SECURITIES AND EXCHANGE COMMISSION

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).  YES   o   NO   x

     Number of shares of common stock outstanding as of the close of business on August 2, 2004.

TABLE OF CONTENTS

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Part I. FINANCIAL INFORMATION

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

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

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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 condensed consolidated financial statements.

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RURAL CELLULAR CORPORATION AND SUBSIDIARIES

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

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RURAL CELLULAR CORPORATION AND SUBSIDIARIES

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

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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 and six months ended June 30, 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 and six months ended June 30, 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.

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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 expense is recognized. The following schedule shows our net loss and net loss per share for the three and six months ended June 30, 2004 and June 30, 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 and PCS 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):

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Customer list amortization expense for the three months ended June 30, 2004 and 2003 was approximately $4.6 million and $5.1 million, respectively. Customer list amortization expense for the six months ended June 30, 2004 and 2003 was approximately $9.2 million and $10.3 million, respectively. Customer list amortization expense is estimated to be approximately $9.2 million for the six months ending December 31, 2004, $18.5 million per year in 2005 through 2006, $8.4 million in 2007 and $2.6 million in 2008.

Changes in carrying amount of goodwill and licenses for the six months ended June 30, 2004 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 No. 02-07 (“EITF No. 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 start-up model assumptions, 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.

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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 revolving credit agreement.

Credit Agreement – As of June 30, 2004, we have $60 million in undrawn availability under our revolving credit agreement, which replaced our former credit agreement. The credit agreement is subject to various covenants, including the ratio of senior secured indebtedness to annualized operating cash flow (as defined in the credit agreement), the ratio of total indebtedness to annualized operating cash, and the ratio of annualized operating cash flow to interest expense. Although the credit agreement financial covenants are not applicable unless we draw against the credit facility, we were in compliance with all financial covenants at June 30, 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 March 15, 2012 (“2012” notes”) and $160 million aggregate principal amount of our senior secured floating rate notes due March 15, 2010 (“2010 notes”). The effective interest rate on the 2010 notes was 6.0% at June 30, 2004. Interest on the 2010 notes is reset quarterly and payable on March 15, June 15, September 15, and December 15 of each year. 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.

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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 ¾% senior subordinated notes due 2010. Interest on the 9 ¾% senior subordinated notes is payable semi-annually on January 15 and July 15. The 9 ¾% 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 on the senior exchangeable preferred stock in:

	•		August 2003,
	•		November 2003,
	•		February 2004,
	•		May 2004, and
	•		August 2004.

We accrued the senior exchangeable preferred undeclared dividends by increasing the carrying amount of the senior exchangeable preferred. At June 30, 2004, we had accrued $26.5 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 six months ended June 30, 2004, we repurchased 57,750 shares of our 11 3/8% senior exchangeable preferred stock, for $49.4 million. These shares had accrued $6.6 million in unpaid dividends. The corresponding $15.3 million gain on redemption of preferred shares, was recorded as a reduction of interest expense.

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 affected class of 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.

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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 under our previous credit agreement. Changes in the fair values of those derivative instruments were recorded 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 repayment of our former credit facility in March 2004, we terminated our two remaining interest rate swaps, which had an aggregate 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 market value, with related changes in fair market value included in the statement of operations, and not accounted for as a hedge under SFAS No. 133.

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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.

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8) NET INTEREST EXPENSE

Components of interest expense are as follows:

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

BUSINESS OVERVIEW

We are a wireless communications service provider focusing primarily on rural markets in the United States. Our operating regions include portions of five states in the Northeast, two states in the Northwest, four states in the Midwest, and three states in the South. Within each of our four regions, we have deployed a strong local sales and customer service presence in the communities we serve, which we believe provides us with a substantial competitive advantage, particularly when coupled with the comprehensive coverage of our network. Our marketed networks covered a total population of approximately 6.3 million POPs and served approximately 662,000 voice customers, excluding wholesale customers, as of June 30, 2004.

In addition, we believe our market characteristics, network quality, and the lower number of competitors in our markets relative to more urban markets make us an attractive roaming partner for other wireless communications service providers. We have preferred roaming relationships with AT&T Wireless, Inc. (“AWE”), Cingular Wireless, LLC, T-Mobile, and Verizon Wireless in our various regions. We began a next generation network build-out in late 2003, which we expect to be substantially complete in 2005.

We also own PCS licenses that cover a total population of 300,000 in our Midwest region and 1.2 million in our Northeast region. Our networks in these areas enable our customers and those of our roaming partners to use our service. We do not yet directly market our services in these areas.

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.

Summary of Second Quarter Operating Results

Our second quarter operating highlights reflect progress on our next generation network buildouts, transition of the acquired AWE operations in our South Region, wireless number portability compliance, ETC certification in Oregon, and additional repurchases of senior preferred stock.

Service revenue increased 4.5% to $95.0 million. Our service revenue increase would likely have been greater if not for the net loss of 21,000 customers in the AWE property swap. LSR increased to $47 for the second quarter of 2004 as compared with $44 last year.

Our total customers increased to 741,507 at June 30, 2004 as compared to 739,015 at June 30, 2003, primarily due to our marketing efforts over the past 12 months, partially offset by the loss of 35,091 customers in the transfer of Oregon RSA 4 to AWE on March 1, 2004. As part of the completed property exchange, we received from AWE operations in Alabama and Mississippi, including approximately 13,837 customers. In the six months ended June 30, 2004, our total customers decreased by approximately 14,000, excluding wholesale.

Roaming revenue for the second quarter of 2004 was $26.3 million as compared to $31.8 million in the second quarter of 2003. We expected lower roaming revenue this year primarily because of the Oregon 4 property swap. During the 2nd quarter of 2003, Oregon 4 provided approximately $4.3 million in roaming revenue. Also contributing to the decline in roaming revenue, our outcollect roaming yield for the quarter was $0.16 as compared to $0.21 last year. We expect outcollect roaming revenues for all of 2004 to be in the $110 million range as compared to actual results of $131.9 million in 2003.

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In addition, we believe the migration of AT&T and Cingular’s customer bases to GSM has accelerated, which is challenging us to complete our GSM networks as quickly as we can to meet demand from their customers. Currently over one-third of all of our cell sites have next generation technology. Based on the experience of other wireless carriers, we may encounter technical difficulties and expense in migrating our customers to the new technology, the extent of which we cannot predict. We believe, the accelerated transition by our national roaming partners to next generation handsets also negatively impacted roaming revenue during the three and six months end June 30, 2004.

We continue to expect capital spending for 2004 to be approximately $100 million range as compared in 2003.

During the quarter, we repurchased 42,750 shares of our 11 3/8% senior exchangeable preferred stock for $36.0 million, resulting in a $12.1 million gain on redemption of preferred shares.

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 and in the first quarter of 2004, we also included the depreciation of the capitalized cost of handsets leased to customers.

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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 secured notes
	•		Interest expense on the senior subordinated notes
	•		Interest expense on senior notes
	•		Amortization of debt issuance costs
	•		Early extinguishment of debt issuance costs
	•		Dividends on senior and junior exchangeable preferred stock after June 30, 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 86.3%. 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 10.7% of our total customer base. Our prepaid customers account for 3.0% of our customer base.

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 certain critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Our critical accounting policies and estimates include our unbilled services revenues; allowances for doubtful accounts; the estimates used in determining the useful lives and valuation allowances of our property, plant, and equipment; fair values and related impairments of property, plant, and equipment, goodwill, licensing costs, and investments in and advances to unconsolidated subsidiaries; and legal and tax contingencies. For a detailed discussion of our critical accounting policies and estimates please refer to our Annual Report on Form 10-K for the year ended December 31, 2003. There were no material changes in the application of our critical accounting policies and estimates subsequent to the report.

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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.

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(1)

Reflects 2000 U.S. Census Bureau data updated for December 2002.

(2)

Represents the ratio of wireless voice customers, excluding wholesale customers, at the end of the period to population served (“POPs”).

(3)

Determined for each period by dividing total postpaid wireless voice customers discontinuing service during such period by the average postpaid wireless voice customers for such period (customers at the beginning of the period plus customers at the end of the period, divided by two), dividing that result by the number of months in the period, and subtracting such result from one.

(4)

Determined for each period by dividing service revenue (not including pass-through regulatory fees) and roaming revenue by the monthly average postpaid customers for such period.

(5)

Determined for each period by dividing service revenue (not including pass-through regulatory fees) by the monthly average postpaid customers for such period.

(6)

Determined for each period by dividing selling and marketing expenses, net costs of equipment sales, and depreciation of rental telephone equipment by the gross postpaid wireless voice customers added during such period.

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Three months ended June 30, 2004 and 2003

Revenue

Operating Revenue:

Service Revenue. Service revenue growth for the three months ended June 30, 2004, reflects additional customers in existing markets together with Universal Service Fund (“USF”) support subsidies increasing to $8.6 million as compared to $2.5 million for the three months ended June 30 2003. Service revenue was also impacted by the 21,254 net customer decrease resulting from the AWE property swap completed on March 1, 2004. For the three months ended June 30, 2004, LSR increased to $47 as compared to $44 for the three months ended June 30, 2003.

We became eligible to receive, but did not record, State of Minnesota USF support during the three months ended March 31, 2004, because we did not have adequate experience as to the amount and timing of these funds. In June 2004, we received and recorded Minnesota USF payments of $3.7 million, of which approximately $1.6 million related to first quarter operations. We expect total USF subsidies in the low $20 million range for all of 2004. Our customer USF pass-through charges were $2.4 million during the three months ended June 30, 2004 as compared to $2.5 million during the three months ended June 30, 2003.

Customers. Our total customers increased to 741,507 at June 30, 2004 as compared to 739,015 at June 30, 2003, primarily due to our marketing efforts over the past 12 months, partially offset by the transfer of 35,091 Oregon RSA 4 customers to AWE on March 1, 2004. As part of the completed property exchange, we received from AWE operations in Alabama and Mississippi, including approximately 13,837 customers. Wireless Alliance accounted for 15,255 of our total customers at June 30, 2004.

During the three months ended June 30, 2004, postpaid retention was 98.2% as compared to 98.4% in the three months ended June 30, 2003. Total customer net adds were 8,144 in the second quarter of 2004 as compared to 10,309 in the second quarter of 2003. The implementation of wireless number portability has not had a significant impact on our customer base.

Roaming Revenue. The 17.4% 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 a decline in outcollect yield for the three months ended June 30, 2004 to $0.16 per minute as compared to $0.21 per minute in 2003. We expect outcollect roaming yield for all of 2004 to be approximately $0.17.

During the three months ended June 30, 2003, Oregon 4 provided approximately $4.3 million in roaming revenue. For the full year of 2003, the Oregon 4 service area generated approximately $15 million of roaming revenue most of which will not be replaced by our revenues in our new South territories in 2004.

Also impacting roaming revenues during the three months ended June 30, 2004 is the accelerated transition by our national roaming partners to next generation handsets. Since our next-generation networks are not fully completed, we believe we may have missed opportunities for roaming minutes.

We expect outcollect roaming revenues for 2004 to be in the $110 million range.

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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.

Equipment Revenue. Equipment revenue increased 20.6% to $5.3 million in the three months ended June 30, 2004 as compared to $4.4 million in three months ended June 30, 2003. Primarily contributing to increased equipment revenue was the adoption of Emerging Issues Task Force EITF No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF No. 00-21”), which was effective for us, prospectively, on July 1, 2003, and increased equipment revenue by $774,000 for the three months ended June 30, 2004. Also contributing to the equipment revenue increase during the three months ended June 30, 2004 was equipment reselling and phone and accessory sales increasing to $271,000 and $4.3 million as compared to $240,000 and $4.2 million, respectively, during the three months ended June 30, 2003.

Operating Expenses