for its headquarters buildings in Chicago, Illinois and Bensenville, Illinois.

        The CompanyU.S. Cellular considers the properties owned or leased by it and its subsidiaries to be suitable and adequate for their respective business operations.



Item 3.    Legal Proceedings

        The CompanyU.S. Cellular is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain wireless telephone systems and other interests. The CompanyU.S. Cellular does not believe that any of these proceedings, individually or in the aggregate, should have a material adverse impact on the financial position, or results of operations or cash flows of the Company.U.S. Cellular.



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

        No matter was submitted to a vote of securities holders during the fourth quarter of 2002.2003.

3031




PART II


Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

        Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled "United States Cellular Stock and Dividend Information."



Item 6.    Selected Consolidated Financial Data

        Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled "Selected Consolidated Financial Data," except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K.



Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations and Financial Condition

        Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition."



Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" under the caption "Market Risk."



Item 8.    Financial Statements and Supplementary Data

        Incorporated by reference from Exhibit 13 to this document, Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes in Common Shareholders' Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly Income Information (Unaudited)," "Report of Independent Accountants"Auditors" and "Copy of Previously Issued Report of Independent Accountants."


3132




Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        This information was "previously reported" within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934, as amended, in the Company'sU.S. Cellular's Form 8-K dated May 23, 2002. The following repeats the disclosure set forth in Item 4 of such Form 8-K.

        On May 23, 2002, United States Cellular Corporation ("U.S. Cellular") dismissed Arthur Andersen LLP ("Andersen") as U.S. Cellular's independent auditors, and engaged PricewaterhouseCoopers LLP ("PWC"PwC") to serve as its new independent auditors for 2002. The change in auditors will become effective May 24, 2002. This action was taken by the U.S. Cellular Board of Directors based on the recommendation of U.S. Cellular's audit committee, subject to the approval of such action by Telephone and Data Systems, Inc. ("TDS"), the parent company of U.S. Cellular, pursuant to the terms of an Intercompany Agreement between TDS and U.S. Cellular.

        Andersen's reports on U.S. Cellular's consolidated financial statements for each of the years ended December 31, 2001 and December 31, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

        During the years ended December 31, 2001 and 2000 and the interim period between December 31, 2001 and the date of this Form 8-K, there were no disagreements between U.S. Cellular and Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement in connection with their report for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

        U.S. Cellular provided Andersen with a copy of the foregoing disclosures. Attached as Exhibit 16.1 is a copy of Andersen's letter, dated May 23, 2002, stating its agreement with the foregoing disclosures.

        During U.S. Cellular's two most recent fiscal years and through the date of this Report on Form 8-K, U.S. Cellular did not consult PWCPwC with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on U.S. Cellular's consolidated financial statements, or any other matters or reportable events listed in item 304(a)(2)(i) and (ii) of Regulation S-K.




PART III



Item 9A.    Controls and Procedures

        (a)    Evaluation of Disclosure Controls and Procedures.    Based on the evaluation required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, the principal executive officer and principal financial officer of U.S. Cellular have concluded that U.S. Cellular's disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report are effective to ensure that the information required to be disclosed by U.S. Cellular in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

        (b)    Changes in internal controls over financial reporting.    There was no change in U.S. Cellular's internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, U.S. Cellular's internal control over financial reporting.

33





PART III


Item 10.    Directors and Executive Officers of the Registrant

        Incorporated by reference from Proxy Statement sections entitled "Election of Directors"Directors," "Executive Officers" and "Executive Officers."Section 16(a) Beneficial Ownership Reporting Compliance."



Item 11.    Executive Compensation

        Incorporated by reference from Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended.



Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        Incorporated by reference from Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management"Management and Related Stockholder Matters" and "Securities Authorized for Issuance under Equity Compensation Plans."



Item 13.    Certain Relationships and Related Transactions

        Incorporated by reference from Proxy Statement section entitled "Certain Relationships and Related Transactions."



Item 14.    Principal Accountant Fees and Services

        Incorporated by reference from Proxy Statement section entitled "Fees Paid to Principal Accountants."

34





PART IV



Item 14.    Controls and Procedures

        (a)    Evaluation of Disclosure Controls and Procedures.    Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the principal executive officer and principal financial officer of the Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

        (b)    Changes in internal controls.    There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluation.




PART IV


Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

        The following documents are filed as a part of this report:

(a)
(1)    Financial Statements

Consolidated Quarterly Income Information (Unaudited)Annual Report*
Consolidated Statements of Operations Annual Report*
Consolidated Statements of Cash Flows Annual Report*
Consolidated Balance Sheets Annual Report*
Consolidated Statements of Changes in Common Shareholders' Equity Annual Report*
Notes to Consolidated Financial Statements Annual Report*
Consolidated Quarterly Income Information (Unaudited)Annual Report*
Report of Independent Accountants for 2002—Auditors—PricewaterhouseCoopers LLP Annual Report*
Copy of Previously issued Report of Independent Accountants for years prior to 2002—Accountants—Arthur Andersen LLP Annual Report*

*
Incorporated by reference from Exhibit 13.

(2)
Schedules

 
  
 Location
Report of Independent AccountantsAuditors on Financial Statement Schedule for 2002—Schedule—PricewaterhouseCoopers LLP page 3637
Copy of Previously Issued Report of Independent Accountants on Financial Statement Schedule for years prior to 2002—Schedule—Arthur Andersen LLP page 3738
II. Valuation and Qualifying Accounts for Each of the Three Years in the Period Ended December 31, 20022003 page 3839