INDIANA BELL TELEPHONE CO INC, 10-K, 1996-03-13

INDIANA BELL TELEPHONE CO INC
10-K, 1996-03-13
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) .... For the fiscal year ended December 31, 1995

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 1-6746

INDIANA BELL TELEPHONE COMPANY,
INCORPORATED
An Indiana Corporation I.R.S. Employer No.
35-0407820

240 North Meridian Street
Indianapolis, Indiana 46204
Telephone Number 1-800-257-0902

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

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

THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF AMERITECH CORPORATION, MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS J(1)(a) AND (b) OF FORM 10-K
AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J(2).

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

Yes [X] No [_]

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I

Item Page
- ---- ----
<C> <S> <C>
1. Business.............................................................. 1

2. Properties............................................................ 8

3. Legal Proceedings..................................................... 8

4. Submission of Matters to a Vote of Security Holders (Omitted
pursuant to General Instruction J(2)).

PART II

5. Market for Registrant's Common Equity and Related Stockholder
Matters (Inapplicable).

6. Selected Financial and Operating Data................................. 10

7. Management's Discussion and Analysis of Results of
Operations (Abbreviated pursuant to
General Instruction J(2))........................................... 11

8. Financial Statements and Supplementary Data........................... 19

9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 36

PART III

10. Directors and Executive Officers of the Registrant
(Omitted pursuant to General Instruction J(2)).

11. Executive Compensation (Omitted pursuant to General Instruction J(2)).

12. Security Ownership of Certain Beneficial Owners
and Management (Omitted pursuant to General Instruction J(2)).

13. Certain Relationships and Related Transactions (Omitted
pursuant to General Instruction J(2)).

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 37
</TABLE>

i
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PART I

Item 1. Business.

The Company

Indiana Bell Telephone Company, Incorporated (the Company), incorporated
under the laws of the State of Indiana, has its principal office at 240 North
Meridian Street, Indianapolis, Indiana 46204 (telephone number 1-800-257-0902).
The Company is a wholly owned subsidiary of Ameritech Corporation (Ameritech), a
Delaware Corporation. Ameritech is the parent of the Company; Illinois Bell
Telephone Company; Michigan Bell Telephone Company; The Ohio Bell Telephone
Company and Wisconsin Bell, Inc. (referred to collectively as the "Ameritech
landline communications subsidiaries"), as well as several other communications
businesses, and has its principal executive offices at 30 South Wacker Drive,
Chicago, Illinois 60606 (telephone number 1-800-257-0902). The Company is
managed by its sole shareowner rather than a Board of Directors as permitted by
Indiana law.

Ameritech operates its business within the framework of customer-specific
business units delivering specialized services to various categories of
customers, each with unique requirements. The functions of the business units,
which include consumer, business, cellular, advertising and leasing services, as
well as services provided to other companies in the communications industry,
overlap the legal entities, including the Company, which form the infrastructure
of Ameritech. The products and services of all the companies are marketed under
the "Ameritech" brand identity, but Ameritech's five landline communications
subsidiaries remain responsible within their respective service areas for
providing telephone and other communications services, subject to regulation by
the Federal Communications Commission (FCC) and the five respective state public
service commissions. In 1995, Ameritech further aligned its business unit and
legal entity structure into three sectors: communications and information
products, consumer and business services and worldwide network systems, to
sharpen its strategic focus and to better position the Company to serve
customers and meet the competition. The Company offers services and operates
under the names "Ameritech" and "Ameritech Indiana", pursuant to assumed name
filings with the state of Indiana.

Operations Under Line-of-Business Restrictions

Until a new telecommunications law came into effect in February 1996, the
operations of Ameritech and its subsidiaries were subject to the requirements of
a consent decree entitled "Modification of Final Judgment" (Consent Decree)
approved by the United States District Court for the District of Columbia
(Court) in August 1982. The Consent Decree arose out of antitrust litigation
brought by the Department of Justice (DOJ) and required AT&T Corp. (AT&T),
formerly named American Telephone and Telegraph Company, to divest those assets
relating to exchange telecommunications, exchange access functions, printed
directories and cellular communications. The Consent Decree, together with the
Court-approved Plan of Reorganization (Plan), outlined the method of divestiture
and established restrictions on the post-divestiture activities of the seven
regional holding companies (RHCs), including Ameritech, formed to receive AT&T's
divested assets. Effective January 1, 1984, AT&T transferred to Ameritech its
100% ownership of the exchange telecommunications, exchange access and printed
directory advertising portions of the Ameritech landline communications
subsidiaries, as well as a cellular communications company.

The Consent Decree, as originally approved, prohibited the RHCs from
providing long distance communications services or information services,
manufacturing telecommunications equipment, or providing any product or service,
except exchange telecommunications and exchange access service, that is not a
natural monopoly service actually regulated by tariff. The Consent Decree
allowed the RHCs to provide printed directory advertising and to provide, but
not manufacture, customer premises equipment.

1
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Over time, the Court granted waivers to the RHCs to engage in otherwise
prohibited lines of business upon a showing to the Court that there was no
substantial possibility that the company could use its monopoly power to impede
competition in the market it sought to enter. In decisions handed down in
September 1987 and March 1988, the Court continued prohibitions relating to
equipment manufacturing and long distance services. The rulings allowed limited
provision of information services by transmission of information and provision
of information gateways, but excluded generation or manipulation of information
content. In addition, the rulings eliminated the need for a waiver for entry
into non-telephone related businesses. In July 1991, the Court lifted the
information services ban, but stayed the effect of the decision pending outcome
of the appeals process. Soon after, the stay was lifted on appeal and in July
1993, the U.S. Court of Appeals unanimously upheld the Court's order allowing
the RHCs to produce and package information for sale across business and home
phone lines. In November 1993, the U.S. Supreme Court declined to review the
lower court ruling.

In April 1995, the Court opened the long distance market to the RHCs,
allowing them to offer long distance cellular and other wireless services on the
condition that they demonstrate measurable competition in their own markets. The
ruling allowed the RHCs to resell long distance services provided by long
distance carriers and handle all marketing, billing and discounts, but imposed a
number of conditions which were recently superseded by the Telecommunications
Act of 1996 (the 1996 Act).

On February 8, 1996, the first comprehensive overhaul of telecommunications
legislation in 62 years was signed into law, removing barriers that had
prevented the phone, cable TV and broadcast industries from entering each others
businesses. The 1996 Act addresses various aspects of competition within, and
regulation of, the communications industry. Among other things, the new law
defines the conditions under which the Company may offer long distance service
and provides certain mechanisms intended to facilitate local exchange
competition. The new law removes the Consent Decree, lifting many prohibitions
imposed by the Court, and gives the FCC responsibility for making a host of new
rules governing telephone service. One rule-making function of the FCC is to
determine when the local exchange carriers (LECs) have met a 14-step competition
test that will allow them to offer long distance service to their local
customers. For the RHCs, immediate relief under the new law includes permission
to provide cellular long distance, in and out of region, out of region long
distance and certain other incidental long distance services. The 1996 Act
eliminates any barriers to companies wishing to compete against providers of
local phone service.

The Company furnishes a wide variety of advanced communications services,
including local exchange and toll service, network access and communications
products, in an operating area comprised of 7 Local Access and Transport Areas
(LATAs) in Indiana. These LATAs are generally centered on a city or other
identifiable community of interest, and each LATA marks the boundary within
which the Company may provide telephone service. The Company provides two basic
types of communications services. First, it transports communications traffic
between a subscriber's equipment and the telephone exchange offices located
within the same LATA (intraLATA service). These services include local
exchange, private line and intraLATA toll services (including 800 and special
services for data, radio and video transport). Second, it provides exchange
access service, which links a subscriber's telephone or other equipment to the
network of transmission facilities of long distance carriers, which in turn
provide communications service between LATAs (interLATA, or long distance,
service).

About 64% of the population and 28% of the area of Indiana is served by the
Company. The remainder of the state is served by nonaffiliated telephone
companies. Fort Wayne and Terre Haute are the only cities of over 50,000
population in the State in which local service is provided by another telephone
company.

2
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The Company provides directory assistance, local and toll operator services,
including collect calls, third number billing, person-to-person and calling card
calls, and offers such digital network services as voice-mail, on-line database
access and fax messaging, document sharing functions, and video-conferencing for
desktop computers. The Company also provides billing and collection services
for several companies, including billing for long distance services offered by
certain long distance carriers, some of which began billing their own customers
in 1996. It is not possible for the Company to estimate the impact of this
change on future billing and collection revenues due to the uncertainty as to
the number of customers affected, the timing of the billing changeovers and the
degree of acceptance by customers.

The following table sets forth the number of access lines served by the
Company at the end of each of the last five years:

Access lines in service (in thousands)....... 2,018 1,924 1,855 1,770 1,711
% increase over prior year................... 4.9 3.7 4.8 3.4 2.5
</TABLE>

The Company had an agreement with Ameritech Publishing, Inc. (API), an
Ameritech subsidiary doing business as Ameritech Advertising Services, under
which API published and distributed classified directories under a license from
the Company and provided services to the Company relating to both classified and
alphabetical directories. API paid license fees to the Company under the
agreement. That agreement terminated effective December 31, 1995. The Company
has entered into a subsequent agreement with API for 1996 under which the
Company furnishes to API certain services and data to be used by API in
publishing and distributing classified and alphabetical directories. In
exchange, the Company will receive compensation for the services and data.

Ameritech Services, Inc. (ASI) is a company jointly owned by the Company and
the other Ameritech landline communications subsidiaries. ASI provides to those
companies human resources, technical, marketing, regulatory planning, and real
estate asset management services, purchasing and material management support, as
well as labor contract bargaining oversight and coordination. ASI acts as a
shared resource for the Ameritech subsidiaries providing operational support for
the Ameritech landline communications subsidiaries and integrated communications
and information systems for all the business units.

In 1995, about 87% of the total operating revenues of the Company were from
communications services and the remainder principally from billing and
collection services, rents, directory advertising and other miscellaneous
nonregulated operations. About 72% of the revenues from communications services
were attributable to intrastate operations.

Long Distance Services

When Ameritech first unveiled its Customers First plan in 1993, becoming the
first company in the U.S. communications industry to voluntarily offer to open
its local network to competitors, it sought regionwide freedom to compete in
both its existing businesses and long distance services. In exchange, to
facilitate competition in the local exchange business, Ameritech would allow
other service providers to purchase components of its network and to repackage
them with their own services for resale. Ameritech proposed to change the way
local communications services are provided and regulated and to furnish a policy
framework for advanced universal access to modern communications services --
voice, data and video information. Under the plan, customers would be able to
choose from competitive providers for local service as they now can choose a
provider for long distance service. In 1995, Ameritech sought permission to
enter the interLATA market on a trial basis only, in order to demonstrate
conclusively the substantial customer and economic benefits of full competition.

3
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Much of the detailed language of the 1996 Act was based on Ameritech's plan.
Under the 1996 Act, the Company must comply with a checklist to ensure
competition before it can offer long distance service to its local landline
customers. The FCC will determine whether or not a local service provider's
entry into the long distance market serves the public interest. An RHC is
restricted from providing long distance service until a competitor provides
local phone service to its residential and business customers. The FCC will have
to give substantial weight to DOJ recommendations in reviewing a company's entry
into the market. In preparation, the Company is currently pursuing local
network resale agreements with companies planning to offer local exchange
service in 1996.

The new Act allows Ameritech and the other RHCs to provide long distance
service immediately to their cellular customers, regardless of location.
Ameritech is currently offering long distance service to its cellular customers
in Illinois, northwest Indiana, Ohio, Wisconsin, Michigan and Missouri.

Regulatory Environment -- Federal

The Company is subject to the jurisdiction of the FCC with respect to
interstate services. The FCC prescribes for communications companies a uniform
system of accounts, rules for apportioning costs between regulated and
nonregulated services and the principles and standard procedures (separations
procedures) used to separate regulated property, plant and equipment costs,
revenues, expenses, taxes and reserves between those applicable to interstate
services under the jurisdiction of the FCC and those applicable to intrastate
services under the jurisdiction of the respective state regulatory authorities.

Access Services

The Company provides access services that allow long distance carriers and
other companies to originate and terminate interstate and intrastate
communications services using the facilities of the Company. Access charges,
which recover the Company's costs associated with such facilities, consist
primarily of three types: common line, traffic sensitive and trunking.

Common line charges are recovered through separate charges applied to end
users (monthly subscriber line charges) and long distance carriers. The FCC has
authorized subscriber line charges of up to $3.50 per access line per month for
residential and single line business customers and up to $6.00 per access line
per month for multiple line business customers. The remaining portion of the
interstate common line revenue requirement is recovered by means of usage-based
long distance carrier common line charges.

Traffic sensitive charges are usage-based charges billed to long distance
carriers which are associated with central office switching facilities used in
the provision of access services and cable and wire facilities that connect
customers through common facilities from the Company's end office where
switching occurs to the serving wire center where access is provided.

Trunking services consist of two types: those associated with the local
transport element of switched access and those associated with special access.
Trunking services associated with switched access handle the transmission of
traffic through dedicated facilities from the Company's end office where
switching occurs to the serving wire center (including the entrance facilities
to the long distance carrier) where access is provided. Trunking services
associated with special access handle the transmission of interstate private
line services using dedicated facilities between any two customer-designated
premises or between a customer-dedicated premises and a Company end office where
multiplexing, the transmission of two or more signals over a single channel,
occurs. Trunking charges are fixed monthly charges per access line which in
certain cases involve a distance element associated with the dedicated
facilities used to provide the trunking service.

4
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In 1994, the FCC initiated its review of interstate price cap regulation
initially adopted effective January 1, 1991. The FCC's price cap regulatory
scheme sets maximum limits on the prices that LECs, including the Company, can
charge for access services. The limits are adjusted each year to reflect
inflation, a productivity factor and certain other cost changes. LECs under
price caps have increased flexibility to change prices of existing services
within the common line, traffic sensitive and trunking access revenue
categories, as well as for interexchange (interstate intraLATA) and video dial
tone service offerings.

In March 1995, the FCC adopted changes to its price cap plan to be effective
August 1, 1995. The new rules include changes to the measure of inflation, the
introduction of new productivity factor options and changes in the definition of
other costs which may be included in the price cap formula. Under the new
rules, LECs can annually elect one of three productivity factors: 4.0%, 4.7% or
5.3%. Ameritech's election of the 5.3% productivity factor allowed the Company
to retain all of its earnings, whereas election of a lower factor would require
earnings to be shared with customers. Concurrently, Ameritech filed a waiver
request with the FCC to make an additional downward adjustment of its indices to
apply the 5.3% productivity factor retroactively to January 1, 1995.

Regulatory Environment -- State

The Company is also subject to regulation by the Indiana Utility Regulatory
Commission (IURC) with respect to certain intrastate rates and services and
other matters.

In 1994, the IURC approved the Company's Opportunity Indiana plan. Under the
plan, market based pricing and flexibility has been instituted for competitive
services, including Centrex, dedicated communications services, 800, WATS,
operator services and business intraLATA toll service. Monthly rates for basic
local residential service will decrease by $2.21 over two years and remain
capped until 1998. Charges for Touch-Tone service were eliminated, retroactive
to May 1, 1994. IURC oversight of depreciation was suspended for the term of the
plan. In addition, the Company will invest up to $120 million in infrastructure
over six years to extend advanced communications links to interested schools,
hospitals and major government centers and will contribute another $30 million
to the Corporation for Educational Communications, an unaffiliated, not-for-
profit organization, which will provide grants to public and private schools in
the Company's service area for equipment, software and training so the schools
can take advantage of advanced network applications. Indiana is already a
national leader in the use of distance learning to enhance education.

5
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Other Matters

In addition, the Company is a party to various proceedings pending before the
IURC which involve, among other things, local exchange service competition,
terms and conditions of services provided by the Company, terms for
interconnecting networks, and reciprocal compensation arrangements (compensation
to be exchanged with competitive local service providers for terminating other
carriers' calls).

Competition

The communications industry is undergoing significant changes. LECs, long
distance service companies, cable TV companies, cellular service companies,
computer companies and the entertainment and information services industries are
converging, forming alliances and positioning to provide a variety of services.

Market convergence, already a reality, intensified in 1995. Regulatory,
legislative and judicial decisions, and technological advances, as well as
heightened customer interest in advanced communications services, have expanded
the types of available communications services and products, as well as the
number of companies offering such services.

The primary competitors in the Company's business historically have been
other access providers, cellular service providers and long distance companies.
AT&T, MCI Communications Corp. and other long distance providers are ready to
offer local phone service in various parts of Ameritech's five-state region.
Companies, such as AT&T and McCaw Cellular Communications, Inc., have allied to
form expanded cellular markets, creating the possibility of a wireless network
with nationwide presence and brand-name recognition. Cable companies and long
distance companies are joining to offer alternative wireless and landline local
service. Today, many of the companies planning to provide local telephone
service also have directory operations. Various communications groups,
including almost all the nation's largest phone and cable companies hold
licenses to offer personal communication services throughout the U.S. Increased
competition in the local exchange service business, as well as the technological
innovations rapidly spawned by that business, will further intensify
competition. Much of it will come from companies with substantial capital,
technological and marketing resources, many of which do not face the same
regulatory constraints as the Company.

Regulatory reform continues to be one of the most significant issues facing
the communications industry today. The Company believes that relief from
excessive regulation will benefit customers and ultimately shareowners by
enabling the Company to compete effectively and meet customers' expanding needs.
The Company is seeking relief before the regulatory agencies from the
restraints, laws and regulations that impose restrictions on its current
business and curtail its future business offerings.

The 1996 Act will radically alter the U.S. communications business and
enhance the Ameritech landline communication subsidiaries' ability to compete.
Passage of the new law broadly opens up the communications industry to
competition and allows cable TV, local phone companies and long distance
carriers into each others businesses, removing the formal barriers between
businesses and reshaping the information industry.

The Company's competitive strategy includes positioning itself to take
advantage of future opportunities by streamlining its processes to continue to
contribute to Ameritech's standing as the most efficient of the RHCs.

6
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Patents, Trademarks and Licenses

The Company, through its parent, Ameritech, has rights to use various
patents, copyrights, trademarks and other intellectual property which are
necessary for it to conduct its present business operations. It is not
anticipated that any such intellectual property will be subject to expiration or
nonrenewal of rights which would materially and adversely affect the Company.

Employee Relations

As of December 31, 1995, the Company employed 4,188 persons, a decrease from
4,398 at December 31, 1994. By year end 1995, approximately 1,344 nonmanagement
employees had resigned or retired in response to an early retirement offer
announced in 1994 (approximately 249 employees left in 1995). Under terms of
agreements between the Company, the Communications Workers of America (CWA) and
the International Brotherhood of Electrical Workers (IBEW), Ameritech
implemented an enhancement to the Ameritech pension plan by adding three years
to the age and the net credited service of eligible nonmanagement employees who
left the business during a designated period ending with contract expiration, a
period extended during contract negotiations to the end of the third quarter of
1995. Staff additions partially offset these departures. New employees were
added to ensure high quality customer service and to meet special skill
requirements. In 1996, as a result of a planned consolidation of data centers
and other reductions, more employees will leave the Company.

In September 1995, members of the CWA and IBEW ratified new three-year
contracts with Ameritech. The new contract wage increases were retroactive to
the expiration dates of the prior contracts, June 25, 1995 for the IBEW and
August 6, 1995 for the CWA. Both contracts address wages, benefits, pensions,
employment security, child and family care, training and retraining and other
conditions of employment. Base wages were increased approximately 10.9%
(compounded at the maximum wage rate) over the next three years. In addition,
all eligible employees received a lump sum bonus of $500. The new contracts will
expire on June 27, 1998, for the IBEW and August 8, 1998, for the CWA.

Most of the Company's employees (approximately 85%) are represented by
unions.

7
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Item 2. Properties.

The properties of the Company do not lend themselves to description by
character and location of principal units. At December 31, 1995, the Company's
investment in property, plant and equipment consisted of the following:

<TABLE>
<S> <C>
Land and buildings............................................... 9%
Central office equipment......................................... 37
Cable, wiring and conduit........................................ 45
Other............................................................ 8
Under construction............................................... 1
---
100%
</TABLE>

Central office equipment includes analog and digital switching equipment,
transmission equipment and related facilities. Buildings are principally
central offices. Cable, wiring and conduit constitute outside plant, and
includes poles as well as cable, conduit and wiring primarily on or under public
roads, highways or streets or on or under private property. Substantially all
of the installations of central office equipment and administrative offices are
located in buildings owned by the Company and situated on property it owns.
Many garages and business offices and some installations of central office
equipment and administrative offices are in leased quarters.

Capital Investment Plans

Capital expenditures, the single largest use of Company funds, were as
follows for the last five years (in millions):

The Company has been making and expects to continue to make large capital
expenditures to respond to the market's demand for a modern, efficient and
productive network. The total investment in property, plant and equipment
increased from about $2.8 billion at December 31, 1990, to about $3.1 billion at
December 31, 1995, after giving effect to retirements but before deducting
accumulated depreciation at either date.

Capital expenditures are expected to be about $167 million in 1996.

Item 3. Legal Proceedings.

Pre-Divestiture Contingent Liabilities Agreement

The Plan provides for the recognition and payment of liabilities that are
attributable to pre-divestiture events (including transactions to implement the
divestiture) but that do not become certain until after divestiture. These
contingent liabilities relate principally to litigation and other claims with
respect to the former Bell System's rates, taxes, contracts, equal employment
matters, environmental matters and torts (including business torts, such as
alleged violations of the antitrust laws).

With respect to such liabilities, under agreements entered into at
divestiture, AT&T and the former Bell operating companies of AT&T (Bell
Companies) will share the costs of any judgment or other determination of
liability entered by a court or administrative agency, the costs of defending
the claim (including attorneys' fees and court costs) and the cost of interest
or penalties with respect to any such judgment or determination. Except to the
extent that affected parties may otherwise agree, the general rule is that
responsibility for such contingent liabilities will be divided among AT&T and
the Bell Companies on the basis of their relative net investment (defined as
total assets less reserves for depreciation) as of the effective date of
divestiture. Different allocation rules apply to liabilities which relate
exclusively to pre-divestiture interstate or intrastate operations.

8
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In January 1995, Ameritech and the other RHCs agreed to terminate the sharing
arrangement among the Bell Companies with respect to pre-divestiture contingent
liabilities for certain matters. AT&T did not enter into the agreement and,
accordingly, the sharing arrangement remains in effect with respect to AT&T's
pre-divestiture liabilities and AT&T's share of Bell Company pre-divestiture
liabilities.

Although complete assurance cannot be given as to the outcome of any litigation,
in the opinion of the Company's management, any monetary liability or financial
impact to which the Company would be subject after final adjudication of all of
the foregoing actions would not be material in amount to the Company.

9
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PART II

Item 6. Selected Financial and Operating Data.

INDIANA BELL TELEPHONE COMPANY, INCORPORATED
Selected Financial and Operating Data
(Dollars in Millions)

<TABLE>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Local service................................... $ 572.1 $ 531.2 $ 506.7 $ 478.7 $ 477.5
Interstate network access....................... 242.9 243.2 230.6 221.3 215.2
Intrastate network access....................... 89.8 103.6 107.6 100.3 96.3
Long distance................................... 150.7 152.3 148.7 127.2 130.6
Other........................................... 156.9 137.8 130.6 122.9 121.5
-------- -------- -------- -------- --------
Total............................................ 1,212.4 1,168.1 1,124.2 1,050.4 1,041.1
Operating expenses*.............................. 799.4 951.3 832.9 780.1 780.3
-------- -------- -------- -------- --------
Operating income................................. 413.0 216.8 291.3 270.3 260.8
Interest expense................................. 17.4 17.3 28.3 34.0 36.1
Other income, net................................ (2.1) (4.8) (5.7) (5.4) (1.9)
Income taxes..................................... 146.8 67.3 87.2 78.5 73.8
-------- -------- -------- -------- --------
Income before extraordinary items and
cumulative effect of change in accounting
principles...................................... 250.9 137.0 181.5 163.2 152.8
Extraordinary items and cumulative effect of
change in accounting principles**............... -- (220.7) (14.7) (160.2) --
-------- -------- -------- -------- --------
Net income (loss)................................ $ 250.9 $ (83.7) $ 166.8 $ 3.0 $ 152.8
-------- -------- -------- -------- --------
Total assets..................................... $1,558.2 $1,541.5 $1,987.5 $2,035.2 $2,044.6
Property, plant and equipment, net............... $1,192.2 $1,227.6 $1,662.3 $1,715.5 $1,722.9
Capital expenditures, net........................ $ 153.6 $ 140.1 $ 162.9 $ 201.5 $ 196.3
Long-term debt................................... $ 85.8 $ 86.1 $ 85.2 $ 392.8 $ 416.5
Debt ratio....................................... 27.3 % 34.1 % 31.8 % 32.8 % 33.6 %
Return on average equity......................... 39.3 % (12.0)% 20.5 % 0.4 % 16.7 %
Return on average total capital.................. 28.8 % (5.8)% 15.7 % 2.8 % 13.3 %
Pretax interest coverage......................... 26.2 14.1 10.7 8.6 7.6
Customer lines -- at end of year (000's)......... 2,018 1,924 1,855 1,770 1,711
Customer lines served by --
Digital electronic offices...................... 80.3 % 78.3 % 74.7 % 58.7 % 49.7 %
Analog electronic offices....................... 19.7 % 21.7 % 35.3 % 41.3 % 50.3 %
Customer lines per employee...................... 482 438 365 323 290
Employees -- at end of year...................... 4,188 4,398 5,077 5,486 5,901
- -------------------------
</TABLE>
* As discussed in Note E to the financial statements, 1995 operating expenses
include a net work force restructuring credit of $36.9, while 1994 operating
expenses include a nonmanagement work force restructuring charge of $93.5.

** The Company had a noncash after-tax extraordinary charge in 1994 of $220.7 as
a result of discontinuing the application of FAS 71 (See Note D) and a charge
of $14.7 in 1993 (See Note F) due to the early extinguishment of debt. The
Company had accounting changes in 1992 for FAS 106 and FAS 112 aggregating
$160.2.

10
<PAGE>

Item 7. Management's Discussion and Analysis of Results of Operations.
(Dollars in Millions)

Following is a discussion and analysis of the results of operations of the
Company for the year ended December 31, 1995 and for the year ended December 31,
1994, which is based on the Statements of Income and Reinvested Earnings. Other
pertinent data are also given in the Selected Financial and Operating Data.

Results of Operations

Revenues

Total operating revenues were $1,212.4 for 1995 and $1,168.1 for 1994. The
increase of $44.3 or 3.8% consisted of the following:

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Local service..................... $572.1 $531.2 $40.9 7.7
</TABLE>

Local service revenues include basic monthly service fees and usage charges,
fees for custom-calling features, public phone revenues and installation and
connection charges. Local service rates have generally been regulated by the
Indiana Utility Regulatory Commission (IURC). Through the Opportunity Indiana
proceeding, price regulation of intrastate services was achieved in 1994. In
exchange, the Company agreed to certain rate reductions which affected 1995
local service revenues by about $5.2, with additional intrastate network access
rate reductions discussed below. All intrastate limits on earnings were
removed.

Local service revenues increased by $41.4 during 1995 due to higher network
usage. Increased volumes were primarily attributed to growth in the number of
customer lines increased, which increased 4.9% to 2,018,000 from 1,924,000 the
previous year, as well as greater sales of call management services (e.g., Call
Forwarding, Caller ID, etc.) and second line additions.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Network access
Interstate........................ $242.9 $243.2 $ (0.3) (0.1)
Intrastate........................ 89.8 103.6 (13.8) (13.3)
</TABLE>

Network access revenues are fees charged to interexchange carriers, such as
AT&T Corp. (AT&T) and MCI Communications Corp. (MCI), that use the local
telecommunications network to provide long distance services to their customers.
In addition, end users pay flat rate access fees to connect to the local network
to obtain long distance service. These revenues are generated from both
interstate and intrastate services.

Interstate access revenues decreased as a result of net rate reductions of
$11.8 largely offset by volume increases of $10.7 due to growth in customer
lines, switched access minutes of use and special access circuits. Also
partially offsetting the decrease were increased revenues of $2.3 due to lower
National Exchange Carrier Association common line support payments. Minutes of
use related to interstate calls increased 6.0% in 1995.

11
<PAGE>

As a result of the FCC's approval of the Company's request for price
regulation without sharing of earnings, as previously discussed in Part I, the
Company was required to reduce its annual access charges to long distance
companies for local network connections by $11.8. The impact in 1995 was a
reduction in interstate access revenues of $5.0.

Intrastate access revenues decreased in 1995 primarily due to rate reductions
of $22.5, primarily resulting from regulatory proceedings which adopted certain
regulatory freedoms as previously discussed. Higher network usage resulted in
additional revenues of $8.9 which partially offset these decreases. Minutes of
use related to intrastate calls increased 14.2% in 1995. Scheduled rate
reductions will affect 1996 revenues by about $13.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Long distance..................... $150.7 $152.3 $(1.6) (1.1)
</TABLE>

Long distance revenues are derived from customer calls to locations outside
of the local calling area but within the same service area. The decrease in
long distance service revenues in 1995 was primarily attributable to volume
reductions of $3.1 partially offset by rate increases of $1.5.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Other............................ $156.9 $137.8 $19.1 13.9
</TABLE>

Other revenues include revenues derived from directory advertising, billing
and collection services, inside wire installation and maintenance services and
other miscellaneous services. The increase in other revenues is primarily due
to an increase in revenues from customer premises equipment (CPE) sales and
nonregulated services, such as voice message and Caller ID, of $15.9, as well as
inside wire installation and maintenance services of $6.9, primarily from rate
increases. Partially offsetting these increases was a decrease of $3.7 in
billing and collection, rents and miscellaneous revenues. As discussed in Part
I above, the Company has entered into a new agreement with Ameritech Publishing,
Inc.(API), an Ameritech subsidiary, for the publishing and distribution of
directories in 1996. As a result of this agreement, 1996 revenues from
directory services will decrease by approximately $50.

The Company provides billing and collection services for several companies,
including billing for long distance services offered by certain long distance
carriers, some of which began billing their own customers in 1996. It is not
possible for the Company to estimate the impact of this change on future billing
and collection revenues due to the uncertainty as to the number of customers
affected, the timing of the billing changeovers and the degree of acceptance by
customers. Accounts receivable and payable balances will be impacted in 1996
reflecting the reduction in accounts billed on behalf of the long distance
carriers and purchased from them.

12
<PAGE>

Operating Expenses

Total operating expenses in 1995 decreased by $151.9 or 16.0% percent to
$799.4. The decrease was almost entirely attributable to the 1994 work force
restructuring, which resulted in a credit of $36.9 ($23.1 after-tax) in 1995
related primarily to the net settlement gains from lump-sum pension payments to
former employees, partially offset by fourth quarter charges for planned work
force reductions due to data center consolidations, increased force costs
related to the work force restructuring started in 1994 and a charge of $1.0 to
write-down certain data processing equipment in connection with information
technology restructuring. This compares with the 1994 charge of $93.5 ($58.0
after-tax) for work force restructuring.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Employee-related expenses......... $216.7 $242.9 $(26.2) (10.8)
</TABLE>

The decrease in employee-related expenses in 1995 was attributable primarily
to the effect of work force reductions over the past year of $20.9, as well as
reduced bonus accruals, overtime payments, payroll taxes, other benefits and
related employee costs of $16.2. These decreases were partially offset by a
decrease in pension credits of $7.5 and wage increases of $3.4.

During September 1995, union agreements were ratified by the Communications
Workers of America (CWA) and the International Brotherhood of Electrical Workers
(IBEW). The new contracts and wage increases were retroactive to June 25, 1995
for the IBEW and August 6, 1995 for the CWA. The contracts include basic wage
increases of 10.9% (compounded at the maximum wage rate) over three years. In
addition, the contracts provided for a signing bonus of $500 to eligible
employees upon ratification. In addition, union employees will receive their
annual bonus in the form of Ameritech stock instead of cash beginning with the
bonus for 1995 and continuing for the remaining three years of the labor
contracts. Both contracts address wages, benefits, pensions, employment
security, training and retraining and other conditions of employment. Most of
the Company's nonmanagement work force (about 85 percent of total employees) is
represented by the two unions.

There were 4,188 employees at December 31, 1995, compared with 4,398 at
December 31, 1994. Work force restructuring at the Company resulted in a
decrease of 249 employees since December 31, 1994. See also the discussion of
restructuring (credits) charges below.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Depreciation and amortization..... $189.7 $210.1 $(20.4) (9.7)
</TABLE>

The decrease in depreciation and amortization expense in 1995 was primarily
due to the cessation of depreciation of analog switches determined to be
obsolete in connection with discontinuing the application of Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation," in the fourth quarter of 1994. This decrease was
partially offset by the increase in depreciation rates as a result of shortening
telephone plant lives following the discontinuation of FAS 71. See Note D for
further details.

13
<PAGE>

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Other operating expenses.......... $387.1 $358.7 $28.4 7.9
</TABLE>

The increase in other operating expenses in 1995 was primarily attributable
to higher affiliated services expenses of $23.3, resulting from increased
project billings from Ameritech Services, Inc. (ASI). Advertising, cost of
sales and bad debt expenses increased $11.1 as a result of increased marketing
and sales efforts. These increases were offset by a net decrease of $10.3 in
expenses for access charges, as a result of renegotiated contracts, switching
system software charges, contract and professional services, and other expenses
as compared to the prior year.

<TABLE>
<CAPTION>
Percent
1995 1994 Change Change
---- ---- ------- -------
<S> <C> <C> <C> <C>
Restructuring (credits) charges... $(36.9) $93.5 $(130.4) n/a
</TABLE>

The Company announced in March 1994 that it intended to significantly reduce
its nonmanagement work force by the end of 1995. Reduction of the work force
resulted from the implementation of technology improvements, consolidations and
initiatives to balance the cost structure in the core business with emerging
competition. The nonmanagement work force was reduced by 1,344 employees. New
employees were added during these periods with different skills to accommodate
growth, ensure high quality customer service and meet staffing requirements for
new business opportunities. Pretax charges totaling $93.5 ($58.0 after-tax)
related to the work force reductions were recorded in 1994. Noncash settlement
gains of $32.5 were recorded in 1995, associated primarily with lump-sum pension
payments to former employees, and accrual adjustments were made that reduced
gross program costs by $7.3, partially offset by $1.9 associated with increased
force costs related to the restructuring, as well as a $1.0 charge that was
recorded to write down certain data processing equipment to net realizable
value.

The restructuring program was recorded by quarter as follows:

Gross Net Program Cost
Program Settlement ----------------
Cost Gains Pretax After-tax
------ ----- ------ ---------
<S> <C> <C> <C> <C>
1995
----
First Quarter................... $ (5.8) $ (30.7) $(36.5) $(22.9)
Second Quarter.................. -- -- -- --
Third Quarter................... (1.5) (1.2) (2.7) (1.7)
Fourth Quarter.................. 2.9 (0.6) 2.3 1.5
------ ----- ------ ---------
1995 Total.................. $ (4.4) $ (32.5) $(36.9) $(23.1)
------ ------- ------ ---------

1994
----
First Quarter................... $ 68.9 $ -- $ 68.9 $ 42.8
Second Quarter.................. -- -- -- --
Third Quarter................... 51.5 (15.5) 36.0 22.4
Fourth Quarter.................. 16.0 (27.4) (11.4) (7.2)
------ ----- ------ ---------
1994 Total.................. $136.4 $ (42.9) $ 93.5 $ 58.0
------ ------- ------ ---------

Program Total.................... $132.0 $ (75.4) $ 56.6 $ 34.9
====== ======= ====== =========
</TABLE>

14
<PAGE>

Actual employee reductions by quarter in 1994 were: 220 in the second
quarter, 271 in the third quarter and 604 in the fourth quarter or 1,095 in
total. Employee reductions in 1995 aggregated 249 as follows: 46 in the first
quarter, 66 in the second quarter and 137 in the third quarter. See also the
discussion of employee-related expenses above. Additional employees are expected
to leave the Company in 1996 as a result of the consolidation of data centers
and additional work force reductions previously discussed. Cash requirements to
fund the financial incentives (principally contractual termination payments
totaling approximately $26.3) were met as prescribed by the applicable
collective bargaining agreements. Certain of these collective bargaining
agreements required contractual termination payments to be paid in a manner
other than lump-sum, thus requiring cash payments beyond an employee's
termination date.

The work force restructuring program reduced annual employee-related costs by
approximately $50 thousand per departing employee. The projected savings are
being partially offset by the hiring of new employees as discussed above.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Taxes other than income taxes........ $42.8 $46.1 $(3.3) (7.2)
</TABLE>

The decrease in taxes other than income taxes is primarily attributable to
lower property taxes and gross receipts taxes.

Other Income and Expenses

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Interest expense...................... $17.4 $17.3 $0.1 0.6
</TABLE>

The increase in interest expense in 1995 resulted from higher interest on
borrowings from the Ameritech short-term funding pool resulting from higher
interest rates, offset by lower average debt balances. (See Note A).

<TABLE>
<CAPTION>
Change
(Income) Percent
1995 1994 Expense Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Other income, net................... $(2.1) $(4.8) $2.7 (56.3)
</TABLE>

Other income, net includes earnings related to the Company's investments,
interest income and other nonoperating items. Other income in 1995 decreased
primarily because the Company's share of equity earnings from ASI decreased.

<TABLE>
<CAPTION>
Increase Percent
1995 1994 (Decrease) Change
---- ---- ---------- -------
<S> <C> <C> <C> <C>
Income taxes...................... $146.8 $67.3 $79.5 118.1
</TABLE>

The increase in income taxes in 1995 was primarily attributable to the
previously discussed increases in pretax income.

<PAGE>

Extraordinary Item -- FAS 71

As described in Note D to the financial statements, the Company discontinued
FAS 71 in the fourth quarter of 1994, after determining that it no longer met
the criteria for following FAS 71. The factors that gave rise to this decision
were changes in the manner in which the Company is regulated and the heightened
competitive environment. The accounting impact to the Company was an
extraordinary noncash after-tax charge of $220.7.

As a result of the discontinuation of applying FAS 71, 1995 depreciation
expense decreased due to the cessation of depreciation on analog switches.
Depreciation expense in 1996 and beyond will likely be higher as the effects of
shorter lives intensifies at the Company.

Additional financial statement impacts occurred as a result of no longer
following FAS 71. Specifically, the effective income tax rate increased in 1995
as a result of the elimination of excess deferred tax balances previously
amortized as a reduction to tax expense over the lives of the related assets.

16
<PAGE>

Other Matters

Competition.

The communications industry is undergoing significant changes. LECs, such as
the Company, and long distance service companies, cable TV companies, cellular
service providers, computer companies and the entertainment and information
services industries are converging, forming alliances and positioning to provide
a variety of services. Regulatory, legislative and judicial decisions, and
technological advances, as well as heightened customer interest in advanced
communications services, have expanded the types of available communications
services and products, as well as the number of companies offering such
services.

The primary competitors of the Company historically have been other access
providers, cellular service providers and long distance companies. Today, as the
Company prepares to open its local market to competition, AT&T, MCI and other
long distance providers are ready to offer local phone service in various parts
of Ameritech's five state region, including Chicago. Companies, such as AT&T
with its acquisition of McCaw Cellular, have allied to form expanded cellular
markets, creating the possibility of a wireless network with nationwide presence
and brand-name recognition. Cable companies and long distance companies are
joining to offer alternative wireless and landline local service. Today, many of
the companies planning to provide local telephone service also have directory
operations. Various communications groups, including almost all of the nation's
largest phone and cable companies, hold licenses to offer personal communication
services throughout the U.S. Increased competition in the local exchange service
business, as well as the technological innovations rapidly spawned by that
business, will further intensify competition in the directory business.

Regulatory reform continues to be one of the most significant issues facing
the communications industry today. The Company believes that continued relief
from regulation will benefit customers and ultimately shareowners by enabling
the Company to compete effectively and meet customers' expanding needs.
Ameritech is seeking relief before regulatory agencies from the restraints, laws
and regulations that impose restrictions on its current business and curtail its
future business offerings.

The Company's competitive strategy includes positioning itself to take
advantage of future opportunities by streamlining its processes to continue its
efficiency gains. In 1995, Ameritech realigned its business units into three
sectors to sharpen its strategic focus and better serve the needs of its
customers.

On the national level, the Telecommunications Act of 1996 was signed into law
by the President on February 8, 1996. This legislation defines the conditions
under which Ameritech will be permitted to offer interLATA long distance service
and provides certain mechanisms intended to facilitate local exchange
competition. This legislation, in addition to allowing Ameritech to offer
interLATA long distance services, will allow competitors into the Company's
traditional local exchange markets. Management believes the legislation gives
Ameritech an opportunity to expand its revenue base by providing long distance
services, while retaining lower-margin access revenues as other local service
providers, acting as resellers, continue to use the Company's network
facilities.

As the communications industry expands and converges, Ameritech is positioned
to compete aggressively in new and existing markets, all of which are expanding
at rates far in excess of historical levels. Ameritech plans to maintain
aggressive revenue growth rates and productivity increases as it faces
formidable competition in these markets.

17
<PAGE>

Regulatory Environment

On July 18, 1995, FCC approved Ameritech's request for price regulation
without sharing of earnings effective January 1, 1995, resulting in a reduction
in prices that the Company charges long distance companies for local
connections. These price reductions resulted in a decrease in 1995 interstate
access revenues as discussed above. Also see Regulatory Environment--Federal in
Part I.

Opportunity Indiana

In June 1994, the IURC approved an alternative regulation proposal --
Opportunity Indiana -- that eliminated rate of return regulation and replaced it
with price regulation. See Regulatory Environment -- State in Part I for a more
complete discussion.

18
<PAGE>

Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareowner of Indiana Bell Telephone Company, Incorporated

We have audited the accompanying balance sheets of Indiana Bell Telephone
Company, Incorporated (an Indiana Corporation) as of December 31, 1995 and 1994,
and the related statements of income and reinvested earnings and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and this schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Indiana Bell Telephone Company,
Incorporated as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.

As discussed in Note D to the financial statements, the Company discontinued
applying the provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," in 1994.

Our audits are made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule
included in Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 17, 1996

19
<PAGE>

INDIANA BELL TELEPHONE COMPANY, INCORPORATED
STATEMENTS OF INCOME AND REINVESTED EARNINGS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues..................................... $1,212.4 $1,168.1 $1,124.2
-------- -------- --------
Operating expenses
Employee-related expenses.................. 216.7 242.9 245.1
Depreciation and amortization.............. 189.7 210.1 215.6
Other operating expenses................... 387.1 358.7 327.4
Restructuring (credits) charges............ (36.9) 93.5 --
Taxes other than income taxes.............. 42.8 46.1 44.8
-------- -------- --------
799.4 951.3 832.9
-------- -------- --------
Operating income............................. 413.0 216.8 291.3
Interest expense............................. 17.4 17.3 28.3
Other income, net............................ (2.1) (4.8) (5.7)
-------- -------- --------
Income before income taxes and extraordinary
items...................................... 397.7 204.3 268.7
Income taxes................................. 146.8 67.3 87.2
-------- -------- --------
Income before extraordinary items............ 250.9 137.0 181.5
Extraordinary items.......................... -- (220.7) (14.7)
-------- -------- --------
Net income (loss)............................ 250.9 (83.7) 166.8
Reinvested earnings, beginning of year....... 30.2 250.8 239.8
Less, dividends.............................. 214.7 136.9 155.8
-------- -------- --------
Reinvested earnings, end of year............. $ 66.4 $ 30.2 $ 250.8
======== ======== ========
</TABLE>

The accompanying notes are an integral part of the financial statements.

20
<PAGE>

INDIANA BELL TELEPHONE COMPANY, INCORPORATED
BALANCE SHEETS
(Dollars in Millions)

<TABLE>
<CAPTION>
As of December 31,
--------------------
1995 1994
---- ----
<S> <C> <C>
Assets
Current assets
Cash and temporary cash investments....................................... $ 0.1 $ 0.5
Receivables, net
Customers and agents (less allowance for uncollectibles
of $2.9 and $7.8, respectively)....................................... 214.9 186.5
Ameritech and affiliates.................................................. 17.1 15.5
Other..................................................................... 8.1 12.7
Material and supplies..................................................... 4.3 4.2
Prepaid and other......................................................... 11.2 19.2
-------- --------
255.7 238.6
-------- --------
Property, plant and equipment
In service................................................................ 3,069.9 2,975.9
Under construction........................................................ 15.1 24.2
-------- --------
3,085.0 3,000.1
Less, accumulated depreciation............................................ 1,892.8 1,772.5
-------- --------
1,192.2 1,227.6
-------- --------
Investments, principally in affiliates...................................... 37.5 40.1
Other assets and deferred charges........................................... 72.8 35.2
-------- --------
Total assets................................................................ $1,558.2 $1,541.5
======== ========
Liabilities and Shareowner's Equity
Current liabilities
Debt maturing within one year
Ameritech............................................................... $ 150.6 $ 222.0
Other................................................................... 0.3 0.3
Accounts payable
Ameritech Services, Inc. (ASI)............................................ 56.8 71.7
Ameritech and affiliates.................................................. 11.8 12.9
Other..................................................................... 68.3 61.8
Other current liabilities................................................. 162.5 141.2
-------- --------
450.3 509.9
-------- --------
Long-term debt.............................................................. 85.8 86.1
-------- --------
Deferred credits and other long-term liabilities
Accumulated deferred income taxes......................................... 46.2 24.9
Unamortized investment tax credits........................................ 21.8 27.2
Postretirement benefits other than pensions............................... 269.2 270.0
Long-term payable to ASI.................................................. 8.3 8.8
Other..................................................................... 45.2 19.4
-------- --------
390.7 350.3
-------- --------
Shareowner's equity
Common stock ($40 par value; 15,000,000 shares
authorized; 13,490,876 issued and outstanding).......................... 539.6 539.6
Proceeds in excess of par value........................................... 25.4 25.4
Reinvested earnings....................................................... 66.4 30.2
-------- --------
631.4 595.2
-------- --------
Total liabilities and shareowner's equity................................... $1,558.2 $1,541.5
======== ========
</TABLE>

The accompanying notes are an integral part of the financial statements.

21
<PAGE>

INDIANA BELL TELEPHONE COMPANY, INCORPORATED
STATEMENTS OF CASH FLOWS
(Dollars in Millions)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).......................................................... $ 250.9 $ (83.7) $ 166.8
Adjustments to net income (loss)
Extraordinary item, net of tax............................................. -- 220.7 14.7
Restructuring (credits) charges, net of tax................................ (23.1) 58.0 --
Depreciation and amortization.............................................. 189.7 210.1 215.6
Deferred income taxes, net................................................. 10.8 9.5 (14.4)
Investment tax credits, net................................................ (5.4) (5.2) (6.7)
Capitalized interest....................................................... (0.6) (0.7) (0.7)
Provision for uncollectibles............................................... 13.0 11.7 7.6
Change in accounts receivable.............................................. (38.4) (39.3) (25.7)
Change in material and supplies............................................ (2.9) 0.5 1.2
Change in certain other current assets..................................... 8.0 (6.5) 1.3
Change in accounts payable................................................. (9.5) 58.1 (16.0)
Change in certain other current liabilities................................ (35.1) (60.0) 17.1
Change in certain noncurrent assets and liabilities........................ 23.8 (19.4) (13.1)
Costs of refinancing long-term debt........................................ -- (8.8) (2.9)
Other...................................................................... (4.8) 7.1 (10.4)
------- ------- -------
Net cash from operating activities.......................................... 376.4 352.1 334.4
------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures, net.................................................. (153.0) (139.4) (162.2)
Proceeds from disposals of property plant and equipment.................. 0.2 4.0 2.0
Other investing activities, net............................................ 3.8 (7.8) (3.0)
------- ------- -------
Net cash from investing activities.......................................... (149.0) (143.2) (163.2)
------- ------- -------
Cash Flows from Financing Activities:
Intercompany financing, net................................................ (71.4) 147.0 75.0
Issuances of long-term debt................................................ -- 0.9 --
Retirements of long-term debt.............................................. (0.3) (220.0) (100.0)
Dividend payments.......................................................... (156.1) (136.9) (155.8)
------- ------- -------
Net cash from financing activities.......................................... (227.8) (209.0) (180.8)
------- ------- -------
Net decrease in cash and temporary cash investments......................... (0.4) (0.1) (9.6)
Cash and temporary cash investments, beginning of year...................... 0.5 0.6 10.2
------- ------- -------
Cash and temporary cash investments, end of year............................ $ 0.1 $ 0.5 $ 0.6
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.

22
<PAGE>

INDIANA BELL TELEPHONE COMPANY, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Dollars in Millions)

A. Significant Accounting Policies

Nature of Operations -- Indiana Bell Telephone Company, Incorporated (the
Company) is a wholly owned subsidiary of Ameritech Corporation (Ameritech).
Ameritech is the parent of the Company, Illinois Bell Telephone Company,
Michigan Bell Telephone Company, The Ohio Bell Telephone Company, and Wisconsin
Bell, Inc. (referred to collectively as the "Ameritech landline communications
subsidiaries"). The Company provides a wide variety of communications services,
including local exchange and toll service, network access and telecommunications
products in Indiana.

See discussion of Competition in Other Matters in Management's Discussion and
Analysis of Results of Operations.

Basis of Accounting -- The financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP). The financial
statements include the accounts of the Company. In the fourth quarter of 1994,
the Company discontinued following accounting prescribed by Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of
Certain Types of Regulation." (See Note D).

Use of Estimates -- The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Transactions with Affiliates -- The Company has various agreements with
affiliated companies. Below is a description of the significant arrangements
followed by a table of the amounts involved.

1. Ameritech Services, Inc. (ASI) -- ASI, an Ameritech-controlled affiliate,
in which the Company has 10% ownership, provides planning, development,
management, procurement and support services to all of the Ameritech landline
communications subsidiaries. The Company also provides certain services and
facilities to ASI.

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Purchases of materials and charges for
services from ASI......................... $272.8 $265.7 $209.0
Recovery of costs for services provided to
ASI....................................... 7.3 12.3 12.3
</TABLE>

2. Ameritech (the Company's parent) -- Ameritech provides various
administrative, planning, financial and other services to the Company. These
services are billed to the Company at cost.

Charges incurred............................ $13.0 $12.6 $12.1
</TABLE>

23
<PAGE>

3. Ameritech Publishing, Inc. (API), a wholly owned subsidiary of Ameritech
doing business as Ameritech Advertising Services -- The Company had an agreement
with API under which API published and distributed classified directories under
a license from the Company and provided services to the Company relating to both
classified and alphabetical directories. API paid license fees to the Company
under the agreement. That agreement terminated, effective December 31, 1995.
The Company has entered into a subsequent agreement with API for 1996 under
which the Company furnishes to API certain services and data to be used by API
in publishing and distributing classified and alphabetical directories. In
exchange, the Company will receive compensation for the services and data.

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fees paid to the Company by API............. $50.5 $48.9 $47.8
Fees paid by the Company to API............. $ 9.8 $ 9.0 $ 8.6
</TABLE>

4. Ameritech Information Systems, Inc. (AIS), a wholly owned subsidiary of
Ameritech -- The Company reimburses AIS for costs incurred by AIS in connection
with the sale of network services by AIS employees.

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Charges incurred............................ $ 9.5 $ 5.1 $ 3.7
</TABLE>

5. Bell Communications Research, Inc. (Bellcore) -- Bellcore provides
research and technical support to the Company. ASI has a one-seventh ownership
interest in Bellcore and bills the Company for the costs.

Charges incurred............................ $10.0 $11.7 $13.0
</TABLE>

Property, Plant and Equipment -- Property, plant and equipment are stated at
original cost. The provision for depreciation is based principally on the
straight-line remaining life and the straight-line equal life group methods of
depreciation applied to individual categories of property, plant and equipment
with similar characteristics. As a result of the discontinuation of applying
FAS 71 in the fourth quarter of 1994, the Company recognized shorter, more
economically realistic lives and increased its accumulated depreciation balance
by $361.2. (See Note D).

The following is a summary of average lives (in years) before and after the
discontinuation of FAS 71:

<TABLE>
<CAPTION>
Asset Category Before After
-------------- ------ -----
<S> <C> <C>
Central office equipment
Digital switching............................... 17 7
Analog switching................................ up to 4 obsolete
Circuit accounts................................ 8-12 7
Copper and fiber cable and wire facilities....... 20-32 15
All other........................................ various various
</TABLE>

Generally, when depreciable plant is retired, the amount at which such plant
has been carried in property, plant and equipment in service is charged to
accumulated depreciation. The cost of maintenance and repairs of plant is
charged to expense.

Investments -- The Company's investment in ASI (10% ownership and $26.5) is
reflected in the financial statements using the equity method of accounting. All
other investments are carried at cost. Derivative transactions are generally
handled by Ameritech. The Company had no derivatives in 1995 or 1994.

24
<PAGE>

Material and Supplies -- Inventories of new and reusable material and
supplies are stated at the lower of cost or market with cost generally
determined on an average cost basis.

Income Taxes -- The Company is included in the federal income tax return
filed by Ameritech and its subsidiaries. Effective January 1, 1993, the Company
adopted FAS 109, "Accounting for Income Taxes." The accounting method is
essentially a refinement of the liability method previously followed by the
Company and, accordingly, did not have a significant impact on the Company's
financial statements upon adoption. The Company's provision for income taxes is
determined effectively on a separate company basis.

Deferred tax assets and liabilities are determined at the end of each period
based on differences between the financial statement bases of assets and
liabilities and the tax bases of those same assets and liabilities, using the
currently enacted statutory tax rates. Deferred income tax expense is measured
by the change in the net deferred income tax asset or liability during the year.

The Company uses the deferral method of accounting for the investment tax
credit whereby credits realized are being amortized as reductions in tax expense
over the life of the plant that gave rise to the credits.

Temporary Cash Investments -- Temporary cash investments are stated at cost
which approximates market. The Company considers all highly liquid, short-term
investments with an original maturity of three months or less to be cash
equivalents.

Advertising Costs -- Advertising costs are charged to operations as incurred.

Revenue Recognition -- The Company recognizes revenue as earned.

Short-Term Financing Arrangement -- Ameritech provides short-term financing
and cash management services to its subsidiaries, including the Company.
Ameritech issues commercial paper and notes and secures bank loans to fund the
working capital requirement of its subsidiaries and invests short-term, excess
funds on their behalf. (See Note F).

<TABLE>
<CAPTION>
The results of these efforts are as follows:
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest charged to the Company by
Ameritech for financing................... $11.0 $10.5 $ 1.0
Cash management interest income earned
by the Company............................ $ -- $ -- $ 0.4
</TABLE>

Reclassifications -- In 1994, the Company made certain reclassifications,
which were applied retroactively, to its financial statements to correspond to
financial reporting for unregulated enterprises.

25
<PAGE>

<TABLE>
<CAPTION>
B. Income Taxes

The components of income tax expense follow:
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal
Current............................................................................. $111.9 $ 91.4 $100.8
Deferred, net....................................................................... 22.5 (25.2) (14.9)
Investment tax credits, net......................................................... (5.4) (5.2) (6.7)
------ ------ ------
Total................................................................................. 129.0 61.0 79.2
------ ------ ------
State and Local
Current............................................................................. 15.7 7.1 7.5
Deferred, net....................................................................... 2.1 (0.8) 0.5
------ ------ ------
Total................................................................................. 17.8 6.3 8.0
------ ------ ------
Total income tax expense.............................................................. $146.8 $ 67.3 $ 87.2
====== ====== ======
</TABLE>
Total income taxes paid were $124.3, $143.9 and $114.2 in 1995, 1994 and
1993, respectively.

The following is a reconciliation between the statutory federal income tax
rate for each of the past three years and the Company's effective tax rate:

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate..................................................... 35.0% 35.0% 35.0%

State income taxes, net of federal benefit........................................... 2.9 2.0 1.9

Reduction in tax expense due to amortization of investment tax credits .............. (0.9) (2.6) (2.5)

Benefit of tax rate differential applied under FAS 71 applied to
reversing temporary differences..................................................... -- (2.3) (2.2)

Effect of adjusting deferred income tax balances due to tax law changes.............. -- -- (0.9)

Other................................................................................ (0.1) 0.8 1.2
----- ----- -----
Effective income tax rate............................................................. 36.9% 32.9% 32.5%
===== ===== =====
</TABLE>

The statutory federal income tax rate was increased to 35% in 1993. Deferred
income tax balances were adjusted to reflect the enacted tax rate. The result
was a reduction in deferred income tax expense of $2.4, primarily from
increasing the deferred tax asset associated with the adoption of FAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."

26
<PAGE>

As of December 31, 1995 and 1994 the components of long-term accumulated
deferred income taxes were as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets
Postretirement and postemployment benefits.... $ 94.4 $ 98.6
Other......................................... 5.3 15.6
------- -------
99.7 114.2
------- -------
Deferred tax liabilities
Accelerated depreciation...................... 120.2 127.7
Prepaid pension cost.......................... 18.7 11.4
Other......................................... 7.0 --
------- -------
145.9 139.1
------- -------
Net deferred tax liability...................... $ 46.2 $ 24.9
======== ========
</TABLE>

Deferred income taxes in current assets and liabilities relate primarily to
temporary differences resulting from vacation pay, bad debts and work force
restructuring. The Company had immaterial valuation allowances against certain
deferred tax assets as of December 31, 1995 and 1994.

C. Property, Plant and Equipment

The components of property, plant and equipment are as follows:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land........................................... $ 11.7 $ 11.9
Buildings...................................... 280.0 280.7
Central office equipment....................... 1,142.2 1,070.2
Cable, wiring and conduit...................... 1,402.1 1,353.0
Other.......................................... 233.9 260.1
------- -------
3,069.9 2,975.9
Under construction............................. 15.1 24.2
------- -------
3,085.0 3,000.1
Less, accumulated depreciation................. 1,892.8 1,772.5
------- -------
$1,192.2 $1,227.6
======== ========
</TABLE>

Depreciation expense on property, plant and equipment was $187.6, $208.0 and
$214.5 in 1995, 1994 and 1993, respectively.

27
<PAGE>

D. Discontinuation of Regulatory Accounting -- FAS 71

In the fourth quarter of 1994, having achieved price regulation and
recognizing increased competition, the Company concluded that GAAP prescribed by
FAS 71 was no longer appropriate.

As a result of discontinuing the application of FAS 71, the Company recorded
an extraordinary noncash after-tax charge of $220.7 in 1994. The following table
is a summary of the extraordinary charge.

<TABLE>
<CAPTION>
Pretax After-Tax
------ ----------
<S> <C> <C>
Increase to the accumulated depreciation
balance........................................ $361.2 $224.2
Elimination of other net regulatory assets....... 7.3 4.5
Tax-related net regulatory liabilities........... -- (5.9)
Accelerated amortization of tax credits.......... -- (2.1)
------ ------
$368.5 $220.7
====== ======
</TABLE>

The adjustment of $361.2 to net property, plant and equipment was necessary
because estimated useful lives and depreciation methods historically prescribed
by regulators did not keep pace with technological changes and differed
significantly from those used by unregulated enterprises. Plant balances were
adjusted by increasing the accumulated depreciation balance. The necessary
adjustment was determined by a discounted cash flow analysis which considered
technological changes, capital requirements, and estimated impacts of future
competition. To corroborate this study, a depreciation reserve study was also
performed that identified inadequate accumulated depreciation levels by
individual asset categories. The Company believes these levels developed over
the years as a result of the systematic underdepreciation of assets resulting
from the regulatory process.

When adjusting its net property, plant and equipment, the Company gave effect
to shorter, more economically realistic lives, as previously outlined in Note A.

The discontinuation of FAS 71 also required the Company to eliminate from its
balance sheet the effects of any actions of regulators that had been recognized
as assets and liabilities pursuant to FAS 71, but would not have been recognized
as assets and liabilities by enterprises in general. The elimination of other
net regulatory assets primarily related to certain deferred vacation pay, debt
financing costs, and certain deferred assets.

Additionally, at the time the Company discontinued the application of FAS 71,
the income tax-related regulatory assets and liabilities were eliminated and
deferred tax balances adjusted to reflect application of FAS 109 consistent with
other unregulated enterprises.

As asset lives were shortened, the related unamortized investment tax credits
deemed already earned were credited to income.

The effects on the Company's financial statements going forward without FAS
71 are discussed in Management's Discussion and Analysis of Results of
Operations.

28
<PAGE>

E. Employee Benefit Plans

Pension Plans -- Ameritech maintains noncontributory defined benefit pension
plans covering substantially all employees and death benefit plans for
nonmanagement employees. Pension credits are allocated to subsidiaries based
upon the percentage of compensation for the management plan and per employee for
the nonmanagement plan. The Company's funding policy is to contribute annually
an amount up to the maximum amount that can be deducted for federal income tax
purposes. However, due to the funded status of the plans, no contributions have
been made for the years reported below. The following data provides information
on the Company's credits for the Ameritech plans:

<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Pension credits....................... $ (9.6) $(17.1) $ (9.5)
====== ====== ======
Current year credits as a percent of
salaries and wages.................. (5.4)% (9.2)% (4.5)%
====== ====== ======
</TABLE>

Pension credits were determined using the projected unit credit actuarial
method. The resulting pension credits are primarily attributable to favorable
investment performance and the funded status of the plans.

Certain disclosures are required to be made of the components of pension
credits and the funded status of the plans, including the actuarial present
value of accumulated plan benefits, accumulated projected benefit obligation and
the fair value of plan assets. Such disclosures are not presented for the
Company because the structure of the Ameritech plans does not permit the plans'
data to be readily disaggregated.

The assets of the Ameritech plans consist principally of debt and equity
securities, fixed income investments and real estate. As of December 31, 1995,
the fair value of plan assets available for plan benefits exceeded the projected
benefit obligation (calculated using a discount rate of 6.9% and 7.2% as of
December 31, 1995 and 1994, respectively). The assumed long-term rate of return
on plan assets used in determining pension credits (or income) was 7.25% for
1995, 1994 and 1993. The assumed increase in future compensation, also used in
the determination of the projected benefit obligation, was 4.5% in 1995 and
1994.

Postretirement Benefits Other Than Pensions -- Ameritech sponsors health care
and life insurance plans which provide noncontributory postretirement benefits
to substantially all of its retirees and their dependents. Ameritech accrues
the cost of postretirement benefits granted to employees as expense over the
period in which the employee renders service and becomes eligible to receive
benefits. The cost of postretirement health care and life insurance benefits
for current and future retirees was recognized as determined under the projected
unit credit actuarial method. Ameritech allocates its retiree health care costs
on a per participant basis, whereas group life insurance is allocated based on
compensation levels.

Ameritech has provided for part of the cost of these plans by making
contributions for health care benefits to voluntary employee benefit association
trust funds (VEBAs) and maintains retirement funding accounts (RFAs) to provide
life insurance benefits. Ameritech intends to continue to fund the
nonmanagement VEBA. During 1993 the Ameritech utilized excess pension plan
assets to help pay the nonmanagement retiree health care obligation. Funding of
the management VEBA was suspended effective in 1994, primarily due to a tax rate
increase from 31.0% to 39.6% on its investment income. The nonmanagement VEBA
and the RFAs earn income without tax. Plan assets consist principally of
corporate securities and bonds.

29
<PAGE>

Certain disclosures are required as to the components of postretirement benefit
costs and the funded status of the plans. Such disclosures are not presented
for the Company as the structure of the Ameritech plans does not permit the data
to be readily disaggregated. However, the Company has been advised by Ameritech
as to the following assumptions used in determining FAS 106 costs.

As of December 31, 1995, the accumulated postretirement benefit obligation
exceeded the fair value of plan assets available for plan benefits. The assumed
discount rate used to measure the accumulated postretirement benefit obligation
was 6.9% as of December 31, 1995 and 8.5% as of December 31, 1994. The assumed
rate of increase in future compensation levels was 4.5% in 1995 and 1994. The
expected long-term rate of return on plan assets was 7.25% in 1995, 1994 and
1993 on VEBAs, and 8.0% in 1995, 1994 and 1993 on RFAs. The assumed health care
cost trend rate in 1995 was 8.8% and 9.2% in 1994, and is assumed to decrease
gradually to 4.0% in 2007 and remain at that level. The assumed health care
cost trend rate is 8.4% for 1996. The health care cost trend rate has
significant effect on the amounts reported for costs each year as well as in the
accumulated postretirement benefit obligation. Specifically, increasing the
assumed health care cost trend rate by one percentage point in each year would
have increased the 1995 annual expense by approximately 12.8%.

Postretirement benefit cost under FAS 106 was $25.0 in 1995, $25.0 in 1994
and $23.5 in 1993.

As of December 31, 1995, the Company had 5,462 retirees eligible to receive
health care and group life insurance benefits.

Work Force and Other Restructuring -- During March 1994, Ameritech announced
a plan to reduce its existing nonmanagement work force. As of December 31,
1995, 1,344 employees have left the Company as a result of this restructuring.
See additional discussion in Management's Discussion and Analysis of Results of
Operations.

As a result of this restructuring, a pretax charge of $93.5, or $58.0 after-
tax, was recorded in 1994. In 1995, a credit of $36.9, or $23.1 after-tax, was
recorded resulting primarily from settlement gains from lump-sum pension
payments to former employees, net of additional restructuring charges of $2.9
recorded in the fourth quarter of 1995. The fourth quarter restructuring
charges include $1.9 associated with increased force costs related to the
restructuring started in 1994, as well as planned work force reductions due to
consolidation of Ameritech's data centers and $1.0 recorded to write down
certain data processing equipment to estimated net realizable value. The
cumulative gross program cost through December 31, 1995 totaled $132.0,
partially offset by settlement gains of $75.4 for an aggregate pretax net
program cost of $56.6, or $34.9 after-tax.

Management Work Force Reductions -- Effective January 1, 1995, management
employees who are asked to leave the Company will receive a severance payment
under the Management Separation Benefit Program. The Company accounts for this
benefit in accordance with FAS 112, "Employers' Accounting for Postemployment
Benefits," accruing the separation cost when incurred. 1995 activity under this
program included 20 employees.

During 1994, 81 management employees left the Company involuntarily. The net
cost of these reductions, including termination benefits, settlement and
curtailment gains from the pension plan, was a net credit to other operating
expense of $2.7 in 1995 and $3.8 in 1994. The 1995 credit resulted from
settlement gains from lump-sum pension payments to former employees.

During 1993, 305 management employees left the Company through voluntary and
involuntary programs. The net cost of these reductions, including termination
benefits, settlement and curtailment gains from the pension plan, was a credit
to other operating expense of $1.4.

The involuntary plans are funded from Company operations and required cash
payments of $0.5, $2.8 and $2.7 in 1995, 1994 and 1993, respectively.

30
<PAGE>

F. Debt Maturing Within One Year

Debt maturing within one year is included as debt in the computation of debt
ratios and consists of the following as of December 31:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes payable -- Ameritech........................ $150.6 $222.0
Long-term debt maturing within one year........... 0.3 0.3
------ ------
Total............................................. $150.9 $222.3
====== ======
Weighted average interest rate of notes payable,
year-end.......................................... 5.8% 5.7%
====== ======
</TABLE>

In December 1993, the Company called $90.0 of 8% debentures due in 2014 and
$130.0 of 8 1/8% debentures due in 2017 using funds obtained from short-term
borrowings. Early extinguishment of debt costs (including call premiums and
write-offs of unamortized deferred costs) in 1993 were $23.5 ($14.7 after-tax)
and were classified as an extraordinary item on the Statements of income and
reinvested earnings.

During 1991, Ameritech consolidated the short-term financing of its
subsidiaries at Ameritech Corporate. (See Note A -- Short-Term Financing
Arrangement).

31
<PAGE>

G. Long-Term Debt

Long-term debt consists principally of debentures issued by the Company.

The following table sets forth interest rates, scheduled maturities and other
information on long-term debt outstanding at December 31:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Forty year 4 3/8% debentures, due June 1, 2003.............. $20.0 $20.0
Forty year 4 3/4% debentures, due October 1, 2005........... 25.0 25.0
Forty year 5 1/2% debentures, due April 1, 2007............. 40.0 40.0
----- -----
85.0 85.0
Other....................................................... 0.8 1.1
----- -----
Total....................................................... $85.8 $86.1
===== =====
</TABLE>

The Company filed a registration statement with the Securities and Exchange
Commission for issuance of up to $225.0 in unsecured debt securities for general
corporate purposes. As of January 17, 1996, none of these securities had been
issued.

H. Lease Commitments

The Company leases certain facilities and equipment used in its operations
under both operating and capital leases. Rental expense under operating leases
was $6.9, $26.1 and $26.0 for 1995, 1994 and 1993 respectively. At December 31,
1995, the aggregate minimum rental commitments under noncancelable leases were
approximately as follows:

<TABLE>
<CAPTION>
Years Operating Capital
----- --------- -------
<S> <C> <C>
1996 ........................................... $ 0.2 $ 0.1
1997 ........................................... 0.2 --
1998 ........................................... 0.1 --
1999 ........................................... -- --
2000 ........................................... -- --
Thereafter ..................................... -- --
----- -----
Total minimum lease commitments ................ $ 0.5 0.1

Less: amount representing executory costs --
amount representing interest costs ....... --
-----
Present value of minimum lease payments ........ $ 0.1
=====
</TABLE>

32
<PAGE>

I. Financial Instruments

The following table presents the estimated fair value of the Company's
financial instruments as of December 31, 1995 and 1994:

<TABLE>
<CAPTION>
1995
-----------------
Carrying Fair
Value Value
-------- -----
<S> <C> <C>

Cash and temporary cash investments............. $ 0.1 $ 0.1
Debt............................................ 237.7 231.4
Long-term payable to ASI
(for postretirement benefits).................. 8.3 8.3
Other assets.................................... 14.3 14.3
Other liabilities............................... 6.4 6.4

<CAPTION>
1994
-----------------
Carrying Fair
Value Value
-------- -----
<S> <C> <C>
Cash and temporary cash investments............. $ 0.5 $ 0.5
Debt............................................ 310.9 290.7
Long-term payable to ASI
(for postretirement benefits).................. 8.8 8.8
Other assets.................................... 16.5 16.3
Other liabilities............................... 7.4 7.4
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments:

Cash and temporary cash investments -- The carrying value approximates fair
value because of the short-term maturity of these instruments.

Debt -- The carrying amount (including accrued interest) of debt maturing
within one year approximates fair value because of the short-term maturities
involved. The fair value of long-term debt was estimated based on the year-end
quoted market price for the same or similar issues.

Other assets and liabilities -- These financial instruments consist primarily
of other investments and customer deposits. The fair values of these items are
based on expected cash flows or, if available, quoted market prices.

Long-term payable to ASI (for postretirement benefits) -- Carrying value
approximates fair value.

33
<PAGE>

J. Additional Financial Information
As of December 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Balance sheets
Other current liabilities:
Accrued payroll........................................................ $ 7.8 $ 9.3
Compensated absences................................................... 14.4 15.2
Accrued taxes.......................................................... 53.5 36.4
Income taxes deferred one year......................................... (28.2) (31.4)
Advance billings and customer deposits................................. 39.0 71.9
Dividend payable....................................................... 58.6 --
Accrued interest....................................................... 8.8 7.6
Other.................................................................. 8.6 32.2
------ ------
Total.................................................................. $162.5 $141.2
====== ======
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statements of income
Capitalized interest............................................ $ (0.6) $ (0.7) $ (0.7)
Provision for uncollectibles.................................... 13.0 11.7 7.6
Advertising..................................................... 15.6 11.9 9.6
</TABLE>

Interest paid, net of amounts capitalized, was $16.2, $22.3 and $29.8 in
1995, 1994 and 1993, respectively.

Revenues from AT&T, consisting principally of interstate network access and
billing and collection services revenues, comprised approximately 10%, 11% and
12% of total revenues in 1995, 1994 and 1993, respectively. No other customer
accounted for more than 10% of total revenues.

K. Other Income, Net

The components of other income, net are as follows:

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Equity earnings of ASI.......................................... $ (3.6) $ (5.0) $ (3.8)
Other, net...................................................... 1.5 0.2 (1.9)
------ ------ ------
Total........................................................... $ (2.1) $ (4.8) $ (5.7)
====== ====== ======
</TABLE>

34
<PAGE>

L. Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
Net
Operating Income
Revenues Income (Loss)
-------- --------- ------
<S> <C> <C> <C>
1995
----
1st Quarter.................................... $ 291.7 $121.5 $ 73.6
2nd Quarter.................................... 299.0 87.2 53.0
3rd Quarter.................................... 306.0 102.3 62.6
4th Quarter.................................... 315.7 102.0 61.7
-------- ------ -------
Total.......................................... $1,212.4 $413.0 $ 250.9
======== ====== =======

1994
----
1st Quarter.................................... $ 293.0 $ 13.0 $ 7.0
2nd Quarter.................................... 289.7 77.3 49.6
3rd Quarter.................................... 291.9 40.5 22.2
4th Quarter.................................... 293.5 86.0 (162.5)
-------- ------ -------
Total.......................................... $1,168.1 $216.8 $ (83.7)
======== ====== =======
</TABLE>

Total nonmanagement work force restructuring credits in 1995 were $36.9 or
$23.1 after-tax as follows: $36.5 or $22.9 after-tax in the first quarter, $2.7
or $1.7 after-tax in the third quarter and a net charge of $2.3 or $1.5 after-
tax in the fourth quarter. The fourth quarter restructuring charge includes
costs related to the restructuring started in 1994 and charges relating to
consolidation of Ameritech's data centers as discussed more fully in Note E.

Total nonmanagement work force restructuring charges in 1994 were $93.5 or
$58.0 after-tax as follows: $68.9 or $42.8 after-tax in the first quarter, $36.0
or $22.4 after-tax in the third quarter, and a net credit of $11.4 or $7.2
after-tax in the fourth quarter. The credit in the fourth quarter results from
settlement gains. (See Note E above.) The fourth quarter of 1994 also includes a
$220.7 noncash after-tax extraordinary charge related to the discontinuance of
applying FAS 71, as discussed in Note D above.

All adjustments necessary for a fair statement of results for each period
have been included.

M. Calculation of Ratio of Earnings to Fixed Charges

The ratio of earnings to fixed charges of the Company for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991 was 20.59, 8.65, 8.13, 7.13 and
6.29, respectively.

For the purpose of calculating this ratio, (i) earnings have been calculated
by adding to income before interest expense and extraordinary item, the amount
of related taxes on income and the portion of rentals representative of the
interest factor, (ii) the Company considers one-third of rental expense to be
the amount representing return on capital, and (iii) fixed charges comprise
total interest expense and such portion of rentals.

35
<PAGE>

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

No changes in nor disagreements with accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure occurred during the period covered by this annual report.

36
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as part of the report:

<TABLE>
<CAPTION>
<S> <C>
(1) Financial Statements:
Page
----
Selected Financial and Operating Data.................................................... 10

Report of Independent Public Accountants................................................. 19

Statements:

Statements of Income and Reinvested Earnings.......................................... 20
Balance Sheets........................................................................ 21
Statements of Cash Flows.............................................................. 22
Notes to Financial Statements......................................................... 23

(2) Financial Statement Schedule:

II Valuation and Qualifying Accounts............................................... 40
</TABLE>

Financial statement schedules other than the one listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required or
applicable.

(3) Exhibits

Exhibits identified in parentheses below, on file with the SEC, are
incorporated herein by reference as exhibits hereto.

<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
3a -- Articles of Incorporation of the Company as amended May 11, 1990
(Exhibit 3a to Form 10-K for 1990, File No. 1-6746).

3b -- By-laws of the Company as amended April 7, 1990 (Exhibit 3b to
Form 10-K for 1990, File No. 1-6746).

4 -- No instrument which defines the rights of holders of long and inter-
mediate term debt of the Company is filed herewith pursuant to
Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
Company hereby agrees to furnish a copy of any such instrument to the
SEC upon request.

10 -- Reorganization and Divestiture Agreement between American Telephone and
Telegraph Company, American Information Technologies Corporation and
Affiliates, dated as of November 1, 1983 (Exhibit 10a to Form 10-K for
1983 for American Information Technologies Corporation, File No.
1-8612).

12 -- Computation of ratio of earnings to fixed charges for the five years
ended December 31, 1995.

23 -- Consent of Arthur Andersen LLP.

27 -- Financial Data Schedule for the year ended December 31, 1995.
</TABLE>

37
<PAGE>

(b) Reports on Form 8-K:

No Form 8-K was filed by the registrant during the quarter for which this
report is filed.

38
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

INDIANA BELL TELEPHONE COMPANY, INCORPORATED

/s/ Laurie L. Streling
_______________________________
(Laura L. Streling,
Comptroller,
State Finance Organization)

March 11, 1996

Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

Principal Executive Officer:

/s/ Kent A. Lebherz
- ----------------------------------------
(Kent A. Lebherz,
President)

Principal Financial and Accounting Officer:

/s/ Laurie L. Streling
- ----------------------------------------
(Laura L. Streling,
Comptroller,
State Finance Organization)

Ameritech Corporation:

/s/ Barry K. Allen
- ----------------------------------------
(Barry K. Allen,
Senior Vice President,
Communications and Information Services)

The sole shareowner of the registrant, which
has elected under the laws of Indiana to be managed by
the shareowner rather than by a board of directors

March 11, 1996

39
<PAGE>

<TABLE>
<CAPTION>
INDIANA BELL TELEPHONE COMPANY, INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLES
(Dollars in Millions)

COL. A COL. B COL. C COL. D COL. E
------ ------ ------------------------------ ------ ------
Additions
------------------------------
Balance
at Charged Charged Balance
Beginning to to Other at End of
Classification of Period Expense (a) Accounts (b) Deductions (c) Period
- -------------- --------- ----------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year 1995 .................. $ 7.8 $ 12.7 $ 34.7 $ 52.3 $ 2.9
Year 1994 .................. 5.6 11.7 15.0 24.5 7.8
Year 1993 .................. 3.1 7.6 20.7 25.8 5.6
- -----------------
</TABLE>

(a) Excludes direct charges and credits to expense on the statements of income
and reinvested earnings related to interexchange carrier receivables.

(b) Includes principally amounts related to the interexchange carrier
receivables which are being billed by the Company and amounts previously
written off which were credited directly to this account when recovered.

<PAGE>

Exhibit 12
<TABLE>
<CAPTION>
INDIANA BELL TELEPHONE COMPANY, INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)

1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1. EARNINGS
a) Income before interest cost, income
tax, extraordinary charge and
cumulative effect of change in
accounting principles ..................... $ 415.7 $ 222.3 $ 297.7 $ 276.2 $ 263.4

b) Portion of rental expense representative
of the interest factor (1) ................ 2.3 8.7 8.7 4.9 6.0
-------- -------- -------- -------- --------
Total 1(a) through 1(b) ................ $ 418.0 $ 231.0 $ 306.4 $ 281.1 $ 269.4
======== ======== ======== ======== ========

2. FIXED CHARGES
a) Total interest cost including capital
lease obligations ......................... $ 18.0 $ 18.0 $ 29.0 $ 34.5 $ 36.8

b) Portion of rental expense representative
of the interest factor (1) ................ 2.3 8.7 8.7 4.9 6.0
-------- -------- -------- -------- --------
Total 2(a) through 2(b) ................ $ 20.3 $ 26.7 $ 37.7 $ 39.4 $ 42.8
======== ======== ======== ======== ========

RATIO OF EARNINGS TO FIXED CHARGES................ 20.59 8.65 8.13 7.13 6.29
========= ========= ========= ========= =========
</TABLE>

(1) One-third of rental expense is considered to be the amount representing
return on capital.

(2) The results for 1995 reflect a $36.9 pretax credit primarily from settlement
gains resulting from lump sum pension payments from the pension plan to
former employees who left the business in the nonmanagement work force
restructuring, partially offset by increased force costs related to the
restructuring started in 1994, as well as write-down of certain data
processing equipment to net realizable value. Results for 1994 reflect a
$93.5 pretax charge associated with the nonmanagement work force
restructuring. Costs of the work force restructuring program have largely
been funded from the Ameritech Pension Plan.

(3) Interest cost includes capitalized interest expense.

(4) Earnings have not been adjusted to reflect the timing of dividends received
and equity in earnings of unconsolidated affiliates since the effect on an
annual basis has been insignificant.

<PAGE>

Exhibit 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 17, 1996, included in this Form 10-K for
the year ended December 31, 1995, into Indiana Bell Telephone Company,
Incorporated's previously filed Registration Statement File No. 33-51027.

ARTHUR ANDERSEN LLP

Chicago, Illinois
March 11, 1996

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Indiana Bell
Telephone Company, Incorporated's December 31, 1995 Financial Statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 100
<SECURITIES> 0<F1>
<RECEIVABLES> 243,000
<ALLOWANCES> 2,900
<INVENTORY> 4,300
<CURRENT-ASSETS> 255,700
<PP&E> 3,085,000
<DEPRECIATION> 1,892,800
<TOTAL-ASSETS> 1,588,200
<CURRENT-LIABILITIES> 450,300
<BONDS> 85,800
0
0
<COMMON> 539,600
<OTHER-SE> 91,800
<TOTAL-LIABILITY-AND-EQUITY> 1,558,200
<SALES> 0<F2>
<TOTAL-REVENUES> 1,212,400
<CGS> 0<F3>
<TOTAL-COSTS> 799,400
<OTHER-EXPENSES> (2,100)
<LOSS-PROVISION> 13,000
<INTEREST-EXPENSE> 17,400
<INCOME-PRETAX> 397,700
<INCOME-TAX> 146,800
<INCOME-CONTINUING> 250,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250,900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Securities are not material and therefore have not been stated separately in
the financial statements. This amount is included in the Cash tag.
<F2>Net sales of tangible products is not more than 10% of total operating revenues
and therefore has not been stated separately in the financial statements
pursuant to Regulation S-X, Rule 5-03(b). This amount is included in the
"Total Revenues" tag.
<F3>Cost of tangible goods sold is included in cost of service and products in the
financial statements and the "Total Cost" tag, pursuant to Regulation S-X, Rule
5-03(b).
</FN>

</TABLE>