e10vq

Actual Customer List Amortization

(in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

$1,766

$7,775

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

for the quarterly period ended September 30, 2007.


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

for the transition period from to .

Commission File Number 0-27416

RURAL CELLULAR CORPORATION

(Exact name of registrant as specified in its charter)


Minnesota		41-1693295
*(State or other jurisdiction of incorporation or organization)*		*(I.R.S. Employer Identification No.)*

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 þ NO o

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

Large accelerated file o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES NO þ

Number of shares of common stock outstanding as of the close of business on November 5, 2007.


Class A		15,427,686
Class B		237,120

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)


	September 30,		December 31,
(In thousands)	2007		2006
CURRENT ASSETS:
Cash and cash equivalents	$	89,324	$	72,495
Short-term investments		—		110,716
Accounts receivable, less allowance for doubtful accounts of $3,083 and $2,676		78,932		62,592
Inventories		11,780		11,366
Other current assets		6,216		4,265

Total current assets		186,252		261,434


PROPERTY AND EQUIPMENT, net		212,550		211,978

LICENSES AND OTHER ASSETS:
Licenses, net		536,613		524,713
Goodwill, net		359,878		348,684
Customer lists, net		8,960		10,734
Deferred debt issuance costs, net		19,629		21,910
Other assets, net		4,569		5,195

Total licenses and other assets		929,649		911,236

	$	1,328,451	$	1,384,648

LIABILITIES AND SHAREHOLDERS’ DEFICIT
(Unaudited)


	September 30,			December 31,
(in thousands, except per share data)	2007			2006
CURRENT LIABILITIES:
Accounts payable	$	48,217		$	38,580
Advance billings and customer deposits		13,887			12,031
Accrued interest		14,180			42,784
Other accrued expenses		11,988			7,832

Total current liabilities		88,272			101,227
LONG-TERM LIABILITIES		1,834,832			1,862,919

Total liabilities		1,923,104			1,964,146


REDEEMABLE PREFERRED STOCK		197,406			185,658

SHAREHOLDERS’ DEFICIT:
Class A common stock; $.01 par value; 200,000 shares authorized, 15,414 and 15,048 outstanding		154			151
Class B common stock; $.01 par value; 10,000 shares authorized, 237 and 398 outstanding		2			4
Additional paid-in capital		231,458			228,149
Accumulated deficit		(1,023,673	)		(993,460	)

Total shareholders’ deficit		(792,059	)		(765,156	)

	$	1,328,451		$	1,384,648

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

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months September 30,						Nine Months September 30,
(in thousands, except per share data)	2007			2006			2007			2006
REVENUE:
Service	$	110,142		$	95,979		$	315,461		$	288,888
Roaming		54,520			46,952			134,047			114,418
Equipment		7,267			5,842			20,335			18,797

Total revenue		171,929			148,773			469,843			422,103

OPERATING EXPENSES:
Network costs, excluding depreciation		44,406			35,174			119,131			102,343
Cost of equipment sales		15,334			14,609			42,300			40,858
Selling, general and administrative		44,787			37,214			118,810			108,171
Depreciation and amortization		18,066			32,069			60,297			92,127

Total operating expenses		122,593			119,066			340,538			343,499

OPERATING INCOME		49,336			29,707			129,305			78,604
OTHER INCOME (EXPENSE):
Interest expense		(43,863	)		(47,668	)		(153,229	)		(147,631	)
Interest and dividend income		686			2,077			5,458			5,827
Other		(42	)		237			(256	)		441

Other expense, net		(43,219	)		(45,354	)		(148,027	)		(141,363	)

INCOME (LOSS) BEFORE INCOME TAX BENEFIT		6,117			(15,647	)		(18,722	)		(62,759	)

INCOME TAX BENEFIT		(89	)		(104	)		(257	)		(313	)

NET INCOME (LOSS)		6,206			(15,543	)		(18,465	)		(62,446	)

PREFERRED STOCK DIVIDEND		(4,034	)		(3,734	)		(11,748	)		(10,870	)

INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	2,172		$	(19,277	)	$	(30,213	)	$	(73,316	)

WEIGHTED AVERAGE SHARES USED TO COMPUTE INCOME (LOSS) PER SHARE:

Basic		15,480			14,090			15,398			14,048

Diluted		16,660			14,090			15,398			14,048


NET INCOME (LOSS) PER BASIC SHARE	$	0.14		$	(1.37	)	$	(1.96	)	$	(5.22	)

NET INCOME (LOSS) PER DILUTED SHARE	$	0.13		$	(1.37	)	$	(1.96	)	$	(5.22	)

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

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
(in thousands)	2007			2006
OPERATING ACTIVITIES:
Net loss	$	(18,465	)	$	(62,446	)
Adjustments to reconcile to net cash (used in) provided by operating activities:
Depreciation and customer list amortization		60,297			92,127
Loss on write-off of debt issuance costs		3,256			2,837
Mark-to-market adjustments – financial instruments		148			(178	)
Net gain on repurchase of senior exchangeable preferred stock		—			(319	)
Stock-based compensation		2,321			947
Deferred income taxes		(257	)		(313	)
Amortization of debt issuance costs		3,837			4,038
Amortization of discount on investments		(1,260	)		(2,117	)
Other		(1,463	)		(430	)
Change in other operating elements:
Accounts receivable		(9,795	)		4,426
Inventories		146			799
Other current assets		(1,911	)		134
Accounts payable		8,319			(10,766	)
Advance billings and customer deposits		1,713			(29	)
Accrued senior and junior exchangeable preferred stock dividends		(38,551	)		33,450
Accrued interest		(28,604	)		(22,373	)
Other accrued expenses		3,891			(580	)

Net cash (used in) provided by operating activities		(16,378	)		39,207

INVESTING ACTIVITIES:
Purchases of property and equipment		(37,066	)		(35,336	)
Acquisition of wireless properties, net of cash		(49,067	)		—
Purchases of short-term investments		(20,497	)		(127,751	)
Maturities of short-term investments		132,473			117,100
Proceeds from sale of property and equipment		52			2,688
Other		615			(112	)

Net cash provided by (used in) investing activities		26,510			(43,411	)

FINANCING ACTIVITIES:
Proceeds from issuance of common stock related to employee stock purchase plan and stock options		1,998			2,059
Proceeds from long-term debt under the credit facility		58,000			—
Repayments of long-term debt under the credit facility		(58,000	)		—
Proceeds from issuance of 8 ¹/4% senior secured notes		—			166,600
Proceeds from issuance of floating rate senior subordinated notes		425,000			—
Redemption of senior secured floating rate notes		—			(160,000	)
Redemption of senior subordinated notes		(300,000	)		—
Redemption of senior subordinated debentures		(115,488	)		—
Repurchases of senior exchangeable preferred stock		—			(11,605	)
Payments of debt issuance costs		(4,813	)		(3,113	)

Net cash provided by (used in) financing activities		6,697			(6,059	)

NET INCREASE (DECREASE) IN CASH		16,829			(10,263	)
CASH AND CASH EQUIVALENTS, at beginning of year		72,495			86,822

CASH AND CASH EQUIVALENTS, at end of period	$	89,324		$	76,559

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

RURAL CELLULAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1) RCC MERGER AGREEMENT WITH VERIZON

On July 29, 2007, Rural Cellular Corporation (“RCC”), Verizon Wireless (“Verizon”) and Airtouch Cellular entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which an indirect wholly-owned subsidiary of Verizon will merge with and into Rural Cellular Corporation (the “Merger”), with Rural Cellular Corporation continuing as the surviving corporation and becoming a subsidiary of Verizon. At the effective time of the Merger, Verizon will assume RCC’s debt. Additionally, each issued and outstanding share of RCC’s Class A and Class B common stock will be cancelled and converted into the right to receive $45.00 in cash, without interest.

RCC shareholders voted to approve the merger agreement providing for the acquisition of Rural Cellular Corporation by Verizon Wireless for approximately $2.67 billion in cash and assumed debt on October 4, 2007.

The consummation of the Merger is still subject to receipt of necessary approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. On September 28, 2007, RCC and Verizon Wireless received a request for additional information from the Antitrust Division of the U.S. Department of Justice (“DOJ”) regarding the proposed merger. The information request, also known as a “second request,” was issued under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”).

The Merger Agreement contains certain termination rights for both Verizon and Rural Cellular Corporation and further provides that, upon termination of the Merger Agreement under specified circumstances, Rural Cellular Corporation may be required to pay Verizon a termination fee of $55 million. We currently anticipate that the merger will be completed in the first half of 2008.

2) 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 nine months ended September 30, 2007 and 2006 have been prepared by management. In the opinion of management, only normal recurring adjustments necessary to fairly present 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, 2006. The results of operations for the three and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the operating results for the full fiscal year or for any other interim periods.

3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

For a detailed discussion of our significant accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes in the application of our significant accounting policies except as described below. Applications of these policies in preparing the third quarter 10-Q require that estimates be made by management to fairly present the financial position of RCC.

Recently Issued Accounting Pronouncements

Measuring Fair Value. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS No. 157”), Fair Value Measurements. This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. SFAS No. 157 is effective for RCC starting in fiscal 2008. We have not determined the impact, if any, the adoption of this statement will have on our consolidated financial statements.

The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS No. 159 on our consolidated financial position and results of operations.

Recently Adopted Accounting Pronouncements

Uncertainty in Income Taxes. On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

We file U.S. federal and state income tax returns. Because of our net operating loss (NOL) carryforwards, we are subject to U.S. federal, state and local income tax examinations by tax authorities for years beginning 1992 and forward. There was no cumulative effect related to adopting FIN 48. However, certain amounts have been reclassified in the statement of financial position in order to comply with the requirements of the statement.

As of January 1, 2007, we reduced our deferred tax assets and corresponding valuation allowance for $5,425,000 of unrecognized tax benefits related to various state income tax matters. None of this amount, if recognized, would impact our effective tax rate. During the nine months ended September 30, 2007, our total liability for unrecognized tax benefits did not materially increase or decrease.

Our policy is to record penalties and interest related to unrecognized tax benefits in income tax expense. As of January 1, 2007, we have not recorded penalties or interest.

We do not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

Sales Taxes Collected From Customers and Remitted to Governmental Authorities. In March 2006, the FASB Emerging Issues Task Force issued Issue 06-03 (“EITF 06-03”), How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. A consensus was reached that entities may adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes. The guidance is effective for periods beginning after December 15, 2006. We present sales net of sales taxes. Our adoption of EITF 06-03 on January 1, 2007 did not have an effect on our policy related to sales taxes and, therefore, did not have an effect on our consolidated financial statements.

4) ACQUISITIONS:

On April 3, 2007, we completed the $48.2 million purchase from Alltel Communications, Inc. (“Alltel”) of certain southern Minnesota wireless markets. We used our existing cash on hand to finance the purchase. Under the agreement, RCC would receive network assets and 25 MHz in the A-block 850 MHz licenses covering Minnesota RSAs 7, 8, 9, and 10. . The southern Minnesota service area is adjacent to RCC’s northern Minnesota service area and includes approximately 80 cell sites and 33 distribution points. These markets include 28 counties in southern Minnesota, and as of April 3, 2007, supported a postpaid customer base of approximately 34,000. The acquired RSAs utilize CDMA technology consistent with our northern Minnesota networks. With these new properties, the population covered by our Midwest territory marketed networks increased by approximately 621,000 to 2.1 million.

A portion of the purchase price for the southern Minnesota wireless markets was allocated to the net assets based on their estimated fair values and the excess was recorded as licenses, goodwill, and customer lists. These purchase price allocations have been completed on a preliminary basis, subject to adjustment should new or additional facts about the business become known.

5) ACCOUNTING FOR SHARE BASED PAYMENTS:

Stock-based compensation in our financial statements was recognized for all stock-based compensation expense arrangements, including employee and non-employee stock options granted after January 1, 2006 and all stock-based compensation arrangements granted prior to January 1, 2006, but remaining unvested as of such date, commencing with the quarter ended March 31, 2006. Accordingly, for the three and nine months ended September 30, 2007, we recognized stock-based compensation of $583,000 and $2.3 million, respectively.

We use the Black-Scholes option pricing model as our method of valuation for stock-based awards. Our determination of the fair value of stock-based awards on the date of grant is affected by the stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected life of the award, its expected stock price volatility over the term of the award, and actual and projected exercise behaviors. Although the fair value of stock-based awards is determined in accordance with SFAS No. 123(R) and SAB 107, the Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

The following table summarizes plan activity under our various stock compensation plans from December 31, 2006 through September 30, 2007:


	2006 Omnibus
	Incentive and			Employee Stock
	Prior Pxlans			Purchase Plan
Shares available for issuance at December 31, 2006		1,111,909			138,374
Options granted		(19,634	)		—
Non-vested shares awarded		(75,802	)		—
Options forfeited		57,490			—
Non-vested shares forfeited		23,693			—

Shares available for issuance at September 30, 2007		1,097,656			138,374

Non-Vested Shares

Under the 1995 Stock Compensation Plan and the 2006 Omnibus Incentive Plan, RCC has entered into non-vested stock agreements with certain key employees, covering the issuance of Class A common stock. These awards are considered non-vested shares under SFAS No. 123(R), as defined. If the relevant performance measures are achieved, the vesting of the awards is subject only to the remaining term of the grantee’s employment. Non-vested shares awarded to nonemployee directors include service conditions. Management has accrued compensation cost based on expectations of whether the conditions as described will be met and reviews these expectations quarterly.

For the nine months ended September 30, 2007, transactions in non-vested shares were as follows:


				Weighted Average
	Shares			Fair Value
Non-vested shares outstanding December 31, 2006		248,346		$	11.09

Granted		75,802			19.86
Vested		(998	)		9.51
Forfeited		(23,693	)		13.63

Non-vested shares outstanding, September 30, 2007		299,457		$	13.12

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, employees who satisfy certain length of service and other criteria are permitted to purchase shares of Class A common stock at 85% of the fair market value of the Class A common stock on the first business day of January or the last business day of December of each year, whichever is lower. The number of shares authorized to be issued under the Employee Stock Purchase Plan is 750,000. Each year, employees participate in this plan by making contributions through payroll deduction. The shares under the Employee Stock Purchase Plan are expensed during the year the employee makes the contribution.

Stock Options

Stock options granted to employees typically vest ratably over five years and have a maximum term of ten years. Stock options granted to directors typically vest in full after one year and have a maximum term of six years. The expense related to these options is recorded on a straight-line basis over the vesting period.

We used the following assumptions to estimate the fair value of stock options granted during the nine months ended September 30, 2007 and 2006:


	2006 Omnibus Incentive Plan Options and Prior
	Plans
	Nine Months Ended September 30,
	2007			2006
Average expected term (years)		6.5			6.5
Expected volatility		80.00	%		82.00	%
Risk-free interest rate (range)		4.88	%		5.17	%
Expected dividend yield		—			—

Information related to stock options issued under various plans is as follows:


	Nine Months Ended September 30, 2007
				Weighted Average
	Shares			Exercise Price
Outstanding, at December 31, 2006		1,653,004		$	14.77

Granted		19,634			30.81
Exercised		(177,822	)		8.97
Forfeited		(57,490	)		29.88

Outstanding, at September 30, 2007		1,437,326		$	15.15

Exercisable, at September 30, 2007		1,283,024		$	15.69


Weighted average fair value of options granted		—		$	12.49

6) LICENSES AND OTHER INTANGIBLE ASSETS:

Licenses consist of the value assigned to our personal communications services (“PCS”) licenses and cellular licenses. 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 our only intangible asset with a definitive useful life; all others are considered to have indefinite useful lives.


	Projected
Year ended	Customer List Amortization
December 31,	(in thousands)
2007	$	9,536
2008	$	3,273
2009	$	1,226
2010	$	1,200
2011	$	1,200
2012	$	300

We review goodwill and other indefinite-lived intangible assets for impairment based on the requirements of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). 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 developments, 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 view 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.

In accordance with Emerging Issues Task Force (“EITF”) No. 02-7 (“EITF 02-7”), Unit of Accounting for Testing of Impairment of Indefinite-Lived Intangible Assets, impairment tests for indefinite-lived intangible assets, including 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. 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. These inputs are included in determining free cash flows of the reporting unit, using assumptions of weighted average costs of capital and the long-term rate of growth for each reporting unit. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. If any of the assumptions were to change, FCC licenses may become impaired. There was no impairment charge in the three and nine months ended September 30, 2007 and 2006.

7) LONG-TERM LIABILITIES:

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


	September 30,			December 31,
	2007			2006
Line of credit	$	58,000		$	58,000
8 ¹/4% senior secured notes (due 2012)		510,000			510,000
9 7/8% senior notes (due 2010)		325,000			325,000
9 ³/4% senior subordinated notes		—			300,000
Senior subordinated floating rate notes (due 2012)		175,000			175,000
Senior subordinated floating rate notes (due 2013)		425,000			—
11 3/8% senior exchangeable preferred stock		—			115,488
Accrued dividends on 11 3/8% senior exchangeable preferred stock		—			34,611
12 ¹/4% junior exchangeable preferred stock (due 2011)		255,558			255,558
Accrued dividends on 12 ¹/4% junior exchangeable preferred stock		60,977			64,917
Premium on senior secured notes offering		4,604			5,572
Discount on senior subordinated floating rate notes		(1,729	)		(1,917	)
Deferred tax liability		12,829			13,143
Asset retirement obligations and other		9,593			7,547

	$	1,834,832		$	1,862,919

Credit Facility – In April 2007, we negotiated an amendment to our revolving credit facility explicitly permitting the payment of senior and junior exchangeable preferred stock dividends and replacing all financial covenant ratios with one new senior secured first lien debt covenant. As of September 30, 2007, we were in compliance with covenants under the credit facility and have drawn $58 million of the $60 million initially available.

8 ¹/4% Senior Secured Notes Due 2012 – In March 2004 and May 2006, we issued $510 million aggregate principal amount of 8 1/4% senior secured notes due March 15, 2012 (“2012 notes”).

Interest on the 2012 notes is payable on March 15 and September 15 of each year. After March 15, 2008, we may redeem the 2012 notes, in whole or in part, at prices starting at 104.125% of the principal amount at March 15, 2008, and declining to 102.063% at March 15, 2009 and 100.000% at March 15, 2010, plus accrued and unpaid interest to but excluding the date fixed for redemption.

9 7/8 % Senior Notes - In 2003, RCC issued $325 million principal amount of 9 7/8% senior notes due 2010. Interest is payable on February 1 and August 1 of each year. The notes will mature on February 1, 2010. After August 1, 2007, at our option, we may redeem the 9 7/8% notes at prices starting at 104.938% of the principal amount at August 1, 2007, declining to 102.469% at August 1, 2008 and 100% at August 1, 2009, plus accrued and unpaid interest to but excluding the date fixed for redemption.

Senior Subordinated Floating Rate Notes Due 2012 – In November 2005, we issued $175 million of Senior Subordinated Floating Rate Notes due 2012, which were sold at an original issue discount of $2.2 million, or 1.25%. The effective interest rate at September 30, 2007 was 11.4%. Interest is reset quarterly.

We may redeem any of the Senior Subordinated Floating Rate Notes at any time on or after November 1, 2007, in whole or in part, at prices starting at 102.000% at November 1, 2007, and declining to 101.000% at November 1, 2008 and 100.000% at November 1, 2009, plus accrued and unpaid interest and liquidated damages, if any, up to, but excluding, the date of redemption.

11 3/8% Senior Exchangeable Preferred Stock – On May 15, 2007, we exchanged all outstanding shares of our 11 3/8% Senior Exchangeable Preferred Stock for 11 3/8% Senior Subordinated Debentures, which mature on May 15, 2010.

11 3/8% Senior Subordinated Debentures – On May 23, 2007 we announced our intention to redeem our 11 3/8% Senior Subordinated Debentures, of which the aggregate principal amount of the exchange debentures totaled $115,488,000.

Senior Subordinated Floating Rate Notes Due 2013 – On May 25, 2007 we issued $425 million aggregate principal amount of Senior Subordinated Floating Rate Notes due September 1, 2013 (“2013 notes”) and used the proceeds to redeem our 11 3/8% Senior Subordinated Debentures and our 9 3/4% Senior Subordinated Notes. The 2013 notes mature on September 1, 2013. Interest on the 2013 notes reset quarterly at a rate equal to the three month LIBOR, plus 3.00%, and is payable on March 1, September 1, September 1 and December 1 of each year, commencing on September 1, 2007.

The 2013 notes are redeemable at our option beginning September 1, 2008, at 102.000% of principal, plus accrued and unpaid interest, declining to 101.000% at September 1, 2009, and 100.000% at September 1, 2010. Prior to September 1, 2008, we may, at our option, redeem up to 35% of the original aggregate principal amount of the 2013 notes with the net cash proceeds of certain sales of equity securities at 100.000% of principal, plus accrued and unpaid interest, if any and to the extent that, after such redemption, at least 65% of the aggregate principal amount of the 2013 notes remains outstanding. In addition, prior to September 1, 2008, we may, at our option, redeem some or all of the 2013 notes at an established “make whole” price. The 2013 notes rank junior in right of payment to our existing and future senior indebtedness and rank equally with all of our existing and future senior subordinated indebtedness. As of September 30, 2007, we were in compliance with covenants under the 2013 Notes.

12 1/4% Junior Exchangeable Preferred Stock – Due February 15, 2011. Dividends on the junior exchangeable preferred stock are cumulative, are payable quarterly, and are to be paid on any dividend payment date occurring after February 15, 2005 in cash. We may redeem the junior exchangeable preferred stock in whole or in part, at any time, at a redemption price equal to 103.063% of the liquidation preference, declining to 101.531% at February 15, 2008, and 100.000% at February 15, 2009, plus accumulated and unpaid dividends, if any, to but excluding the redemption date.

Upon the occurrence of a change in control, as defined in the certificate of designation, each holder of shares of junior exchangeable preferred stock has the right to have such shares repurchased. The acquiring company, within 30 days following the date of the consummation of a transaction resulting in a change of control, must mail to each holder an offer to purchase all outstanding shares at a purchase price equal to 101.000% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to but excluding the purchase date.

RCC’s junior exchangeable preferred securities are classified as Long-Term Liabilities, since the securities are mandatorily redeemable and are exchangeable at our option for debentures of like terms. The dividend expense related to this instrument is classified as interest expense.

Until May 15, 2007, we had not paid any junior exchangeable preferred stock dividends in cash and had accrued the undeclared dividends by increasing the carrying amount of the junior exchangeable preferred stock. On May 15, 2007, we paid four dividends on the junior exchangeable preferred stock, representing the quarterly dividends payable on August 15, 2006, November 15, 2006, February 15, 2007, and May 15, 2007. The dividend payments totaled approximately $128.24 per share, including accrued interest. The aggregate total dividends, which totaled approximately $32.8 million, were paid from existing cash. At September 30, 2007, we have accrued $61.0 million in undeclared dividends with respect to our junior exchangeable preferred stock, representing six quarters in arrears, which will be payable at the mandatory redemption date, if not sooner declared and paid.

The shares of the junior exchangeable preferred stock are non-voting, except as otherwise required by law and as provided in the related Certificate of Designation. The Certificate of Designation provides that at any time dividends on the outstanding junior 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 junior 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 RCC’s Board of Directors. The voting rights continue until such time as all dividends in arrears on the affected class of exchangeable preferred stock are paid in full, 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 Certificate of Designation. While a Voting Rights Triggering Event exists, certain terms of our junior exchangeable preferred stock, if enforceable, may prohibit incurrence of additional indebtedness.

Since we have been six or more dividend payments in arrears, and, as of September 30, 2007, have not paid in full all dividends in arrears, the holders continue to have the right to elect two directors to our board.

8) REDEEMABLE PREFERRED STOCK:

In April 2000, we issued 110,000 shares of Class M Voting Convertible Preferred stock. The security has a liquidation preference of $1,000 per share and will be redeemed of its total liquidation preference plus accumulated and unpaid dividends. Based on SFAS No. 150 guidelines, RCC’s Class M Preferred Stock does not meet the characteristics of a liability and is presented between liability and equity on the RCC’s balance sheet.

Class M Voting Convertible Preferred security balance sheet reconciliation (in thousands):


	As of
	September 30, 2007
Preferred securities originally issued	$	110,000
Accrued dividends		89,154
Unamortized issuance costs		(1,748	)

	$	197,406

Dividends on the Class M convertible preferred stock are compounded quarterly, accrue at 8% per annum, and are payable upon redemption of the stock or upon liquidation of RCC. The Class M convertible preferred stock is convertible into our Class A common stock at $46.71 per share. 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. 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 Class M convertible preferred stock, is redeemable at 100% of its total liquidation preference plus accumulated and unpaid dividends at April 3, 2012. The Class M convertible preferred stock can be redeemed at our option if the closing price of the Class A common stock equals or exceeds 175% of $46.71 for a period of 30 consecutive days. The holders of the Class M convertible preferred stock also have the right to require us to buy back the Class M preferred stock under other circumstances, such as the consumption of a change in control of RCC.

9) NET INTEREST EXPENSE

Components of interest expense are as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in thousands)	2007		2006			2007		2006
Interest on credit facility	$	629	$	1,068		$	2,267	$	3,330
Interest on senior secured notes		10,201		10,207			30,588		32,661
Interest on senior notes		8,023		8,023			24,070		24,070
Interest on senior subordinated notes		13,991		12,344			43,099		36,324
Amortization of debt issuance costs		1,192		1,290			3,837		4,038
Write-off of debt issuance costs		—		42			3,256		2,837
Call premium on early redemption of notes		—		—			9,750		3,200
Senior and junior preferred stock dividends		9,406		14,193			35,932		41,765
Effect of derivative instruments		314		548			148		(178	)
Gain on repurchase and exchange of senior exchangeable preferred stock		—		(146	)		—		(319	)
Other		107		99			282		(97)

	$	43,863	$	47,668		$	153,229	$	147,631

10) GUARANTOR/NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL INFORMATION

RCC’s obligations under the 8 1/4% Senior Secured Notes due 2012 are senior secured obligations and are fully and unconditionally guaranteed on a senior, secured, second-priority basis by certain of RCC’s subsidiaries. Wireless Alliance, LLC (a 70% owned joint venture which is consolidated in our financial statements) is not a guarantor of the notes.

We account for our investment in subsidiaries using the equity method for purposes of the supplemental consolidating presentation. The principal eliminating entries eliminate investments in subsidiaries and inter-company balances and transactions. For financial reporting purposes, each subsidiary computes income tax expense (benefit), income taxes payable, and deferred income taxes on a separate company basis as if they filed separate federal and state income tax returns. The differences between the separate company basis and consolidated income taxes is then adjusted in the elimination column of the condensed consolidating financial information.

THE FOLLOWING CONSOLIDATING FINANCIAL INFORMATION AS OF THE DATES AND FOR THE PERIODS INDICATED OF RURAL CELLULAR CORPORATION (THE PARENT), ITS GUARANTOR SUBSIDIARIES, AND ITS NON-GUARANTOR SUBSIDIARY REFLECTS ALL INTER-COMPANY REVENUE AND EXPENSE.

Balance Sheet Information as of September 30, 2007 (unaudited)
(In thousands, except per share data):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
CURRENT ASSETS:
Cash and cash equivalents	$	85,598		$	3,694		$	32		$	—		$	89,324
Accounts receivable, less allowance for doubtful accounts		38,938			39,506			488			—			78,932
Inventories		4,601			7,064			115			—			11,780
Other current assets		3,103			3,024			89			—			6,216
Current inter-company receivable		(6,762	)		19,657			—			(12,895	)		—

Total current assets		125,478			72,945			724			(12,895	)		186,252

PROPERTY AND EQUIPMENT, net		56,863			149,618			6,069			—			212,550
LICENSES AND OTHER ASSETS:
Licenses, net		—			527,934			8,679			—			536,613
Goodwill, net		14,343			345,535			—			—			359,878
Customer lists, net		5,814			3,146			—			—			8,960
Deferred debt issuance costs, net		19,629			—			—			—			19,629
Investment in consolidated subsidiaries		1,088,035			—			—			(1,088,035	)		—
Other assets, net		2,446			7,980			1,696			(7,553	)		4,569

Total licenses and other assets		1,130,267			884,595			10,375			(1,095,588	)		929,649

	$	1,312,608		$	1,107,158		$	17,168		$	(1,108,483	)	$	1,328,451


CURRENT LIABILITIES:
Accounts payable	$	34,284		$	13,784		$	149		$	—		$	48,217
Advance billings and customer deposits		2,857			10,770			260			—			13,887
Accrued interest		14,180			—			—			—			14,180
Other accrued expenses		38,162			50,172			44			(76,390	)		11,988
Current inter-company payable		—			12,836			59			(12,895	)		—

Total current liabilities		89,483			87,562			512			(89,285	)		88,272
LONG-TERM LIABILITIES		1,817,778			1,004,691			32,566			(1,020,203	)		1,834,832

Total liabilities		1,907,261			1,092,253			33,078			(1,109,488	)		1,923,104


REDEEMABLE PREFERRED STOCK		197,406			—			—			—			197,406

SHAREHOLDERS’ EQUITY (DEFICIT):
Class A common stock; $.01 par value; 200,000 shares authorized,15,414 outstanding		154			2			—			(2	)		154
Class B common stock; $.01 par value; 10,000 shares authorized, 237 outstanding		2			—			—			—			2

Additional paid-in capital		231,458			844,559			31,679			(876,238	)		231,458

Accumulated earnings (deficit)		(1,023,673	)		(829,656	)		(47,589	)		877,245			(1,023,673	)


Total shareholders’ equity (deficit)		(792,059	)		14,905			(15,910	)		1,005			(792,059	)

	$	1,312,608		$	1,107,158		$	17,168		$	(1,108,483	)	$	1,328,451

Balance Sheet Information as of December 31, 2006
(in thousands, except per share data):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
CURRENT ASSETS:
Cash and cash equivalents	$	69,571		$	2,884		$	40		$	—		$	72,495
Short-term investments		110,716			—			—			—			110,716
Accounts receivable, less allowance for doubtful accounts		26,387			34,610			1,595			—			62,592
Inventories		2,739			8,452			175			—			11,366
Other current assets		1,940			2,263			87			(25	)		4,265
Current inter-company receivable		(4,160	)		18,642			—			(14,482	)		—

Total current assets		207,193			66,851			1,897			(14,507	)		261,434

PROPERTY AND EQUIPMENT, net		41,247			163,519			7,212			—			211,978
LICENSES AND OTHER ASSETS:
Licenses, net		—			516,034			8,679			—			524,713
Goodwill, net		3,151			345,533			—			—			348,684
Customer lists, net		644			10,090			—			—			10,734
Deferred debt issuance costs, net		21,910			—			—			—			21,910
Investment in consolidated subsidiaries		1,088,428			—			—			(1,088,428	)		—
Other assets, net		2,859			11,310			1,922			(10,896	)		5,195

Total licenses and other assets		1,116,992			882,967			10,601			(1,099,324	)		911,236

	$	1,365,432		$	1,113,337		$	19,710		$	(1,113,831	)	$	1,384,648


CURRENT LIABILITIES:
Accounts payable	$	19,203		$	18,880		$	497		$	—		$	38,580
Advance billings and customer deposits		2,527			9,286			218			—			12,031
Accrued interest		42,784			—			—			—			42,784
Other accrued expenses		34,771			49,218			36			(76,193	)		7,832
Current inter-company payable		—			14,481			—			(14,481	)		—

Total current liabilities		99,285			91,865			751			(90,674	)		101,227
LONG-TERM LIABILITIES		1,845,645			1,020,518			33,876			(1,037,120	)		1,862,919

Total liabilities		1,944,930			1,112,383			34,627			(1,127,794	)		1,964,146


REDEEMABLE PREFERRED STOCK		185,658			—			—			—			185,658

SHAREHOLDERS’ EQUITY (DEFICIT):
Class A common stock; $.01 par value; 200,000 shares authorized, 15,048 outstanding		151			2			—			(2	)		151
Class B common stock; $.01 par value; 10,000 shares authorized, 398 outstanding		4			—			—			—			4
Additional paid-in capital		228,149			844,559			31,679			(876,238	)		228,149
Accumulated earnings (deficit)		(993,460	)		(843,607	)		(46,596	)		890,203			(993,460	)

Total shareholders’ equity (deficit)		(765,156	)		954			(14,917	)		13,963			(765,156	)

	$	1,365,432		$	1,113,337		$	19,710		$	(1,113,831	)	$	1,384,648

Statement of Operations Information for the three months ended September 30, 2007
(unaudited) (in thousands):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
REVENUE:
Service	$	38,402		$	71,002		$	1,355		$	(617	)		110,142
Roaming		12,249			41,324			947			—			54,520
Equipment		2,201			4,980			86			—			7,267

Total revenue		52,852			117,306			2,388			(617	)		171,929

OPERATING EXPENSES:
Network costs, excluding depreciation		14,525			29,630			823			(572	)		44,406
Cost of equipment sales		5,516			9,684			134			—			15,334
Selling, general and administrative		28,108			15,857			867			(45	)		44,787
Depreciation and amortization		4,471			13,092			503			—			18,066

Total operating expenses		52,620			68,263			2,327			(617	)		122,593

OPERATING INCOME		232			49,043			61			—			49,336

OTHER INCOME (EXPENSE):
Interest expense		(43,829	)		(23,782	)		(780	)		24,528			(43,863	)
Interest and dividend income		25,177			35			2			(24,528	)		686
Inter-company charges		13,907			(13,907	)		—			—			—
Equity in subsidiaries		10,731			—			—			(10,731	)		—
Other		(12	)		(29	)		(1	)		—			(42	)

Other expense, net		5,974			(37,683	)		(779	)		(10,731	)		(43,219	)

INCOME (LOSS) BEFORE INCOME TAXES		6,206			11,360			(718	)		(10,731	)		6,117

INCOME TAX PROVISION (BENEFIT)		—			800			—			(889	)		(89	)

NET INCOME (LOSS)		6,206			10,560			(718	)		(9,842	)		6,206

PREFERRED STOCK DIVIDEND		(4,034	)		—			—			—			(4,034	)

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	2,172		$	10,560		$	(718	)	$	(9,842	)	$	2,172

Statement of Operations Information for the nine months ended September 30, 2007
(unaudited) (in thousands):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
REVENUE:
Service	$	105,559		$	207,437		$	4,077		$	(1,612	)	$	315,461
Roaming		31,432			98,744			3,871			—			134,047
Equipment		5,322			14,679			334			—			20,335

Total revenue		142,313			320,860			8,282			(1,612	)		469,843

OPERATING EXPENSES:
Network costs, excluding depreciation		37,638			80,710			2,199			(1,416	)		119,131
Cost of equipment sales		12,965			28,806			529			—			42,300
Selling, general and administrative		70,606			45,767			2,633			(196	)		118,810
Depreciation and amortization		17,188			41,576			1,533			—			60,297

Total operating expenses		138,397			196,859			6,894			(1,612	)		340,538

OPERATING INCOME		3,916			124,001			1,388			—			129,305

OTHER INCOME (EXPENSE):
Interest expense		(153,124	)		(73,118	)		(2,377	)		75,390			(153,229	)
Interest and dividend income		80,751			95			2			(75,390	)		5,458
Inter-company charges		34,235			(34,235	)		—			—			—
Equity in subsidiaries		15,790			—			—			(15,790	)		—
Other		(27	)		(228	)		(1	)		—			(256	)

Other expense, net		(22,375	)		(107,486	)		(2,376	)		(15,790	)		(148,027	)

INCOME (LOSS) BEFORE INCOME TAXES		(18,459	)		16,515			(988	)		(15,790	)		(18,722	)

INCOME TAX PROVISION (BENEFIT)		6			2,564			5			(2,832	)		(257	)

NET INCOME (LOSS)		(18,465	)		13,951			(993	)		(12,958	)		(18,465	)

PREFERRED STOCK DIVIDEND		(11,748	)		—			—			—			(11,748	)

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	(30,213	)	$	13,951		$	(993	)	$	(12,958	)	$	(30,213	)

Statement of Operations Information for the three months ended September 30, 2006
(unaudited) (in thousands):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
REVENUE:
Service	$	27,955		$	66,978		$	1,501		$	(455	)	$	95,979
Roaming		12,095			33,370			1,487			—			46,952
Equipment		1,410			4,328			104			—			5,842

Total revenue		41,460			104,676			3,092			(455	)		148,773


OPERATING EXPENSES:
Network costs, excluding depreciation		8,598			26,074			840			(338	)		35,174
Cost of equipment sales		3,598			10,768			243			—			14,609
Selling, general and administrative		16,941			19,495			895			(117	)		37,214
Depreciation and amortization		5,470			25,961			638			—			32,069

Total operating expenses		34,607			82,298			2,616			(455	)		119,066

OPERATING INCOME		6,853			22,378			476			—			29,707


OTHER INCOME (EXPENSE):
Interest expense		(47,600	)		(25,682	)		(843	)		26,457			(47,668	)
Interest and dividend income		28,521			12			1			(26,457	)		2,077
Inter-company charges		4,810			(4,810	)		—			—			—
Equity in subsidiaries		(8,112	)		—			—			8,112			—
Other		(15	)		253			(1	)		—			237

Other expense, net		(22,396	)		(30,227	)		(843	)		8,112			(45,354	)

INCOME (LOSS) BEFORE INCOME TAXES		(15,543	)		(7,849	)		(367	)		8,112			(15,647	)

INCOME TAX PROVISION (BENEFIT)		—			822			—			(926	)		(104	)
NET INCOME (LOSS)		(15,543	)		(8,671	)		(367	)		9,038			(15,543	)

PREFERRED STOCK DIVIDEND		(3,734	)		—			—			—			(3,734	)

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	(19,277	)	$	(8,671	)	$	(367	)	$	9,038		$	(19,277	)

Statement of Operations Information for the nine months ended September 30, 2006
(unaudited) (in thousands):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
REVENUE:
Service	$	80,454		$	205,017		$	4,666		$	(1,249	)	$	288,888
Roaming		27,247			81,746			5,425			—			114,418
Equipment		4,087			14,352			358			—			18,797

Total revenue		111,788			301,115			10,449			(1,249	)		422,103


OPERATING EXPENSES:
Network costs, excluding depreciation		23,517			77,408			2,352			(934	)		102,343
Cost of equipment sales		9,894			30,336			628			—			40,858
Selling, general and administrative		46,620			59,061			2,805			(315	)		108,171
Depreciation and amortization		15,840			74,157			2,130			—			92,127

Total operating expenses		95,871			240,962			7,915			(1,249	)		343,499

OPERATING INCOME		15,917			60,153			2,534			—			78,604

OTHER INCOME (EXPENSE):
Interest expense		(147,529	)		(77,808	)		(2,465	)		80,171			(147,631	)
Interest and dividend income		85,916			81			1			(80,171	)		5,827
Inter-company charges		13,552			(13,552	)		—			—			—
Equity in subsidiaries		(30,337	)		—			—			30,337			—
Other		(13	)		468			(14	)		—			441

Other expense, net		(78,411	)		(90,811	)		(2,478	)		30,337			(141,363	)

INCOME (LOSS) BEFORE INCOME TAXES		(62,494	)		(30,658	)		56			30,337			(62,759	)

INCOME TAX PROVISION (BENEFIT)		(48	)		(12,870	)		—			12,605			(313	)
NET INCOME (LOSS)		(62,446	)		(17,788	)		56			17,732			(62,446	)

PREFERRED STOCK DIVIDEND		(10,870	)		—			—			—			(10,870	)

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	(73,316	)	$	(17,788	)	$	56		$	17,732		$	(73,316	)

Statement of Cash Flows Information for nine months ended September 30, 2007
(unaudited) (in thousands):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES:
Net income (loss)	$	(18,465	)	$	13,951		$	(993	)	$	(12,958	)	$	(18,465	)
Adjustments to reconcile to net cash (used in) provided by operating activities:
Depreciation and customer list amortization		17,188			41,576			1,533			—			60,297
Loss on write-off of debt issuance costs		3,256			—			—			—			3,256
Mark-to-market adjustments – financial instruments		148			—			—			—			148
Stock-based compensation		2,321			—			—			—			2,321
Deferred income taxes		6			2,564			5			(2,832	)		(257	)
Amortization of debt issuance costs		3,837			—			—			—			3,837
Amortization of discount on investments		(1,260	)		—			—			—			(1,260	)
Other		(930	)		(536	)		3			—			(1,463	)
Change in other operating elements:
Accounts receivable		(8,119	)		(2,784	)		1,108			—			(9,795	)
Inventories		(1,302	)		1,388			60			—			146
Other current assets		(1,124	)		(785	)		(2	)		—			(1,911	)
Accounts payable		16,009			(7,409	)		(281	)		—			8,319
Advance billings and customer deposits		187			1,484			42			—			1,713
Accrued senior and junior exchangeable preferred stock dividends		(38,551	)		—			—			—			(38,551	)
Accrued interest		(28,604	)		—			—			—			(28,604	)
Other accrued expenses		3,141			742			8			—			3,891

Net cash (used in) provided by operating activities		(52,262	)		50,191			1,483			(15,790	)		(16,378	)


INVESTING ACTIVITIES:
Purchases of property and equipment		(16,837	)		(19,999	)		(230	)		—			(37,066	)
Acquisition of wireless properties, net of cash		(37,167	)		(11,900	)		—			—			(49,067	)
Purchases of short-term investments		(20,497	)		—			—			—			(20,497	)
Maturities of short-term investments		132,473			—			—			—			132,473
Proceeds from sale of property and equipment		20			32			—			—			52
Other		605			15			(5	)		—			615

Net cash provided by (used in) investing activities		58,597			(31,852	)		(235	)		—			26,510


FINANCING ACTIVITIES:
Change in parent company receivable and payable		2,995			(17,529	)		(1,256	)		15,790			—
Proceeds from issuance of common stock related to employee stock purchase plan and stock options		1,998			—			—			—			1,998
Proceeds from issuance of long-term debt under the credit facility		58,000			—			—			—			58,000
Repayments of long-term debt under the credit facility		(58,000	)		—			—			—			(58,000	)
Proceeds from issuance of floating rate senior subordinated notes		425,000			—			—			—			425,000
Redemption of senior secured floating rate notes		(300,000	)		—			—			—			(300,000	)
Redemption of senior subordinated debentures		(115,488	)		—			—			—			(115,488	)
Payments of debt issuance costs		(4,813	)		—			—			—			(4,813	)

Net cash provided by (used in) financing activities		9,692			(17,529	)		(1,256	)		15,790			6,697

NET INCREASE (DECREASE) IN CASH		16,027			810			(8	)		—			16,829
CASH AND CASH EQUIVALENTS, at beginning of year		69,571			2,884			40			—			72,495

CASH AND CASH EQUIVALENTS, at end of period	$	85,598		$	3,694		$	32		$	—		$	89,324

Statement of Cash Flows Information for nine months ended September 30, 2006
(unaudited) (in thousands):


				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES:
Net income (loss)	$	(62,446	)	$	(17,788	)	$	56		$	17,732		$	(62,446	)
Adjustments to reconcile to net cash (used in) provided by operating activities:
Depreciation and customer list amortization		15,840			74,157			2,130			—			92,127
Loss on write-off of debt issuance costs		2,837			—			—			—			2,837
Mark-to-market adjustments – financial instruments		(178	)		—			—			—			(178	)
Gain on repurchase of senior exchangeable preferred stock		(319	)		—			—			—			(319	)
Stock-based compensation		947			—			—			—			947
Deferred income taxes		(48	)		(12,870	)		—			12,605			(313	)
Amortization of debt issuance costs		4,038			—			—			—			4,038
Amortization of discount on investments		(2,117	)		—			—			—			(2,117	)
Other		(49	)		(398	)		17			—			(430	)
Change in other operating elements:
Accounts receivable		(1,879	)		5,771			534			—			4,426
Inventories		431			320			48			—			799
Other current assets		(78	)		100			112			—			134
Accounts payable		(8,170	)		(2,435	)		(161	)		—			(10,766	)
Advance billings and customer deposits		114			(118	)		(25	)		—			(29	)
Accrued senior and junior exchangeable preferred stock dividends		33,450			—			—			—			33,450
Accrued interest		(22,373	)		—			—			—			(22,373	)
Other accrued expenses		(1,476	)		898			(2	)		—			(580	)

Net cash provided by (used in) operating activities		(41,476	)		47,637			2,709			30,337			39,207

INVESTING ACTIVITIES:
Purchases of property and equipment		(8,697	)		(26,400	)		(239	)		—			(35,336	)
Purchases of short-term investments		(127,751	)		—			—			—			(127,751	)
Maturities of short-term investments		117,100			—			—			—			117,100
Proceeds from sale of property and equipment		108			2,580			—			—			2,688
Other		391			(503	)		—			—			(112	)

Net cash used in investing activities		(18,849	)		(24,323	)		(239	)		—			(43,411	)

FINANCING ACTIVITIES:
Change in parent company receivable and payable		55,708			(22,892	)		(2,479	)		(30,337	)		—
Proceeds from issuance of common stock related to employee stock purchase plan and stock options		2,059			—			—			—			2,059
Proceeds from issuance of 8 ¹/4% senior secured notes		166,600			—			—			—			166,600
Retirement of senior secured floating rate notes		(160,000	)		—			—			—			(160,000	)
Repurchase of senior exchangeable preferred stock		(11,605	)		—			—			—			(11,605	)
Other		(3,113	)		—			—			—			(3,113	)

Net cash (used in) provided by financing activities		49,649			(22,892	)		(2,479	)		(30,337	)		(6,059	)

NET (DECREASE) INCREASE IN CASH		(10,676	)		422			(9	)		—			(10,263	)
CASH AND CASH EQUIVALENTS, at beginning of year		84,136			2,639			47			—			86,822

CASH AND CASH EQUIVALENTS, at end of period	$	73,460		$	3,061		$	38		$	—		$	76,559

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 principal operating objective is to increase revenue and achieve profitability through increased penetration in our existing wireless markets.

Our operating territories include portions of five states in the Northeast, three states in the Northwest, four states in the Midwest, two states in the South and the western half of Kansas (Central territory). Within each of our five territories, we have a strong local sales and customer service presence in the communities we serve.

On April 3, 2007, we completed the $48.2 million cash purchase of southern Minnesota wireless markets. These markets include 28 counties in southern Minnesota and, as of April 3, 2007, supported a postpaid customer base of approximately 34,000 and a wholesale customer base of 16,000. Under the agreement, RCC would receive network assets and 25 MHz in the A-block 850 MHz licenses covering Minnesota RSAs 7, 8, 9, and 10. The southern Minnesota RSAs acquired utilize CDMA technology consistent with our northern Minnesota networks.

With the addition of the southern Minnesota properties, the population covered by RCC’s marketed networks increased by approximately 621,000 to 7.2 million. Our marketed networks served approximately 657,000 postpaid and prepaid customers as of September 30, 2007.

We have national roaming agreements in our markets with AT&T (effective through December 2009) and Verizon (effective through December 2009). Under these agreements, we are able to attain preferred roaming status by overlaying our existing TDMA networks in our Central, South, Northeast and Northwest networks with GSM/GPRS/EDGE technology and our Midwest network with CDMA technology. We also have various agreements with T-Mobile, which are effective through December 2007.

ACQUISTION OF RURAL CELLULAR CORPORATION BY VERIZON WIRELESS

On July 29, 2007, RCC, Verizon Wireless and Airtouch Cellular entered into an Agreement and Plan of Merger pursuant to which an indirect wholly-owned subsidiary of Verizon will merge with and into Rural Cellular Corporation, with Rural Cellular Corporation continuing as the surviving corporation and becoming a subsidiary of Verizon. At the effective time of the Merger, Verizon will assume RCC’s debt. Additionally, each issued and outstanding share of RCC’s Class A and Class B common stock will be cancelled and converted into the right to receive $45.00 in cash, without interest.

Summary of three months ended September 30, 2007

Our third quarter operating performance reflects:

	•		Increased net postpaid customers, reflecting improved retention which more than offset a decline in postpaid gross additions.

	•		Increased roaming minutes resulting in increased roaming revenue,

	•		Increased costs related to the increased migration activity to 2.5G handsets,

	•		Increased costs related to our recently acquired southern Minnesota properties, and

	•		Strategic costs resulting from the merger agreement between RCC and Verizon.

Operating revenue

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, long distance charges derived from calls placed by customers, and data related services.

			Also included are charges for features such as voicemail, handset insurance, international calling, SMS and MMS messaging, and incollect revenue, which consists of charges to our customers when they use their wireless phones in other wireless markets. We do not charge installation or connection fees. We also include in service revenue the Universal Service Fund (“USF”) support funding that we receive as a result of our Eligible Telecommunication Carrier (“ETC”) status in certain states and the USF pass-through fees we charge our customers.

	•		Roaming revenue includes only outcollect revenue, which we receive when other wireless providers’ customers use our network.

			Our average monthly roaming revenue per cellular customer typically increases during the second and third calendar quarters. This increase reflects greater usage by our roaming customers who travel in our cellular service areas for weekend and vacation recreation or work in seasonal industries.

	•		Equipment revenue includes sales of wireless equipment and accessories to customers, network equipment reselling, and customer activation fees.

Operating expenses

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 services, and the service and expense associated with incollect revenue.

	•		Cost of equipment sales includes costs associated with telephone equipment and accessories sold to customers. We continue to use discounts on phone equipment to attract customers 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 and migrated 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 contributions payable to the USF.

	•		Depreciation and amortization represents the costs associated with the depreciation of fixed assets and the amortization of customer lists and spectrum relocation.

Other expenses

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

	•		Interest expense primarily results from 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:

	o		Interest expense on our credit facility, senior secured notes, senior notes, and senior subordinated notes,

	o		Amortization of debt issuance costs,

	o		Early extinguishment of debt issuance costs,

	o		Dividends on senior and junior exchangeable preferred stock,

	o		Amortization of preferred stock issuance costs,

	o		Call premiums on early redemption of debt,

	o		Gain (loss) on derivative instruments, and

	o		Gains (losses) on repurchase and exchange of preferred stock.

•

Preferred stock dividends are accrued on our outstanding Class M convertible preferred stock.

Customer Base

Our customer base consisted of three customer categories: postpaid, wholesale, and prepaid.

	(1)		Postpaid customers accounted for the largest portion of our customer base as of September 30, 2007, at 81.7%. 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 data usage, roaming charges, and minutes of use exceeding the rate plans.

	(2)		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. Wholesale customers accounted for 17.0% of our total customer base as of September 30, 2007.

	(3)		Prepaid customers pay in advance to utilize our network and services and allow us to minimize bad debt, billing and collection costs. Typically, prepaid customers produce lower local subscriber revenue (LSR) and higher churn than postpaid customers. Our prepaid customers accounted for 1.3% of our customer base as of September 30, 2007.

SIGNIFICANT 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

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.


	Three Months Ended September 30,												Nine Months Ended September 30,
	2007						2006						2007						2006
				%						%						%						%
(in thousands)	Amount			of revenue			Amount			of revenue			Amount			of revenue			Amount			of revenue
REVENUE:
Service	$	110,142			64.1	%	$	95,979			64.5	%	$	315,461			67.2	%	$	288,888			68.4	%
Roaming		54,520			31.7			46,952			31.6			134,047			28.5			114,418			27.1
Equipment		7,267			4.2			5,842			3.9			20,335			4.3			18,797			4.5

Total revenue		171,929			100.0			148,773			100.0			469,843			100.0			422,103			100.0

OPERATING EXPENSES:
Network costs, excluding depreciation		44,406			25.8			35,174			23.6			119,131			25.4			102,343			24.2
Cost of equipment sales		15,334			8.9			14,609			9.8			42,300			9.0			40,858			9.7
Selling, general and administrative		44,787			26.1			37,214			25.0			118,810			25.3			108,171			25.6
Depreciation and amortization		18,066			10.5			32,069			21.6			60,297			12.8			92,127			21.8

Total operating expenses		122,593			71.3			119,066			80.0			340,538			72.5			343,499			81.3

OPERATING INCOME		49,336			28.7			29,707			20.0			129,305			27.5			78,604			18.7

OTHER INCOME (EXPENSE):
Interest expense		(43,863	)		(25.5	)		(47,668	)		(32.0	)		(153,229	)		(32.6	)		(147,631	)		(35.0	)
Interest and dividend income		686			0.4			2,077			1.4			5,458			1.2			5,827			1.4
Other		(42	)		0.0			237			0.2			(256	)		(0.1	)		441			0.1

Other expense, net		(43,219	)		(25.1	)		(45,354	)		(30.4	)		(148,027	)		(31.5	)		(141,363	)		(33.5	)

INCOME (LOSS) BEFORE INCOME TAX BENEFIT		6,117			3.6			(15,647	)		(10.4	)		(18,722	)		(4.0	)		(62,759	)		(14.8	)

INCOME TAX BENEFIT		(89	)		(0.1	)		(104	)		(0.1	)		(257	)		(0.1	)		(313	)		(0.1	)

NET INCOME (LOSS)		6,206			3.7			(15,543	)		(10.3	)		(18,465	)		(3.9	)		(62,446	)		(14.7	)
PREFERRED STOCK DIVIDEND		(4,034	)		(2.3	)		(3,734	)		(2.5	)		(11,748	)		(2.5	)		(10,870	)		(2.6	)

INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	2,172			1.4	%	$	(19,277	)		(12.8	)%	$	(30,213	)		(6.4	)%	$	(73,316	)		(17.3	)%


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Consolidated Operating Data:	2007			2006			2007			2006
Penetration (1) (2)		9.1	%		8.9	%		9.1	%		8.9	%
Retention (3)		98.2	%		97.4	%		98.2	%		97.4	%
Average monthly revenue per customer (4)	$	81		$	80		$	77		$	74
Local service revenue per customer (5)	$	53		$	52		$	53		$	52
Acquisition cost per customer (6)	$	541		$	494		$	521		$	531


	September 30,		December 31,		March 31,		June 30,		September 30,
Customer and POPs Data:	2006		2006		2007		2007		2007
Voice customers at period end
Postpaid		577,994		586,092		594,327		638,116		645,975
Prepaid		9,910		9,433		8,937		9,111		10,575
Wholesale		106,673		110,133		112,368		131,302		134,272

Total customers		694,577		705,658		715,632		778,529		790,822


Direct marketed POPs (1)
RCC Cellular		5,828,000		5,828,000		5,828,000		6,461,000		6,461,000
Wireless Alliance		776,000		776,000		776,000		781,000		781,000

Total POPs		6,604,000		6,604,000		6,604,000		7,242,000		7,242,000


(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 the sum of 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 the sum of selling and marketing expenses, net cost of equipment sales, and depreciation of rental telephone equipment by the gross postpaid and prepaid wireless voice customers added during such period.

Reconciliations of Key Financial Measures

We utilize certain financial measures that are calculated based on industry conventions. Average revenue per customer (“ARPU”) and local service revenue per customer (“LSR”) are industry terms that measure service revenue per month from our customers divided by the average number of customers in commercial service during the period. We believe that ARPU and LSR provide useful information concerning the appeal of our rate plans and service offerings and our performance in attracting high value customers.

Acquisition cost per customer is a useful measure that quantifies the costs to acquire a new customer and provides a gauge to compare our average acquisition cost per new customer to that of other wireless communication providers. Acquisition cost per customer is determined for each period by dividing the sum of selling and marketing expenses, net cost of equipment sales, and depreciation of rental telephone equipment by gross postpaid and prepaid wireless voice customers added during such period.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Retention
Postpaid wireless voice customers discontinuing service (1)		34,438			44,202			99,793			137,175
Weighted average three month aggregate postpaid wireless voice customers (2)		1,927,326			1,726,471			5,591,172			5,242,065

Churn (1) ¸ (2)		1.8	%		2.6	%		1.8	%		2.6	%
Retention (1 minus churn)		98.2	%		97.4	%		98.2	%		97.4	%


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Acquisition Cost Per Customer
(in thousands, except customer gross additions and acquisition cost per customer)
Selling and marketing expense	$	16,272	$	14,633	$	45,589	$	41,677
Net cost of equipment		8,068		8,767		21,966		22,061
Adjustments to cost of equipment		769		482		2,246		1,680

Total costs used in the calculation of acquisition cost per customer (3)		25,109	$	23,882		69,801	$	65,418
Customer postpaid and prepaid gross additions (4)		46,371		48,350		133,848		123,200

Acquisition cost per customer (3) ¸ (4)	$	541	$	494	$	521	$	531


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Local Service Revenue Per Customer (“LSR”)
(in thousands, except weighted average aggregate postpaid wireless voice customers and LSR)
Revenues (as reported in Consolidated Statements of Operations)
Service revenues	$	110,142		$	95,979		$	315,461		$	288,888
Non postpaid revenue adjustments		(7,630	)		(5,399	)		(20,654	)		(15,800	)

Service revenues for LSR (5)		102,512		$	90,580			294,807		$	273,088
Weighted average aggregate postpaid wireless voice customers (6)		1,927,326			1,726,471			5,591,172			5,242,065

LSR (5) ¸ (6)	$	53		$	52		$	53		$	52


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Average Revenue Per Customer (“ARPU”)
(in thousands, except weighted average aggregate postpaid wireless voice customers and ARPU)
Revenues (as reported in Consolidated Statements of Operations)
Service revenues	$	110,142		$	95,979		$	315,461		$	288,888
Roaming revenues		54,520			46,952			134,047			114,418

Total		164,662			142,931			449,508			403,306

Non postpaid revenue adjustments:		(7,630	)		(5,399	)		(20,654	)		(15,800	)

Service revenues for ARPU (7)	$	157,032		$	137,532		$	428,854		$	387,506
Weighted average aggregate postpaid wireless voice customers (8)		1,927,326			1,726,470			5,591,172			5,242,065

ARPU (7) ¸ (8)	$	81		$	80		$	77		$	74

Three Months Ended September 30, 2007 and 2006

Revenue

Operating Revenue:


	Three Months Ended September 30,
(In thousands)	2007		2006		$ Change		% Change
Service	$	110,142	$	95,979	$	14,163		14.8	%
Roaming		54,520		46,952		7,568		16.1
Equipment		7,267		5,842		1,425		24.4

Total operating revenue	$	171,929	$	148,773	$	23,156		15.6

Service Revenue


	Three Months Ended September 30,
(In thousands)	2007		2006		$ Change		% Change
Local service	$	92,822	$	81,706	$	11,116		13.6	%
USF support		12,024		10,809		1,215		11.2	%
Regulatory pass through		4,476		3,285		1,191		36.3	%
Other		820		179		641		358.1	%

Total service revenue	$	110,142	$	95,979	$	14,163		14.8	%

The increase in service revenue for the three months ended September 30, 2007 primarily reflects 67,981 additional postpaid customers as compared to September 30, 2006. The increase in regulatory pass-through fees reflects an increase in overall customers and a change in rates.

We are currently receiving USF support in the states of Alabama, Kansas, Maine, Minnesota, Mississippi, New Hampshire, Oregon, South Dakota, Vermont, and Washington. Reflecting increased customer levels, USF support payments increased to $12.0 million for the three months ended September 30, 2007 as compared to $10.8 million for the three months ended September 30, 2006.

Customers. Including approximately 34,000 postpaid customers and 16,000 wholesale customers added from the April 1, 2007 southern Minnesota acquisition, total customers increased to 790,822 at September 30, 2007 as compared to 694,577 at September 30, 2006. Postpaid customer gross additions decreased to 42,297 for the three months ended September 30, 2007 compared to 46,659 last year. Postpaid customer retention was 98.2% for the quarter compared to 97.4%in the third quarter last year. As a result of the improved customer retention which more than offset declining customer gross additions, postpaid customers grew by 7,859 during the quarter compared to a gain of 2,457 last year.

As of September 30, 2007, approximately 94% of our postpaid customers were using new technology devices compared to 91% at June 30, 2007. We continue to experience higher retention rates and LSR from our new technology customers and therefore will continue to migrate our legacy customer base to new technology products.

Roaming Revenue. The 16.1% increase in roaming revenue during the three months ended September 30, 2007 primarily reflects a 20.5% increase in outcollect minutes and an increase in data revenue. Our outcollect yield for the three months ended September 30, 2007 and 2006 was $0.11 per minute. Data roaming revenue for the three months ended September 30, 2007 was $5.5 million as compared to $3.4 million in the comparable period of last year.

For the three months ended September 30, 2007, and 2006, AT&T, Verizon Wireless, and T-Mobile together accounted for approximately 94.9%, and 92.4%, respectively, of our total outcollect roaming minutes.

We anticipate 2007 roaming minute increases to offset anticipated roaming yield declines, which, together with the full year operation of our new technology networks, should result in 2007 roaming revenue exceeding 2006 levels.

Equipment Revenue. Equipment revenue for the three months ended September 30, 2007 increased 24.4% to approximately $7.3 million as compared to $5.8 million for the three months ended 2006 resulting from an increase in the average handset sales price. Gross postpaid additions for the three months ended September 30, 2007 were 42,297 as compared to 46,659 during the comparable period last year. Customer handset migrations for the three months ended September 30, 2007 increased to 56,296 as compared to 50,443 in 2006.

Operating Expenses


	Three Months Ended September 30,
(In thousands)	2007		2006		$ Change			% Change
Network cost
Incollect cost	$	16,421	$	11,993	$	4,428			36.9	%
Other network cost		27,985		23,181		4,804			20.7	%

		44,406		35,174		9,232			26.2	%
Cost of equipment sales		15,334		14,609		725			5.0	%
Selling, general and administrative		44,787		37,214		7,573			20.3	%
Depreciation and amortization		18,066		32,069		(14,003	)		-43.7	%

Total operating expenses	$	122,593	$	119,066	$	3,527			3.0	%

Network Cost. Network cost, as a percentage of total revenues, increased to 25.8% for the three months ended September 30, 2007 as compared to 23.6% for the three months ended September 30, 2006, reflecting a substantial incollect cost increase together with increases in other network costs. While these increases are due to greater off-network customer call activity and expanded network presence across all territories, our newly acquired southern Minnesota property represents a disproportionate share of this increase. This disproportionately high southern Minnesota incollect roaming expense is expected to decline as we reposition these customers to better utilize our existing northern Minnesota network together with other more efficient roaming arrangements. Cell sites increased to 1,283 at September 30, 2007 as compared to 1,138 at September 30, 2006, including approximately 80 cell sites acquired in southern Minnesota.

During the three months ended September 30, 2007 incollect minutes increased 40.4% compared to the prior year. Incollect cost per minute for both the three months ended September 30, 2007 and 2006 was approximately $0.09 per minute.

We anticipate network costs to be higher in 2007, reflecting an increased number of cell sites, increased network presence from our acquisition of southern Minnesota markets, overall increased network traffic including incollect minutes, and higher outsourced data service costs.

Cost of Equipment Sales. As a percentage of revenue, cost of equipment sales for the three months ended September 30, 2007 decreased to 8.9% as compared to 9.8% for the three months ended September 30, 2006. Cost of equipment sales increased 5.0% to $15.3 million for the three months ended September 30, 2007, primarily reflecting an increase in the average cost of handsets. The average cost of a handset increased to $138 for the three months ended September 30, 2007 as compared to $137 for the three months ended September 30, 2006. Customer handset migrations for the three months ended September 30, 2007 were 56,296 as compared to 50,443 in the comparable period of the prior year. Gross postpaid additions for the three months ended September 30, 2007 were 42,297 as compared to 46,659 during the comparable period of 2006.

As of September 30, 2007, approximately 94% of our postpaid customers were using new technology devices compared to 91% at June 30, 2007.

Our new technology customers provide higher retention rates and LSR; therefore, we plan to continue the migration of legacy customer base to new technology products.

Selling, General and Administrative.
Components of SG&A are as follows:


	Three Months Ended September 30,
(in thousands)	2007		2006		$ Change			% Change
General and administrative	$	21,026	$	15,479	$	5,547			35.8	%
Sales and marketing		16,272		14,633		1,639			11.2	%
Regulatory pass-through fees		4,722		3,613		1,109			30.7	%
Stock based compensation		583		480		103			21.5	%
Bad debt		2,184		3,009		(825	)		-27.4	%

	$	44,787	$	37,214	$	7,573			20.3	%

As a percentage of revenue, SG&A increased to 26.0% for the three months ended September 30, 2007 as compared to 25.0% for the three months ended September 30, 2006. SG&A increased 20.3% to $44.8 million, reflecting the following:

	•		one-time strategic costs of $4.6 million resulting from the merger agreement between Rural Cellular Corporation and Verizon,

	•		increased regulatory pass-through fees, which were largely offset with service revenue,

	•		increased non-cash stock-based compensation expense (see Stock-based compensation), and

	•		increased sales and marketing expenses, which were primarily related to the southern Minnesota market launch.

These increases were partially offset by a 27.4% decline in bad debt expense, which was $2.2 million in the three months ended September 30, 2007. The decline in bad debt expense reflects our successful collection efforts and credit policies and is another contributing factor to our improved retention.

Stock-based compensation — SG&A. In accordance with our adoption of SFAS No. 123(R), stock-based compensation in our financial statements was recognized for all stock-based compensation expense arrangements, including employee and non-employee stock options granted after January 1, 2006 and all stock-based compensation arrangements granted prior to January 1, 2006, remaining unvested as of such date, commencing with the quarter ended March 31, 2006. Accordingly, for the three months ended September 30, 2007, stock-based compensation increased to $583,000 from $480,000 for the three months ended September 30, 2006, primarily reflecting 2007 awards, and the increase in market price of our stock and its effect on the valuation and the corresponding expense related to current and prior year stock-based awards.

Depreciation and Amortization. Depreciation and amortization expense decreased 43.7% for the three months ended September 30, 2007 to $18.1 million as compared to $32.1 million for the three months ended September 30, 2006. This decrease reflects the fully depreciated status of our TDMA cell site assets at December 31, 2006. Reflecting the fully depreciated status of these TDMA assets, we expect depreciation for 2007 to be less than in 2006.

Other Income (Expense)

Interest Expense.

Components of interest expense are as follows:


	Three Months Ended
	September 30,
(in thousands)	2007		2006			$ Change			% Change
Interest on credit facility	$	629	$	1,068		$	(439	)		-41.1	%
Interest on senior secured notes		10,201		10,207			(6	)		-0.1	%
Interest on senior notes		8,023		8,023			—			0.0	%
Interest on senior subordinated notes		13,991		12,344			1,647			13.3	%
Amortization of debt issuance costs		1,192		1,290			(98)			-7.6	%
Write-off of debt issuance costs		—		42			(42	)		-100.0	%
Senior and junior exchangeable preferred stock dividends		9,406		14,193			(4,787	)		-33.7	%
Effect of derivative instruments		314		548			(234	)		-42.7	%
Gain on repurchase of senior exchangeable preferred stock		—		(146	)		146			-100.0	%
Other		107		99			8			8.1	%

	$	43,863	$	47,668		$	(3,805	)		-8.0	%

Interest expense for the three months ended September 30, 2007 decreased 8.0%, primarily reflecting moderately lower debt levels and lower average rates, than a year ago.

Primarily reflecting moderately lower debt levels, cash interest expense for three months ended September 30, 2007 was $51.0 million as compared to $56.3 million in the three months ended September 30, 2006.

Preferred Stock Dividends

Preferred stock dividends for the three months ended September 30, 2007 increased by 8.0% to $4.0 million as compared to $3.7 million in the three months ended September 30, 2006. The increase in preferred stock dividends reflects the compounding effect of the accrual of past Class M preferred stock dividends.

Nine Months Ended September 30, 2007 and 2006

Revenue

Operating Revenue:


	Nine Months Ended September 30,
(In thousands)	2007		2006		$ Change		% Change
Service	$	315,461	$	288,888	$	26,573		9.2	%
Roaming		134,047		114,418		19,629		17.2
Equipment		20,335		18,797		1,538		8.2

Total operating revenue	$	469,843	$	422,103	$	47,740		11.3	%

Service Revenue.

Service Revenue


	Nine Months Ended September 30,
(In thousands)	2007		2006		$ Change		% Change
Local service	$	267,170	$	245,559	$	21,611		8.8	%
USF support		34,354		33,080		1,274		3.9	%
Regulatory pass through		12,753		9,696		3,057		31.5	%
Other		1,184		553		631		114.1	%

Total service revenue	$	315,461	$	288,888	$	26,573		9.2	%

The 9.2% increase in service revenue for the nine months ended September 30, 2007 primarily reflects an 11.8% increase in postpaid customers as compared to September 30, 2006. The increase in regulatory pass-through fees reflects an increase in overall customers and a change in rates.

USF support payments increased to $34.4 million for the nine months ended September 30, 2007 as compared to $33.1 million for the nine months ended September 30, 2006. Reflecting the addition of our southern Minnesota markets, we expect USF support in 2007 to be slightly higher than in 2006.

Customers. Including approximately 34,000 postpaid customers and 16,000 wholesale customers added in the April 3, 2007 southern Minnesota acquisition, total customers increased 96,245 to 790,822 at September 30, 2007 as compared to 694,577 at September 30, 2006. Postpaid customer gross additions increased to 125,676 for the nine months ended September 30, 2007 compared to 117,400 last year. Postpaid customer retention improved to 98.2% for the nine months ended September 30, 2007 compared to 97.4% for the nine months ended September 30, 2006. As a result of the improved gross additions and retention, and excluding the initial addition of southern Minnesota, postpaid customers grew by approximately 26,000 during the nine months ended September 30, 2007 compared to a loss of 19,775 last year.

As of September 30, 2007, approximately 94% of our postpaid customers were using new technology devices compared to 82% at December 31, 2006. We continue to experience higher retention rates and LSR from our new technology customers and therefore will continue to migrate our legacy customer base to new technology products.

Roaming Revenue. The 17.2% increase in roaming revenue during the nine months ended September 30, 2007 primarily reflects a 20.7% increase in outcollect minutes and a significant increase in data revenue, which together were partially offset by a decline in our roaming yield. Our outcollect yield for the nine months ended September 30, 2007 was $0.10 per minute as compared to $0.11 per minute last year at this time. Data roaming revenue for the nine months ended September 30, 2007 was $12.1 million as compared to $5.8 million in the comparable period of last year.

For the nine months ended September 30, 2007, and 2006, AT&T, Verizon Wireless, and T-Mobile together accounted for approximately 94.4% and 93.0%, respectively, of our total outcollect roaming minutes.

Equipment Revenue. Equipment revenue increased 8.2% during the nine months ended September 30, 2007 to $20.3 million as compared to $18.8 million for the nine months ended September 30, 2006. Primarily contributing to this increase was a 7.0% increase in gross postpaid additions to 125,676 as compared to 117,400 during the comparable period of the prior year. Customer handset migrations for the nine months ended September 30, 2007 were 155,433 as compared to 150,523 in 2006.

Operating Expenses


		Nine Months Ended September 30,
(In thousands)	2007		2006		$ Change			% Change
Network cost
Incollect cost	$	45,799	$	33,817	$	11,982			35.4	%
Other network cost		73,332		68,526		4,806			7.0	%

		119,131		102,343		16,788			16.4	%

Cost of equipment sales		42,300		40,858		1,442			3.5	%
Selling, general and administrative		118,810		108,171		10,639			9.8	%
Depreciation and amortization		60,297		92,127		(31,830	)		-34.5	%

Total operating expenses	$	340,538	$	343,499	$	(2,961	)		-0.9	%

Network Cost. Network cost, as a percentage of total revenues, increased to 25.4% for the nine months ended September 30, 2007 as compared to 24.2% for the nine months ended September 30, 2006 largely reflecting an increase in incollect cost. While these increases are due to greater off-network customer call activity and expanded network presence across all territories, our newly acquired southern Minnesota property represents a disproportionate share of this increase. This disproportionately high southern Minnesota incollect roaming expense is expected to decline as we reposition these customers to better utilize our existing northern Minnesota network together with other more efficient roaming arrangements. Cell sites increased to 1,283 at September 30, 2007 as compared to 1,138 at September 30, 2006, including approximately 80 cell sites acquired in southern Minnesota.

During the nine months ended September 30, 2007 incollect minutes increased 38.4% compared to the prior year. Partially offsetting the effect of increased incollect minutes was a decline in incollect cost per minute for the nine months ended September 30, 2007 to approximately $0.08 per minute as compared to $0.09 for the nine months ended September 30, 2006.

We anticipate network costs to be higher in 2007, reflecting an increased number of cell sites, increased network presence from our acquisition of southern Minnesota markets, overall increased network traffic, including incollect minutes, and higher outsourced data service costs.

Cost of Equipment Sales. As a percentage of revenue, cost of equipment sales for nine months ended September 30, 2007 decreased to 9.0% as compared to 9.7% for the nine months ended September 30, 2006. Cost of equipment sales increased 3.5% to $42.3 million for the nine months ended September 30, 2007, primarily reflecting an increase in gross customer additions partially offset by lower average handset costs. The average cost of a handset decreased to $135 for the nine months ended September 30, 2007 as compared to $138 for the nine months ended September 30, 2006. Gross postpaid additions for the nine months ended September 30, 2007 were 125,676 as compared to 117,400 during the comparable period of 2006. Customer handset migrations for the nine months ended September 30, 2007 were 155,433 as compared to 150,523 in the comparable period of the prior year.

As of September 30, 2007, approximately 94% of our postpaid customers were using new technology devices as compared to 82% at December 31, 2006. Our new technology customers provide higher retention rates and LSR; therefore, we plan to continue the migration of legacy customer base to new technology products.

Selling, General and Administrative.

Components of SG&A are as follows:


	Nine months ended September 30,
(in thousands)	2007		2006		$ Change			% Change
General and administrative	$	51,605	$	44,046	$	7,559			17.2	%
Sales and marketing		45,589		41,677		3,912			9.4	%
Regulatory pass-through fees		13,402		10,457		2,945			28.2	%
Stock based compensation		2,321		947		1,374			145.1	%
Bad debt		5,893		11,044		(5,151	)		-46.6	%

	$	118,810	$	108,171	$	10,639			9.8	%

As a percentage of revenue, SG&A decreased to 25.3% for the nine months ended September 30, 2007 as compared to 25.6% for the nine months ended September 30, 2006. SG&A for the nine months ended September 30, 2007 increased 9.8% to $118.8 million, reflecting:

	•		one-time strategic costs of $4.6 million which resulted from the merger agreement between Rural Cellular Corporation and Verizon,

	•		increased general and administrative expenses, primarily reflecting an increase in employee medical claims,

	•		increased regulatory pass-through fees, which were largely offset in service revenue,

	•		increased non-cash stock-based compensation expense (see Stock-based compensation), and

	•		increased sales and marketing expenses, which were primarily related to the southern Minnesota market launch.

These increases were partially offset by a 46.6% decline in bad debt expense, which was $5.9 million for the nine months ended September 30, 2007. The decline in bad debt expense reflects our successful collection efforts and credit policies and is another contributing factor to our improved retention

Stock-based compensation — SG&A. In accordance with our adoption of SFAS No. 123(R), stock-based compensation in our financial statements was recognized for all stock-based compensation expense arrangements, including employee and non-employee stock options granted after January 1, 2006 and all stock-based compensation arrangements granted prior to January 1, 2006, remaining unvested as of such date, commencing with the quarter ended March 31, 2006. Accordingly, for the nine months ended September 30, 2007, stock-based compensation increased to $2.3 million from $947,000 for the nine months ended September 30, 2006, primarily reflecting the increase in market price of our stock and its effect on the valuation and the corresponding expense related to current and prior year stock-based awards.

Depreciation and Amortization. Depreciation and amortization expense decreased 34.5% for the nine months ended September 30, 2007 to $60.3 million as compared to $92.1 million for the nine months ended September 30, 2006. This decrease reflects the fully depreciated status of our TDMA cell site assets at December 31, 2006. Reflecting the fully depreciated status of these TDMA assets, we expect depreciation for 2007 to be less than in 2006.

Other Income (Expense)

Interest Expense.

Components of interest expense are as follows:


	Nine Months Ended September 30,
(in thousands)	2007		2006			$ Change			% Change
Interest on credit facility	$	2,267	$	3,330		$	(1,063	)		-31.9	%
Interest on senior secured notes		30,588		32,661			(2,073	)		-6.3	%
Interest on senior notes		24,070		24,070			—			0.0	%
Interest on senior subordinated notes		43,099		36,324			6,775			18.7	%
Amortization of debt issuance costs		3,837		4,038			(201	)		-5.0	%
Write-off of debt issuance costs		3,256		2,837			419			14.8	%
Call premium on early redemption of notes		9,750		3,200			6,550			204.7	%
Senior and junior preferred stock dividends		35,932		41,765			(5,833	)		-14.0	%
Effect of derivative instruments		148		(178	)		326			-183.1	%
Gain on repurchase of senior exchangeable preferred stock		—		(319	)		319			-100.0	%
Other		282		(97	)		379			-390.7	%

	$	153,229	$	147,631		$	5,598			3.8	%

Interest expense for the nine months ended September 30, 2007 increased 3.8%, primarily reflecting a $9.7 million call premium related to the redemption of our 9 ³/4% senior subordinated notes partially offset by lower debt levels and lower average rates, than a year ago.

Cash interest expense for the nine months ended September 30, 2007 increased to $203.9 million as compared to $127.3 million in the nine months ended September 30, 2006. This increase primarily reflects the cash payment of $41.7 million in dividends on our senior exchangeable preferred stock and the cash payment of $32.8 million in dividends on our junior exchangeable preferred stock during the nine months ended September 30, 2007. Senior exchangeable preferred stock dividends paid in cash during the nine months ended September 30, 2006 totaled $8.3 million. We did not pay junior exchangeable preferred stock dividends during the nine months ended September 30, 2006.

Preferred Stock Dividends

Preferred stock dividends for nine months ended September 30, 2007 increased by 8.1% to $11.7 million as compared to $10.9 million in the nine months ended September 30, 2006. The increase in preferred stock dividends reflects the compounding effect of the accrual of past Class M preferred stock dividends.

LIQUIDITY AND CAPITAL RESOURCES

We need cash primarily for working capital, capital expenditures related to our network construction efforts, debt service, customer growth initiatives, and purchases of additional spectrum. In past years, we have met these requirements through cash flow from operations, borrowings under our credit facility, sales of common stock, and issuance of long-term debt and preferred stock.

We believe our networks continue to perform well as shown by increasing customers and roaming MOUs as we continue to manage the process of transferring our networks from TDMA/analog to new technologies. Our cell site count has increased from 1,158 sites at December 31, 2006 to 1,283 sites at September 30, 2007, including 80 sites acquired in southern Minnesota. We anticipate our total capital expenditures for 2007 will be funded primarily from cash on hand and operating cash flow. Primarily reflecting our efforts to provide additional network capacity, capital expenditures for the nine months ended September 30, 2007 were $37.1 million. During the nine months ended September 30, 2006, capital expenditures were $35.3 million.

Junior Exchangeable Preferred Stock. As of August 15, 2006, we had failed to pay six quarterly dividends on the Junior Exchangeable Preferred Stock and, accordingly, a “Voting Rights Triggering Event,” as defined in its Certificate of Designation occurred. As a result, the holders of junior exchangeable preferred stock have the right to elect two directors. Although a portion of the accrued dividends were paid in May 2007, the right to elect directors continues until all past due dividends are paid in full. In addition, while a “Voting Rights Triggering Event” exists, certain terms of our junior exchangeable preferred stock, if enforceable, may prohibit incurrence of additional indebtedness, including borrowings under our revolving credit facility. The accrued dividends in arrears for the junior exchangeable preferred securities, through September 30, 2007, totaled approximately $61.0 million.

Credit Facility. In April 2007, we negotiated an amendment to our revolving credit facility explicitly permitting the payment of senior and junior exchangeable preferred stock dividend payments and replacing all financial covenant ratios with one new senior secured first lien debt covenant. As of September 30, 2007, we were in compliance with covenants under the credit facility and have drawn $58 million of the $60 million initially available.

Our borrowings under the revolving credit facility bear interest at rates based on, at our option, on either (i) the one, two, three, six, or, if made available by the lender, nine or twelve month Eurodollar rate, which is determined by reference to the Adjusted LIBOR rate, or (ii) the Alternate Base Rate, which is the higher of the prime lending rate on page 5 of the Telerate Service and the Federal Funds Effective Rate plus 1/2 of 1 percent. In each case, we are required to pay an additional margin of interest above the Eurodollar rate or the Alternate Base Rate. The margin is based on the ratio of our senior secured debt to our adjusted cash flow. The margin above the Alternate Base Rate ranges from 0.75% to 1.00%. The margin above the Eurodollar rate fluctuates from 1.75% to 2.00%.

Senior Subordinated Floating Rate Notes. In May 2007 we issued $425 million aggregate principal amount of Senior Subordinated Floating Rate Notes due September 1, 2013 and used the proceeds to redeem our 11 3/8% Senior Subordinated Debentures and our 9 3/4% Senior Subordinated Notes. The 2013 notes mature on September 1, 2013. Interest on the 2013 notes reset quarterly at a rate equal to the three month LIBOR, plus 3.00%, and is payable on March 1, September 1, September 1 and December 1 of each year, commencing on September 1, 2007. On May 15, 2007, we had exchanged all outstanding shares of our 11 3/8% Senior Exchangeable Preferred Stock for 11 3/8% Senior Subordinated Debentures.

Cash flows for the nine months ended September 30, 2007, compared with the nine months ended September 30, 2006.


	Nine Months Ended September 30,
(in thousands)	2007			2006			Change
Net cash (used in) provided by operating activities	$	(16,378	)	$	39,207		$	(55,585	)
Net cash provided by (used in) investing activities		26,510			(43,411	)		69,921
Net cash (used in) provided by financing activities		6,697			(6,059	)		12,756

Net (decrease) increase in cash and cash equivalents		16,829			(10,263	)		27,092

Cash and cash equivalents, at beginning of year		72,495			86,822			(14,327	)

Cash and cash equivalents, at end of period	$	89,324		$	76,559		$	12,765

Net cash and cash equivalents used in operating activities was $16.4 million for the nine months ended September 30, 2007. Adjustments to the $18.5 million net loss to reconcile to net cash used in operating activities primarily included $38.6 million in senior and junior exchangeable preferred stock dividends and $28.6 million in accrued interest. Partially offsetting these items was $60.3 million in depreciation and amortization.

Net cash provided by investing activities for the nine months ended September 30, 2007 was $26.5 million. This amount included $132.5 million in maturities of short-term investments, which were partially offset by $49.1 million for acquisition of wireless properties, $37.1 million for purchases of property and equipment and $20.5 million in short-term investment purchases. The majority of property and equipment purchases were related to maintenance related to our networks in addition to adding to our southern Minnesota network.

Net cash provided by financing activities for the nine months ended September 30, 2007 was $6.7 million, reflecting the following:

	•		Proceeds from the issuance of common stock pursuant to our employee stock purchase plan and upon exercise of stock options for $2.0 million,

	•		Issuance of $425.0 million aggregate principal amount of Senior Subordinated Floating Rate Notes,

	•		Redemption of 9 3/4% Senior Subordinated Notes for $300.0 million, and

	•		Redemption of senior subordinated debentures for $115.5 million.

Liquidity. Primarily reflecting the cash payment of $41.7 million in dividends on our senior exchangeable preferred stock and the cash payment of $32.8 million in dividends on our junior exchangeable preferred stock, our cash and cash equivalents and short-term investments decreased to $89.3 million as compared to $183.2 million at December 31, 2006. Cash interest payments during the nine months ended September 30, 2007 were $203.9 million as compared to $127.3 million during the nine months ended September 30, 2006.

Under the documents governing our indebtedness, we are able to make limited restricted payments, including the repurchase of senior subordinated notes or preferred stock and the payment of dividends to holders of our equity securities.

We believe that our cash and cash equivalents on hand and our cash flows from operations will be sufficient to enable us to meet required cash commitments through the next twelve-month period, and we anticipate we will be in compliance with our covenants under the credit facility.

Forward-Looking Statements

Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although RCC believes that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. A number of factors could cause actual results, performance, achievements of RCC, or industry results to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, competitive considerations, success of customer enrollment initiatives, the ability to increase wireless usage and reduce customer acquisition costs, the ability to improve customer retention, the successful integration of any acquired operations with RCC’s existing operations, the ability to negotiate favorable roaming agreements, the ability to service debt, and other factors discussed in RCC’s Report on Form 10-K for the year ended December 31, 2006 and in other filings with the Securities and Exchange Commission. Investors are cautioned that all forward-looking statements involve risks and uncertainties.

In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates, and data that may be incorrect or imprecise and involve known and unknown risks, uncertainties, and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. All subsequent written and oral forward-looking statements attributable to RCC or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. RCC disclaims any obligation to update any such statements or to announce publicly the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We have issued debt and preferred securities and used bank credit facilities as well as cash from operations to finance our capital requirements and operations. These financial instruments, to the extent they provide for variable rates of interest, expose us to interest rate risk. One percentage point of an interest rate adjustment would have changed our cash interest payments on an annual basis by approximately $6.6 million as of September 30, 2007.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

RCC’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this report, RCC performed an evaluation, under the supervision and with the participation of RCC’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that our files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to RCC’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. No changes were made to RCC’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

The management of RCC is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). RCC’s internal control system is designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. RCC’s management assessed the effectiveness of the company’s internal control over financial reporting as of September 30, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on our assessment, we believe that, as of September 30, 2007, our internal controls over financial reporting were effective. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Deloitte and Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes to Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On August 3, 2007, a purported shareholder class action complaint, captioned Joshua Teitelbaum v. Rural Cellular Corporation, et al., was filed by a shareholder of RCC in the District Court of Douglas County, State of Minnesota, against RCC and its directors challenging the proposed merger. The complaint alleges causes of action for violation of fiduciary duties of care, loyalty, candor, good faith and independence owed to the public shareholders of RCC by the members of our board of directors and acting to put their personal interests ahead of the interests of RCC’s shareholders. The complaint seeks, among other things, to declare and decree that the merger agreement was entered into in breach of the fiduciary duties of the defendants and is therefore unlawful and unenforceable, to enjoin the consummation of the merger and to direct the defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of RCC’s shareholders and to refrain from entering into any transaction until the process for the sale or auction of RCC is completed and the highest possible price is obtained. We believe that the lawsuit is without merit. The parties have executed a memorandum of understanding that sets forth the terms under which the parties have agreed to resolve the action.

Item 1A. RISK FACTORS

See “Risk Factors” in Part I — Item 1A. in our Annual Report on Form 10-K for the year ended December 31, 2006 for information on risk factors. There were no material changes in the nature or status of our risk factors as described in our Annual Report on Form 10-K for the year ended December 31, 2006.

Item 3. DEFAULTS UPON SENIOR SECURITIES

(b) Preferred Stock Dividends

12¹/4% Junior Exchangeable Preferred Stock. Although we paid four quarterly dividends on the junior exchangeable preferred stock in May 2007, at September 30, 2007 we were six dividend payments in arrears, creating a “Voting Rights Triggering Event.” Accrued dividends in arrearage, through November 8, 2007 were approximately $65 million. We have not declared and likely will not pay, the dividend due on November 15, 2007.

The shares of the junior exchangeable preferred stock are non-voting, except as otherwise required by law and as provided in their Certificate of Designation. The Certificate of Designation provides that at any time dividends on the outstanding junior 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 junior 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 RCC’s Board of Directors. The voting rights continue until such time as all dividends in arrears on the junior exchangeable preferred stock are paid in full, 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 Certificate of Designation.

Item 6. EXHIBITS

The following exhibits are filed with this report.


10.1		Amendment No. 6 to the 1995 Stock Compensation Plan

10.2		Amendment No. 5 to the Stock Option Plan for Nonemployee Directors

31.1		(Certification of CEO)

31.2		(Certification of CFO)

32.1		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. SECTION 1350


	Page #
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2007 and 2006		4
Condensed Consolidated Statements of Cash Flows — Three and Nine Months Ended September 30, 2007 and 2006		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures about Market Risk		42
Item 4. Controls and Procedures		42
Part II. Other Information
Item 1. Legal Proceedings		43
Item 1A. Risk Factors		43
Item 3. Defaults upon Senior Securities		44
Item 6. Exhibits		44
Signatures		45
Amendment No. 6 to the 1995 Stock Compensation Plan
Amendment No. 5 to the Stock Option Plan for the Nonemployee Directors
Certification of CEO
Certification of CFO
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 1350


		RURAL CELLULAR CORPORATION (Registrant)
Date: November 8, 2007	/s/ Richard P. Ekstrand
	Richard P. Ekstrand
	President and Chief Executive Officer


Date: November 8, 2007	/s/ Wesley E. Schultz
	Wesley E. Schultz
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

	1.		I have reviewed this Quarterly Report on Form 10-Q of Rural Cellular Corporation, a Minnesota corporation (the “registrant”);

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	(1)		such Form 10-Q for the quarter ended September 30, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		the information contained in such Form 10-Q for the quarter ended September 30, 2007, fairly presents, in all material respects, the financial condition and results of operations of Rural Cellular Corporation.