SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number 0-27416

RURAL CELLULAR CORPORATION

PO Box 2000
3905 Dakota Street SW
Alexandria, Minnesota 56308
(320) 762-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES x   NO o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).   o  YES    NO x

          Number of shares of common stock outstanding as of the close of business on May 6, 2004.

TABLE OF CONTENTS

2

Part I. FINANCIAL INFORMATION

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

3

RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS’ DEFICIT
(Unaudited)

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

4

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

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

5

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

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

6

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

1) BASIS OF PRESENTATION:

Throughout this document, Rural Cellular Corporation and its subsidiaries are referred to as “RCC,” “we,” “our,” or “us.”

The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2004 and 2003 have been prepared by management. In the opinion of management, only normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for all periods presented have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the operating results for the full fiscal year or for any other interim periods.

2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Supplemental Disclosure of Condensed Consolidated Cash Flow Information

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Ultimate results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior year’s consolidated financial statements in order to conform to the 2004 presentation. Such reclassifications had no effect on total shareholders’ deficit, net loss applicable to common shares or net loss per share as previously reported.

The statement of operations for the prior period presented has been reclassified to reflect billings to our customers for the USF and other regulatory fees as ''Service revenue’’ and the related payments into the associated regulatory funds as ''Selling, general and administrative expense.’’ Operating income for the prior period has been unaffected. The amount reclassified for 2003 was $1.1 million.

7

3) ACCOUNTING FOR STOCK OPTIONS

We account for stock option plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized. The following schedule shows our net (loss) and net (loss) per share for the three months ended March 31, 2004 and March 31, 2003, had compensation expense been determined consistent with the SFAS No. 123, “Accounting for Stock-Based Compensation.” The pro forma information presented below is based on several assumptions and should not be viewed as indicative of future periods.

4) LICENSES AND OTHER INTANGIBLE ASSETS:

Licenses consist of the cost of acquiring paging licenses and the value assigned to the Wireless Alliance personal communications services (“PCS”) licenses, other PCS licenses, local multipoint distribution service (“LMDS”) licenses, and cellular licenses acquired through acquisitions. Other intangibles, resulting primarily from acquisitions, include the value assigned to customer lists and goodwill. Amortization is computed using the straight-line method based on the estimated useful life of the asset. Customer lists are the only intangible asset with a definitive useful life; all others are considered to have indefinite useful lives.

The components of licenses and other intangible assets are as follows (in thousands):

8

Customer list amortization expense for the three months ended March 31, 2004 and 2003 was approximately $4.6 million and $5.1 million, respectively. Customer list amortization expense is estimated to be approximately $18.7 million for 2004 through 2006, $8.4 million in 2007 and $2.6 million in 2008.

The changes in carrying amount of goodwill and licenses are as follows (in thousands):

We review goodwill and other indefinite-lived intangible assets for impairment based on the requirements of SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with this statement, goodwill is tested for impairment at the reporting unit level on an annual basis as of October 1st or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. In analyzing goodwill for potential impairment, we use projections of future cash flows from the reporting units. These projections are based on our views of growth rates and anticipated future economic conditions, the appropriate discount rates relative to risk, and estimates of residual values. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. If changes in growth rates, future economic conditions, discount rates, or estimates of residual values were to occur, goodwill may become impaired.

Additionally, impairment tests for indefinite-lived intangible assets, consisting of FCC licenses, are required to be performed on an annual basis or on an interim basis if an event occurs or circumstances change that would indicate the asset might be impaired. In accordance with Emerging Issues Task Force (“EITF 02-7”), Unit of Accounting for Testing of Impairment of Indefinite-Lived Intangible Assets, impairment tests for FCC licenses are performed on an aggregate basis. We utilize a fair value approach, incorporating discounted cash flows, to complete the test. This approach determines the fair value of the FCC licenses, using a start-up model assumption, and, accordingly, incorporates cash flow assumptions regarding the investment in a network, the development of distribution channels, and other inputs for making the business operational. As these inputs are included in determining free cash flows of the business, the present value of the free cash flows is attributable to the licenses using assumptions of our weighted average costs of capital and the long-term rate of growth for our business. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. If any of the cash flow assumptions were to change, FCC licenses may become impaired.

9

5) LONG-TERM LIABILITIES:

We had the following long-term liabilities outstanding (in thousands):

(1)

The net proceeds from the offering of our Senior Secured Notes completed on March 25, 2004, together with some of our existing cash, were used to repay all outstanding obligations under our former credit agreement, to terminate interest rate swap agreements associated with the former credit agreement, and to pay fees and expenses associated with the notes offering and a new revolving credit agreement.

Credit Agreement – As of March 31, 2004, we have $60 million in undrawn availability under our new revolving credit agreement, which replaced our former credit agreement. The new credit agreement is subject to various covenants, including the ratio of senior secured indebtedness to annualized operating cash flow (as defined in the new credit agreement), the ratio of total indebtedness to annualized operating cash, and the ratio of annualized operating cash flow to interest expense. We were in compliance with all financial covenants at March 31, 2004.

Senior Secured Notes – In March 2004, we completed the placement of $350 million aggregate principal amount of our 8 1/4% senior secured notes due 2012 and $160 million aggregate principal amount of our senior secured floating rate notes due 2010. The effective interest rate on our senior secured floating rates was 5.6% at March 31, 2004. Interest on the 2010 notes is reset quarterly and will be payable on March 15, June 15, September 15, and December 15 of each year, beginning on June 15, 2004. Interest on the 2012 notes is payable on March 15 and September 15 of each year, beginning on September 15, 2004. We may redeem all or part of the 2010 notes on or after March 15, 2006 and all or part of the 2012 notes on or after March 15, 2008.

10

9 7/8 % Senior Notes - In 2003, we issued $325 million principal amount of 9 7/8% senior notes due 2010. Interest is payable semi-annually on February 1 and August 1 of each year. The notes will mature on February 1, 2010. RCC may redeem all or part of the notes on or after August 1, 2007. Prior to August 1, 2006, we may redeem up to 35% of the aggregate principal amount of the notes issued under the indenture with the net cash proceeds of certain equity offerings.

9 3/4 % Senior Subordinated Notes - In 2002, we issued $300 million principal amount of 9 3/4% senior subordinated notes due 2010. Interest on the 9 3/4% senior subordinated notes is payable semi-annually on January 15 and July 15. The 9 3/4% senior subordinated notes will mature on January 15, 2010, and are redeemable, in whole or in part, at the option of RCC, at any time on or after January 16, 2006.

9 5/8 % Senior Subordinated Notes - In 1998, RCC issued $125 million principal amount of 9 5/8% senior subordinated notes due 2008. Interest on the 9 5/8% senior subordinated notes is payable semi-annually on May 15 and November 15. The 9 5/8% senior subordinated notes will mature on May 15, 2008, and are currently redeemable, in whole or in part, at our option.

11 3/8% Senior Exchangeable Preferred Stock — Dividends on the senior exchangeable preferred stock are cumulative, are payable quarterly, and were payable, until May 15, 2003, at our option either in cash or by the issuance of additional shares of senior exchangeable preferred stock having an aggregate liquidation preference equal to the amount of such dividends. We did not declare or pay the cash dividends due in cash in August 2003, November 2003, February 2004, or May 2004 and accrued the undeclared dividends by increasing the carrying amount of the preferred stock. At March 31, 2004, we had accrued $24.7 million in undeclared dividend liability with respect to our senior exchangeable preferred stock, which will be payable at the senior preferred mandatory redemption date, if not sooner declared and paid.

Gain on redemption of preferred stock. During the three months ended March 31, 2004, we repurchased 15,000 shares of 11 3/8% senior exchangeable preferred stock for $13.4 million. These shares of 11 3/8% senior exchangeable preferred stock had accrued $1.5 million in unpaid dividends. This repurchase resulted in a gain on redemption of $3.2 million.

12 1/4% Junior Exchangeable Preferred Stock - Dividends on the junior exchangeable preferred stock are cumulative, are payable quarterly, and may be paid, at our option, on any dividend payment date occurring on or before February 15, 2005, either in cash or by the issuance of additional shares of junior exchangeable preferred stock having an aggregate liquidation preference equal to the amount of such dividends.

The senior and junior exchangeable preferred stock are non-voting, except as otherwise required by law and as provided in their respective Certificates of Designation. Each Certificate of Designation provides that at any time any dividends on the outstanding exchangeable preferred stock are in arrears and unpaid for six or more quarterly dividend periods (whether or not consecutive), the holders of a majority of the outstanding shares of the affected exchangeable preferred stock, voting as a class, will be entitled to elect the lesser of two directors or that number of directors constituting 25% of the members of our Board of Directors. The voting rights will continue until such time as all dividends in arrears on the exchangeable preferred stock are paid in full (in the case of the senior exchangeable preferred stock after May 15, 2003, or in the case of the junior exchangeable preferred stock after February 15, 2005, are paid in cash), at which time the terms of any directors elected pursuant to such voting rights will terminate. Voting rights may also be triggered by other events described in the Certificates of Designation.

11

6) FINANCIAL INSTRUMENTS

We recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. We used interest rate swaps to manage our interest rate exposure on our previous credit agreement. Changes in the fair values of those derivative instruments were recorded to earnings as “Interest Expense” or other comprehensive income depending on the use of the derivative instrument and whether it qualified for hedge accounting.

We formally document all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedge transactions. We also assess, both at inception and on an on-going basis, whether the derivatives that are used in hedging transactions are effective. Should it be determined that a derivative is not effective as a hedge, we would discontinue the hedge accounting prospectively.

In connection with the retirement of the former credit facility in March 2004, we terminated our two remaining interest rate swaps, which had a notional amount of $284.0 million, for aggregate cash consideration of $7.6 million. Amounts previously recognized in other comprehensive income, when hedge accounting was applied, have been charged to interest expense in the current period.

RCC’s financial instruments’ estimated fair values and carrying amounts are set forth in the table below. Fair values are based on quoted market prices, if available.

(1)		These financial instruments are not actively traded and, therefore, the estimated fair market value is stated at the carrying value.
(2)		Recorded on our balance sheet at fair value, with related changes in fair value included in the statement of operations, and not accounted for as a hedge under SFAS No. 133.

12

7) PREFERRED SECURITIES:

We have issued the following preferred stock with liquidation preferences of $1,000 per share:

Preferred security balance sheet reconciliation (in thousands):

Dividends on the Class M convertible preferred stock are compounded quarterly, accrue at 8% per annum, and are payable upon redemption or upon liquidation of RCC. The Class M convertible preferred stock is convertible into our Class A common stock at $53.00 per share subject to certain adjustments. Dividends are not payable if the shares are converted. The holders of the Class M convertible preferred stock are entitled to vote on all matters submitted to the holders of the common stock on an as-converted basis.

In order to comply with the FCC rules regarding cross-ownership of cellular licensees within a given market, we issued 7,541 shares of Class T convertible preferred stock with a liquidation preference of $1,000 per share to Telephone & Data Systems, Inc. (“TDS”) on March 31, 2000 in exchange for 43,000 shares of Class A common stock and 105,940 shares of Class B common stock owned by TDS. TDS or RCC can convert the convertible preferred stock into the original number of shares of Class A or Class B common stock in the future if ownership by TDS of the common stock would then be permissible under FCC rules. Dividends on the Class T convertible preferred stock are cumulative, have a fixed coupon rate of 4% per annum, and are payable in April 2020. Dividends are not payable if the shares are converted. Shares of Class T convertible preferred stock are non-voting, except as otherwise required by law and as provided in the Certificate of Designation.

The Class T convertible preferred stock is senior to the junior exchangeable preferred stock, Class M convertible preferred stock and common stock of RCC with respect to dividend rights and rights on liquidation, winding-up and dissolution of RCC. The Class M convertible preferred stock is senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution of RCC.

The senior exchangeable preferred stock, junior exchangeable preferred stock, Class M convertible preferred stock, and Class T convertible preferred stock are redeemable at 100% of their total liquidation preference plus accumulated and unpaid dividends at their respective redemption dates.

13

8) NET INTEREST EXPENSE

Components of interest expense are as follows:

(1)

As a result of adopting SFAS No. 150 on July 1, 2003, our 11 3/8% Senior Exchangeable and 12 1/4 % Junior Exchangeable Preferred securities were reclassified into Long-Term Liabilities in the consolidated balance sheets. The dividend expense related to these instruments, which was previously reported as a component of “Preferred Stock Dividend” in our Condensed Consolidated Statements of Operations, is now classified as “Interest Expense.” SFAS No. 150 does not permit reclassification of prior year amounts to conform to the current year presentation.

14

9) PROPERTY EXCHANGE WITH AT&T WIRELESS (“AWE”)

On March 1, 2004, we closed on the exchange of certain properties with AWE. Under the agreement, we transferred to AWE our operations in Oregon RSA 4, covering 226,000 POPs and including 36 cell sites and 35,091 customers as of March 1, 2004. RCC received from AWE operations in Alabama and Mississippi covering 545,000 incremental POPs and including 96 cell sites and 13,837 customers as of March 1, 2004. In addition, RCC received from AWE unbuilt PCS licenses covering portions of RCC’s South, Midwest, and Northwest regions that incorporate 1.3 million incremental POPs. RCC also received $13.9 million in cash, of which $12.9 million was applied to reduce indebtedness under our former credit facility.

Pursuant to the agreement, we received the following properties:

15

Giving effect to the property exchange with AWE, our covered POPs increased to approximately 6.3 million:

The net effect of the property exchange with AWE on March 1, 2004, resulted in a 21,254 decrease in our customers.

The following table reflects our accounting for the property exchange with AWE. The purchase price allocation has been completed on a preliminary basis using the purchase method of accounting under SFAS No. 141, Business Combinations, subject to adjustment should new or additional facts about the business become known.

16

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets, and liabilities during the periods reported. Estimates are used when accounting for certain items such as unbilled revenue, allowance for doubtful accounts, depreciation and amortization period, income taxes, valuation of intangible assets, and litigation contingencies. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Goodwill and Indefinite-Lived Intangible Assets

We review goodwill and indefinite-lived intangible assets for impairment based on the requirements of SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with this statement, goodwill is tested for impairment at the reporting unit level on an annual basis as of October 1st or on an interim basis if an event occurs or circumstances change that could reduce the fair value of a reporting unit below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. In analyzing goodwill for potential impairment, we use projections of future cash flows from the reporting units. These projections are based on our views of growth rates, anticipated future economic conditions, the appropriate discount rates relative to risk, and estimates of residual values. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. If changes in growth rates, future economic conditions, discount rates or estimates of residual values were to occur, goodwill may become impaired.

Additionally, impairment tests for indefinite-lived intangible assets, consisting of FCC licenses, are required to be performed on an annual basis or on an interim basis if an event occurs or circumstances change that would indicate the asset might be impaired. In accordance with Emerging Issues Task Force (“EITF 02-7”), Unit of Accounting for Testing of Impairment of Indefinite-Lived Intangible Assets, impairment tests for FCC licenses are performed on an aggregate basis. We utilize a fair value approach, incorporating discounted cash flows, to complete the test. This approach determines the fair value of the FCC licenses, using a start-up model assumption and, accordingly, incorporates cash flow assumptions regarding the investment in a network, the development of distribution channels, and other inputs for making the business operational. As these inputs are included in determining free cash flows of the business, the present value of the free cash flows is attributable to the licenses using assumptions of our weighted average costs of capital and the long-term rate of growth for our business. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. If any of the cash flow assumptions were to change, FCC licenses may become impaired.

We believe that the accounting estimates related to determine the fair value of goodwill and indefinite-lived intangible assets, and thus any impairment, are “critical accounting estimates” because (i) they are highly susceptible to change from period to period since they require management to make cash flow assumptions about future sales, operating costs, and discount rates over an indefinite life and (ii) the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as our net income (loss) would be material. In estimating future operations, we use our internal budgets, which require significant judgment regarding anticipated customer growth and other business trends.

17

Revenue Recognition - Service

We recognize service revenue based upon minutes of use processed and contracted fees, net of credits and adjustments for service discounts. As a result of our billing cycle cut-off times, we are required to make estimates for service revenue earned, but not yet billed, at the end of each month. These estimates are based primarily upon historical minutes of use processed. We follow this method since reasonable, dependable estimates of the revenue can be made. Actual billing cycle results and related revenue may vary from the results estimated at the end of each quarter, depending on customer usage and rate plan mix. For customers who prepay their monthly access, we match the recognition of service revenue to their corresponding usage.

In 2003, we started to receive Universal Service Fund (“USF”) revenue reflecting our Eligible Telecommunication Carrier (“ETC”) status in certain states. How we recognize support revenue depends on the level of our collection experience in each ETC qualified state. When we do not have adequate experience to determine the timing and amount of reimbursement, we recognize revenue upon cash receipt. We currently account for the State of Minnesota under this approach and estimate that we could receive approximately $2.0 million in the second quarter of 2004 related to first quarter of 2004. Where we do have adequate experience as to the amount and timing of the receipt of these funds, we recognize revenue on an accrual basis. Additionally, we include the pass-through fees we charge our customers to support the USF as service revenue.

Revenue Recognition - Roaming Revenue and Incollect Cost

Roaming revenue and incollect cost information is provided to us primarily through a third party centralized clearinghouse. From the clearinghouse we receive monthly settlement data. We base our accrual of roaming revenue and incollect expense on these clearinghouse reports. We follow this method since reasonably dependable estimates of roaming revenue and incollect cost can be made utilizing these reports.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses that will result from failure of our customers to pay amounts owed. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, we may be required to maintain higher allowances.

Depreciation of Property and Equipment

We depreciate our wireless communications equipment using the straight-line method over estimated useful lives. We periodically review changes in our technology and industry conditions, asset retirement activity, and salvage to determine adjustments to estimated remaining useful lives and depreciation rates. Effective January 1, 2003, we implemented the results of a review of the estimated service lives of our remaining TDMA network assets. Useful lives were shortened to substantially depreciate all such equipment by December 31, 2008. While we will continue to sell and market TDMA services for the foreseeable future, the amount of future projected cash flows to be derived from the TDMA network assets is highly dependent upon the rate of transition of existing subscribers using TDMA equipment to GSM/GPRS and CDMA capable equipment, as well as other competitive and technological factors. We determined that a reduction in the useful lives of these assets is warranted based on the projected transition of network traffic.

18

Impairment of Long-Lived Assets

We review long-lived assets, consisting primarily of property, plant and equipment and intangible assets with finite lives, for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In analyzing potential impairment, we use projections of future cash flows from the assets. These projections are based on our views of growth rates for the related business and anticipated future economic conditions and the appropriate discount rates relative to risk and estimates of residual values. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. If changes in growth rates, future economic conditions, discount rates, or estimates of residual values were to occur, long-lived assets may become impaired.

When we determine that the carrying value of certain long-lived assets may not be recoverable based upon the existence of one or more of the above impairment indicators, we then measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in our current business model. In connection with our property exchange with AWE, we recorded a non-cash loss on assets held for sale, in accordance with SFAS No. 144, of $42.2 million effective in the third quarter of 2003. There was no additional gain or loss recognized on this property exchange at closing on March 1, 2004.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” As part of the process of preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent RCC increases or decreases the valuation allowance in a period, we must include an expense or benefit within the tax provision in the consolidated statement of operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. As of March 31, 2004, our valuation allowance was $156.3 million due to uncertainties related to our ability to utilize the deferred tax assets. The deferred tax assets consist principally of certain net operating losses (“NOLs”) being carried forward, as well as impairment write-downs of intangible assets not currently deductible for tax purposes. The valuation allowance is based on our historical operations projected forward and our estimate of future taxable income and the period over which deferred tax assets will be recoverable. It is possible that we could be profitable in the future at levels that cause us to conclude that it is more likely than not that we will realize a portion or all of the NOL carryforwards. Upon reaching such a conclusion, we would immediately record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates, which would be approximately 38% under current tax law. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOLs is utilized or the NOLs expire unused.

Litigation and Other Loss Contingencies

In the ordinary course of business, we are subject to litigation and other contingencies. Management must use its best judgment and estimates of probable outcomes when determining the impact of these contingencies. We assess the impact of claims and litigation on a regular basis and update the assumptions and estimates used to prepare the consolidated financial statements.

19

BUSINESS OVERVIEW

Our principal operating objective is to increase revenue and achieve profitability through increased penetration in existing wireless markets. We believe that we can achieve this objective because our rural markets provide growth opportunities due to their lower current penetration rates and reduced competition for customers as compared to wireless systems located in larger metropolitan areas.

We have materially expanded our business since 1996 through a series of acquisitions, increasing the population to whom we market our services from 636,000 to 6.3 million, covering portions of the Midwest, Northeast, South, and Northwest regions. As of March 31, 2004, we provided wireless voice services to approximately 659,000 customers, excluding wholesale customers.

Our revenue primarily consists of service, roaming, and equipment revenue, each of which is described below:

•		Service revenue includes monthly access charges, charges for airtime used in excess of the time included in the service package purchased, activation fees, long distance charges derived from calls placed by customers as well as wireless and paging equipment lease revenue. Also included are charges for features such as voicemail, call waiting, call forwarding, and incollect revenue, which consists of charges to our customers when they use their wireless phones in other wireless markets.
		We include in service revenue the USF support funding that we are eligible to receive as a result of our ETC status in certain states.
•		Roaming revenue includes only outcollect revenue, which we receive when other wireless providers’ customers use our network.
•		Equipment revenue includes activation fees, sales of wireless and paging equipment and accessories to customers, and network equipment reselling.

Our operating expenses include network costs, cost of equipment sales, selling, general and administrative expenses, and depreciation and amortization, each of which is described below:

•		Network costs include switching and transport expenses and expenses associated with the maintenance and operation of our wireless network facilities, including salaries for employees involved in network operations, site costs, charges from other service providers for resold minutes, and the expense associated with incollect revenue.
•		Cost of equipment sales includes costs associated with telephone equipment and accessories sold to customers. In recent years, we and other wireless providers have increased the use of discounts on phone equipment as competition between service providers has intensified. As a result, we have incurred, and expect to continue to incur, losses on equipment sales per gross additional customer. We expect to continue these discounts and promotions because we believe they will increase the number of our wireless customers and, consequently, increase service revenue.
•		Selling, general and administrative (“SG&A”) expenses include salaries, benefits, and operating expenses such as marketing, commissions, customer support, accounting, administration, and billing. We also include in SG&A charges to our customers for USF contributions, which are offset by a corresponding increase in service revenue.
•		Depreciation and amortization represents the costs associated with the depreciation of fixed assets and the amortization of customer lists. In 2003, we also included the depreciation of the capitalized cost of handsets leased to customers.

20

In addition to the operating expenses discussed above, RCC also incurs other expenses, primarily interest and dividends on preferred stock.

•

Interest expense primarily results from borrowings under our credit agreement and the issuance of outstanding notes and exchangeable preferred stock, the proceeds of which were used to finance acquisitions, repay other borrowings, and further develop our wireless network.

     Interest expense includes the following:

•		Interest expense on credit facility
•		Interest expense on the senior subordinated notes
•		Interest expense on senior notes
•		Amortization of debt issuance costs
•		Early extinguishments of debt issuance costs
•		Dividends on senior and junior exchangeable preferred stock
•		Related amortization of stock issuance costs upon adoption of SFAS No. 150 on July 1, 2003
•		Gain (loss) on derivative instruments

		All of our derivative financial instruments entered into after January 1, 2003, were marked to market, with changes in fair value included in interest expense. In March 2004, in connection with the repayment of our former credit facility, we terminated all such agreements.
•		Preferred stock dividends are paid on our outstanding Class M convertible preferred stock and Class T convertible preferred stock. Through June 30, 2003, preferred stock dividends also included dividends on our Senior and Junior exchangeable preferred securities.

Customer base

Our customer base includes three types of customers: postpaid, wholesale, and prepaid. Postpaid customers account for the largest portion of our customer base, at 88.3%. These customers pay a monthly access fee for a wireless service plan that generally includes a fixed number of minutes and certain service features. In addition to the monthly access fee, these customers are typically billed in arrears for long-distance charges, roaming charges, and minutes of use exceeding the rate plans. Our wholesale customers are similar to our postpaid customers in that they pay monthly fees to utilize our network and services; however, the customers are billed by a third party (reseller), who has effectively resold our service to the end user (customer). We in turn bill the third party for the monthly usage of the end user. The wholesale base accounts for 10.2% of our total customer base. Our prepaid customers account for 3.2% of our customer base.

21

RESULTS OF OPERATIONS

The following tables present certain consolidated statement of operations data as a percentage of total revenue as well as other operating data for the periods indicated.

22

Consolidated Operating Data:

23

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO MARCH 31, 2003

Revenue

Operating Revenue:

Service Revenue. Service revenue growth reflects the revenue from new customers added through increased penetration in certain existing markets together with increases in local service revenue per customer (“LSR”). The increase in LSR to $43 in 2004 from $40 in 2003 is the result of several factors, including increases in per customer access and features fees and in USF subsidies. Also contributing to increased service revenue was ETC support revenue, which increased to $2.8 million in 2004 as compared to $383,000 in 2003. We expect USF subsidies in the low $20 million range for all of 2004. Reflecting FCC changes to the USF rate structure, our customer pass-through charges were $2.4 million during 2004 as compared to $1.1 million during 2003.

Our total number of customers increased 8% to 733,363 at March 31, 2004 as compared to 728,706 at March 31, 2003, primarily due to our marketing efforts over the past 12 months, partially offset by the transfer of customers to AWE. On March 1, 2004, we transferred to AWE our operations in Oregon RSA 4, including 35,091 customers. We received from AWE operations in Alabama and Mississippi including approximately 13,837 customers. Wireless Alliance accounted for 15,437 of our total customers at March 31, 2004. During 2004, postpaid retention was 98.0% as compared to 98.1% in 2003.

Customer reconciliation giving effect to the AWE property exchange:
(not including long distance and paging)

24

Roaming Revenue. The 11.4% decrease in roaming revenue primarily reflects the effect of the transfer of our Northwest Region Oregon 4 (“Oregon 4”) service area to AWE on March 1, 2004 together with our outcollect yield for 2004 declining to $0.19 per minute as compared to $0.21 per minute in 2003, partially offset by a 10% increase in outcollect minutes.

Excluding the Oregon 4 service area that was transferred to AWE and the new South region service area received from AWE, outcollect minutes in the first quarter of 2004 increased approximately 14% as compared to the first quarter of 2003. For the full year of 2003, the Oregon 4 service area provided us approximately $15 million of roaming revenue.

We have roaming agreements in our markets with various national carriers and have signed the following nationwide roaming agreements:

•		AWE, which is effective through June 2006, renewable until 2008 at our option,
•		Cingular, which is effective through June 2007,
•		T-Mobile, which is effective through December 2007, and
•		Verizon, which is effective through December 2007.

Outcollect yields under these agreements will continue to decline over the terms of the agreements. In certain markets, these decreases may be offset by increases in outcollect minutes.

Under these agreements, we are able to attain preferred roaming status by overlaying our existing TDMA networks with GSM/GPRS or CDMA technologies. Our Northeast and Northwest networks are currently being overlaid with GSM/GPRS technology, while our Midwest region network is being overlaid with CDMA technology. We expect to have these technology conversions substantially completed during 2005. We are currently considering the overlay options for our South region, where demand for next-generation technologies by our customers is not yet as great as compared to other regions.

AWE, Cingular, T-Mobile and Verizon Wireless accounted for approximately 88% of our outcollect minutes in 2004 as compared to 89% in 2003. AWE, Cingular, T-Mobile and Verizon Wireless accounted for 82% of our total roaming revenue in 2004 as compared to 79% in 2003. Under our agreements with AWE, Verizon Wireless, Cingular, and other roaming partners, the roaming yield per minute we receive from outcollect calling minutes, in addition to the cost per minute we pay for our customers’ incollect activity, declines over time. We do not expect Cingular’s recently announced acquisition of AWE to impact our anticipated outcollect minutes.

Equipment Revenue. Equipment revenue increased 42.5% to $5.5 million in 2004 as compared to $3.9 million in 2003. Within equipment revenue, equipment reselling increased by $170,000 in 2004 to $311,000. In addition, 2004 phone and accessory sales increased 19% to $4.4 million as compared to $3.7 million in 2003. Also contributing to increased equipment revenue was the adoption of EITF 00-21, Revenue Arrangements with Multiple Deliverables, which was effective for us, prospectively, on July 1, 2003, and increased 2004 equipment revenue by $770,000.

Operating Expenses

25

Network Costs. Network cost, as a percentage of total revenues, decreased to 19.6% in 2004 as compared to 21.3% in 2003. Network costs decreased 2.9% to $23.5 million for 2004, reflecting a 6.2% decrease in incollect cost to $10.3 million together with additional network efficiencies. Per minute incollect cost for 2004 was $0.13 per minute as compared to $0.16 in 2003. Partially offsetting the decrease in incollect cost were increased costs related to next generation network overlays. Incollect cost per minute under our current roaming agreements is expected to decline.

Cost of Equipment Sales. Cost of equipment sales increased 18.6% to $9.9 million, reflecting the increased level of equipment revenue. As a percentage of revenue, cost of equipment sales for 2004 increased to 8.3% as compared to 7.4% in 2003.

Selling, General and Administrative. Contributing to the increase in SG&A was an increase in USF pass-through charges totaling $2.5 million in 2004 as compared to $1.1 million in 2003. Sales and marketing costs were $12.3 million in 2004 as compared to $12.5 million in 2003. As a percentage of revenue, SG&A decreased to 25.4% in 2004 from 26.4% in 2003.

Components of SG&A are as follows: