TELEPHONE & DATA SYSTEMS INC, 10-K, 1998-03-27

TELEPHONE & DATA SYSTEMS INC
10-K, 1998-03-27
RADIOTELEPHONE COMMUNICATIONS

Previous: TCI COMMUNICATIONS INC, 10-K, 1998-03-27

Next: TEXAS EASTERN TRANSMISSION CORP, 10-K, 1998-03-27

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
---------------------
FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-8251
---------------------
TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

IOWA 36-2669023
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
30 NORTH LASALLE STREET, CHICAGO, 60602
ILLINOIS
(Address of principal executive offices) (Zip code)

REGISTRANT'S TELEPHONE NUMBER: (312) 630-1900

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

<TABLE>
<S> <C>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- ----------------------------------- ------------------------------
Common Shares, $1 par value American Stock Exchange
8.5% TDS-Obligated Manditorily
Redeemable Preferred Securities of
Subsidiary Trust American Stock Exchange
8.04% TDS-Obligated Manditorily
Redeemable Preferred Securities of
Subsidiary Trust American Stock Exchange
</TABLE>

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

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

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

As of February 27, 1998, the aggregate market values of the registrant's
Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates
were approximately $2.3 billion, $22.3 million and $41.0 million, respectively.
The closing price of the Common Shares on February 27, 1998, was $43.56, as
reported by the American Stock Exchange. Because no market exists for the Series
A Common Shares and Preferred Shares, the registrant has assumed for purposes
hereof that (i) each Series A Common Share has a market value equal to one
Common Share because the Series A Common Shares were initially issued by the
registrant in exchange for Common Shares on a one-for-one basis and are
convertible on a share-for-share basis into Common Shares, (ii) each
nonconvertible Preferred Share has a market value of $100 because each of such
shares had a stated value of $100 when issued, and (iii) each convertible
Preferred Share has a value of $43.56 times the number of Common Shares into
which it was convertible on February 27, 1998.

The number of shares outstanding of each of the registrant's classes of
common stock, as of February 27, 1998, is 53,934,975 Common Shares, $1 par
value, and 6,936,277 Series A Common Shares, $1 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Those sections or portions of the registrant's 1997 Annual Report to
Shareholders described in the cross reference sheet and table of contents
attached hereto are incorporated by reference into Part II of this report.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE NUMBER
OR REFERENCE(1)
--------------------
<S> <C> <C>
Item 1. Business........................................................................... 3
Item 2. Properties......................................................................... 48
Item 3. Legal Proceedings.................................................................. 49
Item 4. Submission of Matters to a Vote of Security Holders................................ 49
Market for Registrant's Common Equity and Related Stockholder Matters.............. 50(2)
Item 5.
Item 6. Selected Financial Data............................................................ 50(3)
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 50(4)
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 50
Item 8. Financial Statements and Supplementary Data........................................ 50(5)
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... 50
Item 9.
Item 10. Directors and Executive Officers of the Registrant................................. 51
Item 11. Executive Compensation............................................................. 56
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 66
Item 13. Certain Relationships and Related Transactions..................................... 69
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 70
</TABLE>

- ------------------------

(1) Parenthetical references are to information incorporated by reference from
the registrant's Exhibit 13, which includes portions of its Annual Report to
Shareholders for the year ended December 31, 1997 ("Annual Report").

(2) Annual Report sections entitled "TDS Stock and Dividend Information" and
"Market Price per Common Share by Quarter."

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

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

(5) Annual Report sections entitled "Consolidated Statements of Income,"
"Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
"Consolidated Statements of Common Stockholders' Equity," "Notes to
Consolidated Financial Statements," "Consolidated Quarterly Income
Information (Unaudited)" and "Report of Independent Public Accountants."
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
TELEPHONE (312) 630-1900

[LOGO]

- --------------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------------

ITEM 1. BUSINESS

Telephone and Data Systems, Inc. (the "Company" or "TDS"), is a diversified
telecommunications service company with established cellular telephone, local
telephone and radio paging operations and developing personal communications
services ("PCS") operations. At December 31, 1997, the Company served
approximately 3.2 million customer units in 37 states, including 1,710,000
cellular telephones, 515,500 telephone access lines, 125,000 PCS telephones and
811,100 pagers. For the year ended December 31, 1997, cellular operations
provided 60% of the Company's consolidated revenues; telephone operations
provided 30%; PCS operations provided 4%; and paging operations provided 6%. The
Company's long-term business development strategy is to expand its existing
operations through internal growth and acquisitions and to explore and develop
other telecommunications businesses that management believes will utilize the
Company's expertise in customer-based telecommunications.

The Company conducts substantially all of its cellular operations through
its 81%-owned subsidiary, United States Cellular Corporation [AMEX: USM]. At
December 31, 1997, U.S. Cellular provided cellular telephone service to
1,710,000 customers through 134 majority-owned and managed ("consolidated")
cellular systems serving approximately 16% of the geography and approximately 9%
of the population of the United States. Since 1985, when U.S. Cellular began
providing cellular service in Knoxville, Tennessee, U.S. Cellular has expanded
its cellular networks and customer service operations to cover 143 managed
markets in 26 states as of December 31, 1997. In total, the Company operated
eight market clusters, of which four had a total population of more than two
million, and each of which had a total population of more than one million.
Overall, 86% of the Company's 26.2 million population equivalents were in
markets which were consolidated, 2% were in managed but not consolidated markets
and 12% were in markets in which the Company holds an investment interest.

The Company conducts substantially all of its telephone operations through
its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").
At December 31, 1997, TDS Telecom operated 106 telephone companies serving
515,500 access lines in 28 states. TDS Telecom is expanding by offering
additional lines of telecommunications products and services to existing
customers and through the selective acquisition of local exchange telephone
companies serving rural and suburban areas. TDS Telecom has acquired 18
telephone companies and divested one telephone company since the beginning of
1993. These net acquisitions added 89,600 access lines during this five-year
period, while internal growth added 104,200 lines.

The Company conducts substantially all of its broadband personal
communications services ("PCS") operations through its 83%-owned subsidiary,
Aerial Communications, Inc. [NASDAQ: AERL]. Aerial provides PCS service in the
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus Major Trading Areas ("MTAs") (collectively, the "PCS Markets"). The PCS
Markets include approximately 27.6 million population equivalents. Aerial has
commenced service in all its markets and provided service to 125,000 PCS
telephones as of December 31, 1997.

3
<PAGE>
The Company conducts substantially all of its radio paging operations
through its 82%-owned subsidiary, American Paging, Inc. [AMEX: APP]. American
Paging offers radio paging and related services through its subsidiaries. Since
the beginning of 1993, the number of pagers in service increased from 322,200 to
811,100 at December 31, 1997, primarily from internal growth. American Paging
provides service in 21 states and the District of Columbia through 35 sales and
service offices. American Paging's service areas cover a total population of
approximately 76 million.

The Company was incorporated in Iowa in 1968. The Company's executive
offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its
telephone number is 312-630-1900.

Unless the context indicates otherwise: (I) references to "TDS" or the
"Company" refer to Telephone and Data Systems, Inc., and its subsidiaries; (ii)
references to "USM" or "U.S. Cellular" refer to United States Cellular
Corporation and its subsidiaries; (iii) references to "TDS Telecom" refer to TDS
Telecommunications Corporation and its subsidiaries; (iv) references to "AERL"
or "Aerial" refer to Aerial Communications, Inc. and its subsidiaries;(v)
references to "APP" or "American Paging" refer to American Paging, Inc. and its
subsidiaries; (vi) references to "MSA" or to a particular city refer to the
Metropolitan Statistical Area, as designated by the U.S. Office of Management
and Budget and used by the Federal Communications Commission ("FCC") in
designating metropolitan cellular market areas; (vii) references to "RSA" refer
to the Rural Service Area, as used by the FCC in designating non-MSA cellular
market areas; (viii) references to cellular "markets" or "systems" refer to
MSAs, RSAs or both; (ix) references to "MTA" refer to Major Trading Areas, as
used by the FCC in designating PCS markets; (x) references to "population
equivalents" mean the population of a market, based on 1997 Claritas Estimates,
multiplied by the percentage interests that the Company owns or has the right to
acquire in an entity licensed, designated to receive a license or expected to
receive a construction permit ("licensee") by the FCC to construct or operate a
cellular or a PCS system in such market.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT

This Annual Report on Form 10-K, including exhibits, contains
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations are forward-looking statements.
These statements contain potential risks and uncertainties and therefore, actual
results may differ materially. TDS undertakes no obligation to update publicly
any forward-looking statements whether as a result of new information, future
events or otherwise.

Important factors that may affect these projections or expectations include,
but are not limited to: changes in the overall economy; changes in competition
in markets in which TDS operates; advances in telecommunications technology;
changes in the telecommunications regulatory environment; pending and future
litigation; availability of future financing; start-up of PCS operations; and
unanticipated changes in growth in cellular and PCS customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets. Readers should evaluate any statements in light of these important
factors.

PROPOSED CORPORATE RESTRUCTURING

The Board of Directors of Telephone and Data Systems, Inc. (the "Board") has
adopted a proposal which, if approved by shareholders and implemented by the
Board, would authorize the Board to issue three new classes of common stock and
change the state of incorporation of TDS from Iowa to Delaware (the "Tracking
Stock Proposal"). The three new classes of stock are intended to separately
reflect the performance of TDS's cellular telephone, landline telephone and
personal communications services businesses ("Tracking Stocks").

The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of TDS and of TDS's three principal
business groups ("Tracking Groups"), thereby

4
<PAGE>
enhancing shareholder value over the long term, while at the same time enabling
TDS's businesses to preserve the benefits of being part of a consolidated
enterprise. The Tracking Stock Proposal is expected to:

- provide TDS with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups;

- enable TDS to more effectively tailor employee benefit plans to provide
incentives to employees of the Tracking Groups;

- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives;

- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.

Pursuant to the Tracking Stock Proposal each issued Preferred Share, Common
Share and Series A Common Share of TDS would be converted into a new Preferred
Share, Common Share and Series A Common Share, respectively, of Telephone and
Data Systems, Inc., a Delaware corporation. In addition, the Tracking Stock
Proposal would authorize three new classes of common stock, to be designated as
United States Cellular Group Common Shares (the "Cellular Group Shares"), TDS
Telecommunications Group Common Shares (the "Telecom Group Shares") and Aerial
Communications Group Common Shares (the "Aerial Group Shares"). The Cellular
Group Shares, when issued, are intended to reflect the separate performance of
the United States Cellular Group (the "Cellular Group"), which consists of TDS's
interest in United States Cellular Corporation, a subsidiary of TDS operating
and investing in cellular telephone companies and properties ("U.S. Cellular").
The Telecom Group Shares, when issued, are intended to reflect the separate
performance of the TDS Telecommunications Group (the "Telecom Group"), which
primarily consists of TDS's interest in TDS Telecommunications Corporation, a
subsidiary of TDS operating landline telephone companies ("TDS Telecom"). The
Aerial Group Shares, when issued, are intended to reflect the separate
performance of the Aerial Communications Group (the "Aerial Group"), which
consists of TDS's interest in Aerial Communications, Inc., a subsidiary of TDS
providing broadband personal communications services ("Aerial").

Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
intends to:

- offer and sell Telecom Group Shares in a public offering for cash, subject
to prevailing market and other conditions (the "Telecom Public Offering"),
and allocate the net proceeds thereof to the Telecom Group,

- issue Cellular Group Shares in exchange for all of the Common Shares of U.
S. Cellular which are not owned by TDS, subject to approval by the board
of directors and the shareholders of U. S. Cellular, (the "U.S. Cellular
Merger"),

- issue Aerial Group Shares in exchange for all of the Common Shares of
Aerial which are not owned by TDS, subject to approval by the board of
directors and the shareholders of Aerial (the "Aerial Merger"), and

- distribute one Cellular Group Share, two-thirds of a Telecom Group Share
and two-thirds of an Aerial Group Share in the form of a stock dividend
with respect to each outstanding Series A Common Share and Common Share of
TDS (the "Distribution").

It is currently expected that the Distribution would take place in July 1998
or later, after the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger, although the Board reserves the right to effect
all or any part of the Distribution at any time after the approval of the
Tracking Stock Proposal, or not to make the Distribution, regardless of whether
or not such other transactions have taken place.

5
<PAGE>
the Outstanding Interest would initially represent in the aggregate an
approximately 80% interest in each Tracking Group. Upon completion of all of the
Transactions as contemplated, approximately 20% of the common shareholders'
value of each Tracking Group would initially be retained (the "Retained
Interest") in a residual group (the "TDS Group"), along with all other interests
held by TDS.

The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group, and the Aerial Group to the extent of the Retained Interest
in the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.

Following the Distribution, subject to the legal and contractual
restrictions on the payment of dividends, the Board currently intends to
establish an annual dividend on the TDS Common Shares and Series A Common Shares
in an amount equal to $.11 per share. The Board also currently intends to
establish an annual dividend on the Telecom Group Shares in an amount equal to
$.50 per share. (Based on the expected distribution ratio of two-thirds of a
Telecom Group Share for each existing Common Share and Series A Common Share,
the dividend on Telecom Group shares would equate to a per share dividend of
$.33 per existing Common Share and Series A Common Share. The total of the
dividend on TDS Common Shares and Series A Common Shares of $.11 and the
equivalent dividend on Telecom Group Shares of $.33 equals the existing current
annual dividend on the existing Common Shares and Series A Common Shares of
$.44.) With regard to the Cellular Group and the Aerial Group Shares, the Board
currently intends to retain future earnings, if any, for the development of the
businesses of the Cellular Group and the Aerial Group, respectively, and does
not anticipate paying dividends on the Cellular Group or the Aerial Group Shares
in the foreseeable future. Future dividends on the shares of common stock will
be payable when, as and if declared by the Board out of the lesser of (1) all
funds of TDS legally available therefor and (2) the available dividend amount
with respect to the relevant Group.

On a pro forma basis assuming the Tracking Stock Proposal became effective,
funds of TDS legally available for the payment of dividends ("Surplus")
(approximately $1,966 million as of December 31, 1997, based on the financial
statements) is an amount approximately equal to the Total Common and Preferred
Equity of TDS less the par or stated value of all shares of common and preferred
stock outstanding (204,922,000 shares as of December 31, 1997 after the
Distribution). With respect to any Tracking Group, the Available Dividend Amount
(approximately $1,222 million for the Cellular Group, $287 million for the
Telecom Group and $144 million for the Aerial Group as of December 31, 1997,
based on the financial statements) is an amount approximately equal to the
Outstanding Interest Fraction of such Tracking Group (approximately 75% after
the Distribution) times the respective Tracking Group Equity less the par value
of the respective outstanding Tracking Group shares. With respect to the TDS
Group, the Available Dividend Amount (approximately $602 million as of December
31, 1997) is an amount approximately equal to the greater of a) an amount
(approximately $313 million) which is approximately equal to the Surplus of TDS
less the sum of all Available Dividend Amounts of all Tracking Groups or b) an
amount (approximately $602 million) which is approximately equal to the TDS
Group Equity and Preferred Stock less the par or stated value of all Common and
Series A Common Shares and Preferred Stock outstanding.

Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, some or all of the arrangements
between TDS and such subsidiaries would be determined solely by policies that
management of TDS believes to be reasonable. Many of such policies would
continue the arrangements which presently exist between TDS and U.S. Cellular or
Aerial pursuant to the intercompany agreements, but TDS would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated.

6
<PAGE>
assets, liabilities (including contingent liabilities) and shareholders' equity
of TDS attributed to the Cellular Group, the Telecom Group, the Aerial Group,
and the TDS Group, such attribution will not affect the legal title to such
assets or responsibility for such liabilities. Holders of the Cellular Group,
the
Telecom Group, and the Aerial Group Common Shares will be, and holders of TDS
Common Shares and Series A Common Shares will continue to be, shareholders of
TDS. TDS and its subsidiaries will each continue to be responsible for their
respective liabilities.

LEGAL PROCEEDINGS. On December 29, 1997, a party, which claims to be a
holder of U.S. Cellular Common Shares, filed a putative class action complaint
on behalf of common stockholders of U.S. Cellular in the Court of Chancery of
the State of Delaware in New Castle County. The complaint names as defendants
TDS, U.S. Cellular, and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants and seeks to have the U.S. Cellular
Merger enjoined or, if it is consummated, to have it rescinded and to recover
unspecified damages, fees and expenses. The defendants have been served with the
complaint in this case but have not yet responded to the complaint. The time for
the defendants to respond has been extended. The timing for a response will be
determined based on discussions between counsel for plaintiffs and defendants,
but a response is not expected to take place for at least one or more months. On
January 30, 1998, a virtually identical complaint was filed by an individual.
None of the defendants have been served with this complaint. It is expected that
these cases will be consolidated.

On January 5, 1998, an individual who claims to be a holder of Aerial Common
Shares, filed a putative class action complaint on behalf of common stockholders
of Aerial in the Court of Chancery of the State of Delaware in New Castle
County. The complaint names as defendants TDS, Aerial and the directors of TDS
and Aerial. The complaint alleges a breach of fiduciary duties by the defendants
and seeks to have the Aerial Merger enjoined or, if it is consummated, to have
it rescinded and to recover unspecified damages, fees and expenses. The
defendants have been served with the complaint in this case but have not yet
responded to the complaint. The time for the defendants to respond has been
extended. The timing for a response will be determined based on discussions
between counsel for plaintiffs and defendants, but a response is not expected to
take place for at least one or more months. On February 6, 1998, a virtually
identical complaint was filed by a second individual. None of the defendants
have been served with this complaint. It is expected that these cases will be
consolidated.

The Company intends to vigorously defend against these lawsuits.

The foregoing description of the Tracking Stock Proposal is qualified in its
entirety to the more complete description contained in the Company's proxy
statement dated March 24, 1998, which is incorporated herein by reference.

CELLULAR TELEPHONE OPERATIONS

The Company's cellular operations are conducted through U.S. Cellular and
subsidiaries. U.S. Cellular served 1,710,000 customers through 134
majority-owned and managed cellular systems at December 31, 1997. Overall, U.S.
Cellular owned 26.2 million population equivalents in 192 markets at December
31, 1997.

THE CELLULAR TELEPHONE INDUSTRY

Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.

Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching

7
<PAGE>
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network and potentially other MTSOs. Each conversation on a cellular
phone involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.

The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. PCS has become
available in certain areas of the United States, including U.S. Cellular's
markets, and U.S. Cellular expects PCS operators to complete initial deployment
of PCS in portions of all of its market clusters by the end of 1998.
Additionally, emerging technologies such as Enhanced Specialized Mobile Radio
("ESMR") and mobile satellite communication systems may prove to be competitive
with cellular service in the future in some or all of U.S. Cellular markets.

The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers may be charged a separate
fee for system access, airtime, long-distance calls, and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. The system that provides the service to these roamers will generate
usage revenue. Many operators, including U.S. Cellular, charge premium rates for
this roaming service.

There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, on
certain cellular systems the radio transmission is done on an analog basis.
During 1992, a new transmission technique was approved for implementation by the
cellular industry. Time Division Multiple Access ("TDMA") technology was
selected as one industry standard by the cellular industry and has been deployed
in several markets, including U.S. Cellular's operations in portions of several
clusters. Another digital technology, Code Division Multiple Access ("CDMA"), is
being deployed by U.S. Cellular in portions of certain clusters. Digital radio
technology offers several advantages, including greater privacy, less
transmission noise, greater system capacity and potentially lower incremental
costs for additional customers. The conversion from analog to digital radio
technology is continuing on an industry-wide basis; however this process is
expected to take a number of years. PCS operators have deployed TDMA, CDMA and a
third digital technology, Global Systems for Mobile Communications ("GSM"), in
the markets where they have begun operations.

The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.

CELLULAR OPERATIONS

From its inception in 1983 until 1993, U.S. Cellular had principally been in
a start-up phase. During that time, U.S. Cellular's activities had been
concentrated significantly on the acquisition of interests in cellular licensees
and on the construction and initial operation of cellular systems. The
development of a cellular system is capital-intensive and requires substantial
investment prior to and subsequent to initial operation. U.S. Cellular
experienced operating losses and net losses from its inception until 1993.
During the past four years, U.S. Cellular has generated operations-driven net
income and has significantly increased its operating cash flows during that
time. Management anticipates further growth in cellular

8
<PAGE>
units in service and revenues as U.S. Cellular continues to expand through
internal growth. Marketing and system operations expenses associated with this
expansion may reduce the rate of growth in operating cash flow and operating
income during the period of increased growth. In addition, U.S. Cellular
anticipates that the seasonality of revenue streams and operating expenses may
cause U.S. Cellular's operating income to vary from quarter to quarter.

While U.S. Cellular produced operating income and net income during the last
four years, changes in any of several factors may reduce U.S. Cellular's growth
in operating income and net income over the next few years. These factors
include: (i) the growth rate in U.S. Cellular's customer base; (ii) the usage
and pricing of cellular services; (iii) the churn rate; (iv) the cost of
providing cellular services, including the cost of attracting new customers; (v)
the introduction of competition from PCS and other emerging technologies; and
(vi) continuing technological advances which may provide competitive
alternatives to cellular service.

U.S. Cellular is building a substantial presence in selected geographic
areas throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas: Wisconsin/Illinois/Indiana, Iowa/Missouri,
Eastern North Carolina/South Carolina, West Virginia/Maryland/Pennsylvania/Ohio,
Virginia, Washington/Oregon/Idaho, Oregon/California, Maine/New
Hampshire/Vermont, Florida/Georgia, Oklahoma/Missouri/Kansas, Texas/Oklahoma,
Eastern Tennessee/Western North Carolina, and Southwestern Texas. See "U.S.
Cellular's Cellular Interests." U.S. Cellular has acquired its cellular
interests through the wireline application process (17%), including settlements
and exchanges with other applicants, and through acquisitions (83%), including
acquisitions from TDS and third parties.

CELLULAR SYSTEMS DEVELOPMENT

ACQUISITIONS. During the last five years, U.S. Cellular has expanded its
size, particularly in contiguous or adjacent markets, through acquisitions which
have been aimed at strengthening U.S. Cellular's position in the cellular
industry. This growth has resulted primarily from acquisitions of interests in
mid-sized and rural markets and has been based on obtaining interests with
rights to manage the underlying market.

Including acquisitions of cellular interests from TDS, U.S. Cellular has
increased its population equivalents by 17% from approximately 22.5 million at
December 31, 1992, to approximately 26.2 million at December 31, 1997. Markets
managed by U.S. Cellular have increased from 116 markets at December 31, 1992,
to 143 markets at December 31, 1997. As of December 31, 1997, 88% of U.S.
Cellular's population equivalents represented interests in markets it manages
compared to 75% at December 31, 1992.

Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. U.S. Cellular's
population equivalents grew at a compound annual rate of just 3% over the last
five years due to the increased number of exchange and divestiture transactions
in the past few years.

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

U.S. Cellular, or TDS for the benefit of U.S. Cellular, has historically
negotiated acquisitions of cellular interests from third parties primarily in
consideration for U.S. Cellular's or TDS's equity securities. Cellular interests
acquired by TDS in these transactions have been assigned to U.S. Cellular. At
that time,

9
<PAGE>
U.S. Cellular reimbursed TDS for the value of TDS securities issued in such
transactions, generally by issuing Common Shares to TDS or by increasing the
balance due TDS under U.S. Cellular's Revolving Credit Agreement in amounts
equal to the value of TDS securities delivered at the time the acquisitions were
completed. The fair market value of the U.S. Cellular securities issued to TDS
in connection with these transactions was equal to the fair market value of the
TDS securities delivered in the transactions and was determined at the time the
transactions were completed.

In the past four years, U.S. Cellular has also negotiated substantial
divestitures and exchanges of cellular interests with third parties. The
consideration received from these divestitures of non-strategic markets has
primarily been cash, which has been used to reduce debt or for general corporate
purposes. The exchanges have included the divestiture of controlling interests
in non-strategic markets in exchange for controlling interests in markets which
further enhance U.S. Cellular's clusters.

COMPLETED ACQUISITIONS. During 1997, U.S. Cellular, or TDS for the benefit
of U.S. Cellular, purchased majority interests in two markets and several
additional minority interests, representing approximately 534,000 population
equivalents. The total consideration paid for these purchases, primarily in the
form of cash and TDS Common Shares totaled $81.4 million.

During 1997, U.S. Cellular completed the divestiture of majority interests
in one market and minority interests in two other markets, representing
approximately 358,000 population equivalents, for an aggregate consideration of
$54.5 million in cash and receivables. The two minority interests involved
interests U.S. Cellular had previously acquired from TDS pursuant to an
agreement between the two companies signed in June 1996.

Also during 1997, U.S. Cellular completed an exchange with BellSouth
Corporation ("BellSouth"). Pursuant to the exchange, U.S. Cellular received
majority interests representing approximately 4.0 million pops in exchange for
majority interests representing 2.0 million pops, minority interests
representing 1.2 million pops and a net amount of $86.7 million in cash. The
majority interests U.S. Cellular received are in 12 markets adjacent to its
Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.

PENDING ACQUISITIONS. At December 31, 1997, U.S. Cellular had entered into
agreements to acquire a majority interest in one market and a minority interest
in a market in which the U.S. Cellular owns a majority interest, representing
410,000 population equivalents, for $51.3 million in cash. If the majority
interest is acquired as expected, U.S. Cellular will subsequently sell that
interest to BellSouth for cash.

PENDING DIVESTITURES. At December 31, 1997, U.S. Cellular and TDS had
entered into agreements with Airtouch Communications, Inc. ("AirTouch") to
divest minority interests in 11 markets, representing approximately 900,000
population equivalents. AirTouch will issue approximately 4.0 million shares of
its common stock and $54.2 million in cash for minority interests in nine
markets held by U.S. Cellular and approximately 1.0 million shares of its common
stock for minority interests in two markets held by TDS.

Additionally, U.S. Cellular has entered into an agreement to sell its
minority interests in two other markets representing 176,000 population
equivalents, for $37.6 million in cash. The sales are expected to be completed
during the first half of 1998. Management anticipates that it will record
significant book gains on these divestitures when the transactions are
completed.

TDS and U.S. Cellular maintain shelf registration of their respective Common
Shares and Preferred Shares under the Securities Act of 1933 for issuance
specifically in connection with acquisitions.

U.S. Cellular is a majority-owned subsidiary of TDS. TDS owns 81% of the
combined total of the outstanding Common Shares and Series A Common Shares of
U.S. Cellular and controls 96% of the combined voting power of both classes of
common stock. U.S. Cellular benefits from the extensive telecommunications
industry experience of TDS, which also operates telephone and paging businesses
and is developing its PCS business.

10
<PAGE>
CELLULAR INTERESTS AND CLUSTERS

U.S. Cellular operates clusters of adjacent cellular systems in nearly all
of its markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where U.S. Cellular offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to U.S. Cellular certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of U.S. Cellular's
per customer cost of service. The extent to which U.S. Cellular benefits from
these revenue enhancements and economies of operation is dependent on market
conditions, population size of each cluster and engineering considerations.

U.S. Cellular may continue to make opportunistic acquisitions and exchanges
which will complement its established market clusters. From time to time, U.S.
Cellular may also consider exchanging or selling its interests in markets which
do not fit well with its long-term strategies.

U.S. Cellular owned interests in cellular telephone systems in 192 markets
at December 31, 1997, representing 26.2 million population equivalents.
Including the effect of the 11 interests to be sold during 1998, U.S. Cellular
owned or had the right to acquire 181 markets, representing 25.3 million
population equivalents, at December 31, 1997. The following table summarizes the
growth in U.S. Cellular's population equivalents in recent years and the
development status of these population equivalents.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed.................................. 22,778 20,389 20,104 18,829 19,086
Minority-Owned and Managed (2).............................. 401 401 514 1,234 1,263
Markets to be Managed, Net of Markets to be Divested: (3)
To Be Majority-Owned...................................... -- 216 273 2,220 1,035
To Be Minority-Owned (2).................................. -- -- -- -- 6
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed................... 23,179 21,006 20,891 22,283 21,390
Minority Interest in Markets Managed by Others.............. 2,121 4,511 4,026 3,779 3,577
--------- --------- --------- --------- ---------
Total..................................................... 25,300 25,517 24,917 26,062 24,967
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

- ------------------------------

(1) Based on 1997 Claritas estimates for all years.

(2) Includes markets where U.S. Cellular has the right to acquire an interest
but does not currently own an interest.

(3) Includes markets which are operational but which are currently managed by
third parties.

The following section details U.S. Cellular's cellular interests, including
those it owned or had the right to acquire as of December 31, 1997. The table
presented therein lists clusters of markets that U.S. Cellular manages or
anticipates managing. U.S. Cellular's market clusters show the areas in which
U.S. Cellular is currently focusing its development efforts. These clusters have
been devised with a long-term goal of allowing delivery of cellular service to
areas of economic interest and along corridors of economic activity. The number
of population equivalents represented by U.S. Cellular's cellular interests may
have no direct relationship to the number of potential cellular customers or the
revenues that may be realized from the operation of the related cellular
systems.

11
<PAGE>
U.S. CELLULAR'S CELLULAR INTERESTS

The table below sets forth certain information with respect to the interests
in cellular markets which U.S. Cellular owned or had the right to acquire
pursuant to definitive agreements as of December 31, 1997.

<TABLE>
<CAPTION>
TOTAL CURRENT
AND
ACQUIRABLE
1997 POPULATION
CLUSTER/MAJOR SERVICE AREA POPULATION EQUIVALENTS
- ------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
MIDWEST REGIONAL MARKET CLUSTER:
Wisconsin/Illinois/Indiana........................................................ 6,080,000 5,754,000
Iowa/Missouri..................................................................... 3,424,000 3,207,000
------------- -------------
Total Midwest Regional Market Cluster........................................... 9,504,000 8,961,000
------------- -------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
Eastern North Carolina/South Carolina............................................. 2,379,000 2,349,000
West Virginia/Maryland/Pennsylvania/Ohio.......................................... 1,387,000 1,260,000
Virginia.......................................................................... 1,152,000 1,144,000
------------- -------------
Total Mid-Atlantic Regional Market Cluster...................................... 4,918,000 4,753,000
------------- -------------
NORTHWEST REGIONAL MARKET CLUSTER:
Washington/Oregon/Idaho........................................................... 1,482,000 1,266,000
Oregon/California................................................................. 1,038,000 964,000
------------- -------------
Total Northwest Regional Market Cluster......................................... 2,520,000 2,230,000
------------- -------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:......................................... 1,688,000 1,631,000
------------- -------------
FLORIDA/GEORGIA MARKET CLUSTER:..................................................... 1,539,000 1,539,000
------------- -------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
Oklahoma/Missouri/Kansas.......................................................... 1,420,000 879,000
Texas/Oklahoma.................................................................... 695,000 495,000
------------- -------------
Total Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:................... 2,115,000 1,374,000
------------- -------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER:............................ 1,623,000 1,308,000
SOUTHWESTERN TEXAS MARKET CLUSTER:.................................................. 1,254,000 1,243,000
------------- -------------
Other Operations:................................................................... 140,000 140,000
------------- -------------
Total Managed Markets............................................................... 25,301,000 23,179,000
Markets Managed by Others........................................................... 2,121,000
-------------
Total Population Equivalents........................................................ 25,300,000
-------------
-------------
</TABLE>

SYSTEM DESIGN AND CONSTRUCTION. U.S. Cellular designs and constructs its
systems in a manner it believes will permit it to provide high-quality service
to mobile, transportable and portable cellular telephones, generally based on
market and engineering studies which relate to specific markets. Engineering
studies are performed by U.S. Cellular personnel or independent engineering
firms. U.S. Cellular's switching equipment is digital, which reduces noise and
crosstalk and is capable of interconnecting in a manner which reduces costs of
operation. While digital microwave interconnections are typically made between
the MTSO and cell sites, primarily analog radio transmission is used between
cell sites and the cellular telephones themselves.

In accordance with its strategy of building and strengthening market
clusters, U.S. Cellular has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. U.S.
Cellular's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and the
cell site. U.S. Cellular has implemented such microwave interconnection in most
of the cellular systems it manages. In

12
<PAGE>
other systems in which U.S. Cellular owns a majority interest and where it is
believed to be cost-efficient, such microwave technology will also be
implemented. Otherwise, such systems will rely upon landline telephone
connections or microwave links owned by others to link cell sites with the MTSO.
Although the installation of microwave network interconnection equipment
requires a greater initial capital investment, a microwave network enables a
system operator to avoid the current and future charges associated with leasing
telephone lines from the landline telephone company, while generally improving
system reliability. In addition, microwave facilities can be used to connect
separate cellular systems to allow shared switching, which reduces the aggregate
cost of the equipment necessary to operate both systems.

U.S. Cellular expanded its internal network in 1996 to encompass all of its
managed markets. This network provides automatic call delivery for U.S.
Cellular's customers and handoff between adjacent markets. The network has also
been extended through links with certain systems operated by several other
carriers, including GTE, Airtouch/US West, Ameritech, BellSouth, Centennial
Cellular Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard
Cellular Systems and others. Additionally, U.S. Cellular has implemented certain
Signal Transfer Points which have allowed it to interconnect efficiently with
network providers such as Illuminet and the North American Cellular Network.

U.S. Cellular plans to integrate the systems in the markets acquired in the
exchange with BellSouth into its internal network as quickly as possible. This
may involve changing out certain system equipment and replacing it with new
equipment which will allow for more efficient networking.

During 1997, U.S. Cellular has extended the network for its customers
through interconnection with additional system operators for call delivery and
hand-off. This expanded network increases the area in which customers can
automatically receive incoming calls, and should also reduce the incidence of
"tumbling" electronic serial number fraud due to the pre-call validation feature
of networked systems. In addition, the extension of these networks will allow
for the termination of wireless-to-wireless traffic without the inherent costs
that are otherwise incurred if this traffic is routed through the landline
network.

U.S. Cellular believes that currently available technologies will allow
sufficient capacity on U.S. Cellular's networks to meet anticipated demand over
the next few years.

COSTS OF SYSTEM CONSTRUCTION AND FINANCING

Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. U.S. Cellular,
consistent with FCC control requirements, uses primarily its own personnel to
engineer and oversee construction of each cellular system it owns and operates.
In so doing, U.S. Cellular expects to improve the overall quality of its systems
and to reduce the expense and time required to make them operational.

The costs (exclusive of license costs) of the systems in which U.S. Cellular
owns an interest have historically been financed through capital contributions
or intercompany loans from U.S. Cellular to the entities owning the systems, and
through certain vendor financing. In recent years, these funding requirements
have been met with cash generated from operations, proceeds from debt and equity
offerings and proceeds from the sales of cellular interests.

MARKETING

U.S. Cellular's marketing plan is centered around rapid penetration of its
market clusters, increasing customer awareness of cellular service and reducing
churn through both the building of brand awareness and the implementation of
marketing programs. The marketing plan stresses the value of U.S. Cellular's
service offerings and incorporates combinations of rate plans and cellular
telephone equipment which are designed to meet the needs of a variety of
customer segments and their usage patterns. U.S. Cellular's distribution
channels include direct sales personnel, agents and retail service centers in
the vast majority of its markets. The retail locations are U.S. Cellular-owned
and managed and are designed to market cellular service to the consumer segment
in a familiar setting. In late 1996, U.S.

13
<PAGE>
Cellular implemented its new site on the WorldWideWeb to support its marketing
efforts and to be a future distribution channel. Customers may now order U.S.
Cellular service through this web site.

U.S. Cellular manages each cluster of markets from an administrative office
with a local staff, including sales, customer service, engineering and in some
cases installation personnel. Direct sales consultants market cellular service
to business customers throughout each cluster. Retail associates work out of the
retail locations and market cellular service primarily to the consumer and small
business segment. U.S. Cellular maintains an ongoing training program to improve
the effectiveness of sales consultants and retail associates by focusing their
efforts on obtaining customers and maximizing the sale of high-user packages.
These packages provide for customers to obtain a minimum amount of usage at
discounted rates per minute, at fixed prices which are charged even if usage
falls below a defined monthly minimum amount.

U.S. Cellular continues to expand its relationships with agents, dealers and
non-U.S. Cellular retailers to obtain customers. Agents and dealers are
independent business people who obtain customers for U.S. Cellular on a
commission basis. U.S. Cellular's agents are generally in the business of
selling cellular telephones, cellular service packages and other related
products. U.S. Cellular's dealers include car stereo companies and other
companies whose customers are also potential cellular customers. The non-U.S.
Cellular retailers include car dealers, major appliance dealers, office supply
dealers and mass merchants.

U.S. Cellular opened its first retail locations in late 1993, expanding to
260 stand-alone retail stores by December 31, 1997. These U.S. Cellular-owned
and operated businesses utilize rental facilities in high-traffic areas. U.S.
Cellular has implemented a uniform appearance in these stores, with all having
similar displays and layouts. The retail centers' hours of business match those
of the retail trade in the local marketplace, often staying open on weekends and
later in the evening than a typical business supplier. To fully serve customer
needs, these stores sell accessories to complement the phones and services U.S.
Cellular has traditionally provided. During 1996, U.S. Cellular further expanded
its retail presence by opening smaller retail kiosks within other larger
merchandisers and grocery stores. At December 31, 1997, U.S. Cellular had opened
over 140 "stores within a store," primarily in Wal-Mart locations.

In addition to its own retail centers, U.S. Cellular actively pursues
national retail accounts, as agents for U.S. Cellular, which yield new customer
additions in multiple markets. Agreements have been entered into with such
national distributors as Ford Motor Company, General Motors, Radio Shack, Best
Buy, Circuit City, Staples, Office Depot and Sears, Roebuck & Co. in certain of
U.S. Cellular's markets. Upon the sale of a cellular telephone by one of these
national distributors, U.S. Cellular receives, often exclusively within the
territories served, the resulting cellular customer.

U.S. Cellular uses a variety of direct mail, billboard, radio, television
and newspaper advertising to stimulate interest by prospective customers in
purchasing its cellular service and to establish familiarity with U.S.
Cellular's name. In 1997, U.S. Cellular increased its focus on brand
advertising, using the tag line "The Way People Talk Around Here"-SM- to promote
the United States Cellular-Registered Trademark- brand. Advertising is directed
at gaining customers, improving customers' awareness of the United States
Cellular brand, increasing existing customers' usage and increasing the public
awareness and understanding of the cellular services offered by U.S. Cellular.
U.S. Cellular attempts to select the advertising and promotion media that are
most appealing to the targeted groups of potential customers in each local
market. U.S. Cellular utilizes local advertising media and public relations
activities and establishes programs to enhance public awareness of U.S.
Cellular, such as providing telephones and service for public events and
emergency uses.

CUSTOMERS AND SYSTEM USAGE

Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices,
such as people in the construction, real estate, wholesale and retail
distribution businesses, and professionals. Increasingly, U.S. Cellular is
providing cellular service to consumers and to customers who use their cellular
telephones for security purposes. Although some of U.S. Cellular's customers
still use in-vehicle cellular telephones, most new

14
<PAGE>
customers are selecting portable cellular telephones. These units have become
more compact and fully featured as well as more attractively priced, and they
appeal to newer segments of the customer population.

U.S. Cellular's cellular systems are used most extensively during normal
business hours between 7:00 am and 6:00 pm. On average, the local retail
customers in U.S. Cellular's consolidated systems used their cellular systems
approximately 103 minutes per unit each month and generated retail revenue of
approximately $36 per month during 1997, compared to 107 minutes and $40 per
month in 1996. Revenue generated by roamers, together with local retail, toll
and other revenues, brought U.S. Cellular's total average monthly service
revenue per customer unit in consolidated markets to $54 during 1997. Average
monthly service revenue per customer unit decreased approximately 15% during
1997 compared to the same period in 1996. This decrease is related to the
industry-wide trend of newer customers tending to use fewer minutes during peak
business hours, which has reduced the average local retail revenue per minute,
and to declining contribution of inbound roaming revenue per customer. U.S.
Cellular believes that its customer base is growing faster than that of the
cellular industry as a whole, which has a dilutive effect on inbound roaming
revenue per customer. U.S. Cellular anticipates that average monthly service
revenue per customer unit will continue to decline as its distribution channels
provide additional customers who generate lower revenue per local minute of use
and as roaming revenues grow more slowly. However, this effect is more than
offset by U.S. Cellular's increasing number of customers; therefore, U.S.
Cellular expects total revenues to continue to grow for the next few years.

In addition to revenue from local retail customers, U.S. Cellular generates
revenue from roaming customers and other services. U.S. Cellular's roaming
service allows a customer to place or receive a call in a cellular service area
away from the customer's home market area. U.S. Cellular has entered into
"roaming agreements" with operators of other cellular systems covering virtually
all systems in the United States and Canada. These agreements offer customers
the opportunity to roam in these systems. These reciprocal agreements
automatically pre-register the customers of U.S. Cellular's systems in the other
carriers' systems. Also, a customer of a participating system roaming (i.e.
traveling) in a U.S. Cellular market where this arrangement is in effect is able
to make and receive calls on U.S. Cellular's system. The charge for this service
is typically at premium rates and is billed by U.S. Cellular to the customer's
home system, which then bills the customer. U.S. Cellular has entered into
agreements with other cellular carriers to transfer roaming usage at agreed-upon
rates. In some instances, based on competitive factors, U.S. Cellular may charge
a lower amount to its customers than the amount actually charged to U.S.
Cellular by another cellular carrier for roaming.

The following table summarizes, by operating cluster, the total population,
U.S. Cellular's customer units and penetration for U.S. Cellular's
majority-owned and managed markets that were operational as of December 31,
1997.

<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Wisconsin/Illinois/Indiana............................................. 5,778,000 452,000 7.82%
Iowa/Missouri.......................................................... 3,154,000 257,000 8.15
Eastern North Carolina/South Carolina.................................. 2,379,000 124,000 5.21
West Virginia/Maryland/Pennsylvania/Ohio............................... 1,138,000 69,000 6.06
Virginia............................................................... 1,152,000 70,000 6.08
Washington/Oregon/Idaho................................................ 1,380,000 102,000 7.39
Oregon/California...................................................... 1,038,000 71,000 6.84
Maine/New Hampshire/Vermont............................................ 1,688,000 103,000 6.10
Florida/Georgia........................................................ 1,539,000 115,000 7.47
Oklahoma/Missouri/Kansas............................................... 1,420,000 111,000 7.82
Texas/Oklahoma......................................................... 695,000 46,000 6.62
Eastern Tennessee/Western North Carolina............................... 1,279,000 117,000 9.15
Southwestern Texas..................................................... 1,254,000 56,000 4.47
Other Operations....................................................... 140,000 17,000 12.14
------------- ----------- -----
24,034,000 1,710,000 7.11%
------------- ----------- -----
------------- ----------- -----
</TABLE>

15
<PAGE>
The following table summarizes certain information about customers and
market penetration in U.S. Cellular's managed operations.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)............... 134 131 137 130 116
Total population of markets in service (000s)... 24,034 21,712 22,309 21,314 19,383
Customer Units:
at beginning of period (2).................... 1,073,000 710,000 421,000 261,000 150,800
additions during period (2)................... 941,000 561,000 426,000 250,000 165,300
disconnects during period (2)................. 304,000 198,000 137,000 90,000 55,100
at end of period (2).......................... 1,710,000 1,073,000 710,000 421,000 261,000
Market penetration at end of period (3)......... 7.11% 4.94% 3.18% 1.98% 1.35%
Consolidated revenues (4)......................... $ 876,965 $ 680,068 $ 480,316 $ 327,630 $ 210,344
Depreciation expense.............................. 97,591 74,631 57,302 39,520 25,665
Amortization expense.............................. 34,788 34,208 32,156 25,934 19,362
Operating income (loss)........................... 129,543 87,366 42,755 17,385 (8,656)
Capital expenditures.............................. 318,748 248,123 210,878 167,164 92,915
Identifiable assets............................... $2,548,909 $2,116,592 $1,890,621 $1,584,142 $1,275,569
</TABLE>

- ------------------------------

(1) Represents the number of markets in which U.S. Cellular owned at least a 50%
interest and which it managed. The revenues and expenses of these cellular
markets are included in U.S. Cellular's consolidated revenues and expenses.

(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.

(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years (Claritas in 1997).

(4) Consolidated revenues for 1997 reflect U.S. Cellular's change in financial
reporting presentation of certain credits given to customers on their
monthly bills. 1993-1996 consolidated revenues have been reclassified to
conform to 1997 presentation.

PRODUCTS AND SERVICES

CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with cellular
systems nationwide. U.S. Cellular offers a full range of vehicle-mounted,
transportable and hand-held portable cellular telephones. Features offered in
some of the cellular telephones include hands-free calling, repeat dialing, horn
alert and others.

U.S. Cellular negotiates volume discounts from its cellular telephone
suppliers. U.S. Cellular discounts cellular telephones to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign a
service contract with U.S. Cellular. U.S. Cellular also cooperates with cellular
equipment manufacturers in local advertising and promotion of cellular
equipment.

U.S. Cellular has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow U.S. Cellular to improve its service
by promptly assisting customers who experience equipment problems. Additionally,
U.S. Cellular maintains a repair facility in Tulsa, Oklahoma, which handles more
complex service and repair issues.

CELLULAR SERVICES. U.S. Cellular's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. U.S. Cellular has developed and introduced its new consumer line of
products under the CarryPhone brand. These products include a) Express, a pre-
packaged phone plus price plan aimed at the convenience buyer; b) TalkTracker, a
cellular phone with usage prepaid; and c) Home and Away, a combination cordless
and cellular phone in a single package. U.S. Cellular's customer bills typically
show separate charges for custom-calling features, airtime in excess of the
packaged amount, and toll calls. Custom-calling features provided by U.S.
Cellular include wide-area call delivery, call forwarding, call waiting,
three-way calling and no-answer transfer. U.S. Cellular also offers a voice
message service in many of its markets. This service, which functions like a

16
<PAGE>
sophisticated answering machine, allows customers to receive messages from
callers when they are not available to take calls.

REGULATION

REGULATORY ENVIRONMENT. The operations of U.S. Cellular are subject to FCC
and state regulation. The cellular telephone licenses held by U.S. Cellular are
granted by the FCC for the use of radio frequencies and are an important
component of the overall value of the assets of U.S. Cellular. The construction,
operation and transfer of cellular systems in the United States are regulated to
varying degrees by the FCC pursuant to the Communications Act of 1934 (the
"Communications Act"). In 1996, Congress enacted the Telecommunications Act of
1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act
mandates significant changes in existing telecommunications rules and policies
to promote competition, ensure the availability of telecommunications services
to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens as competition
develops. The FCC has promulgated regulations governing construction and
operation of cellular systems, licensing (including renewal of licenses) and
technical standards for the provision of cellular telephone service under the
Communications Act, and is implementing the legislative objectives of the 1996
Act, as discussed below.

LICENSING. For cellular telephone licensing purposes, the FCC has divided
the United States into separate geographic markets (MSAs and RSAs). In each
market, the allocated cellular frequencies are divided into two equal blocks.
During the application process, the FCC reserved one block of frequencies for
non-wireline applicants and another block for wireline applicants. Subject to
FCC approval, a cellular system may be sold to either a wireline or non-wireline
entity, but no entity which controls a cellular system may own an interest in
another cellular system in the same MSA or RSA.

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

The FCC must be notified each time an additional cell is constructed which
enlarges the service area of a given market. The FCC's rules also generally
require persons or entities holding cellular construction permits or licenses to
coordinate their proposed frequency usage with neighboring cellular licensees in
order to avoid electrical interference between adjacent systems. The height and
power of base stations in the cellular system are regulated by FCC rules, as are
the types of signals emitted by these stations. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation Administration
("FAA") regulations with respect to the siting and construction of cellular
transmitter towers and antennas as well as local zoning requirements.

Beginning in 1996, the FCC has also imposed a requirement that all licensees
register and obtain FCC registration numbers for all of their antenna towers
which require prior FAA clearance. U.S. Cellular is currently engaged in this
registration process. All new towers must be registered at the time of
construction and existing towers are being registered on a staggered
state-by-state basis, to be concluded in May 1998.

Beginning in October 1997, cellular systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements (cellular towers of less than 10 meters
in height, building mounted antennas and cellular telephones). After October
1997, all new cellular facilities must be in compliance when they are brought
into service. Existing facilities must be brought into compliance with the
requirements when their licenses are renewed. U.S. Cellular believes that the
great majority of its existing facilities already comply with the requirements,
the remainder will be brought into compliance as required and that the cellular
telephones it sells comply with the standards.

Initial cellular telephone licenses were granted for ten-year periods. The
FCC has established standards for conducting comparative renewal proceedings
between a cellular licensee seeking renewal of its license and challengers
filing competing applications. The FCC has: (i) established criteria

17
<PAGE>
for comparing the renewal applicant to challengers, including the standards
under which a renewal expectancy will be granted to the applicant seeking
license renewal; (ii) established basic qualifications standards for
challengers; and (iii) provided procedures for preventing possible abuses in the
comparative renewal process. The FCC has concluded that it will award a renewal
expectancy if the licensee has (i) provided "substantial" performance, which is
defined as "sound, favorable and substantially above a level of mediocre service
just minimally justifying renewal," and (ii) complied with FCC rules, policies
and the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.

U.S. Cellular's Tulsa and Knoxville licenses were renewed in 1995, and U.S.
Cellular's Des Moines, Iowa; Peoria, Illinois; and Roanoke, Virginia licenses
were renewed in 1996. In September 1997, U.S. Cellular filed license renewal
applications for its Davenport, Iowa; Tallahassee, Florida; Asheville, North
Carolina; Manchester, New Hampshire; Columbia, Missouri; Wichita Falls, Texas;
Gainesville, Florida; Lewiston, Maine; Joplin, Missouri; Cedar Rapids, Iowa;
LaCrosse, Wisconsin; Bangor, Maine; Fort Pierce, Florida; Victoria, Texas;
Evansville, Indiana and Owensboro, Kentucky licenses. Those applications were
unopposed. On October 30, 1997, U.S. Cellular assigned its Evansville and
Owensboro licenses to a subsidiary of BellSouth Cellular Corporation as part of
the larger U.S. Cellular-BellSouth transaction. As part of the same transaction,
BellSouth assigned its Appleton, Wisconsin; Rockford, Illinois; Green Bay,
Wisconsin and Janesville, Wisconsin licenses to U.S. Cellular. All of these
licenses were renewed in January 1998.

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

The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by U.S. Cellular
and others. U.S. Cellular's strategy with respect to system construction in its
markets has been and will be to build cells covering areas within such markets
that U.S. Cellular considers economically feasible to serve or might conceivably
wish to serve and to do so within the five-year period following issuance of the
license. In cases where applications for unserved areas are filed which are
mutually exclusive and would result in overlapping service areas, the FCC
decides between the competing applicants by an auction process.

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

RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the cellular industry. In
one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular
carriers. Enhanced 911 capabilities will enable cellular systems to determine
the precise location of persons making emergency calls. The new rules will
require cellular carriers to work with local public safety officials to process
911 calls, including those made from mobile telephones not registered with the
cellular system, will require carriers by April 1998 to be able to identify the
cell from which the call has been made, and will require cellular systems to
improve their ability to locate wireless 911 callers over a five-year period.

The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the roaming subscribers of broadband PCS providers, among
others, even though the subscribers involved have no pre-existing service
relationship with that carrier. Under these new policies, broadband PCS
providers may offer their subscribers handsets which are capable of operating
over broadband PCS and cellular networks so that when their subscribers are out
of range of broadband PCS networks, they will be able to

18
<PAGE>
obtain non-automatic access to cellular networks. The FCC expects that
implementation of these roaming capabilities will promote competition between
broadband PCS and cellular service providers.

The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between Local Exchange Carriers ("LECs") and other wireline
providers, between wireless service providers and between LEC/wireline and
wireless providers. LECs have implementation deadlines by the end of 1998.
Broadband PCS, cellular and certain other wireless providers have phased
implementation deadlines in 1998 and 1999.

In another proceeding, the FCC in 1996 adopted rules regarding the method by
which cellular carriers and LECs shall compensate each other for interconnecting
cellular and local exchange facilities. The FCC rules provided for symmetrical
and reciprocal compensation between LECs and cellular carriers, and also
prescribed interim interconnection proxy rates, which are much lower than the
rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal
compensation means they must pay each other at the same rate. The U.S. Court of
Appeals for the Eighth Circuit has vacated the FCC's rules. However, the FCC's
rules requiring reciprocal and symmetrical compensation remain in effect as
applied to the cellular industry. Interconnection rate issues will be decided by
the states. Whether the issue is decided by the states or the federal
government, cellular carriers in the future can be expected to pay lower rates
to LECs than they previously paid. This result is expected to be favorable to
the wireless industry and somewhat unfavorable to LECs.

The FCC is also proceeding to implement other parts of the 1996 Act. The
1996 Act provides that implementing its legislative objectives will be the task
of the FCC, the state public utilities commissions and a Federal-state Joint
Board. Much of this implementation is proceeding in numerous, concurrent
proceedings with aggressive deadlines. The Company cannot predict the full
extent of, nature of and interrelationships among state and federal
implementation and other responses to the 1996 Act.

The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.

Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service
provisions and necessary for universal services, public safety and welfare,
continued service quality and consumer rights. While a state may not impose
requirements that effectively function as barriers to entry, it retains limited
authority to regulate certain competitive practices in rural telephone company
service areas.

The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. The FCC has implemented the mandate of the 1996
Act to create a new universal service support mechanism "to ensure that all
Americans have access to telecommunications services." The 1996 Act requires all
interstate telecommunications providers, including wireless service providers,
to "make an equitable and non-discriminatory contribution," to support the cost
of providing universal service, unless their contribution would be de minimis.
At present, the provision of landline telephone service in high cost areas is
subsidized by access charges and other payments by interexchange carriers to
LECs. The obligation to make payments to support universal service has been
expanded to include other telecommunications service providers, including
cellular carriers. Such payments, which are to be based on a percentage of the
total "billed revenue" of carriers for a given previous half year, are to begin
being made in the first quarter of 1998. Carriers are free to pass such charges
on to their customers. Cellular carriers are also eligible to receive universal
service support payments in certain circumstances under the new systems if they
provide specified services in "high cost" areas. U.S. Cellular has sought
designation as an "eligible telecommunications carrier" qualified to receive
universal service support in certain states.

19
<PAGE>
Under a 1994 federal law, the Communications Assistance to Law Enforcement
Act, all telecommunications carriers, including U.S. Cellular and other wireless
licensees, must, by October 1998, implement certain equipment changes necessary
to assist law enforcement authorities in achieving an enhanced ability to
conduct electronic surveillance of those suspected of criminal activity.
However, owing to disputes between the Federal Bureau of Investigation and the
relevant industry groups about the law's requirements, the FCC has not yet
adopted the necessary technical standards to enable carriers to meet those
requirements. Questions also exist regarding reimbursement by a federal fund of
certain of the costs involved. U.S. Cellular has supported the efforts of
industry groups to obtain from the FCC a postponement of the October 1998
deadline on the grounds that compliance with the originally proposed schedule is
impossible. The FCC is considering these requests for postponement, and
legislation mandating a two-year postponement is also pending in Congress.

The FCC has also allocated a total of 140 megahertz ("MHz") to broadband
PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations,
consisting of two 30 MHz blocks in each of the 51 Major Trading Areas ("MTAs")
and one 30 MHz block and three 10 MHz blocks in each of 493 Basic Trading Areas
("BTAs"). Cellular operators and those entities under common ownership with them
are permitted to participate in the ownership of PCS licenses, except for those
PCS licenses reserved for small businesses, and licenses for PCS service areas
in which the cellular operator owns a 20% or greater interest in a cellular
licensee, the service area of which covers 10% or more of the population of the
PCS service area. In the latter case, the cellular license is limited to two 10
MHz PCS channel blocks.

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

Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. U.S. Cellular has
reviewed relevant scientific information and, based on such information, is not
aware of any credible evidence linking the usage of portable cellular telephones
with cancer.

STATE AND LOCAL REGULATION. U.S. Cellular is also subject to state and
local regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from regulating the entry
of cellular systems into service and the rates charged by cellular systems to
customers. The siting and construction of the cellular facilities, including
transmitter towers, antennas and equipment shelters are still subject to state
or local zoning and land use regulations. However, in 1996, Congress amended the
Communications Act to provide that states could not discriminate against
wireless carriers in tower zoning proceedings and had to decide on zoning
requests with reasonable speed. In addition, states may still regulate other
terms and conditions of cellular service. The FCC is currently considering
whether to take action to pre-empt moratoria imposed by certain localities on
the construction of wireless towers. U.S. Cellular has supported such FCC
action.

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

U.S. Cellular and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and, through its membership in state
associations of wireless providers, before state

20
<PAGE>
regulatory authorities. Proceedings with respect to the foregoing policy issues
before the FCC and state regulatory authorities could have a significant impact
on the competitive market structure among wireless providers and the
relationships between wireless providers and other carriers. U.S. Cellular is
unable to predict the scope, pace or financial impact of policy changes which
could be adopted in these proceedings.

COMPETITION

U.S. Cellular's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHZ frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered and responsiveness of
customer service. The competing entities in many of the markets in which U.S.
Cellular has an interest have financial resources which are substantially
greater than those of U.S. Cellular and its partners in such markets.

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

In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, SMR systems, which are
able to connect with the landline telephone network. U.S. Cellular believes that
conventional SMR systems are competitively disadvantaged because of
technological limitations on the capacity of such systems. The FCC has
previously given approval, through waivers of its rules, to ESMR, an enhanced
SMR system. ESMR systems may have cells and frequency reuse like cellular,
thereby potentially eliminating any current technological limitation. The first
ESMR systems were implemented in 1993 in Los Angeles and are being constructed
in several other cities across the United States. In 1995, an ESMR provider
initiated service in Tulsa, Oklahoma, where U.S. Cellular operates a cellular
system. ESMR service is also being provided in certain other of U.S. Cellular's
markets. Although less directly a substitute for cellular service, wireless data
services and one-way paging service (and in the future, two-way paging services)
may be adequate for those who do not need full two-way voice service.

PCS providers have initiated service in many markets across the United
States, including a number of markets where U.S. Cellular has operations. PCS
providers offer digital, wireless communications services to their customers.
Similar technological advances or regulatory changes in the future may make
available other alternatives to cellular service, thereby creating additional
sources of competition. U.S. Cellular expects PCS operators to complete initial
deployment of PCS in portions of all of U.S. Cellular clusters by the end of
1998.

Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.

21
<PAGE>
TELEPHONE OPERATIONS

OVERVIEW

The Company's telephone operations are conducted through TDS Telecom. TDS
Telecom provides modern, high-quality telecommunications services to rural and
suburban communities. Through its network of ILECs, TDS Telecom served
approximately 515,500 access lines as of December 31, 1997 and on this basis is
the ninth largest non-Bell local exchange telephone company in the United
States. TDS Telecom's ILEC markets are located in 28 states throughout the
United States.

The table below sets forth, as of December 31, 1997, (i) the eight largest
states of operations of TDS Telecom based on the number of access lines and (ii)
the total number of access lines operated by all of the telephone subsidiaries
of TDS Telecom.

<TABLE>
<CAPTION>
NUMBER OF ACCESS LINES
STATE AT DECEMBER 31, 1997 % OF TOTAL
- ---------------------------------------------------------------------------- ------------------------ -----------
<S> <C> <C>
Tennessee................................................................... 87,910 17.1%
Wisconsin................................................................... 86,262 16.7
Georgia..................................................................... 37,729 7.3
Minnesota................................................................... 30,054 5.8
Indiana..................................................................... 26,977 5.2
Alabama..................................................................... 25,535 5.0
Michigan.................................................................... 23,786 4.6
Maine....................................................................... 23,055 4.5
-------- -----
Total for 8 Largest States.............................................. 341,308 66.2
-------- -----
Other States................................................................ 174,170 33.8
-------- -----
Total................................................................. 515,478 100.0%
-------- -----
-------- -----
</TABLE>

TDS Telecom recently began providing telecommunications services as a
competitive local exchange carrier ("CLEC") in Madison, Wisconsin and is
developing CLEC operations in selected additional markets in Wisconsin and
Minnesota. TDS Telecom is also pursuing emerging markets such as data and
Internet services.

TDS Telecom is a wholly owned business unit of TDS, founded in 1968. TDS
Telecom's corporate headquarters are located in Madison, Wisconsin.

TELECOMMUNICATIONS SERVICES MARKET

The market for local telecommunications services has historically consisted
of firms offering traditional landline telephone service along with
complementary services and equipment in a highly regulated environment. TDS
Telecom's ILEC business has traditionally focused primarily on providing service
to rural and suburban areas. TDS Telecom's ILEC markets are geographically
dispersed throughout the United States with a significant concentration in the
Upper Midwest and the Southeast.

The ILEC business of TDS Telecom is being changed by telecommunications
reform legislation, the growth of the Internet and rapid advances in technology.
With the passage of the 1996 Act, competition in the local telecommunications
marketplace is increasing because of the removal of certain state and local
entry barriers and the introduction of ILEC facility interconnection
requirements. These changes will create challenges for TDS Telecom in its
existing ILEC business but will also create growth opportunities for TDS Telecom
in connection with its entry into CLEC markets.

BUSINESS STRATEGY

TDS Telecom has historically produced revenue growth in its ILEC markets by
providing its customers with state-of-the-art telecommunications solutions,
maintaining a high quality of on-going service and selectively acquiring
landline telephone companies. Management believes that TDS Telecom has a number
of advantages as an ILEC, including (i) a modern network substantially upgraded
to provide a variety of Advanced Calling Services, (ii) a strong local presence
and established brand name, (iii) economies of scale not available to smaller
independent operators, (iv) attractive, growing markets

22
<PAGE>
and (v) a favorable regulatory environment which is likely to be less
competitive than urban markets. TDS Telecom intends to: (i) grow and protect TDS
Telecom's core local exchange business, (ii) provide service to targeted CLEC
markets by leveraging its technical and managerial expertise and
telecommunications infrastructure from its ILEC's existing operations, (iii)
pursue emerging markets, such as data and Internet services, to become a leading
provider of electronically deliverable products and services in all of its
markets and (iv) enhance profitability through improved operating efficiencies.

GROW CORE ILEC BUSINESS

Management of TDS Telecom believes that the key to growing and protecting
its existing ILEC markets is to continue to build customer loyalty by providing
superior customer service, offering a full range of standardized products and
services not typically available in rural markets and rapidly developing new
data products and services. Management of TDS Telecom maintains a local presence
in each of its ILEC markets in order to provide superior customer service. With
respect to products and services, TDS Telecom offered Advanced Calling Services
to 78% of its customers at December 31, 1997. TDS Telecom increasingly markets
itself to consumers as a single telecommunications provider offering bundled
packages of advanced telecommunications services including local, long distance,
Internet and data services. These service packages will further build brand
equity in the TDS Telecom name. In addition, management of TDS Telecom believes
it can achieve cost economies through selective acquisitions designed to
increase the geographic clustering of TDS Telecom's ILEC markets.

LEVERAGE ILEC STRENGTHS INTO CLEC MARKETS

TDS Telecom is providing CLEC services in certain targeted third-tier cities
which are geographically proximate to existing TDS Telecom facilities and
service areas. Management of TDS Telecom believes that service levels have
deteriorated in certain markets due to a lack of focus by the ILECs thereby
creating an opportunity for TDS Telecom to compete effectively in those markets.
In addition, management of TDS Telecom believes that the smaller size of these
markets may discourage competition from additional CLECs. Through February 28,
1998, TDS Telecom had invested $13 million to install a digital switch and to
construct 54 miles of fiber optic cable in and around Madison, Wisconsin. TDS
Telecom initiated service as a CLEC in Madison in January 1998 and is providing
service to approximately 4,000 business access lines. In addition, TDS Telecom
commenced operations as a CLEC in secondary markets in Minnesota in January
1998, initially as a reseller, through its regional long-distance reseller,
USLink, and is providing service to approximately 3,000 business access lines in
those markets. TDS Telecom intends to initiate service in Appleton and Green
Bay, Wisconsin in mid-1998.

The geographic focus of TDS Telecom's CLEC strategy is designed to leverage
TDS Telecom's existing infrastructure to facilitate early entry into new CLEC
markets and to complement TDS Telecom's ILEC clustering strategy. TDS Telecom
believes that significant synergies exist between its ILEC and CLEC businesses.
TDS Telecom is able to utilize existing resources and business processes that
currently serve ILEC markets in developing and expanding its CLEC operations,
including administrative and financial support, marketing and new product
development support, information technology and systems, and shared network
systems support. These synergies reduce the overall time to market and cost
required for TDS Telecom to expand into its new CLEC markets.

PURSUE EMERGING DATA MARKETS

Data communications is one of the fastest growing segments of the
telecommunications services industry. In light of the growth of the use of the
Internet and rapid introduction of new telecommunications technology, TDS
Telecom intends to offer a full range of data products to its customers,
including Internet access and potentially, ATM, Frame Relay and other products,
if appropriate, in all of its markets, thereby positioning itself as a
full-service data communications service provider. Most of TDS Telecom's data
products are in the early stages of development. TDS Telecom has, however,
developed a LAN wiring business and currently provides Internet access service
to approximately 40,000 customers.

23
<PAGE>
NETWORK INFRASTRUCTURE

TDS Telecom plans to provide its operating telephone companies with the most
advanced central office switching equipment that is economically feasible in
order to offer customers up-to-date services, such as advanced calling services,
high-speed data access and Internet access services. TDS Telecom plans to
provide its customers bundled service offerings and to become a single source
for their telecommunications needs as an Integrated Communications Provider
("ICP"). In furtherance of this objective, in 1997, TDS Telecom continued its
program of enhancing and expanding its service providing network. TDS Telecom
intends to meet competition by providing its customers with high-quality
telecommunications services and building its network to take full advantage of
advanced telecommunications technologies such as Signaling System 7, fiber optic
fed Digital Serving Areas, Integrated Services Digital Network and Advanced
Calling Services. The following table illustrates that TDS Telecom continues to
make these advanced features available to a large majority of its customers:

<TABLE>
<CAPTION>
% EQUIPPED LINES # EQUIPPED LINES
1997 1997
--------------------- ------------------
<S> <C> <C>
Signaling System 7.................................... 86% 478,690
Advanced Calling Services............................. 86% 478,690
Integrated Services
Digital Network..................................... 68% 378,570
</TABLE>

As TDS Telecom upgrades and expands its network, it is also standardizing
equipment and processes to increase efficiency and has centralized the
monitoring and management of its network to reduce costs and improve service
reliability. TDS Telecom formed strategic alliances with Lucent Technologies and
Siemens Telecom Networks to modernize and standardize TDS Telecom's switching
platform with the Lucent 5ESS-2000 and Siemens EWSD switches. This standardized
switching platform assisted TDS Telecom in implementing its 24 hour-a-day/7
day-per-week Network Management Center. The Network Management Center
continuously monitors the network in an effort to proactively identify and
correct network faults prior to any customer impact. By the end of 1998, the
Network Management Center is expected to be proactively monitoring 100% of TDS
Telecom's network.

TDS Telecom's total 1998 capital budget is $140 million compared to actual
capital expenditures of $151.5 million in 1997 and $144.4 million in 1996.
Financing for the 1998 capital additions will be primarily provided by
internally generated funds and supplemented by federal long-term financing.

ILEC TELEPHONE MARKETS

TDS Telecom's goal is to be a leading provider of electronically deliverable
products in its ILEC markets. According to published sources, TDS Telecom is
currently the ninth largest non-Bell local exchange telephone company in the
United States, based on the number of telephone access lines served. At December
31, 1997, the telephone subsidiaries of TDS Telecom served approximately 515,500
access lines in 28 states. TDS Telecom currently operates over 378 central
office and remote switching centers in its telephone operating areas.
Substantially all of TDS Telecom's access lines are served by digital switching
technology, which, in conjunction with other technologies, allows TDS Telecom to
offer additional premium services to its customers, including call forwarding,
conference calling, caller identification, selective call ringing and call
waiting.

As one of the major independent telephone companies in the United States,
TDS Telecom's ILECs provide both local telephone service and access to the long
distance network for customers in their respective service areas. The ILECs also
provide directory advertising through a contract with another company and
billing and collection services to inter-exchange carriers ("IXCs"). TDS Telecom
provides centralized administrative and support services to field operations
from its corporate offices in Madison, Wisconsin.

24
<PAGE>
The following table summarizes certain information regarding TDS Telecom's
telephone operations:

<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Telephone Operations
Access lines(1)........................... 515,500 484,500 425,900 392,500 356,200
% Residential............................. 78.3% 79.9% 80.6% 81.3% 82.0%
% Business (nonresidential)............... 21.7% 20.1% 19.4% 18.7% 18.0%
Total Revenues............................ $ 444,203 $ 395,602 $ 354,841 $ 306,341 $ 268,122
% Local service........................... 27.7% 27.9% 26.8% 26.8% 26.9%
% Network access and long-distance........ 53.1% 53.9% 55.1% 56.9% 59.3%
% Miscellaneous and other................. 19.2% 18.2% 18.1% 16.3% 13.8%
Depreciation and amortization expense..... $ 98,066 $ 88,459 $ 77,354 $ 68,878 $ 59,562
Operating income.......................... 98,613 102,708 98,240 91,606 78,585
Construction expenditures................. 151,460 144,440 104,372 115,483 80,818
Total identifiable assets................. $ 1,221,463 $ 1,181,084 $ 1,058,241 $ 984,563 $ 829,489
</TABLE>

- ------------------------

(1) An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.

RETAIL MARKETS

TDS Telecom's existing ILEC business consists of two major customer focused
organizations addressing the retail and wholesale marketplace for its services.
The Retail Markets Group focuses on TDS Telecom's retail customers and is
comprised of TDS Telecom's 106 operating companies. The Retail Markets Group
serves a mix of rural and suburban customers, with a significant geographic
concentration in the Upper Midwest and Southeast. Approximately 78% of TDS
Telecom's retail customers are residential and approximately 22% are businesses,
most of which are of the small business or small office/home office segments.
The Retail Markets Group has identified three primary goals to grow and protect
its existing ILEC business: (i) build customer loyalty, (ii) develop revenue
growth, and (iii) implement cost control. Management of TDS Telecom believes it
can achieve these goals by offering bundled services to its customers, by
building brand equity in the TDS Telecom brand name, and by providing superior
customer service to its retail customers. In addition, TDS Telecom will continue
to standardize operations, improve cost controls and selectively invest in
network facilities in order to enhance efficiency and reduce costs.

BUNDLED SERVICE OFFERINGS. Management of TDS Telecom believes that its
consumer and business customers have a strong preference to purchase all of
their telecommunications services from a single provider. TDS Telecom believes
that by offering a full complement of telecommunications services and bundling
those services in customer-friendly packages it can build customer loyalty and
reduce customer churn. Implementing a full-service strategy requires TDS Telecom
to combine the services of its network with the products and services of
carefully selected strategic partners. TDS Telecom plans to pursue such
relationships to develop the long distance, video, and wireless components of
its product mix.

BRAND EQUITY. In 1996, TDS Telecom adopted the TDS Telecom name as a
unified brand name across its ILEC markets to build its brand image. Prior to
1996, the local identity of each operating company enjoyed a higher profile than
TDS Telecom. TDS Telecom has subsequently implemented a customer awareness
campaign to build brand awareness of the TDS Telecom name. For example, all
bills now contain the TDS Telecom name and all customer checks are made payable
to TDS Telecom. The change in branding has been reinforced by a comprehensive
media campaign that includes television, radio, newspaper, bill inserts and
direct mail advertising. Management of TDS Telecom

25
<PAGE>
believes that branding will increase the loyalty of its customers and also
reduce expenses through more cost effective marketing.

CUSTOMER SERVICE. TDS Telecom maintains a local business office in each of
its ILEC markets to ensure high levels of customer service. Management believes
that its community-based business offices offering full-service, face-to-face
customer service are a fundamental competitive advantage for TDS Telecom. To
further TDS Telecom's goal of enhancing service to its customers, TDS Telecom is
implementing a virtual business office ("VBO") initiative. The VBO builds on TDS
Telecom's current community oriented customer service by linking business
offices through technology, standardizing processes, expanding hours of
operations, and providing management information on operations and service
quality. VBO technology will be deployed across TDS Telecom's business offices
to enable multiple local business offices to perform customer sales and service
functions as if they were one "virtual" office in the eyes of the customer.
Unlike traditional call centers where service representatives and technology are
centrally located, the VBO environment distributes call center technology to the
individual business offices enabling customer service representatives to remain
in their local communities.

WHOLESALE MARKETS

The Wholesale Markets Group focuses on TDS Telecom's wholesale customers and
has traditionally provided a majority of TDS Telecom's revenues. TDS Telecom
receives much of its ILEC revenue from the sale of traditional wholesale
services, such as access charges and billing and collections services. As a
result, TDS Telecom continues to provide a high level of service to traditional
wholesale customers such as AT&T, MCI, Sprint and the RBOCs.

TDS Telecom intends to grow its wholesale business by pursuing opportunities
created by the 1996 Act. TDS Telecom plans to expand into new wholesale groups
by targeting two groups of customers. First, TDS Telecom will provide new
entrants to markets, such as CLECs and PCS carriers, with access to the public
network, as well as dedicated services. Second, TDS Telecom will supply existing
businesses such as cable television providers, electric utilities and long
distance resellers with network services needed to complement their existing
assets. TDS Telecom also intends to pursue other wholesale opportunities, such
as network management and Internet access, as demand for those services
increases.

The primary source of TDS Telecom's wholesale business revenues are access
revenues. TDS Telecom's operating telephone subsidiaries receive access revenue
as compensation for carrying interstate and intrastate long-distance traffic on
their networks. The interstate and intrastate access rates charged include the
cost of providing service plus a fair rate of return on the capital allocated to
such services. Access revenues account for approximately 57% of the revenue
generated by TDS Telecom's ILEC subsidiaries.

TDS Telecom's ILECs participate in the National Exchange Carrier Association
("NECA") interstate common line and traffic sensitive tariffs for all but one
portion of one ILEC's interstate access. These operating companies participate
in the access revenue pools administered by NECA, which collect and distribute
revenue from interstate access services. The FCC created NECA and it operates
subject to FCC rules and oversight.

The FCC regulates interstate access rates and other matters relating to
interstate telephone service. On May 16, 1997, the FCC released an order on
access reform. This order applies primarily to price cap local exchange carriers
("LECs"). However, non-price cap companies, such as TDS Telecom, were also
affected in certain areas by this order. The FCC is expected to release an order
on access charge reform for non-price cap companies in mid-1998. Depending on
the outcome of the order for non-price cap companies, the source and nature of
the operating companies' recovery of costs from interstate services will be
affected.

The 1996 Act provides for reciprocal compensation for parties to any
interconnection arrangement. The FCC issued a 1996 order governing the
compensation arrangements between LECs and wireless providers. LECs must charge
wireless carriers cost-based rates and must pay access charges to wireless
carriers to terminate calls from LEC customers. Since this order raises
interconnection costs, the operating companies may adjust their charges to
recover such increased costs.

26
<PAGE>
On October 7, 1997, the FCC released a Notice of Proposed Rulemaking
("NPRM") on jurisdictional separations reform. In the NPRM, the FCC reviews the
current procedures for separating LECs' service costs between the state and
federal jurisdictions. Many of the proposals in the NPRM seek to limit costs
assigned to the interstate jurisdiction and seek to assign greater costs to the
intrastate jurisdiction. To the extent that the costs are not made up in the new
federal and state universal service mechanisms, the Telecom Group may seek rate
increases in local service rates to offset any reductions in interstate
revenues.

Where applicable and subject to state regulatory approval, TDS Telecom's
ILEC subsidiaries utilize intrastate access tariffs and participate in
intrastate revenue pools. However, many intrastate toll revenue pooling
arrangements, historically a source of substantial revenues to TDS Telecom's
LECs, have been replaced with access-charge-based arrangements. In these cases,
access charges are typically set to generate revenue flows similar to those
realized in the pooling process. The impact of the 1996 Act has accelerated the
pace of regulatory re-evaluation at both the state and federal level. To the
extent that state-ordered access charge revisions reduce revenues, TDS Telecom
may seek adjustments in other rates. Some states are utilizing a state high cost
fund to offset access charge reductions. Given the many regulatory issues still
unresolved, TDS Telecom cannot predict the cumulative nature or extent of
impacts from federal and state regulatory reform.

TELEPHONE ACQUISITIONS

TDS and TDS Telecom continually review attractive opportunities to acquire
operating telephone companies. Since January 1, 1993, TDS has acquired 17
telephone companies serving a total of 89,600 access lines for an aggregate
consideration totaling $188.0 million, all of which were attributed to TDS
Telecom. During the past five years, TDS acquired one telephone company in 1997
serving 3,200 access lines, five telephone companies in 1996 serving an
aggregate of 33,100 access lines, four telephone companies in 1995 serving an
aggregate of 13,500 access lines, three telephone companies in 1994 serving an
aggregate of 19,700 access lines and four telephone companies in 1993 serving an
aggregate of 20,100 access lines. Recently, TDS Telecom has modified its
acquisition strategy to focus on geographic clustering of telephone companies to
achieve cost economies and to complement TDS Telecom's growth strategy.

It is TDS Telecom's policy to preserve, in so far as possible, the local
management of each telephone company it acquires. TDS Telecom provides the
telephone companies with centralized purchasing and general management and other
services, at cost plus a reasonable rate of return on invested capital. These
services afford the subsidiaries expertise in finance; accounting and treasury
services; marketing; customer service; traffic; network management; engineering
and construction; customer billing; rate administration; credit and collection;
and the development of administrative and procedural practices.

FEDERAL FINANCING

TDS Telecom's primary sources of long-term financing for additions to
telephone plant and equipment have been the Rural Utilities Service ("RUS"), the
Rural Telephone Bank ("RTB") and the Federal Financing Bank ("FFB"), each of
which is an agency of the United States of America. The RUS has made primarily
35-year loans to telephone companies since 1949, at interest rates of 2% and 5%,
for the purpose of improving telephone service in rural areas. Currently, the
RUS is authorized to issue hardship loans at a 5% interest rate and other loans
at an interest rate approximating the government's rate for instruments of
comparable maturity. The RTB, established in 1971, makes loans at interest rates
based on its average cost of money (6.54% for its fiscal year ended September
30, 1997), and in some cases makes loans concurrently with RUS loans. In
addition, the RUS guarantees loans made to telephone companies by the FFB at the
federal cost of money (6.01% for a 35-year note at December 31, 1997).

Substantially all of TDS Telecom's telephone plant is pledged under, or is
otherwise subject to, mortgages securing obligations of the operating telephone
companies to the RUS, RTB and FFB. The amount of dividends on common stock that
may be paid by the operating telephone companies is limited by certain financial
requirements set forth in the mortgages.

27
<PAGE>
Effective October 6, 1997, the RUS revised its regulations on the amount of
allowable distributions a borrower can make in any calendar year. For those
companies with greater than 40% net worth to total assets, the entire amount
above 40% net worth to total assets can be distributed. The majority of TDS
Telecom's telephone subsidiaries exceed this percentage.

At December 31, 1997, TDS Telecom's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $112.0 million, at a weighted average annual interest rate of
5.71%, to finance specific construction activities in 1998 and future years.
These loan commitments are generally issued for five-year periods and may be
extended under certain circumstances. TDS Telecom's operating telephone
companies intend to make further applications for additional loans from the RUS,
RTB and FFB as their needs arise. There is no assurance that these government
loan programs will continue to be available or that these applications will be
accepted or what the terms or interest rates of any future loan commitments will
be.

FEDERAL AND STATE SUPPORT MECHANISMS

To promote universal service, the FCC developed a number of federal support
mechanisms to keep telephone rates affordable for both high-cost rural areas and
low-income customers. Many of TDS Telecom's ILEC subsidiaries provide telephone
service in rural areas and all of them offer service to low-income customers.

The 1996 Act codified universal service goals and support; set forth clear
principles for ensuring affordable access to modern telephone service
nationwide; established discounts for schools, libraries and rural health care
facilities; and established a federal-state joint board to make recommendations
to the FCC regarding implementation of the universal service provisions of the
1996 Act. On May 8, 1997, the FCC released an order on universal service,
adopting many of the joint board's recommendations. The FCC adopted the use of
forward-looking proxy cost models to determine costs rather than relying on
actual costs. However, rural ILECs will continue to receive support based on
their actual costs through December 31, 2000. After December 31, 2000, rural
ILECs will transition to the use of proxy cost models over an additional
three-year period. To date, management of TDS Telecom believes that no proxy
cost models have proven to provide sufficient and predictable revenue support
for the provision of universal service by rural ILECs. The FCC has not adopted
any proxy cost model for rural ILECs. Both petitions for review and judicial
appeals of portions of the FCC's universal service rules and policies remain
pending, and Congress legislated a requirement for the FCC to report on its
implementation of universal service in its appropriations legislation.

The FCC's order also mandated that all telecommunications providers
contribute to the universal service fund beginning January 1, 1998. However, the
order allows ILECs to recover these contributions through their interstate
access rates.

The final rules to implement the universal service provisions of the 1996
Act will involve development of new support mechanisms and changes in the
eligibility criteria. In addition, some of TDS Telecom's ILEC subsidiaries
operate in states where support and rate structures are either being
re-evaluated or have already been changed. Full recovery of universal service
costs in the future through interstate and intrastate mechanisms is uncertain.
If interstate or intrastate support decreases, TDS Telecom's ILEC subsidiaries
may pursue local service rate increases to recover the difference.

Historically, telephone company acquisition and investment decisions assumed
the ability to recover the cost and a reasonable rate of return through local
service, access and support revenues. Significant changes in the universal
service funding system could affect TDS's and TDS Telecom's acquisition and
investment strategy.

CLEC TELEPHONE MARKETS

The 1996 Act facilitates entry of TDS Telecom into new markets by requiring
non-exempted ILECs (e.g., RBOCs, GTE and other-ILECs, based on state regulators'
determinations) to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. TDS Telecom,
through TDS METROCOM, a wholly-owned subsidiary of TDS Telecom, has targeted
certain third-tier cities,

28
<PAGE>
geographically proximate to existing TDS Telecom facilities and service areas,
for facilities-based entry as a CLEC. Management of TDS Telecom believes that
the size of the target markets will sustain one or two facilities-based
competitors in addition to the ILEC. While additional competitors may enter such
markets as resellers, TDS Telecom believes facility-based CLECs will have a
long-run cost advantage, establish a barrier to entry and enable an alternative
wholesale strategy for growth. To this end, TDS Telecom plans to build
fiber-ring, switching and other network facilities in its targeted CLEC markets.
TDS Telecom plans to follow a "clustering" approach to building its CLECs which
will allow it to seek regional long distance traffic, share service and repair
resources, and realize marketing efficiencies. As in its ILEC markets, TDS
Telecom intends to become an ICP in its CLEC markets. TDS Telecom will provide
local, long-distance, Internet access and other services through its own
facilities and via resale. TDS Telecom also intends to resell mobile services in
many markets.

TDS Telecom's first CLEC in Madison, Wisconsin became operational in January
1998. The Madison CLEC is a facilities-based, full-service alternative to
Madison's existing ILECs, Ameritech and Mid-Plains Telephone Companies,
providing both voice and data services to commercial and consumer accounts, as
well as wholesale services to IXCs and other carriers. While TDS Telecom is
beginning its CLEC venture in its Madison and Minnesota markets, it plans to
expand operations to Appleton and Green Bay, Wisconsin. As of December 31, 1997,
TDS Telecom has invested $12 million in constructing its facilities in the
Madison market and plans to invest $18 million during 1998.

The CLEC strategy will place primary emphasis on small and medium-sized
commercial and wholesale customers such as IXCs, Internet Service Providers
("ISPs") and cellular, paging and PCS companies. TDS Telecom expects to pursue
consumer markets approximately six months after the CLEC enters the commercial
market. Wholesale customers purchase transmission capacity and access services
from CLECs. These services will be available to wholesale customers shortly
after network completion. TDS Telecom believes that these customers are
generally more sophisticated and are more likely to switch providers to obtain
network reliability, redundancy and more flexible pricing. Medium-sized
commercial prospects are characterized by above-average access line-to-employee
ratios, heavier utilization of data services, and a focus on using
telecommunications for business improvement rather than by concerns for cost
reduction. These companies are generally growth-oriented and may be underserved
by the ILEC or major IXCs. TDS Telecom will pursue a personal selling approach
for its primary target markets. This approach builds on customer preference for
integrated communication services and the customer's perception that the quality
of the product is in the personalized service.

While the CLEC is positioning itself as a high-quality provider, it expects
price competition from the ILECs as they attempt to retain and regain their
customers. The CLEC will seek to maintain an efficient cost structure to ensure
it can match price-based initiatives from competitors. TDS Telecom expects to be
more flexible in responding to customer needs than its ILEC competitors. To
effectively compete in this new environment, TDS Telecom will enhance its
efforts at product development to provide high-quality, cutting-edge services to
its customers.

DATA INITIATIVES

In 1997, TDS Telecom continued to expand its investments into data
communications in order to offer a full suite of data products in its CLEC and
many of its ILEC markets. TDS Telecom believes the targeted third-tier markets
present a significant opportunity to market data services as the major carriers
serving these locations have typically underinvested in these markets despite
the growing demand. Switched data communications represent one of the fastest
growing segments of the telecommunications services market. Computer
proliferation, connectivity via local and wide area networks, the Internet and
the emergence of multimedia applications are all driving demand. As a result,
the domestic network infrastructure is strained at both the local and national
levels. TDS Telecom's CLEC initiative will add local capacity in its selected
cities designed to capture this growth.

TDS Telecom has developed a LAN wiring business as part of its data services
business. The LAN wiring business provides in-building wiring services to its
customers. TDS Telecom assists its customers in designing and constructing
specialized wiring networks for their business needs. Customers of the LAN
wiring business include traditional in-market business customers of TDS Telecom
and also non-traditional business customers located in ILEC markets not
currently served by TDS Telecom. At

29
<PAGE>
December 31, 1997, TDS DATACOM, TDS Telecom's LAN wiring entity, operated in 14
markets and generated approximately $6.6 million in revenue for the year then
ended.

In furtherance of TDS Telecom's strategy to position itself as a
full-service, networking service provider, it plans to make high-speed Digital
Subscriber Loop ("xDSL") based services available to customers in many of its
ILEC markets. TDS Telecom believes xDSL technology will form the foundation for
new, high-speed data services and applications and is currently conducting
trials of xDSL modems manufactured by several vendors. This technology will be
employed to offer high-speed Internet access as well as high-speed LAN
connectivity. In addition, TDS Telecom plans to develop Frame Relay and ATM
services in select markets. TDSNET, TDS Telecom's ISP, is expanding its existing
business offerings to include web hosting services and customized web content
development. TDSNET expanded its operation in 1997 by adding an additional 13
operating markets to bring its total operating markets to 49. It served
approximately 30,000 customers and generated approximately $4 million in revenue
for the year then ended.

SALES AND MARKETING

TDS Telecom seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: retail and wholesale.
Retail customers are composed primarily of residential customers, businesses,
government and institutional telecommunications users. Wholesale customers
consist of IXCs and information service providers such as commercial data
processing service providers and ISPs.

RETAIL MARKETS

COMMERCIAL MARKETS. Businesses account for approximately 22% of TDS
Telecom's access lines. TDS Telecom focuses its business customer marketing on
information-intensive industries such as financial services, health services,
realty, hotels and motels, education and government. TDS Telecom uses its direct
sales force, targeted mailings, and telemarketing to sell products and services
to the commercial markets, which are segmented into tiers based on size and
strategic importance. Different sales and distribution channels are employed for
each segment. Specific account executives focus on the most profitable
commercial customers by staying in contact with them on a regular basis. In
1996, TDS Telecom adopted a more aggressive compensation plan for its account
executives targeted at revenue and customer satisfaction results.

CONSUMER MARKETS. TDS Telecom's promotional and sales strategy with respect
to its residential customers consists of two major initiatives: building brand
equity by creating awareness of the TDS Telecom brand name; and using direct
marketing to sell specific products and product groupings. Approximately 78% of
TDS Telecom's total access lines are residential. The nature of TDS Telecom's
residential markets has historically made direct marketing more effective than
mass media such as radio and television. In addressing its consumer markets, TDS
Telecom has made extensive and aggressive use of direct mail. TDS Telecom has
been more selective in the use of telemarketing as a means of generating
awareness, qualified leads, and sales. Increasingly, uniform branding has made
the use of mass media more attractive, and TDS Telecom is beginning to
increasingly incorporate these elements into its marketing program.

In nearly all of its markets, TDS Telecom offers a complete family of custom
calling services, including call waiting, call forwarding, three-way calling,
and speed dialing. In 1997, TDS Telecom sold 27,700 residential second lines, an
increase of 46% over 1996. The Telecom Group recently launched its Advanced
Calling Services family, which is centered around Caller ID service. In 1997,
the Advanced Calling Services family of services were available to 78% of the
lines in service compared to 66% in 1996. In 1997, penetration of Caller ID
increased from 13% in 1996 to 16% of lines equipped and aggregate penetration of
ACS increased from 25% in 1996 to 30% of lines equipped.

WHOLESALE MARKETS

Access charges, billing and collection services and other traditional
wholesale offerings generated $253 million, or approximately 61 percent, of TDS
Telecom's ILEC subsidiaries' revenue for the year ended December 31, 1997. TDS
Telecom seeks to establish close working relationships with the IXCs.

30
<PAGE>
TDS Telecom is working to establish systems to support "electronic bonding" of
its operations with those of the IXCs. Electronic bonding provides seamless
integration of TDS Telecom's and the IXCs' networks, enabling the IXCs to access
service, billing and other data directly from TDS Telecom's network. It will
also permit the IXCs to enter access service requests electronically using the
integrated network. The initial phase of establishing these systems has taken
place with the establishment of a dedicated customer service team to provide a
single point of contact for the IXCs. During 1998 and beyond, automated systems
solutions will be implemented to fully support electronic bonding.

TDS Telecom sees significant potential in leveraging its infrastructure to
provide new wholesale offerings to non-traditional customers. TDS Telecom has
targeted high growth industry sectors such as CLECs, independent telephone
companies, cable television companies, electric utilities and other
telecommunications service providers for purchase of its wholesale offerings.
Additionally, existing cellular wireless carriers are expanding their services
in and near TDS Telecom's territories and new PCS wireless carriers are, or soon
will be, offering service.

COMPETITION

ILEC MARKETS

The 1996 Act was intended to promote competition in the telecommunications
industry as a national policy and continue the process of deregulation. The 1996
Act requires ILECs to provide reasonable and non-discriminatory interconnection
services and access to unbundled network elements to any CLEC that seeks to
enter the markets in which the ILEC already offers services. The 1996 Act also
allows CLECs to co-locate network equipment on the ILEC's premises and prevents
ILECs and CLECs from unduly restricting each other from use of facilities or
information that would allow other organizations to effectively compete with
them.

All 106 telephone company subsidiaries of TDS Telecom are currently exempt
from many of the interconnection provisions of the 1996 Act. According to the
1996 Act, a rural telephone company (which currently includes all 106 TDS
Telecom ILECs) is exempt from the ILEC interconnection requirements until (i)
such company has received a bona fide request for interconnection, resale of
services, or network elements, and (ii) the state commission determines that
such request is not unduly economically burdensome, is technically feasible, and
is consistent with the universal service provisions of the 1996 Act. The party
making a bona fide request must submit a notice of its request to the
appropriate state commission which must then conduct an inquiry to determine
whether to terminate the exemption. Within 120 days after a state commission
receives notice of the request, it must determine if it will terminate the
exemption. Upon termination of the exemption, the state commission must
establish an implementation schedule for compliance with the request.
Accordingly, the length of TDS Telecom's rural exemptions will vary based on the
decisions of the various state commissions. Some TDS Telecom ILECs have already
had requests filed by potential competitors seeking to terminate their
exemptions and TDS Telecom believes there will eventually be open entry into
nearly every aspect of the telephone industry, including local service, and
switched and special access services. However, TDS Telecom also anticipates
there will continue to be some protection for universal service in rural areas.

TDS Telecom expects competition in the local telephone and access services
businesses to be increased substantially as a result of the entrance of new
competitors and the development of new technologies, products and services.
Increased competition is expected from competitive access providers, IXCs,
out-of-territory RBOCs and independent telephone companies, niche entrepreneurs,
cable and utility companies, and wireless and satellite providers. To meet this
increasing competition, TDS Telecom's strategy is to build customer loyalty by
providing superior customer service, offering a full range of standardized
products and services bundled in response to customer preferences and to rapidly
develop new data products and services.

TDS Telecom believes that the wireless companies pose the most significant
threat in the long run to the local exchange industry. Although traditional
analog cellular radio service cannot match the features or the clarity of
communications provided via wireline networks, and as a result of high error
rates and speed limitations is not currently suitable for data transmission,
advances in digital PCS technology may permit wireless companies to eventually
match the functionality and clarity of wireline communication and still allow
customers the mobility of traditional wireless service. As the emerging PCS
companies

31
<PAGE>
compete directly with established cellular radio companies, flat rate pricing
alternatives may drive wireless rates towards or below wireline rates. In order
to minimize the impact of wireless competition, TDS Telecom is pursuing
wholesale service agreements with wireless companies to provide services to them
and expects to provide wireless services through resale in many of its markets.

CLEC MARKETS

In Madison and in each city in which TDS Telecom expands as a CLEC, TDS
Telecom faces, and expects to continue to face, significant competition from the
ILECs which currently dominate their local telecommunications markets. TDS
Telecom will compete with the ILECs on the basis of price, reliability,
state-of-the-art technology, product offerings, route diversity, ease of
ordering and customer service. However, the ILECs have long-standing
relationships with their customers, have the potential to subsidize competitive
services from monopoly service revenues, and benefit from favorable state and
federal regulations. TDS Telecom expects its CLECs to provide a full range of
local telecommunications services in order to compete effectively with the
ILECs.

Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the 1996 Act. Existing
competition for private line, special access and local exchange services is
based primarily on quality, capacity and reliability of network facilities,
customer service, response to customer needs, service features and price, and is
not based on any proprietary technology. As a result of the technology used in
its networks, TDS Telecom may have cost and service quality advantages over some
currently available ILEC networks. In addition, TDS Telecom believes that, in
general, it will provide more attention and responsiveness to its customers than
its ILEC competitors.

TDS Telecom may face competition from other CLECs and other potential
competitors in certain of the cities in which TDS Telecom plans to offer its
services. Many of TDS Telecom's existing and potential competitors have
financial, personnel and other resources significantly greater than those of TDS
Telecom. However, TDS Telecom believes that its strategy of targeting third tier
cities, its capital, technical and management resources and its orientation
toward IXCs and other commercial telecommunications users will enable it to
achieve its strategic objectives. CLECs' ability to compete depends in part on
federal and state rules covering pricing and terms for ILECs' services provided
by unbundled network elements and resale, as well as ILECs' operation support
systems.

In addition to the ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange services include long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, and private networks built by
large end users. Previous impediments to certain utility companies entering
telecommunications markets under the Public Utility Holding Company Act of 1935
were removed by the 1996 Act.

REGULATION

The intrastate, local and access services of TDS Telecom's ILEC subsidiaries
are regulated by state regulatory agencies, and TDS Telecom seeks to maintain
positive relationships with these regulators. Rate setting, including local
rates, intrastate toll rates and intrastate access charges, are subject to state
commission approval. TDS Telecom will continue to pursue necessary changes in
rate structures to ensure affordable rates and reasonable earnings.

State regulators can approve service areas, service standards, accounting
and related matters. In some states, construction plans, borrowing, depreciation
rates, affiliated charge transactions and certain other financial transactions
are also subject to regulatory approval. States have traditionally regulated
entry into local markets by designating a single carrier to be the universal
service provider. However, the 1996 Act has almost completely pre-empted state
authority over market entry. Each state retains the power to impose
competitively neutral requirements that are consistent with the 1996 Act's
universal service provision and necessary for universal services, public safety,
and welfare, continued service quality and consumer rights. While a state may
not impose requirements that effectively function as barriers to entry, and the
FCC must pre-empt challenged state requirements if they impose such barriers to
entry, a state retains limited authority to regulate certain competitive
practices in rural telephone company service areas.

32
<PAGE>
The 1996 Act establishes a general duty for all telecommunications carriers,
including wireless providers, to interconnect with other carriers. Congress
prescribed a more specific list of interconnection requirements for all LECs
including resale, number portability, dialing parity, access to rights-of-way
and reciprocal compensation. The FCC has adopted or is considering rules and
policies implementing the provisions of the 1996 Act.

Unless exempted, or granted suspension or modification, ILECs have
additional obligations: (a) to negotiate in good faith terms of interconnection;
(b) to comply with more detailed interconnection terms, including
non-discrimination and unbundling their network and service components so
competitors may use only those elements they choose for providing their
services; (c) to offer their retail services at wholesale rates to facilitate
resale by their competitors; and (d) to allow other carriers to place equipment
necessary for interconnection or access on their premises. Rural telephone
companies are exempted from these obligations until they receive a bona fide
request for interconnection, resale of services or network elements and the
applicable state commission determines that termination of the exemption is not
unduly economically burdensome, is technically feasible and is consistent with
universal service.

Many of the FCC determinations made to implement the 1996 law and to
facilitate competition in local service and other telephone services involve
investment and upgrades to TDS Telecom networks. These investments and upgrades
include requirements to implement local number portability so subscribers may
change to competitors' services without changing their telephone numbers,
network signaling information that must be provided to certain other carriers
and pay phone providers, and other changes that require additional investments
and expenses. TDS Telecom is seeking to comply with these requirements, and is
pursuing policies that provide a fair opportunity to recover its costs, but in
some cases is asking for waivers or delayed implementation deadlines. A new law
also requires LECs to provide certain communications for law enforcement
purposes. The full cost and the adequacy of the government compensation are not
yet known, but the LEC industry is pursuing regulatory policies that cover any
shortfall in available government compensation.

As defined in the 1996 Act, all of TDS Telecom's ILEC subsidiaries qualify
as rural telephone companies. Therefore, they enjoy an exemption from the ILEC
interconnection requirements until they receive a bona fide request for
interconnection and the state commission lifts the exemption. TDS Telecom has
received two requests for interconnection, one of which has been withdrawn, and
the other of which is currently pending. The FCC has also adopted extensive
rules for state commissions to follow in mediating and arbitrating
interconnection negotiations between incumbent LECs and carriers requesting
interconnection, services or network elements. The 1996 Act establishes
deadlines, standards for state commission approval of interconnection agreements
and recourse to the FCC if a state commission fails to act. A federal appellate
decision striking down FCC pricing regulations for interconnection and several
rules that limited TDS Telecom telephone companies' ability to obtain regulatory
relief from stricter interconnection requirements for incumbent telephone
companies has been accepted for review by the U.S. Supreme Court. TDS cannot
predict the outcome of this or the numerous other court and FCC proceedings
stemming from the 1996 Act.

TDS Telecom seeks to maintain and enhance existing revenue streams despite
heightened earnings review activity by state regulators and the advent of local
exchange competition resulting from the 1996 Act. TDS Telecom is preparing for
competition even though such changes will often require changes in state
regulation or state regulatory approvals. For example, TDS Telecom is seeking
the necessary pricing flexibility to adjust its rate structures to a more
competitive model. TDS Telecom is also participating in state regulatory and
legislative processes to urge that any telecommunications reform measures treat
rural areas fairly and continue to provide sufficient contributions to high cost
rural service areas to keep TDS Telecom ILECs' rates affordable. The ongoing
changes in public policy and introduction of competition may negatively affect
the earnings of the operating subsidiaries, and TDS Telecom is not able to
predict the extent of any such negative impact.

33
<PAGE>
While the majority of TDS Telecom's ILEC subsidiaries continue to operate in
a rate-of-return environment, a number of state commissions are negotiating, or
have agreed to alternative regulation plans with ILECs. Price regulation, the
most common form of alternative regulations, focuses on the price of
telecommunications services rather than rules based on authorized costs and
rates of return. TDS Telecom's ILEC subsidiaries in Alabama, Arkansas, Michigan
and Pennsylvania are currently operating in a price-regulated environment,
whereby the commissions in those states are no longer reviewing earnings
annually. For several years, the RBOCs and some of the nation's larger ILECs
have operated under an FCC "price cap" plan, modified in 1997, where earnings
can be increased through productivity improvements.

For 1998, TDS Telecom's telephone subsidiaries neither elected federal price
caps nor an alternative FCC plan, which was designed for smaller LECs. Instead,
the operating subsidiaries plan to continue to abide by traditional
rate-of-return regulation for interstate purposes, unless those regulatory terms
are changed. Since approximately one-third of TDS Telecom's telephone
subsidiaries serve high-cost areas, important averaging mechanisms associated
with the NECA pooling process would be lost if TDS Telecom elected either of the
alternatives to traditional rate-of-return regulation. However, the FCC
periodically considers whether to initiate a proceeding to lower the allowed
rate-of-return for rate-of-return LECs. The FCC also plans to reform the rules
that govern how rate-of-return regulated LECs, on their own or through NECA,
charge IXCs for local distribution of their interstate calls. Some of the
reforms already adopted for price cap regulated LECs, if expanded to cover the
TDS Telecom LECs, could reduce interstate cost recovery, and could prompt the
LECs to seek state commission approval of increased local rates.

NECA is requesting access charge changes from the FCC which would use a
"banded" rate structure to help pool members with lower costs charge more
competitive rates. NECA's most recent access charges were approved effective
January 1, 1998.

Access to affordable long-distance service in rural areas was achieved
because the FCC ordered AT&T to provide nationwide average rates. As a result of
increasing competition, the FCC lifted all regulations relating to AT&T's
interstate services in 1996. However, the 1996 Act preserves interstate toll
rate averaging and endorses a nationwide policy that interstate and intrastate
long-distance rates of all long-distance carriers should not be higher in rural
areas than in urban areas they serve. The statute is intended to ensure
affordable long distance services even in TDS Telecom's most remote exchanges.

BROADBAND PCS OPERATIONS

The Company's broadband PCS operations are conducted through Aerial
Communications, Inc. and subsidiaries. Aerial is a provider of Personal
Communications Services in the Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus Major Trading Areas (collectively,
the "PCS Markets"). The PCS Markets include approximately 27.6 million
population equivalents ("POPs"). Aerial has constructed networks for its PCS
Markets using Global Systems for Mobile Communications ("GSM") technology.
Aerial has commenced service in each of its markets and served 125,000 PCS
telephones at December 31, 1997. At December 31, 1997, Aerial had expanded its
system coverage to approximately 80% of the six MTAs' total population.

THE WIRELESS TELECOMMUNICATIONS INDUSTRY

OVERVIEW. Wireless service is currently available using analog or digital
technology. Most wireless services currently transmit voice and data signals
over analog-based networks by varying the amplitude or frequency of one
continuous electronic signal transmitted over a single radio channel. Analog
technology currently has several limitations, including inconsistent service
quality, lack of privacy, limited capacity and less reliability in transferring
data without errors. Aerial has chosen GSM, which utilizes a digital technology,
for use in the PCS Markets. Digital systems convert voice or data signals into a
stream of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions. This additional
capacity, along with improvements in digital protocols, allows digital-based
wireless technologies to offer new and enhanced services, such as greater call
privacy and more robust data transmission features, such as "mobile office"
applications (including facsimile, electronic mail and wireless connections to
computer/data networks, including the Internet).

34
<PAGE>
While digital technology serves generally to reduce transmission
interference relative to analog technology, coding methods in the 8 Kb vocoder
cellular digital handsets which have been deployed by several digital wireless
operators using TDMA technology cause a perceptible decline in voice quality.
This gap in voice quality has proven to be a significant barrier to cellular
operators attempting to switch their customers from analog to digital service.
Manufacturers have developed enhanced 13 Kb vocoder digital handsets for both
PCS and digital cellular networks using GSM or CDMA technology and an 8Kb
vocoder using TDMA technology. These new handsets are expected to offer digital
voice transmission comparable to wireline quality.

PCS spectrum differs from existing cellular and specialized mobile radio
("SMR") spectrum in three basic ways: frequency, spectrum and geographic
division. PCS networks will operate in a higher-frequency range (1850-1990 MHz)
compared to the cellular and SMR frequency (800-900 MHz). PCS is comprised of 30
or 10 MHz spectrum versus 25 MHz spectrum for cellular networks. As a result of
the improved capacity of the infrastructure and large allocation of spectrum in
the A, B and C PCS frequency Blocks, PCS will have more capacity for new
wireless services such as data and video transmission. Finally, the geographic
areas for PCS licenses are divided differently than for cellular licenses. PCS
is segmented among 51 MTAs and 493 Basic Trading Areas ("BTAs") as opposed to
cellular's 306 Metropolitan Statistical Areas ("MSAs") and 428 Rural Service
Areas ("RSAs"). An MTA license generally covers a much larger geographic area
than a BTA, MSA or RSA license.

OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into
smaller geographic areas called "cells", each of which contains an antenna and a
base transceiver station ("BTS") consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected
by microwave, fiber optic cable or telephone wires to a switching office
("mobile switching center" or "MSC"). The MSC controls the operation of the
wireless telephone network for its entire service area, performing inter-BTS
hand-offs, managing call delivery to handsets, allocating calls among the cells
within the network and connecting calls to local landline telephone systems or
to long-distance telephone carriers. Wireless service providers have
interconnection agreements with various local exchange carriers and
interexchange carriers, thereby integrating the wireless telephone network with
landline telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long-distance networks,
customers can receive and originate both local and long-distance calls from
their wireless telephones.

The signal strength of a transmission between a handset and a BTS antenna
declines as the handset moves away from the BTS antenna. The MSC and the BTSs
monitor the signal strength of calls in process. When the signal strength of a
call declines to a predetermined level, the call may be "handed off" to another
BTS that can establish a stronger signal with the handset. If a handset leaves
the service area of the wireless service provider, the call is disconnected
unless an appropriate technical interface is established to hand off the call to
an adjacent service provider's system.

Operators of wireless networks frequently agree to provide service to
customers from other compatible networks who are temporarily located or
traveling through the operator's service area. Such customers are called
"roamers." Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless customers are preregistered in certain
networks outside their home service area and receive service automatically while
they are roaming. Other roaming features permit calls to a customer to follow
the customer into different networks, so that the customer will continue to
receive calls in a different network just as if the customer were within his or
her service area.

Wireless customers generally are charged separately for monthly access,
airtime, long-distance calls and custom-calling features (although
custom-calling features may be included in monthly access charges in certain
pricing plans). Wireless network operators pay fees to local exchange and long-
distance telephone companies for access to their networks and toll charges based
on standard or negotiated rates. When wireless operators provide service to
roamers from other networks, they generally charge roamer airtime usage rates,
which usually are higher than standard airtime usage rates for their own
customers, and additionally may charge daily access fees. Special, discounted
rate roaming arrangements, often between neighboring operators who wish to
stimulate usage in their respective territories, provide for reduced roaming
fees and no daily access fees.

35
<PAGE>
TECHNOLOGY

With GSM technology, Aerial offers easy-to-use, interactive menu-driven
phones, and advanced features such as caller identification and a smart card, as
well as more complex features such as text messaging, which allows the GSM
handset to function as a two-way messaging device. In the future, Aerial intends
to increasingly emphasize services which are expected to increase the size and
scope of the wireless market, such as wireless data and information services as
well as wireless local loop services. Aerial anticipates that PCS will
ultimately offer a competitive alternative to wireline telephone service as PCS
networks are constructed and PCS operators form strategic alliances.

GSM is not compatible with other PCS or cellular technologies. However,
compatibility can be achieved through the use of handsets that support multiple
technologies. Aerial expects that compatibility between GSM and the existing
analog cellular systems will be achieved with the use of dual-mode handsets.
Dual-mode handsets are expected to be available in 1998. Because analog cellular
service is available nationwide, Aerial expects that PCS customers will be able
to roam into service areas served by analog cellular providers.

To date, 17 other North American PCS licensees have implemented or announced
their intention to utilize the GSM protocol in the construction of their
networks. GSM committed providers in the U.S. have licenses to cover
approximately 260 million POPs (representing approximately 98% of the population
of the United States) and approximately 25 million POPs in Canada, although
their can be no assurance that all the licensees will build-out their licensed
territory. GSM systems are currently in commercial operation in over 700 North
American cities with more than one million customers. Aerial anticipates that
its customers will be able to roam substantially throughout the United States,
either on other GSM-based PCS networks or by using dual-mode handsets that can
also be used on existing cellular networks.

Aerial is a member of the North American GSM Alliance LLC ("GSM Alliance"),
an all-digital wireless PCS network of U.S. and Canadian carriers. The GSM
Alliance was established to create a national network and develop seamless
wireless communications for customers, whether at home, away or abroad. The GSM
Alliance's collaborative efforts focus on serving the wireless customer
efficiently by addressing the areas of roaming, customer care, national
distribution, and data communications. Aerial is also a part of the GSM North
America consortium, which is the North American interest group for the GSM MoU
Association. Formed in 1995, GSM North America brings together service providers
and equipment manufacturers to identify and resolve issues related to making GSM
the premier PCS digital technology.

PRODUCTS AND SERVICES

Aerial offers coverage in those areas of the PCS Markets where most of the
population lives and works. Subsequent construction of its PCS networks will
provide urban and suburban coverage which is competitive with that of current
cellular operators. Aerial provides roaming capabilities, through agreements
with other GSM and cellular operators.

Aerial's two primary sources of revenues are similar to those available to
other cellular system providers. Service revenue primarily consists of charges
for access, airtime and value-added services provided to Aerial's retail
customers who use the network operated by Aerial, and charges for long-distance
calls made on Aerial's systems. Equipment sales revenue consists of the sale of
handsets and related accessories to retailers, independent agents and end user
customers. At December 31, 1997, Aerial had 125,000 customers. Service revenues
and equipment sales revenues totaled $32.3 million and $23.6 million,
respectively, for the year ended December 31, 1997.

Aerial provides the following services and features:

THE SMART CARD. GSM technology employs a Smart Card which contains a
microchip containing detailed information about a customer's service profile.
The Smart Card allows Aerial to initiate services or change a customer's service
package from a remote location. The Smart Card also allows customers to roam
onto other participating GSM-based networks by using their cards in handsets
compatible with the local network.

FEATURE-RICH HANDSETS. As part of its basic service package, Aerial
provides easy-to-use, interactive menu-driven phones that enable customers to
utilize the features available in a GSM network. These handsets primarily use
words and easy-to-use menus rather than numeric codes to operate handset
functions such as call-forwarding, call-waiting and text messaging.

36
<PAGE>
SHORT TEXT MESSAGING. GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows Aerial to offer a quicker and less expensive form of wireless
communication when a full conversation is not necessary.

ENHANCED SECURITY. Aerial's service provides greater security from
eavesdropping and cloning than existing wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM handsets require the use of a Smart
Card with a sophisticated authentication scheme, the replication of which is
virtually impossible.

As the market for wireless telecommunications services continues to develop,
Aerial expects to offer advanced wireless applications such as mobile data
services, wireless private branch exchange applications, wireless local loop
services and other individually customized wireless products and services.

MARKETING AND DISTRIBUTION

Aerial's marketing objective is to create demand for its PCS service by
clearly differentiating its service offerings. Aerial believes the strength of
its marketing efforts will be a key contributor to its success. Aerial has
developed overall marketing strategies as well as certain, specific local
marketing strategies for each PCS Market.

Aerial's mass marketing efforts emphasize the value of Aerial's
high-quality, innovative services and are supported by heavily promoting the
Aerial brand name. This is supported by a substantial advertising program.

Aerial offers its services and products through traditional cellular sales
channels as well as through new, lower cost channels. Aerial utilizes
traditional sales channels which include mass merchandisers and retail outlets,
company retail stores, sales agents and a direct sales force. National
distributors include Best Buy, Circuit City, Office Depot, Office Max and Radio
Shack in certain markets. Aerial currently also distributes its services and
products through over 50 company retail locations (mall stores, strip mall
stores and kiosks). Based in part upon the remote activation feature of the GSM
Smart Card, Aerial also intends to develop distribution innovations such as
simplified retail sales processes and lower-cost channels which include inbound
telesales, affinity marketing programs, neighborhood sales and on-line sales.

AERIAL'S PCS MARKETS

The PCS Markets cover large areas which, in general, have attractive
demographic characteristics including growing populations, high population
densities, favorable commuting patterns, high median household incomes and
favorable business climates. Aerial believes the geographic diversity of the PCS
markets mitigates adverse consequences which may result from an economic
slowdown in one particular region.

COMPETITION

The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog cellular networks, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. Accordingly, Aerial expects competition in the
wireless telecommunications business to be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services.

Aerial will compete directly with up to five other PCS providers in each of
its PCS Markets. The other successful bidders in the FCC's broadband Block A and
Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and
Tampa-St. Petersburg-Orlando), Sprint Spectrum (Minneapolis, Pittsburgh and
Kansas City) and AT&T Wireless Services, Inc. (Columbus). Aerial also expects
that existing cellular providers in the PCS Markets, most of which have an
infrastructure in place and have been operational for a number of years, will
upgrade their networks to provide comparable services in competition with
Aerial. Principal cellular providers in the PCS Markets are AT&T Wireless
Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation,
AirTouch Communications, Inc., Southwestern Bell, Bell Atlantic-NYNEX Mobile and
Ameritech Cellular.

37
<PAGE>
Additionally, Aerial competes with SMR provider Nextel Communications, Inc. in
each of its six PCS Markets.

Aerial also expects to compete with other communications technologies that
now exist, such as paging, enhanced specialized mobile radio ("ESMR") and global
satellite networks, and expects to compete with cellular and PCS resellers. In
the future, cellular service and PCS will also compete more directly with
traditional landline telephone service providers and with cable operators who
expand into the offering of traditional communications services over their cable
systems. In addition, Aerial may face competition from technologies that may be
introduced in the future.

All of such competition is expected to be intense. There can be no assurance
that Aerial will be able to compete successfully in this environment or that new
technologies and products that are more commercially effective than Aerial's
technologies and products will not be developed. In addition, many of Aerial's
competitors have substantially greater financial, technical, marketing, sales
and distribution resources than those of Aerial and have significantly greater
experience than Aerial in testing new or improved telecommunications products
and services and obtaining regulatory approvals. Some competitors are expected
to market other services, such as cable television access, with their wireless
telecommunications service offerings. Several of Aerial's competitors are
operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless telecommunications networks that cover most of the United
States.

Handsets used for GSM-based PCS networks ordinarily will not be compatible
with cellular systems, and vice versa. Aerial expects dual-mode handsets to be
available in 1998, which will permit its customers to roam by using the existing
cellular wireless network in markets where GSM service is not available. Until
then, this lack of interoperability may impede Aerial's ability to attract
current cellular customers or potential new wireless communication customers
that desire the ability to access wireless service where GSM service is not
available.

Aerial anticipates that market prices for two-way wireless services
generally will decline in the future based on increased competition. Aerial will
compete to attract and retain customers principally on the basis of services and
enhancements, its customer service, the size and location of its service areas
and pricing. Aerial's ability to compete successfully will also depend, in part,
on its ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced, changes
in consumer preferences, demographic trends, economic conditions and discount
pricing strategies by competitors, which could adversely affect Aerial's
operating margins.

REGULATION

REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the United
States pursuant to the Communications Act, and the rules and policies
promulgated by the FCC thereunder. Under the Communications Act, the FCC is
authorized to establish regulations governing the interconnection of PCS
networks with wireline and other wireless carriers, grant or deny license
renewals and applications for transfer of control or assignment of PCS licenses,
and impose forfeitures for violations of the Communications Act.

In addition, the 1996 Act, which amended the Communications Act, mandates
significant changes in existing telecommunications rules and policies to promote
competition, ensure the availability of telecommunications services to all parts
of the nation and to streamline regulation of the telecommunications industry to
remove regulatory burdens as competition develops. The FCC promulgated and
continues to promulgate rules governing the operation of wireless providers,
licensing (including renewal of licenses) and technical standards for the
provision of PCS services under the Communications Act, and is implementing the
legislative objectives of the 1996 Act, as discussed below.

PCS LICENSING. The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.

The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed
for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the
493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of
the 493 BTAs. A PCS license has

38
<PAGE>
been awarded for each MTA and BTA in every block, for a total of more than 2,000
licenses. This means that in any PCS service area as many as six licensees could
be operating separate PCS networks. Under the FCC's rules, a broadband PCS
licensee may own combinations of licenses with total aggregate spectrum coverage
of up to 45 MHz in a single geographic area. The FCC adopted comprehensive rules
that outlined the bidding process, described the bidding application and payment
process, established penalties for certain bid withdrawals, default or
disqualification and established regulatory safeguards. Several auction winners
have filed for bankruptcy.

On November 9, 1995, in Cincinnati Bell Telephone Co. v. FCC (Case No.
94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted
two petitions for review of an FCC order that had barred certain common
ownership of cellular and PCS interests in the same market, and remanded the
case to the FCC for further proceedings. Neither of the two petitioners had been
barred by cross interests from applying for any of the authorizations the FCC
later granted to Aerial. Aerial is watching the FCC proceedings closely.

The grants of licenses to Aerial are conditioned upon timely compliance with
the FCC's build-out requirements, I.E., coverage of one-third of the population
of a PCS market within five years of initial license grant and coverage of
two-thirds of that population within ten years.

The FCC also imposes a requirement that all licensees register and obtain
FCC registration numbers for all of their antenna towers which require prior FAA
clearance. Aerial has complied with and continues to comply with registration
requirements.

The FCC licenses granted to Aerial are issued for a ten-year period expiring
June 23, 2005 and may be renewed. In the event challengers file competing
applications in response to any of Aerial's renewal filings, the FCC has rules
and policies providing that the application of the licensee seeking renewal will
be granted and the application of the challenger will not be considered in the
event that the broadband PCS licensee involved has (i) provided "substantial"
performance, which is defined as "sound, favorable and substantially above a
level of mediocre service just minimally justifying renewal" and (ii)
substantially complied with FCC rules, policies and the Communications Act.
Although Aerial is unaware of any circumstances which would prevent the approval
of any future renewal applications, there can be no assurance that Aerial's
licenses will be renewed by the FCC in the future. Moreover, although revocation
and involuntary modification of licenses are extraordinary regulatory measures,
the FCC has the authority to restrict the operation of licensed facilities or
revoke or modify licenses.

The FCC has proceedings in process which could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no assurance
that such proceedings will not result in additional wireless competition.

In addition, there are citizenship requirements, assignment requirements and
other federal rules and policies and requirements which may affect the business
of Aerial.

RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the broadband PCS industry.

In one proceeding, the FCC has imposed new "enhanced 911" regulations in
broadband PCS systems to determine the precise location of the person making the
emergency call. The new rules require broadband PCS providers to work with local
public safety officials to process 911 calls, including those made from mobile
telephones not registered with the broadband PCS provider, and to meet phased
deadlines for implementing these capabilities.

The FCC is expected to give the telecommunications industry guidance as to
the implementation of the Communications Assistance for Law Enforcement Act
("CALEA"). Due to late development of standards and law enforcement
requirements, there is risk that the industry, as a whole, and Aerial, in
particular, may not be able to meet statutory implementation deadlines with the
possibility of financial penalties. Aerial is working with law enforcement
agencies through industry trade associations to extend the implementation
deadlines in order to reach closure with law enforcement representatives on
technical and reimbursement issues.

The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though the subscribers involved have no pre-existing service relationship with
that carrier. Under these new policies, broadband PCS providers may offer their
subscribers handsets which are capable of operating over broadband PCS and
cellular networks so that when their subscribers are out of range of broadband
PCS networks, they will be able to

39
<PAGE>
obtain non-automatic access to cellular networks. The FCC expects that
implementation of these roaming capabilities will promote competition between
broadband PCS and cellular service providers.

The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between LEC and other wireline providers, between wireless
service providers and between LEC/wireline and wireless providers. LECs have
implementation deadlines by the end of 1998. Broadband PCS, cellular and certain
other wireless providers have phased implementation deadlines in 1998 and 1999.

Beginning in October 1997, broadband PCS systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements. After October 1997, all new broadband
PCS facilities must be in compliance when they are brought into service.

The FCC is also proceeding to implement the 1996 Act. The 1996 Act provides
that implementing its legislative objectives will be the task of the FCC, the
state public utilities commissions and a Federal-state Joint Board. Much of this
implementation is proceeding in numerous, concurrent proceedings with aggressive
deadlines. Several of these proceedings have been appealed to courts of review.
Aerial cannot predict the full extent and nature of developments of the 1996
Act, which will depend, in part, upon interrelationships among state and federal
regulators.

The primary purpose and effect of the new law is to open all
telecommunications markets to competition-including local telephone service. The
1996 Act makes most direct or indirect state and local barriers to competition
unlawful. It directs the FCC to preempt all inconsistent state and local laws
and regulations, after notice and comment proceedings. It also enables electric
and other utilities to engage in telecommunications service through qualifying
subsidiaries.

Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices of state and local carriers.

Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that broadband PCS and
certain other wireless providers are entitled to reciprocal compensation from
LECs for exchange of traffic, may not be charged for LEC-originated traffic or
for code opening/per-number fees, and may obtain LEC interconnection subject to
the terms of the 1996 Act. Appeals were taken to the United States Court of
Appeals for the Eighth Circuit from certain positions these FCC orders by
numerous parties alleging that the FCC has exceeded its statutory mandate, among
other matters. On July 18, 1997, the Eighth Circuit vacated the FCC's rules
prescribing interim rates for reciprocal compensation because it has held that
the 1996 Act requires that rate issues are to be decided by the states. It
upheld the authority of the FCC to order LECs to interconnect with broadband PCS
and other wireless providers and to issue rules relating to certain terms of
interconnection between LECs and such providers.

STATE AND LOCAL REGULATION. The scope of state and local regulatory
authority covers such matters as the terms and conditions of interconnection
between LECs and wireless carriers with respect to intrastate services, customer
billing information and practices, billing disputes, other consumer protection
matters, facilities construction issues and transfers of control, among other
matters. In these areas, particularly the terms and conditions of
interconnection between LECs and wireless providers, the FCC and state
regulatory authorities share regulatory responsibilities with respect to
interstate and

40
<PAGE>
intrastate issues, respectively. Of concern is the trend of certain state and
local regulatory authorities to expend their scope of regulation and to increase
taxes, fees, assessments and service mandates on wireless operators. The direct
and indirect burden of these trends will have an impact on Aerial's operating
costs. Aerial is challenging all such regulatory developments, of significance,
either directly or through trade associations.

The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting pre-emption of moratoria imposed by
state and local governments on siting of telecommunications facilities, the
imposition of state taxes on the gross receipts of CMRS providers and other
proposed state taxes based on the asset value of CMRS licenses awarded by the
FCC. The FCC has been actively involved in educating state and local regulatory
and zoning authorities as to the prohibitions in the 1996 Act against the
creation of unreasonable and discriminatory zoning, taxation or other barriers
to new wireless providers. Several lawsuits have been filed on behalf of Aerial
to protect its rights under the 1996 Act for zoning of antenna siting.

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

RADIO PAGING OPERATIONS

The Company managed its radio paging business through American Paging, Inc.
and subsidiaries. American Paging provided wireless communications messaging
services in the United States with operations concentrated in Florida and in the
Mid-Atlantic and Midwest regions. The Company intends to combine its paging
operations with TSR Paging in 1998 as discussed below.

COMBINATION OF AMERICAN PAGING AND TSR PAGING

American Paging is currently an 82%-owned subsidiary of the Company which
offers radio paging and related services.

In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. Pursuant to the agreement, TDS
made an offer to American Paging to negotiate and enter into a merger agreement
pursuant to which TDS would acquire all of the outstanding Common Shares of
American Paging held by persons other than TDS (the "Minority Shareholders") for
cash in an amount equal to $2.25 per American Paging Common Share. The TDS offer
was considered by a special committee of the Board of Directors of American
Paging, which consists of two independent directors of American Paging.
Following review of the offer by the special committee and negotiations between
the special committee and TDS, TDS increased its offer to $2.50 per American
Paging Common Share. On February 10, 1998, the special committee approved the
revised offer and recommended that the full Board of Directors of American
Paging approve the revised offer. As a result, on February 10, 1998, the Board
of Directors of each of American Paging and TDS approved a merger agreement
providing for the acquisition by TDS (through a wholly-owned subsidiary ("TDS
Sub")) of all the issued and outstanding American Paging Common Shares held by
the Minority Shareholders for cash in an amount equal to $2.50 per American
Paging Common Share.

Pursuant to the merger agreement, on February 18, 1998, TDS Sub commenced a
Tender Offer (the "Offer") for each of the Common Shares held by the Minority
Shareholders of American Paging in exchange for $2.50 in cash. Approximately
2,294,000 American Paging Common Shares were tendered and accepted by TDS Sub in
the Offer. The shares tendered, together with the 16,500,000 American Paging
Common Shares already owned by TDS Sub (which included 12,500,000 American
Paging

41
<PAGE>
Common Shares which TDS Sub received upon conversion of its American Paging
Series A Common Shares) represented approximately 93.3% of the outstanding
American Paging Common Shares. On March 20, 1998, TDS caused TDS Sub to be
merged into American Paging. In that second-step merger, each American Paging
Common Share not purchased in the Offer, other than those held by TDS or its
subsidiaries, was converted into the right to receive $2.50 per American Paging
Common Share in cash, subject to applicable appraisal rights under Delaware law.
As a result of such merger, American Paging Common Shares ceased to be traded on
the American Stock Exchange, and American Paging ceased to be a reporting
company under the Securities Exchange Act of 1934.

It is expected that TDS will cause American Paging to contribute
substantially all of its assets and certain limited liabilities, and TSR will
contribute all of its assets and liabilities, to a new limited liability
company. The asset contribution agreement provides that, subject to adjustment,
TDS will have a 30% interest and TSR will have a 70% interest in the new
company. TDS will adopt the equity method of accounting for its investment in
the new company.

WIRELESS MESSAGING INDUSTRY

Wireless communications messaging technology uses an assigned radio
frequency, licensed by the FCC, to contact a customer within a geographic
service area. Subscriber devices are small, lightweight, easy-to-use,
battery-operated devices which receive messages by the broadcast of a radio
signal. To contact a customer, a message is initiated by placing a telephone
call to the customer's subscriber device number or through computer software
which enables a computer to transmit a text message via the modem line. The
message is received by a computerized paging switch which generates a signal
sent to microprocessor-controlled radio transmitters within the service area.
These radio transmitters are connected to the paging terminal either through
landline or satellite links. The transmitters broadcast a digital or analog
signal that is received by the pager and delivered as alphanumeric text,
numerical display, tone or voice message.

The wireless messaging industry started in 1949 when the FCC allocated
certain radio frequencies for exclusive use in providing one-way and two-way
types of mobile communications services. The industry grew slowly during its
first thirty years as the quality and reliability of equipment was developed and
the market began to perceive the benefits of wireless communications. Until the
1980s, the industry was highly fragmented with a large number of small, local
operators. During that decade, acquisitions of many firms by regional telephone
companies and others greatly consolidated the industry. Several large industry
acquisitions have occurred in the 1990s which has resulted in further
consolidation of the paging industry.

Manufacturers of subscriber devices and transmission equipment have produced
innovative technological advances which are expected to continue to broaden the
potential market size for wireless messaging services and support the industry's
rapid growth rate. Micro circuitry, liquid crystal display technology and
digital signal processing have all expanded the capability and capacity of
messaging services while reducing equipment and airtime costs and equipment
size. Narrowband PCS technology is expected to greatly expand the messaging
capacity of the infrastructure and provide advanced two-way messaging and data
services.

Recent technological innovations in subscriber devices and transmission
protocols have resulted in the development of acknowledgment paging and two-way
paging. In acknowledgment paging, the subscriber devices can initiate a return
message to the original message sender, informing him or her that the message
was successfully received. In two-way paging, the subscriber devices enable the
user to initiate, receive and/or reply to messages and pages through a built-in
keyboard and miniaturized transmitter. In addition, the subscriber devices can
communicate with other devices such as pagers, fax machines, and computers
through electronic mail addresses.

42
<PAGE>
The following table summarizes certain information about American Paging's
operations.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pagers in service.............................. 811,100 777,400 784,500 652,800 460,900
Total revenues................................. $ 94,413 $ 104,187 $ 107,150 $ 92,065 $ 75,363
Depreciation and amortization expense.......... 32,040 33,777 24,692 17,178 13,392
Operating (loss)............................... (35,307) (36,626) (8,997) (169) (721)
Capital expenditures........................... 18,624 32,517 26,527 28,966 21,454
Identifiable assets............................ $ 135,840 $ 153,374 $ 159,170 $ 146,107 $ 74,923
</TABLE>

DEVELOPMENT

American Paging's business strategy is to enhance the customers' business
and solve their communications problems by utilizing quality employees and
leading-edge wireless messaging technology while creating value for
shareholders. American Paging also strives to be a company that people enjoy
doing business with through consistent positive customer interactions. American
Paging's business strategy is based on the following elements:

QUALITY CUSTOMER SERVICE. American Paging's centralized Customer Telecare
Center ("CTC") located in Oklahoma City, Oklahoma can provide full customer
service to the entire customer base 24-hours-per-day, seven-days-per-week.
Customer service representatives at the CTC, which are organized based on
geographic regions, have the capability to fulfill sales orders, add additional
services and answer technical and billing questions. American Paging experienced
difficulties in converting to the CTC in 1996, but has gradually improved
customer satisfaction levels throughout 1997 as a result of improvements in
customer communication and workflow processes.

SPECTRUM DEVELOPMENT. American Paging owns five regional narrowband PCS
licenses which provide coverage equivalent to that of a nationwide license. Each
of the five licenses consists of a 50 kHz outbound channel on frequency 930.625
MHz paired with a 12.5 kHz return channel on frequency 901.80625 MHz. During
1997, American Paging launched North America's first commercial two-way paging
network utilizing the ReFLEX25-Registered Trademark- protocol in Pittsburgh,
Pennsylvania. Testing of the network occurred in the second half of 1997 with
commercial sales expected during the first half of 1998. The licenses enable
American Paging to introduce two-way wireless messaging communications services
including acknowledgment paging, data and telemetry services, wireless e-mail
and digitized voice messaging. These services will be initially available in the
Western Pennsylvania market with potential expansion throughout the rest of the
United States as the network is expanded to cover these areas.

American Paging also owns an exclusive nationwide Private Carrier Paging
("PCP") channel on frequency 929.3375 MHz. American Paging believes this license
will enable it to offer competitive regional and nationwide one-way wireless
messaging services. American Paging's Minnesota, Oklahoma, Texas and Washington,
D.C. systems currently utilize this frequency.

The narrowband PCS licenses and the PCP license will provide American Paging
with significant spectrum capacity upon which to offer future wireless messaging
services. Significant funds will be required as American Paging proceeds with
development of its narrowband PCS licenses and PCP license. There can be no
assurance that American Paging will be successful in developing these licenses
due to such factors as the inability to obtain sufficient financing at a
reasonable cost, availability of the supporting infrastructure and related
subscriber device equipment, competition, regulatory developments or other
factors.

TECHNOLOGICAL LEADERSHIP. American Paging invests in state-of-the-art
communication network technology which provides high transmission quality, data
speed and system capacity, while also providing strong system management tools
which allow American Paging to efficiently and effectively operate the systems.
American Paging utilizes FLEX-Registered Trademark- protocol technology for all
new transmitters installed on its one-way networks which increases system
capacity and will allow a more cost effective migration to narrowband PCS
technology and other future wireless messaging services. American

43
<PAGE>
Paging also utilizes satellite-based digital technology which reduces
maintenance and eliminates expensive terrestrial radio links, site costs and
repeater equipment. American Paging's satellite-controlled systems cover
portions of Arizona, Minnesota, Wisconsin, Illinois, Oklahoma, Florida, Texas
and Washington, D.C. American Paging is converting all other wide-area systems
to this satellite-based digital technology.

In order to reduce the cost of providing service, American Paging
implemented a plan in 1997 to migrate the existing customer base from its
current 19 frequencies and 43 networks to no more than three frequencies
supported by six nationwide networks. During this three to four year migration
period, American Paging expects to dismantle and sell some of the older, less
efficient systems. In addition, American Paging intends to relocate some
existing transmitters to more heavily populated areas in order to expand
coverage, improve quality and gain new customers.

PAGING OPERATIONS

American Paging provides local, statewide, regional and nationwide advanced,
one-way digital wireless messaging communications services to customers in 21
states and the District of Columbia through its 35 sales and service offices.
American Paging offers local and regional paging coverage throughout Florida,
the Midwest (including all or parts of Minnesota, Wisconsin, Missouri, Illinois,
Indiana and Kentucky), the Mid-Atlantic (including all or parts of Maryland,
Pennsylvania, Virginia and Washington, D.C.) and in portions of Oklahoma, Texas,
Arizona and Utah. One-way paging services are also offered in portions of Ohio,
Iowa and Southern California, through various transmitter-sharing agreements
with nonaffiliated service providers. American Paging expects to begin
commercial sales on its two-way network in Western Pennsylvania in the first
half of 1998. Nationwide one-way and two-way paging services are offered through
American Paging's alliances with nonaffiliated service providers.

Generally, a one-way wireless messaging system consists of a control center,
transmitters and dedicated links (wire, fiber optic, radio, or satellite)
between the control center and the transmitters and the subscriber devices
themselves. The control center is interconnected with the public switched
telephone network ("PSTN") and receives messages from landline telephones.
Messages received at the control center are matched to each subscriber device's
unique telephone number, or "cap code," translated into digital signals and
forwarded over dedicated links to transmitters that broadcast the message over a
specified frequency. If the subscriber device to which the message is directed
is in the transmitter coverage area, it will recognize its "cap code" and
indicate to its wearer that it has received a message.

A one-way wireless messaging system can be migrated to a two-way system
through modification of the control center and additional receivers. The new
network configuration provides continuity between existing one-way transmitters
and receivers and the narrowband PCS network. The network configuration also
provides the receiver network for return messages generated from two-way
subscriber devices. The narrowband PCS network will be capable of services such
as guaranteed delivery, short response messaging and gateways to the Internet.

A paging operator is generally assigned a block of numbers by the local
telephone company in its service area. These numbers are assigned to individual
subscriber devices. When the number assigned to the subscriber device is called
from the PSTN, messages can be transmitted automatically by terminal equipment
in the control center without the intervention of a live operator.

American Paging currently provides four types of subscriber devices in all
of its markets: alphanumeric text display, numeric, tone and voice. Alphanumeric
text display service allows customers to receive, store and display full text
messages, consisting of both numbers and letters up to 240 characters long,
which are sent from either a data entry device, message dispatch operator or via
computer modem through messaging software. A numeric display pager permits a
caller to transmit to the customer a numeric message that may consist of a
telephone number, an account number or coded numeric information. A tone pager
notifies the customer that a message has been received by emitting an audible
beep, displaying a flashing light or vibrating. In the case of voice service,
the notification is followed by a brief voice message.

44
<PAGE>
MARKETING STRATEGY

American Paging directs its marketing efforts at value-oriented customers
who appreciate its high degree of technical reliability and high level of
customer service. American Paging's marketing strategy is designed to increase
market share and operating cash flow by achieving rapid growth at modest cost
per net customer unit added. Continuing quality improvements, including new
services and products, help stimulate this growth while controlling costs.

American Paging generates its revenues from (I) service usage billed on a
flat-rate or measured-service basis, (ii) subscriber device rentals, (iii)
subscriber device maintenance and repair, (iv) loss protection, (v) voice mail
usage on a flat-rate or measured-service basis, (vi) activation fees, (vii) the
sale of subscriber device accessories and (viii) service usage of value-added
services such as information services, text dispatching, second telephone
numbers or group calls. Service to end users is provided directly by American
Paging in most cases.

American Paging markets its services directly through its direct sales
force, company-owned retail stores, and indirectly through third-party resellers
and agents. The direct sales staff is responsible for the development of large
and medium business accounts and for the promotion of nationwide paging
services. Company-owned retail stores focus on serving consumer and small
business accounts as do indirect agents. American Paging sells subscriber
devices to agents at a small mark-up or at cost. Agents then sell the subscriber
devices to customers who purchase the services directly from American Paging.
American Paging provides sales support to its agents, including promotional
material and end-user information.

American Paging provides services under marketing agreements with
third-party marketing organizations, or resellers. American Paging offers
airtime in bulk quantities at wholesale rates to resellers who then "re-sell"
the air time to end users at a mark-up. Resellers incur the cost to acquire
customers as well as to service, bill and collect revenues from the customer.
They also assume the cost of the subscriber device for those who lease rather
than purchase.

COMPETITION

American Paging faces significant competition in all of its markets.
Competition for subscribers in most geographic markets American Paging serves is
based primarily on price, quality of services offered and the geographic area
covered. A number of American Paging's competitors, which include local,
regional and national paging companies and certain regional telephone companies,
possess greater financial, technical and other resources than American Paging.
Moreover, certain competitors in the wireless messaging business offer wider
coverage in certain geographic areas than does American Paging and certain
competitors follow a low-price discounting strategy to expand market share. If
any of such companies were to devote additional resources to the wireless
messaging business or increase competitive pressure in American Paging's
markets, American Paging's results of operations could be adversely affected.

A number of wireless communication technologies, including cellular
telephone service, broadband PCS, enhanced SMR and others, are competitive forms
of technology used in, or projected to be used for, wireless two-way
communications. Cellular telephone technology provides an alternative
communications system for customers who are frequently away from fixed-wire or
landline communications systems (i.e., ordinary telephones). American Paging
believes that paging will remain one of the lowest-cost forms of wireless
messaging due to the low-cost infrastructure associated with paging systems, as
well as advances in technology that will provide for reduced paging costs.

Broadband PCS technology is currently available in selected markets and
development continues in many other markets throughout the United States.
Broadband PCS Technology is similar in design to cellular technology and will
offer increased capacity for wireless two-way communication as well as
short-text messaging. Accordingly, this technology is expected to result in
increased competition for American Paging.

American Paging believes the services offered by narrowband PCS technology
will be complementary to the services and functionality of cellular and
broadband PCS. Future technological developments

45
<PAGE>
in the wireless telecommunications industry and the enhancement of current
technologies will likely create new products and services that are competitive
with the wireless messaging services currently offered by American Paging. There
can be no assurance that American Paging would not be adversely affected by such
technology changes.

REGULATION

REGULATORY ENVIRONMENT. American Paging's paging operations are subject to
regulation by the FCC and by state regulatory agencies. The FCC exercises broad
authority to regulate market entry and rates and shares responsibilities with
state regulatory authorities over a broad range of other matters.

The construction, operation and transfer of American Paging's systems in the
United States are regulated to varying degrees by the FCC pursuant to the
Communications Act. In addition, the 1996 Act, which amended the Communications
Act, mandates significant changes in existing telecommunications rules and
policies to promote competition, ensure the availability of telecommunications
services to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens as competition
develops. The FCC has promulgated regulations governing construction and
operation of wireless systems, licensing (including renewal of licenses) and
technical standards for the provision of wireless services under the
Communications Act, and is implementing the legislative objectives of the 1996
Act, as discussed below.

LICENSING. The FCC is responsible for awarding licenses for radio
frequencies used by American Paging and its subsidiaries to provide its one-way
and two-way message and other service offerings. It also establishes and
enforces the licensing, technical and operating rules which govern operations on
those frequencies, the terms and conditions under which the wireless systems of
American Paging and its subsidiaries are interconnected with and obtain services
and facilities from other service providers such as local exchange carriers and
others with respect to interstate services and adjudicates any consumer or other
complaints filed under the Communications Act with respect to service providers
subject to its jurisdiction. The FCC also imposes a requirement that all
licensees register and obtain FCC registration numbers for all of their antenna
towers which require prior FAA clearance. American Paging is currently engaged
in this registration process. All new towers must be registered at the time of
construction.

The FCC licenses granted to American Paging are issued for up to ten years
at the end of which time renewal applications must be filed with the FCC. Most
of American Paging's current licenses expire between 1998 and 2001. FCC renewals
are generally granted so long as American Paging is in compliance with FCC
regulations. Although American Paging is unaware of any circumstances which
would prevent the approval of any pending or future renewal applications, no
assurance can be given that American Paging's licenses will be renewed by the
FCC in the future. Moreover, although revocation and involuntary modification of
licenses are extraordinary regulatory measures, the FCC has the authority to
restrict the operation of licensed facilities or revoke or modify licenses. No
license granted to American Paging has ever been involuntarily revoked or
modified.

The Communications Act requires licensees, such as American Paging, to
obtain prior approval from the FCC for the assignment or transfer of control of
any construction permit or station license, or any rights thereunder. The
Communications Act also requires prior approval by the FCC of acquisitions of
other paging companies by American Paging. The FCC has approved all transfers of
control for which American Paging has sought approval. American Paging also
routinely applies for FCC authority to use frequencies, modify the technical
parameters of existing licenses, expand its service territory and provide new
services. Although there can be no assurance that any future requests for
approval or applications filed by American Paging will be approved or acted upon
in a timely manner by the FCC, or that the FCC will grant the relief requested,
American Paging has no reason to believe that any such requests, applications or
relief will not be approved or granted.

Pursuant to 1993 amendments to the Communications Act, a paging service is
classified as a CMRS, to the extent that it is a service offered to the public,
for a fee, which is interconnected to the public switched telephone network.
These 1993 amendments prohibit state and local authorities from limiting CMRS
market entry and regulating CMRS rates.

46
<PAGE>
RECENT EVENTS. The FCC adopted certain significant decisions during 1997.
In one decision, the
FCC amended its environmental protection rules to adopt new guidelines and
procedures for evaluating the environmental effects of RF emissions. Beginning
in October 1997, paging systems, which previously were "categorically excluded"
from having to evaluate their facilities to ensure their compliance with federal
"radio frequency" (RF) radiation requirements, were made subject to those
requirements. After October 1997, all new paging facilities must be in
compliance when they are brought into service.

In addition, in February of 1997, the FCC adopted market area licensing
rules to replace site-by-site licensing of paging base stations and granted
nationwide exclusive authority for American Paging to operate on 929.3375 MHz
under those new rules. The FCC has also recently announced its intention to hold
spectrum auctions for 929/931 MHz paging channels in 1998.

The FCC also established a phased program which requires per-call
compensation to be paid to pay-phone service providers by subscribers to 800
numbers, among others. American Paging and numerous other paging providers who
offer 800 number calling features as a means of accessing their networks will be
required to compensate pay phone service providers under these new requirements.

During 1997 the FCC implemented significant changes in existing regulation
of the telecommunications industry under the 1996 Act. Some of these specific
changes, potentially affecting CMRS providers, including paging and narrowband
PCS providers, are summarized below.

Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices in rural telephone company service areas.

Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that certain wireless
providers are entitled to reciprocal compensation, may not be charged for
LEC-originated traffic or for code opening/per-number fees, and may obtain LEC
interconnection subject to the terms of the 1996 Act. Appeals were taken to the
United States Court of Appeals for the Eighth Circuit from these FCC orders by
numerous parties alleging that the FCC has exceeded its statutory mandate, among
other matters. On July 18, 1997, the Eighth Circuit vacated the FCC's rules
prescribing interim rates for reciprocal compensation because it has held that
the 1996 Act requires that rate issues are to be decided by the states. It
upheld the authority of the FCC to order LECs to interconnect with paging and
other wireless providers and to issue rules relating to certain terms of
interconnection between LECs and such providers.

47
<PAGE>
STATE AND LOCAL REGULATION. The scope of state regulatory authority, while
excluding market entry and rate regulation, covers such matters as the terms and
conditions of interconnection between local exchange carriers and wireless
carriers with respect to intrastate services, customer billing information and
practices, billing disputes, other consumer protection matters, facilities setup
issues and transfers of control, among other matters. In these areas,
particularly the terms and conditions of interconnection between local exchange
carriers and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.

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

EMPLOYEES

The Company enjoys satisfactory employee relations. As of December 31, 1997,
approximately 9,685 persons were employed by the Company, approximately 155 of
whom are represented by unions.

- --------------------------------------------------------------------------------

ITEM 2. PROPERTIES

The property of TDS consists principally of switching and cell site
equipment related to cellular telephone operations; telephone lines, central
office equipment, telephone instruments and related equipment, and land and
buildings related to telephone operations; switching and cell site equipment
related to broadband PCS operations; and radio pagers and transmitting equipment
related to radio paging operations. As of December 31, 1997, TDS's gross
property, plant and equipment of approximately $3.5 billion consisted of the
following:

<TABLE>
<CAPTION>
<S> <C>
Cellular telephone................................................................. 34.7%
Telephone.......................................................................... 40.7
PCS................................................................................ 18.4
Radio paging....................................................................... 3.4
Other.............................................................................. 2.8
-----
100.0%
-----
-----
</TABLE>

The plant and equipment of TDS is maintained in good operating condition and
is suitable and adequate for the Company's business operations. The properties
of the operating telephone subsidiaries are subject to the lien of the mortgages
securing the funded debt of such companies. The Company

48
<PAGE>
owns substantially all of its central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations
and leases most of its offices and transmitter sites used in its cellular, PCS
and paging businesses. All of the Company's telephone lines and cell and
transmitter sites are located either on private or public property. Locations on
private land are by virtue of easements or other arrangements.

- --------------------------------------------------------------------------------

ITEM 3. LEGAL PROCEEDINGS

In addition to the legal proceedings discussed above under "Proposed
Corporate Restructuring," the Company is involved in a number of legal
proceedings before the FCC and various state and federal courts. Management does
not believe that any such proceeding should have a material adverse impact on
the financial position or results of operations of the Company.

- --------------------------------------------------------------------------------

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth
quarter of 1997.

49
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Incorporated by reference from Exhibit 13, Annual Report sections entitled
"TDS Stock and Dividend Information" and "Market Price per Common Share by
Quarter."

- --------------------------------------------------------------------------------

ITEM 6. SELECTED FINANCIAL DATA

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

- --------------------------------------------------------------------------------

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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

- --------------------------------------------------------------------------------

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Pursuant to the General Instructions to Rule 305 of Regulation S-K, Item 7A
is not applicable to the Company as its market capitalization was under $2.5
billion on January 28, 1997.

- --------------------------------------------------------------------------------

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Statements of Income," "Consolidated Statements of Cash Flows,"
"Consolidated Balance Sheets," "Consolidated Statements of Common Stockholders'
Equity," "Notes to Consolidated Financial Statements," "Consolidated Quarterly
Income Information (Unaudited)," and "Report of Independent Public Accountants."

- --------------------------------------------------------------------------------

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

50
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

CURRENT DIRECTORS

The Company's Board of Directors is divided into three classes. Each year,
one class is elected to serve for three years. With respect to the election of
directors at the 1998 Annual Meeting, under the currently effective Articles of
Incorporation, as amended, of TDS, an Iowa corporation, the holders of Common
Shares and holders of Preferred Shares issued before October 31, 1981 (Series A,
B, D, G, H and N), voting as a group (collectively, the "Public Holders"), are
entitled to elect 25% of the directors (rounded up to the nearest whole number),
and the holders of Series A Common Shares and the holders of Preferred Shares
issued after October 31, 1981 (Series O, S, U, BB, DD, EE, GG, HH, II, JJ, KK,
LL, QQ, SS and TT), voting as a group (collectively, the "Series A Holders"),
are entitled to elect the remaining directors.

CLASS I DIRECTORS

The following persons were elected at the 1997 Annual Meeting of
Shareholders to serve as Class I directors for three years or until their
successors are elected and qualified:

<TABLE>
<CAPTION>
POSITION WITH TDS SERVED AS
NAME AGE AND PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------------------ --- --------------------------------------------- --------------
<S> <C> <C> <C>
Donald R. Brown............... 66 Director of the Company 1979
Rudolph E. Hornacek........... 69 Director and Vice President-Engineering of 1968
the Company
Martin L. Solomon............. 61 Director of the Company and Chairman and June 1997
Chief Executive Officer of American Country
Holdings, Inc.
</TABLE>

Donald R. Brown has been retired since December 1997. Prior to his
retirement, Mr. Brown had been President of the Wholesale Markets Group of TDS
Telecom between 1995 and 1997. He was also Senior Vice President of TDS Telecom
between 1992 and 1997. Mr. Brown has advised the Company that he intends to
resign from the Board of Directors following the 1998 Annual Meeting of
Shareholders. As discussed below, it is expected that the Board of Directors
will appoint Mr. James Barr III to fill the vacancy created by the resignation
of Mr. Brown.

Rudolph E. Hornacek has been Vice President-Engineering of the Company for
more than five years. He is a director of TDS Telecom and AERL.

Martin L. Solomon has been a director and Chairman and Chief Executive
Officer of American Country Holdings, Inc., an insurance holding company, since
June 1997. Prior to that time, Mr. Solomon had been occupied primarily as a
private investor since 1990. He is the former Vice Chairman of Great Dane
Holdings, Inc. and, in addition to TDS and American Country Holdings, Inc., is
currently the director of three public companies: XTRA Corporation, a lessor of
truck trailers, marine containers and other equipment, Hexcel Corporation, a
manufacturer of composite materials, and DLB Oil and Gas, Inc., a company
engaged in oil exploration and production.

Messrs. Brown and Hornacek were elected by the Series A Holders. Mr. Solomon
was elected by the Public Holders.

51
<PAGE>
The following person was appointed as a Class I director by the Board of
Directors in 1997, and will serve as a Class I director until the Annual Meeting
of Shareholders to be held in the year 1998, or until his successor is elected
and qualified.

<TABLE>
<CAPTION>
POSITION WITH TDS SERVED AS
NAME AGE AND PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------------------ --- --------------------------------------------- --------------
<S> <C> <C> <C>
George W. Off................. 50 Director of the Company and President and January 1997
Chief Executive Officer of Catalina
Marketing Corporation
</TABLE>

George W. Off is the President and Chief Executive Officer and a member of
the Board of Directors of Catalina Marketing Corporation, a New York Stock
Exchange listed company, which he was instrumental in founding in 1983. Mr. Off
became President and Chief Executive Officer of Catalina in 1994. Prior to that,
Mr. Off was President and Chief Operating Officer between 1992 and 1994, and its
Executive Vice President between 1990 and 1992. Catalina is a leading supplier
of in-store electronic scanner-activated consumer promotions. Mr. Off has nearly
30 years experience in the retail marketing industry, and has previously held
operations and executive positions at two major supermarket chains and has
worked as a consultant.

Mr. Off was identified as a candidate for the Board by a national search
firm specializing in board of director searches after an extensive search in
1996. Mr. Off met or exceeded all of the requirements for an independent
director which had been provided to the search firm. Considering Mr. Off's
qualifications, the Board appointed Mr. Off as a director in January 1997 and
nominated him as the Board's candidate for election as a Class I director by the
Public Holders at the 1997 Annual Meeting. Mr. Off was not elected as a director
by the Public Holders at such meeting. Following the announcement of the voting
results of such meeting in June 1997, the Board of Directors determined to
increase the size of the Board and to appoint Mr. Off to fill the vacancy
created thereby. Accordingly, Mr. Off was appointed as a Series A Holders' Class
I director in June, 1997. This was done because the Board believed that the
failure of the Public Holders to elect Mr. Off was due to dissatisfaction with
the public market value of the TDS Common Shares, rather than based on Mr. Off's
qualifications. Considering the circumstances, the Board determined that it
would be in the best interests of TDS and its shareholders to retain the
services of a director with Mr. Off's qualifications. Since Mr. Off was
appointed as a director by the Board of Directors, Mr. Off will stand for
election as a Class I director at the 1998 Annual Meeting to be elected by the
Series A Holders.

CLASS II DIRECTORS

The following persons were elected at the 1995 Annual Meeting of
Shareholders to serve as Class II directors for three years or until their
successors are elected and qualified.

<TABLE>
<CAPTION>
POSITION WITH TDS SERVED AS
NAME AGE AND PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------------------ --- --------------------------------------------- --------------
<S> <C> <C> <C>
LeRoy T. Carlson, Jr.......... 51 Director and President of the Company (chief 1968
executive officer)
Donald C. Nebergall........... 69 Director and Consultant to the Company and 1977
other companies
Murray L. Swanson............. 57 Director and Executive Vice President-Finance 1983
of the Company (chief financial officer)
James Barr III................ 58 Director of the Company and President of TDS 1990
Telecommunications Corporation
</TABLE>

LeRoy T. Carlson, Jr., has been the Company's President and chief executive
officer for more than five years. Mr. LeRoy T. Carlson, Jr. is also Chairman and
a director of USM, AERL, APP and TDS Telecom. Mr. LeRoy T. Carlson, Jr. is the
son of Mr. LeRoy T. Carlson, and the brother of Mr. Walter C.D. Carlson and Dr.
Letitia G.C. Carlson.

Donald C. Nebergall has been a consultant to the Company and other companies
since 1988. Mr. Nebergall was Vice President of The Chapman Company, a
registered investment advisory company

52
<PAGE>
located in Cedar Rapids, Iowa, from 1986 to 1988. Prior to that, he was the
Chairman of Brenton Bank & Trust Company, Cedar Rapids, Iowa, from 1982 to 1986,
and was its President from 1972 to 1982.

Murray L. Swanson has been the Company's Executive Vice President-Finance
and chief financial officer for more than five years. Mr. Swanson is also a
director of USM, AERL, APP and TDS Telecom.

Mr. Barr has been President and chief executive officer of TDS Telecom for
more than five years. Mr. Barr is also a director of AERL and APP. Mr. Barr's
term as a Class II director will expire at the 1998 Annual Meeting. However, it
is expected that Mr. Barr will be appointed as a director to fill the vacancy on
the Board of Directors due to the retirement of Mr. Donald R. Brown, as
discussed above.

Messrs. Carlson, Nebergall and Swanson were elected by the Series A Holders.
Mr. Barr was elected by the Public Holders.

CLASS III DIRECTORS

The following persons were elected at the 1996 Annual Meeting of
Shareholders to serve as Class III directors for three years or until their
successors are elected and qualified.

<TABLE>
<CAPTION>
POSITION WITH TDS SERVED AS
NAME AGE AND PRINCIPAL OCCUPATION DIRECTOR SINCE
------------------------------ --- --------------------------------------------- --------------
<S> <C> <C> <C>
LeRoy T. Carlson.............. 81 Director and Chairman of the Company 1968
Walter C.D. Carlson........... 44 Director of the Company and Partner, Sidley & 1981
Austin, Chicago, Illinois
Letitia G.C. Carlson.......... 37 Director of the Company, Medical Doctor and 1996
Assistant Professor, George Washington
University Medical Center
Herbert S. Wander............. 63 Director of the Company and Partner, Katten, 1968
Muchin & Zavis, Chicago, Illinois
</TABLE>

Messrs. LeRoy T. Carlson, Walter C.D. Carlson and Herbert S. Wander have had
the principal occupations indicated for more than five years. Dr. Letitia G.C.
Carlson has been an Assistant Professor at George Washington University Medical
Center for more than five years.

Mr. LeRoy T. Carlson is the father of Messrs. LeRoy T. Carlson, Jr. and
Walter C.D. Carlson and Dr. Letitia G.C. Carlson.

Messrs. LeRoy T. Carlson and Walter C.D. Carlson and Dr. Letitia G.C.
Carlson were elected by the Series A Group. Mr. Wander was elected by the Public
Holders.

The law firms of Sidley & Austin and Katten, Muchin & Zavis provided legal
services to TDS in 1997.

NOMINEE FOR DIRECTOR

The following person has been nominated for election by Public Holders at
the 1998 Annual Meeting of Shareholders.

Kevin A. Mundt is a co-founder, and has been a director since 1984, of
Corporate Decisions, Inc., a strategy consulting firm with 150 professionals in
offices in North America and Europe. Corporate Decisions, Inc. recently merged
with Mercer Management Consulting. Mr. Mundt's management consulting practice
focuses on advising companies on strategies for profitable growth in changing
markets. Prior to his association with Corporate Decisions, Mr. Mundt was
associated with Bain and Company. Mr. Mundt holds a B.A. degree in economics
from Brown University and an M.B.A. from the Harvard Graduate School of
Business.

Mr. Mundt will fill the directorship presently held by Mr. James Barr III.
Mr. Barr's term as a Class II director will expire at the 1998 Annual Meeting.
However, as discussed above, it is expected that Mr. Barr

53
<PAGE>
will be appointed as a director to fill a vacancy on the Board of Directors due
to the retirement of Mr. Donald R. Brown.

Subject to the approval of the Tracking Stock Proposal and the effectiveness
of the Merger to reincorporate in Delaware, the 1998 Annual Meeting of
Shareholders will be a meeting of shareholders of TDS as a Delaware corporation.
In such event, an additional Class II director will be elected by the Public
Holders at such meeting. The TDS Delaware Board has not yet designated the
person who will be its nominee for such directorship in that event. In the event
that the Tracking Stock Proposal is approved and the Merger becomes effective,
it is expected that the TDS Delaware Board would designate a person for such
directorship at a TDS Delaware Board meeting which will be held after the
Special Meeting of Shareholders relating to the Tracking Stock Proposal. In the
event that the Tracking Stock Proposal is not approved or in the event the
Merger is not effected for any reason, the 1998 Annual Meeting of Shareholders
will be a shareholders' meeting of TDS Iowa and only Kevin A. Mundt will stand
for election as a Class II director by the Public Holders.

COMMITTEES AND MEETINGS

The Board of Directors of the Company held nine meetings during 1997. Each
person who was a director during all of 1997 attended at least 75% of the
meetings of the Board of Directors.

The Board of Directors does not have a formal nominating committee.

The Audit Committee of the Board of Directors, among other things,
determines audit policies, reviews external and internal audit reports and
reviews recommendations made by the Company's internal auditing staff and
independent public accountants. The current members of the Audit Committee are:
Messrs. Walter C.D. Carlson (Chairman), George W. Off and Herbert S. Wander. The
Audit Committee held three meetings in 1997 which were attended by all members.

The Stock Option Compensation Committee approves the annual salary, bonus
and other cash compensation for the President, considers and approves long-term
compensation for executive officers and considers and recommends to the Board of
Directors any changes to long-term compensation plans or policies. The current
members of the Stock Option Compensation Committee are: Mr. George W. Off
(Chairman) and Dr. Letitia G.C. Carlson. The Stock Option Compensation Committee
held two meetings in 1997 which were attended by both members.

The primary function of the Compensation Committee is to approve the annual
salary, bonus and other cash compensation of officers and key employees of TDS
other than the President. The sole member of the Compensation Committee is LeRoy
T. Carlson, Jr., President of TDS. All actions of the Compensation Committee are
taken by written consent.

54
<PAGE>
EXECUTIVE OFFICERS

In addition to the executive officers identified in the tables regarding the
election of directors, set forth below is a table identifying current officers
of the Company and its subsidiaries who may be deemed to be executive officers
of the Company for disclosure purposes under the rules of the Securities and
Exchange Commission. Unless otherwise indicated, the position held is an office
of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------------------------------- --- -----------------------------------------------
<S> <C> <C>
H. Donald Nelson........................................................... 64 President of United States Cellular Corporation
Donald W. Warkentin........................................................ 42 President of Aerial Communications, Inc.
Terrence T. Sullivan....................................................... 53 President of American Paging, Inc.
Scott H. Williamson........................................................ 46 Senior Vice President-Acquisitions and
Corporate Development
Michael K. Chesney......................................................... 42 Vice President-Corporate Development
George L. Dienes........................................................... 67 Vice President-Corporate Development
C. Theodore Herbert........................................................ 62 Vice President-Human Resources
Peter L. Sereda............................................................ 39 Vice President and Treasurer
Mark A. Steinkrauss........................................................ 52 Vice President-Corporate Relations
Vice President-Corporate Development &
Edward W. Towers........................................................... 51 Operations
Byron A. Wertz............................................................. 51 Vice President-Corporate Development
Gregory J. Wilkinson....................................................... 47 Vice President and Controller
Michael G. Hron............................................................ 53 Secretary
</TABLE>

H. Donald Nelson has served as a director and the President and Chief
Executive Officer of USM for more than five years.

Donald W. Warkentin was appointed a director and President of AERL in 1995.
Prior to that time, Mr. Warkentin was Vice President of Multimedia Marketing for
US West Communications from 1994 to 1995. Before that, Mr. Warkentin was Head of
Marketing for Mercury One-2-One in the United Kingdom, the world's first major
market PCS venture.

Terrence T. Sullivan was appointed a director and President of APP in
September 1996. Prior to that, Mr. Sullivan was Vice President - Finance (CFO)
and Treasurer of APP since January 1996. Prior to that time, Mr. Sullivan was
Vice President of Finance and Administration, CFO and Treasurer of
Microelectronics and Computer Technology Corporation, a consortium which
conducts research and development, from February 1995 to January 1996. Before
that, Mr. Sullivan was Vice President of Finance, Administration and Contract
Programs of Minnesota Supercomputer Center, Inc., which provides remote
supercomputing services and software, for more than five years.

Scott H. Williamson was appointed Senior Vice President-Acquisitions and
Corporate Development of the Company in February 1998. Prior to that time, he
was Vice President-Acquisitions of the Company since November 1995. Immediately
before joining the Company, Mr. Williamson was Vice President, Corporate
Development of FMC Corporation, a manufacturer of machinery and chemicals,
between 1993 and 1995. Before that, Mr. Williamson was Vice President of
Acquisitions and Development of Itel Corporation, a diversified holding company,
for more than five years.

Michael K. Chesney was appointed a Vice President-Corporate Development of
the Company in 1994. Prior to that, he was Director of Corporate Development of
the Company for more than five years.

George L. Dienes has been a Vice President-Corporate Development of the
Company for more than five years.

C. Theodore Herbert has been Vice President-Human Resources of the Company
for more than five years.

Peter L. Sereda joined the Company and was appointed Vice President and
Treasurer of the Company in February 1998. Prior to joining the Company, he was
employed by Specialty Foods Corporation, a privately held company which produces
meat and bakery products, between 1994 and 1998. At Specialty Foods Corporation,
Mr. Sereda was Vice President of Finance-Operations between 1997 and 1998, and
was Vice President and Treasurer between 1994 and 1997. Prior to that time,

55
<PAGE>
Mr. Sereda was employed by Duchossois Industries, Inc., a privately-held
diversified manufacturing company, between 1986 and 1994, and was its Treasurer
between 1990 and 1994.

Mark A. Steinkrauss was appointed Vice President-Corporate Relations of the
Company in March 1998. Prior to joining the Company, Mr. Steinkrauss was
employed by Fruit of the Loom, Inc., an international apparel company, for more
than five years. At Fruit of the Loom, Mr. Steinkrauss was Vice President,
Corporate Relations, between 1993 and 1998, and was Vice President, Investor
Relations, between 1992 and 1993.

Edward W. Towers was appointed Vice President-Corporate Development and
Operations of the Company in May, 1997. Immediately prior thereto, Mr. Towers
was Vice President-Market and Business Development of USM for more than five
years.

Byron A. Wertz was appointed a Vice President-Corporate Development of the
Company in 1994. Prior to that, he was Director-Telecommunications Development
of the Company for more than five years. Mr. Wertz is the nephew of LeRoy T.
Carlson and the cousin of each of LeRoy T. Carlson, Jr., Walter C.D. Carlson and
Letitia G.C. Carlson.

Gregory J. Wilkinson was appointed a Vice President of the Company in 1993.
He has been the Controller of the Company for more than five years.

Michael G. Hron has been the Secretary of the Company for more than five
years. He has been a partner at the law firm of Sidley & Austin for more than
five years.

All of TDS' executive officers devote substantially all of their time to the
Company or its subsidiaries, except for Michael G. Hron who is a practicing
attorney.

- --------------------------------------------------------------------------------

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF COMPENSATION

The following table summarizes the compensation paid by TDS to the President
and chief executive officer of TDS and certain other executive officers of the
Company and its subsidiaries other than the chief executive officer. Due to the
fact that certain 1997 salaries and bonuses have not yet been finalized, the
Company is reporting the five most highly compensated executive officers in
addition to the President and chief executive officer.

56
<PAGE>
SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------------------------------
--------------------- RESTRICTED STOCK SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) AWARDS(4) OPTIONS/SARS(5) COMPENSATION(6)
- ------------------------------ ---- --------- --------- --------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LeRoy T. Carlson ............. 1997 $381,000 $ 90,000 8,295 $67,956
Chairman 1996 $347,000 $135,000 9,367 $68,467
1995 $317,000 $120,000 9,476 $65,215

LeRoy T. Carlson, Jr ......... 1997 $515,000 $105,000 11,770 $22,894
President (chief executive 1996 $440,000 $250,000 13,233 $22,047
officer) 1995 $390,000 $140,000 13,114 $20,883

Murray L. Swanson ............ 1997 $312,000 $ 86,250 4,279 $31,780
Executive Vice President- 1996 $293,000 $115,000 4,899 $35,378
Finance (chief financial 1995 $269,000 $110,000 4,563 $30,327
officer)

James Barr III ............... 1997 $325,000 $ 97,500 -- $34,777
President of TDS 1996 $295,512 $100,000 -- $35,214
Telecommunications 1995 $267,500 $100,000 -- $33,274
Corporation

H. Donald Nelson(7) .......... 1997 $337,709 $ 67,800 $254,837 25,178 $34,468
President of United States 1996 $306,672 $228,000 8,560 $26,748
Cellular Corporation 1995 $274,712 $140,180 9,736 $31,803

Donald W. Warkentin(8) ....... 1997 $283,011 59,873 255,112 $24,817
President of Aerial 1996 $238,996 $264,372 9,526 $12,682
Communications, Inc. 1995 $103,788 $ 56,000 19,500 $95,411
</TABLE>

- ------------------------------

(1) Does not include the discount amount under any dividend reinvestment plan or
any employee stock purchase plan since such plans are generally available to
all eligible shareholders or salaried employees, respectively. Does not
include the value of any perquisites and other personal benefits, securities
or property, since the aggregate amount of such compensation is less than
the lesser of either $50,000 or 10% of the total of annual salary and bonus
reported for the named executive officers above.

(2) Represents the dollar value of base salary (cash and non-cash) earned by the
named executive officer during the fiscal year identified.

(3) Represents the dollar value of bonus (cash and non-cash) earned by the named
executive officer for 1996 and 1995. Final bonuses for 1997 have not yet
been determined for all executive officers. The amounts listed above include
partial advances of the 1997 bonus. See "Executive Officer Compensation
Report."

(4) Represents the value of bonus stock and restricted stock (based on the
closing price of USM Common Shares on the date of grant) awarded to Mr.
Nelson in 1997.

(5) Represents the number of shares subject to stock options ("Options") and/or
stock appreciation rights ("SARs") awarded during the fiscal year
identified. Unless otherwise indicated by footnote, the awards represent
Options without tandem SARs and relate to TDS Common Shares. In the case of
H. Donald Nelson, the amounts represent the number of USM shares subject to
Options and/or SARs awarded during the fiscal year identified. In the case
of Donald W. Warkentin, the amounts for 1995 and 1996 represent TDS Common
Shares subject to Options and the amount in 1997 represents AERL Common
Shares subject to Options.

(6) Includes contributions by the Company for the benefit of the named executive
officer under the TDS Tax-Deferred Savings Plan ("TDSP"), the TDS Employees'
Pension Trust or the TDS Wireless Companies' Pension Plan ("Pension Plan"),
including earnings accrued under a related supplemental benefit agreement,
and the TDS Supplemental Executive Retirement Plan ("SERP"), and the taxable
dollar value of any insurance premiums paid during the covered fiscal year
with respect to term life insurance for the benefit of the named executive
("Life Insurance"), as indicated below for 1997:

<TABLE>
<CAPTION>
LEROY T. CARLSON LEROY T. CARLSON, JR. MURRAY L. SWANSON JAMES BARR III H. DONALD NELSON DONALD W. WARKENTIN
---------------- --------------------- ----------------- -------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
TDSP....... $ 1,900 $ 1,900 $ 1,900 $ 1,900 $ 3,166 $ 3,166
Pension
Plan...... 22,755 5,964 8,302 15,394 7,638 7,638
SERP....... 30,000 12,546 18,016 14,606 19,852 13,563
Life
Insurance... 13,301 2,484 3,562 2,877 3,812 450
-------- -------- -------- -------------- -------- --------
Total...... $ 67,956 $22,894 $31,780 $ 34,777 $34,468 $24,817
-------- -------- -------- -------------- -------- --------
-------- -------- -------- -------------- -------- --------
</TABLE>

(7) All of Mr. Nelson's compensation is paid by USM. Mr. Nelson's annual
compensation is approved by LeRoy T. Carlson, Jr., the Chairman of USM, and
Mr. Nelson's long-term compensation is approved by the stock option
compensation committee of USM.

57
<PAGE>
(8) Mr. Warkentin was originally hired by TDS in 1995 but is now an employee of
AERL. As an employee of AERL, Mr. Warkentin's annual compensation is
approved by LeRoy T. Carlson, Jr., the Chairman of AERL, and Mr. Warkentin's
long-term compensation is approved by the stock option compensation
committee of AERL. Mr. Warkentin's 1996 bonus includes a $150,000 signing
bonus on the one-year anniversary date of his employment by AERL. "All Other
Compensation" for Mr. Warkentin in 1995 includes the reimbursement of moving
expenses of $95,411, related to his relocation to Chicago to serve as
President of AERL.

58
<PAGE>
GENERAL INFORMATION REGARDING OPTIONS AND SARS

The following tables show, as to the executive officers who are named in the
Summary Compensation Table, information regarding Options and/or SARs.

INDIVIDUAL OPTION/SAR GRANTS IN 1997

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS/SARS OPTION TERMS(4)
OPTIONS/SARS GRANTED TO EXERCISE MARKET EXPIRATION --------------------------------
NAME GRANTED(1) EMPLOYEES(2) PRICE PRICE(3) DATE 5% 10%
- -------------------------- ------------- ------------- --------- --------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
LeRoy T. Carlson (5)...... 8,295 12.2% $37.77 $37.77 12/15/07 $212,964 $549,612
LeRoy T. Carlson, Jr.
(5)...................... 11,770 17.3% $37.77 $37.77 12/15/07 $302,180 $779,859
Murray L. Swanson (5)..... 4,279 6.3% $37.77 $37.77 12/15/07 $109,858 $283,519
H. Donald Nelson (6)...... 8,178 $24.48 $24.48 05/01/07 $125,903 $319,063
(7)...................... 17,000 $25.25 $25.25 05/14/07 269,953 684,114
------------- --------------- ---------------
Total Mr. Nelson.......... 25,178 10.1% $395,856 $1,003,177
------------- --------------- ---------------
------------- --------------- ---------------
Donald W. Warkentin (8)... 106,883 $17.00 $6.38 04/18/06 $-- $--
(9)...................... 104,500 $9.74 $7.38 04/18/06 192,565 842,427
(10)..................... 43,729 $4.94 $4.88 12/15/07 142,051 370,511
------------- --------------- ---------------
Total Mr. Warkentin
(11)..................... 255,112 17.6% $334,616 $1,212,938
------------- --------------- ---------------
------------- --------------- ---------------
</TABLE>

- ------------------------------

(1) Represents the number of TDS shares underlying Options awarded during the
year, except in the case of H. Donald Nelson, in which case the amount
represents the number of USM shares underlying Options/SARs awarded during
the fiscal year, and in the case of Donald W. Warkentin, in which case the
amount represents the number of AERL shares underlying Options/SARs awarded
during the fiscal year.

(2) Represents the percent of total TDS shares underlying Options awarded to all
TDS employees during the fiscal year, except for H. Donald Nelson, in which
case the percentage represents the percent of total USM shares underlying
the total Options awarded to all USM employees during the fiscal year, and
in the case of Donald W. Warkentin, in which case the percentage represents
the percent of total AERL shares underlying the total Options awarded to all
AERL employees during the fiscal year.

(3) Represents the fair market value of shares as of the award date.

(4) Represents the potential realizable value of each grant of Options, assuming
that the market price of the shares underlying the Options appreciates in
value from the award date to the end of the Option term at the indicated
annualized rates.

(5) Pursuant to the Company's 1994 Long-Term Incentive Plan, on May 1, 1997,
such named executive officers were granted options (the "Performance
Options") to purchase Common Shares based on the achievement of certain
levels of corporate and individual performance in 1996 as contemplated by
the 1994 Long-Term Incentive Plan. The purchase price per Common Share
subject to the Performance Options is the average of the closing price of
the Common Shares on the American Stock Exchange for the 20 trading days
ended on the trading day immediately preceding April 30, 1997. The
Performance Options became exercisable on December 15, 1997.

(6) The USM 1996 Performance Options were awarded to Mr. Nelson under the USM
1994 Long Term Incentive Plan as of May 1, 1997 and became exercisable on
December 15, 1997.

(7) The USM 1997 Automatic Options become exercisable in annual increments of
20% on March 31 of each year beginning in 1998 and ending in 2002, and are
exercisable until May 14, 2007 at the exercise price of $25.25.

(8) Such AERL Options were granted at AERL's initial public offering price of
$17.00 per share. They are immediately exercisable with respect to 21,377
AERL Common Shares, and become exercisable with respect to an additional
21,377 AERL Common Shares on each of December 15, 1997, 1998, 1999 and 2000,
and expire on April 18, 2006.

(9) Such AERL Supplemental Options became immediately exercisable with respect
to 20,900 AERL Common Shares on January 23, 1997, and become exercisable
with respect to an additional 20,900 AERL Common Shares on each of December
15, 1997, 1998, 1999 and 2000, and expire on April 18, 2006.

(10) Such AERL Options became exercisable on December 15, 1997, and are
exercisable until December 15, 2007, at the exercise price of $4.94 per
share.

(11) In addition, Mr. Warkentin received an adjustment to the number of TDS
shares subject to option granted under the TDS 1994 Long-Term Incentive Plan
with respect to 1995 performance. Mr. Warkentin received an option for an
additional 813 TDS shares, for a total of 9,526 TDS shares subject to option
for 1995 performance at an exercise price of $47.60 per share.

59
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN 1997, AND DECEMBER 31, 1997 OPTION/SAR VALUE

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------------------------
1997 NUMBER OF SECURITIES VALUE OF UNEXERCISED
------------------------- UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS(3) OPTIONS/SARS(4)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
LeRoy T. 1996 Performance
Carlson........ Options(5) 8,295 -- $ 72,913 $ --
1995 Performance
Options(6) 9,367 -- -- --
1994 Performance
Options(7) 9,476 -- 79,977 --
1994 Automatic
Options(8) 28,840 7,210 -- --
----------- ------------- ----------- -------------
Total 55,978 7,210 $ 152,890 $ --
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
LeRoy T. 1996 Performance
Carlson, Jr.... Options(5) 11,770 -- $ 103,458 $ --
1995 Performance
Options(6) 13,233 -- -- --
1994 Performance
Options(7) 13,114 -- 110,682 --
1994 Automatic
Options(8) 37,680 9,420 -- --
1988 Options(9) 76,500 12,750 2,444,175 407,363
----------- ------------- ----------- -------------
Total 152,297 22,170 $ 2,658,315 $407,363
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Murray L. 1996 Performance
Swanson........ Options(5) 4,279 -- $ 37,612 $ --
1995 Performance
Options(6) 4,899 -- -- --
1994 Automatic
Options(7) 4,563 -- 38,512 --
1994 Performance
Options(8) 14,800 3,700 --
1987 Options(10) 3,375 $106,954 -- -- -- --
----------- ------------- ----------- -------------
Total................. 28,541 3,700 $ 76,124 $ --
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
James Barr 1990 Options(11) 14,000 6,000 $ 91,840 $ 39,360
III............
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
H. Donald USM 1997 Performance
Nelson......... Options(12) 17,000 $ -- $ 97,750
USM 1996 Performance
Options(13) 8,178 -- 53,321 --
USM 1995 Performance
Options(14) 7,960 -- -- --
USM 1994 Performance
Options(15) 9,136 -- 15,257 --
USM 1994 Automatic
Options(16) 22,560 5,640 -- --
USM 1991 Options(17) 10,238 $146,711 -- -- -- --
USM SARs(18) 21,600 14,400 345,600 230,400
----------- ------------- ----------- -------------
Total 69,434 37,040 $ 414,178 $328,150
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Donald W. TDS 1995 Performance
Warkentin...... Options(6) 9,526 -- $ -- $ --
TDS 1995 Automatic
Options(19) 19,500 -- 182,520 --
----------- ------------- ----------- -------------
Total TDS Options 29,026 -- $ 182,520 $ --
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
AERL IPO Options(20) 42,753 64,130 $ -- $ --
AERL Supplemental
Options(21) 41,800 62,700 -- --
AERL 1996 Performance
Options(22) 43,729 -- 103,747 --
----------- ------------- ----------- -------------
Total AERL Options 128,282 126,830 $ 103,747 $ --
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>

- ------------------------------

(1) Represents the number of TDS Common Shares with respect to which the Options
or SARs were exercised.

(2) Represents the aggregate dollar value realized upon exercise, based on the
difference between the exercise price and the average of the high and low
price of the shares on the date of exercise.

(3) Represents the number of TDS Common Shares subject to Options and/or SARs,
except for H. Donald Nelson, in which case the information is presented with
respect to USM shares, and for Donald W. Warkentin, in which case the
information is presented with respect to TDS shares and AERL shares, as
indicated.

(4) Represents the aggregate dollar value of in-the-money, unexercised Options
and SARs held at the end of the fiscal year, based on the difference between
the exercise price and $46.56, the market value of TDS Common Shares on
December 31,

60
<PAGE>
1997 or, with respect to Options for USM shares, $31.00, the market value of
USM Common Shares on December 31, 1997 or, with respect to Options for AERL
shares, $7.31, the market value of AERL Common Shares on December 31, 1997.

(5) Such options became exercisable on December 15, 1997 and are exercisable
until December 15, 2007 at the exercise price of $37.77 per share.

(6) Such options became exercisable on December 15, 1996 and are exercisable
until December 15, 2006 at the exercise price of $47.60 per share.

(7) Such options became exercisable on December 15, 1995, and are exercisable
until May 1, 2005 at the exercise price of $38.12 per share.

(8) Such options become exercisable in annual increments of 20% on each of
December 15, 1995 and on the first through the fourth anniversaries of such
date, and are exercisable until November 4, 2004 at the exercise price of
$47.59 per share.

(9) Options for a total of 127,500 shares were granted on March 14, 1988 to
become exercisable with respect to 12,750 shares on March 14 of each year
between 1989 through 1998. Options for a total of 38,250 shares have been
exercised prior to 1996. The unexercised 1988 Options are exercisable until
March 14, 1999 at the exercise price of $14.61 per share.

(10) Options for a total of 33,750 shares were granted on February 15, 1987, to
become exercisable with respect to 3,375 shares on February 25 of each year
between 1988 through 1997. Options for a total of 30,375 shares were
exercised prior to 1997. Options for 3,375 shares were exercised in 1997.
The value realized is equal to the product of the number of shares exercised
and the difference between the exercise price of $8.31 and $40.00, the fair
market value of the Common Shares on March 24, 1997, the exercise date.

(11) The 1990 Options were granted on January 15, 1990 to become exercisable
with respect to 2,000 shares on January 15 of each year between 1991 through
2000, and are exercisable until January 15, 2001 at the exercise price of
$40.00 per share.

(12) The USM 1997 Automatic Options become exercisable in annual increments of
20% on March 31 of each year beginning in 1998 and ending in 2002, and are
exercisable until May 14, 2007 at the exercise price of $25.25.

(13) USM 1996 Performance Options became exercisable on December 15, 1997 and
are exercisable until May 1, 2007 at the exercise price of $24.48.

(14) The USM 1995 Performance Options became exercisable on December 15, 1996
and are exercisable until May 1, 2006 at the exercise price of $34.60 per
share.

(15) The USM 1994 Performance Options became exercisable on December 15, 1995
and are exercisable until May 1, 2005 at the exercise price of $29.33 per
share.

(16) The USM 1994 Automatic Options become exercisable in annual increments of
20% on each of December 15, 1994, and on the first through the fourth
anniversaries of such date, and are exercisable until November 9, 2004 at
the exercise price of $32.25 per share.

(17) The USM 1991 Options are exercisable until November 1, 1997 at the exercise
price of $15.67 per share.

(18) The USM SARs were granted in 1988 and are exercisable at the exercise price
of $15.00 per share.

(19) In 1995, Mr. Warkentin was awarded options for 32,500 TDS Common Shares at
an exercise price of $37.20. Such options were originally scheduled to
become exercisable with respect to 6,500 TDS Common Shares on December 15 of
1995, 1996, 1997, 1998 and 1999. However, in February 1997, in partial
consideration for the grant of options for 106,883 AERL Common Shares at an
exercise price equal to AERL's initial public offering price of $17.00 per
share, Mr. Warkentin agreed to the cancellation of options with respect to a
total of 13,000 TDS Common Shares which would have become exercisable on
December 15, 1998 and 1999.

(20) As discussed in note (19) above, the AERL IPO Options were granted at
AERL's initial public offering price of $17.00 per share. They are
immediately exercisable with respect to 21,377 AERL Common Shares, and
become exercisable with respect to an additional 21,377 AERL Common Shares
on each of December 15, 1997, 1998, 1999 and 2000, and expire on April 18,
2006.

(21) The AERL Supplemental Options were granted at an exercise price of $9.74
per share. Such options became immediately exercisable with respect to
20,900 AERL Common Shares on January 23, 1997, and become exercisable with
respect to an additional 20,900 AERL Common Shares on each of December 15,
1997, 1998, 1999 and 2000, and expire on April 18, 2006.

(22) The AERL 1996 Performance Options became exercisable on December 15, 1997,
and are exercisable until December 15, 2007, at the exercise price of $4.94
per share.

TDS TELECOM PHANTOM INCENTIVE OPTION PLAN

Mr. James Barr III participates in the TDS Telecommunications Corporation
Phantom Stock Incentive Plan (the "TDS Telecom Plan"). The TDS Telecom Plan was
adopted by TDS Telecom in 1997 and relates to the five-year period beginning on
January 1, 1995. Under the TDS Telecom Plan, Mr. Barr was

61
<PAGE>
awarded certain phantom stock units by the Chairman of TDS Telecom. The award
consists of automatic awards and performance awards. The automatic awards vest
in five equal annual installments beginning on December 15, 1995. The
performance awards include a corporate performance award and an individual
performance award. The performance awards vest on December 15 of the year
following the performance year to which they relate. When vested, the phantom
stock option units may be exercised at an exercise price determined in
accordance with the terms of the plan. Upon exercise of the phantom stock units,
Mr. Barr will receive a cash payment equal to the difference between the
exercise price and the implied value of the phantom stock unit as provided in
the TDS Telecom Plan.

The following table summarizes the award of options for phantom stock units
to Mr. Barr in 1997:

TDS TELECOM PHANTOM STOCK PLAN - AWARDS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF NON-STOCK PRICE-BASED PLANS(3)
SHARES, UNITS PERFORMANCE OR ---------------------------------
OR OTHER OTHER PERIOD UNTIL THRESHOLD TARGET MAXIMUM
NAME RIGHTS(1) MATURATION OR PAYOUT(2) (#) (#) (#)
- -------------------------------------------------- ----------------- ----------------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
James Barr III.................................... 39,217 1995 22,558 45,116 67,674
45,185 1996 22,558 45,116 67,674
22,558 1997 22,558 45,116 67,674
22,558 1998 22,558 45,116 67,674
22,558 1999 22,558 45,116 67,674
</TABLE>

- ------------------------------

(1) For 1995 and 1996, represents the actual number of automatic and performance
phantom stock units which were awarded for such years. For 1997, 1998 and
1999, represents the minimum number of automatic phantom stock option units
which will become exercisable. In 1998, Mr. Barr exercised options for an
aggregate of 106,960 phantom stock units for 1995, 1996 and 1997, and
received a net cash payment, prior to withholding taxes, of $327,410.

(2) Represents the fiscal year to which such phantom stock units relate.

(3) The minimum threshold number (representing the automatic options) vests on
December 15 of the year to which the award relates, and the additional units
which may be awarded at target or maximum performance (representing
performance options) vest on December 15 of the year following the
performance year to which the award relates. All phantom stock unit options
expire on July 1, 2003.

PENSION PLANS AND SUPPLEMENTAL BENEFIT AGREEMENTS

The Telephone and Data Systems, Inc. Employees' Pension Trust (the "TDS
Pension Plan") is a defined contribution plan designed to provide retirement
benefits for eligible employees of the Company and certain of its affiliates
which adopt the TDS Pension Plan. Annual employer contributions based upon
actuarial assumptions are made under a formula designed to fund a target pension
benefit for each participant commencing generally upon the participant's
attainment of retirement age. The amounts of the annual contributions are
included above in the Summary Compensation Table under "All Other Compensation."

USM and AERL have adopted the Telephone and Data Systems, Inc. Wireless
Companies' Pension Plan (the "Wireless Pension Plan"). The Wireless Pension
Plan, a qualified non-contributory defined contribution pension plan, provides
pension benefits for USM and AERL employees. Under the Wireless Pension Plan,
pension costs are calculated separately for each participant and are funded
currently. The amount of the annual contribution for Messrs. H. Donald Nelson
and Donald W. Warkentin are included above in the Summary Compensation Table
under "All Other Compensation."

The TDS Supplemental Executive Retirement Plan ("SERP") provides
supplemental benefits under the TDS Pension Plan and the Wireless Pension Plan.
The SERP was established to offset the reduction of benefits caused by the
limitation on annual employee compensation under the Code. The SERP is a
non-qualified deferred compensation plan and is intended to be unfunded. The
amounts of the accruals for the benefit of the named executive officers are
included above in the Summary Compensation Table under "All Other Compensation."

In 1980, TDS entered into a non-qualified supplemental benefit agreement
with LeRoy T. Carlson which, as amended, requires TDS to pay a supplemental
retirement benefit to Mr. Carlson, in the amount

62
<PAGE>
of $47,567 plus interest at a rate equal to 1/4% under the prime rate for the
period from May 15, 1981 (the date of Mr. Carlson's 65th birthday) to May 31,
1992, in five annual installments beginning June 1, 2001, plus interest at
9 1/2% compounded semi-annually from June 1, 1992. The agreement was entered
into because certain amendments made to the TDS Pension Plan in 1974 had the
effect of reducing the amount of retirement benefits which Mr. Carlson would
receive under the TDS Pension Plan. The payments to be made under the agreement,
together with the retirement benefits under the TDS Pension Plan, were designed
to permit Mr. Carlson to receive approximately the same retirement benefits he
would have received if the TDS Pension Plan had not been amended. All of the
interest accrued under this agreement is included above in the Summary
Compensation Table under "All Other Compensation" and identified in footnote 6
thereto as contributions under the TDS Pension Plan.

In 1988, USM entered into a non-qualified supplemental benefit agreement
with H. Donald Nelson which requires USM to pay a supplemental retirement
benefit to Mr. Nelson. The agreement was entered into because Mr. Nelson's
employment with TDS was terminated upon the completion of the initial public
offering of USM Common Shares in 1988 and, as a result, he was no longer
eligible to participate in the TDS Pension Plan. Under the supplemental benefit
agreement, USM is obligated to pay Mr. Nelson an amount equal to the difference
between the retirement benefit he will receive from the TDS Pension Plan and
that which he would have received had he continued to work for TDS, less any
amounts which he is entitled to receive under any other qualified pension plan
(such as the Wireless Pension Plan). USM will pay any such benefit at the same
time as Mr. Nelson receives payments from the TDS Pension Plan. The actual
benefits payable to Mr. Nelson upon retirement will be based upon the facts that
exist at the time and will be determined actuarially. Since the nature of this
agreement is a defined benefit arrangement, no amounts related thereto are
included above in the Summary Compensation Table.

In 1996, AERL entered into a non-qualified supplemental benefit agreement
with Donald W. Warkentin which requires AERL to pay a supplemental retirement
benefit to Mr. Warkentin. The agreement was entered into because Mr. Warkentin's
employment with TDS was terminated as a result of the completion of the initial
public offering of AERL Common Shares in 1996 and, as a result, he was no longer
eligible to participate in the TDS Pension Plan. Under the supplemental benefit
agreement, AERL is obligated to pay Mr. Warkentin an amount equal to the
difference between the retirement benefit he will receive from the TDS Pension
Plan and that which he would have received had he continued to work for TDS,
less any amounts which he is entitled to receive under any other qualified
defined benefit or money purchase pension plan (such as the Wireless Pension
Plan). AERL will pay any such benefit at the same time as Mr. Warkentin receives
payments from the TDS Pension Plan. The actual benefits payable to Mr. Warkentin
upon retirement will be based upon the facts that exist at the time and will be
determined actuarially. Since the nature of this agreement is a defined benefit
arrangement, no amounts related thereto are included above in the Summary
Compensation Table.

DEFERRED COMPENSATION AGREEMENTS

Mr. H. Donald Nelson and Mr. James Barr III are parties to Executive
Deferred Compensation Agreements, pursuant to which such persons will have a
specified percentage of gross compensation deferred and credited to a Deferred
Compensation Account. The Deferred Compensation Account will be credited with
interest compounded monthly, computed at a rate equal to one-twelfth of the sum
of the average thirty-year Treasury Bond rate plus 1.25 percentage points until
the Deferred Compensation Amount is paid to such persons.

SALARY CONTINUATION AND CONSULTING AGREEMENT

The Company has entered into an agreement with LeRoy T. Carlson whereby it
will employ Mr. Carlson until he elects to retire. Mr. Carlson is to be paid at
least $60,000 per annum until his retirement. The agreement also provides that
upon his retirement, Mr. Carlson will be retained by the Company as a part-time
consultant (for not more than 60 hours in any month) until his death or
disability. Upon his retirement, Mr. Carlson will receive $75,000 per annum as a
consultant, plus increments beginning in 1985 equal to the greater of three
percent of his consulting fee or two-thirds of the percentage increase in the
consumer price index for the Chicago metropolitan area. If Mr. Carlson becomes
disabled before retiring, the Company can elect to discontinue his employment
and retain him

63
<PAGE>
in accordance with the consulting arrangement described above. Upon Mr.
Carlson's death (unless his death follows his voluntary termination of his
employment or the consulting arrangement), his widow will receive until her
death an amount equal to that which Mr. Carlson would have received as a
consultant. The Company may terminate payments under the agreement if Mr.
Carlson becomes the owner of more than 21% of the stock, or becomes an officer,
director, employee or paid agent of any competitor of the Company within the
continental United States. No amounts were paid or payable under this agreement
in 1997, 1996 or 1995, and no amounts related thereto are included above in the
Summary Compensation Table.

SIGNING LETTER WITH DONALD W. WARKENTIN

Pursuant to signing a letter agreement with Donald W. Warkentin, the Company
has agreed, among other things, to pay Mr. Warkentin (i) an annual salary of
$200,000 in 1995, with an increase to $220,000 effective January 1, 1996; (ii) a
$150,000 signing bonus payable on his first anniversary date; (iii) a 1995
guaranteed bonus of $40,000 and a maximum bonus of $60,000; and (iv) a target
bonus opportunity of 35% of base salary, starting in 1996.

COMPENSATION OF DIRECTORS

Effective July 23, 1996, the Board of Directors adopted a Compensation Plan
(the "Non-Employee Directors' Plan") for non-employee directors ("Non-Employee
Directors"). A Non-Employee Director is a director of the Company who is not an
employee of the Company, USM, AERL, APP or TDS Telecom ("Affiliates"). The
purpose of the Non-Employee Directors' Plan is to provide for reasonable
compensation to non-employee directors in connection with their services to the
Company, in order to induce qualified persons to become and serve as
non-employee members of the Board of Directors.

The Non-Employee Directors' Plan provides that, effective for the twelve
month period ending at the time of the Company's 1997 annual meeting, each
Non-Employee Director will receive an annual director's fee of $24,000; and each
director of the Company who is not an employee of any Affiliate will continue to
receive a fee of $1,000, plus reimbursement of reasonable out-of-pocket expenses
incurred in connection with travel, for attendance at each regularly scheduled
or special meeting of the Board of Directors. The Non-Employee Directors' Plan
also provides that, effective as of July 23, 1996, each director of the Company
who is not an employee of any Affiliate will receive a fee of $750, plus
reimbursement of reasonable out-of-pocket expenses incurred in connection with
travel, for attendance at each meeting of the Audit Committee, Compensation
Committee, or other committee established by resolution of the Board of
Directors.

Under the Non-Employee Directors' Plan, an amount equal to 50% of the annual
director's fee will be paid immediately prior to the Company's Annual Meeting of
Shareholders by the delivery of Common Shares of the Company having a fair
market value as of the date of payment equal to such percentage of the annual
fee. In addition, under the Non-Employee Directors' Plan, an amount equal to 33%
of each committee meeting fee will be accumulated and paid immediately prior to
the Company's Annual Meeting of Shareholders by the delivery of Common Shares of
the Company having a fair market value as of the date of payment equal to such
percentage of such fee. The Company has reserved 15,000 Common Shares of the
Company for issuance pursuant to the Non-Employer Directors' Plan.

Donald C. Nebergall, a director of the Company, also received $15,485 as a
bonus and $152,800 for consulting services provided to the Company and was
reimbursed for out-of-pocket expenses incurred in connection with such services
in 1997.

In addition, the Company pays life insurance premiums on behalf of
directors. Except for such life insurance premiums, directors who are also
employees of the Company or any Affiliate do not receive any additional
compensation for services rendered as directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The sole member of the Compensation Committee is LeRoy T. Carlson, Jr.,
President of TDS. The primary function of the Compensation Committee is to
approve the annual salary, bonus and other cash

64
<PAGE>
compensation of officers and key employees of TDS other than the President.
LeRoy T. Carlson, Jr. is a member of the Board of Directors of TDS, USM, AERL,
APP and TDS Telecom. LeRoy T. Carlson, Jr. is also the Chairman of USM, AERL,
APP and TDS Telecom and, as such, approves the executive officer annual
compensation decisions for USM, AERL, APP and TDS Telecom. LeRoy T. Carlson, Jr.
is compensated by TDS for his services to TDS and all of its subsidiaries.
However, USM, AERL and APP reimburse TDS for a portion of such compensation
pursuant to intercompany agreements between TDS and such subsidiaries. The Stock
Option Compensation Committee of the Board of Directors of TDS makes annual
compensation decisions for the President of TDS and makes long-term compensation
decisions for all executive officers who are employees of TDS. The members of
the Stock Option Compensation Committee are George W. Off (Chairman) and Letitia
G.C. Carlson. The members of the Stock Option Compensation Committee are neither
officers or employees of the Company or any of its subsidiaries nor directors of
any of the Company's subsidiaries. Long-term compensation for executive officers
who are employees of USM, AERL or APP are approved by the stock option
compensation committees of USM, AERL and APP, respectively. The stock option
compensation committees of USM, AERL and APP are composed of directors of such
subsidiaries who are neither officers or employees of TDS or any of its
subsidiaries nor directors of TDS.

In addition to such compensation committee interlocks and insider
participation in compensation decisions, the Company and certain related parties
are involved in the following relationships and transactions.

ISSUANCE OF TDS SHARES IN CONNECTION WITH CERTAIN ACQUISITIONS. The Company
may issue TDS securities in connection with the acquisition of cellular
interests on behalf of USM. At the time such acquisitions are closed, the
acquired cellular interests are generally transferred to USM, which reimburses
TDS by issuing USM securities to TDS or by increasing the balance due to TDS
under a revolving credit agreement between TDS and USM (the "Revolving Credit
Agreement"). The fair market value of the USM securities issued to TDS in
connection with these transactions is calculated in the same manner and over the
same time period as the fair market value of the TDS securities issued to the
sellers in such acquisitions. During 1997, USM issued 996,000 USM Common Shares
to TDS to reimburse TDS for 759,000 TDS Common Shares issued for such cellular
interests.

OTHER RELATIONSHIPS AND RELATED TRANSACTIONS. Walter C.D. Carlson, a
director of TDS, Michael G. Hron, Secretary of TDS and certain TDS subsidiaries,
William S. DeCarlo, the Assistant Secretary of TDS and certain TDS subsidiaries,
Stephen P. Fitzell, the Secretary of certain TDS subsidiaries, and Sherry S.
Treston, the Assistant Secretary of certain TDS subsidiaries, are partners of
Sidley & Austin, the principal law firm of TDS and its subsidiaries. Walter C.D.
Carlson is a trustee and beneficiary of a voting trust which controls TDS and is
the husband of Debora M. de Hoyos, a director of APP.

65
<PAGE>
- --------------------------------------------------------------------------------

ITEM 12. BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth at December 31, 1997, the number of Common
Shares and Series A Common Shares beneficially owned, and the percentage of the
outstanding shares of each such class so owned by each director and nominee for
director of the Company, by each of the executive officers named in the Summary
Compensation Table and by all directors and executive officers as a group.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF INDIVIDUAL OR BENEFICIAL PERCENT OF VOTING
NUMBER OF PERSONS IN GROUP TITLE OF CLASS OWNERSHIP(1) OF CLASS POWER
- ---------------------------------------------- ---------------------------------- ---------------------- --------- ---------
<S> <C> <C> <C> <C>
LeRoy T. Carlson, Jr.,
Walter C.D. Carlson,
Letitia G.C. Carlson,
Donald C. Nebergall and
Melanie J. Heald(2).......................... Series A Common Shares 6,337,187 91.4% 51.4%

LeRoy T. Carlson, Jr.,
C. Theodore Herbert
and Michael G. Hron(3)....................... Common Shares 148,876 * *
Series A Common Shares 1,008 * *

LeRoy T. Carlson, Jr.,
C. Theodore Herbert
and Michael G. Hron(4)....................... Common Shares 142,575 * *

LeRoy T. Carlson(5)........................... Common Shares 62,407 * *
Series A Common Shares 51,975 * *

LeRoy T. Carlson, Jr. (6)(12)................. Common Shares 157,760 * *

Walter C.D. Carlson(7)........................ Common Shares 405 * *

Letitia G.C. Carlson(8)....................... Common Shares 470 * *

Murray L. Swanson(9)(12)...................... Common Shares 47,324 * *
Series A Common Shares 2,506 * *

Rudolph E. Hornacek(10)....................... Common Shares 22,410 * *
Series A Common Shares 1,669 * *

James Barr III(12)............................ Common Shares 19,958 * *

Donald C. Nebergall(11)....................... Common Shares 1,463 * *

Donald R. Brown(9)............................ Common Shares 4,001 * *
Series A Common Shares 4,735 * *

Herbert S. Wander............................. Common Shares 334 * *

George W. Off................................. Common Shares 1,127 * *

Martin L. Solomon............................. Common Shares 15,000 * *

Kevin A. Mundt................................ -- -- -- --

H. Donald Nelson.............................. Common Shares 4,098 * *
Series A Common Shares 5,308 * *

Donald W. Warkentin........................... Common Shares 29,566 * *

Terrence T. Sullivan.......................... -- -- -- --

All directors, director nominees and executive
officers as a group (25 persons)(12)......... Common Shares 861,754 1.6% *
Series A Common Shares 6,424,580 92.6% 52.1%
</TABLE>

- ------------------------------

* Less than 1%

66
<PAGE>
(1) The nature of beneficial ownership for shares in this column is sole voting
and investment power, except as otherwise set forth in these footnotes.

(2) The shares listed are held by the persons named as trustees under a voting
trust which expires June 30, 2009, created to facilitate longstanding
relationships among the trust certificate holders. Under the terms of the
voting trust, the trustees hold and vote the Series A Common Shares held in
the trust. If the voting trust were terminated, the following persons would
each be deemed to own beneficially more than 5% of the outstanding Series A
Common Shares: Margaret D. Carlson (wife of LeRoy T. Carlson), LeRoy T.
Carlson, Jr., Walter C.D. Carlson, Prudence E. Carlson, Letitia G.C. Carlson
(children of LeRoy T. Carlson and Margaret D. Carlson) and Donald C.
Nebergall, as trustee under certain trusts for the benefit of the heirs of
LeRoy T. and Margaret D. Carlson and an educational institution.

(3) Voting and investment control is shared by the persons named as members of
the investment management committee of the Telephone and Data Systems, Inc.
Employees' Pension Trust I and the Wireless Companies' Pension Plan. Such
members disclaim beneficial ownership of such shares, which are held for the
benefit of plan participants.

(4) Voting and investment control with respect to Company-match shares is
shared by the persons named as members of the investment management
committee of the Telephone and Data Systems, Inc. Tax-Deferred Savings
Trust. Does not include 55,125 shares acquired by trust employee
contributions for which voting and investment control is passed-through to
plan participants.

(5) Includes 51,975 Series A Common Shares held by Mr. Carlson's wife. Mr.
Carlson disclaims beneficial ownership of such shares. Does not include
252,668 Series A Common Shares held for the benefit of LeRoy T. Carlson,
630,525 Series A Common Shares held for the benefit of Mr. Carlson's wife or
50,526 Series A Common Shares held for the benefit of certain grandchildren
of Mr. Carlson (an aggregate of 933,719 shares, or 13.5% of class) in the
voting trust described in footnote (2). Beneficial ownership is disclaimed
as to Series A Common Shares held for the benefit of his wife and
grandchildren in such voting trust.

(6) Does not include 1,068,186 Series A Common Shares (15.4% of class) held in
the voting trust described in footnote (2), of which 1,037,084 shares are
held for the benefit of LeRoy T. Carlson, Jr. Beneficial ownership is
disclaimed with respect to an aggregate of 31,102 Series A Common Shares
held for the benefit of his wife, his children and others in such voting
trust.

(7) Does not include 1,087,366 Series A Common Shares (15.7% of class) held in
the voting trust described in footnote (2), of which 1,058,143 shares are
held for the benefit of Walter C.D. Carlson. Beneficial ownership is
disclaimed with respect to an aggregate of 29,223 Series A Common Shares
held for the benefit of his wife and children in such voting trust.

(8) Does not include 1,070,127 Series A Common Shares (15.4% of class) held in
the voting trust described in footnote (2), of which 1,061,477 shares are
held for the benefit of Letitia G.C. Carlson. Beneficial ownership is
disclaimed with respect to an aggregate of 8,650 Series A Common Shares held
for the benefit of her husband and child in such voting trust.

(9) Includes shares as to which voting and/or investment power is shared,
and/or shares held by spouse and/or children.

(10) Does not include Series A Common Shares held as custodian for his children,
for which beneficial ownership is disclaimed.

(11) Does not include 641,540 Series A Common Shares (9.2% of class) held as
trustee under trusts for the benefit of the heirs of LeRoy T. and Margaret
D. Carlson and an educational institution, or 31 Series A Common Shares held
for the benefit of Donald C. Nebergall, which are included in the voting
trust described in footnote (2).

(12) Includes the following number of Common Shares that may be purchased
pursuant to stock options and/or stock appreciation rights which are
currently exercisable or exercisable within 60 days: Mr. LeRoy T. Carlson,
55,978 shares; Mr. LeRoy T. Carlson, Jr., 152,297 shares; Mr. Swanson,
28,541 shares; Mr. Barr, 16,000 shares; Mr. Hornacek, 14,551 shares; Mr.
Warkentin, 29,026 shares; all other executive officers, 151,508 shares; and
all directors and officers as a group, 460,651 shares.

67
<PAGE>
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS

In addition to persons listed in the preceding table and the footnotes
thereto, the following table sets forth as of December 31, 1997, information
regarding each person who is known to the Company to beneficially own more than
5% of any class of voting securities of TDS, based on publicly available
information and the Company's stock records as of such date. The nature of
beneficial ownership in this table is sole voting and investment power except as
otherwise set forth in footnotes thereto.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
SHAREHOLDER'S NAME AND ADDRESS TITLE OF CLASS CLASS OWNED CLASS
- -------------------------------------------------------------- ---------------------- --------------- -----------
<S> <C> <C> <C>
The Equitable Companies Inc. (1)
787 Seventh Avenue
New York, New York 10019..................................... Common Shares 10,988,100 20.5%

Franklin Mutual Advisers, Inc. (2)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078................................ Common Shares 5,279,200 9.8%

William and Betty McDaniel
160 Stowell Road
Salkum, Washington 98582..................................... Preferred Shares 46,666 14.4%

Bennet R. Miller
1212 Wea Avenue
Lafayette, Indiana 47905..................................... Preferred Shares 30,000 9.2%

The Peterson Revocable Living Trust
Kenneth M. & Audrey M. Peterson, Trustees
108 Avocado Lane
Weslaco, Texas 78596......................................... Preferred Shares 20,637 6.4%

Roland G. and Bette B. Nehring
5253 North Dromedary Road
Phoenix, Arizona 85018....................................... Preferred Shares 20,012 6.2%

<CAPTION>
PERCENT OF
SHAREHOLDER'S NAME AND ADDRESS VOTING POWER
- -------------------------------------------------------------- ---------------
<S> <C>
The Equitable Companies Inc. (1)
787 Seventh Avenue
New York, New York 10019..................................... 8.9%
Franklin Mutual Advisers, Inc. (2)
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078................................ 4.3%
William and Betty McDaniel
160 Stowell Road
Salkum, Washington 98582..................................... *
Bennet R. Miller
1212 Wea Avenue
Lafayette, Indiana 47905..................................... *
The Peterson Revocable Living Trust
Kenneth M. & Audrey M. Peterson, Trustees
108 Avocado Lane
Weslaco, Texas 78596......................................... *
Roland G. and Bette B. Nehring
5253 North Dromedary Road
Phoenix, Arizona 85018....................................... *
</TABLE>

- ------------------------------

* Less than 1%

(1) Based on the most recent Schedule 13G (Amendment No. 11) filed with the
SEC. Includes shares held by the following affiliates: The Equitable Life
Assurance Society of the United States--4,176,200 shares; Alliance Capital
Management, L.P.-- 6,782,543 shares; Wood, Struthers & Winthrop Management
Corp.--28,976 shares; and Donaldson Lufkin & Jenrette Securities
Corporation--381 shares. In such Schedule 13G, Equitable reported sole
voting power with respect to 5,644,753 shares, shared voting power with
respect to 5,255,600 shares, sole dispositive power with respect to
10,987,719 shares and shared dispositive power with respect to 381 shares.
Alpha Assurance I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle, AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Uni Europe
Assurance Mutuelle and AXA, corporations organized under the laws of France,
are affiliates of The Equitable Companies, Inc.

(2) Based on a Schedule 13D (Amendment No. 4) filed with the SEC. Such Schedule
13D reports that Franklin Mutual Advisers, Inc. exercised sole voting and
investment power with respect to all such shares. Such Schedule 13D is also
filed on behalf of Franklin Resources, Inc., the parent holding company of
Franklin Mutual Advisers, Inc., and by Charles B. Johnson and Rupert H.
Johnson, Jr., principal shareholders of such parent holding company.

Subsequent to December 31, 1997, on March 9, 1998, Gabelli Funds, Inc., One
Corporate Center, Rye, New York 10580, filed a Schedule 13D with the SEC to
report beneficial ownership of 2,799,405 Common Shares of the Company. Such
Schedule 13D included shares held by the following affiliates: Gabelli Funds,
Inc.--810,000 shares; ALCE Partners, L.P.--1,000 shares; GAMCO Investors, Inc.--
1,969,705 shares; Gabelli Fund, LDC--1,000 shares; Gabelli International
Limited--10,000 shares; Gabelli Multimedia Partners, L.P.--1,200 shares; Gemini
Capital Management Ltd.--4,000 shares; Marc J. Gabelli--0 shares; and Mario J.
Gabelli--2,500 shares. In such Schedule 13D filing, such group has reported sole
voting power with respect to 2,724,405 shares, shared voting power with respect
to -0-shares, sole dispositive power with respect to 2,799,405 shares and shared
dispositive power with respect to -0- shares.

68
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16 of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder require the Company's directors and officers, and
persons who are deemed to own more than ten percent of the Common Shares
(collectively, the "Reporting Persons"), to file certain reports ("Section 16
Reports") with the SEC with respect to their beneficial ownership of Common
Shares. The Reporting Persons are also required to furnish the Company with
copies of all Section 16 Reports they file.

Based on a review of copies of Section 16 Reports furnished to the Company
by the Reporting Persons and written representations by directors and officers
of the Company, the Company believes that all Section 16 filing requirements
applicable to the Reporting Persons during and with respect to 1997 were
complied with on a timely basis.

- --------------------------------------------------------------------------------

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Executive Compensation--Compensation Committee Interlocks and Insider
Participation" under Item 11.

69
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

(a) (1) Financial Statements

<TABLE>
<S> <C>
Consolidated Statements of Income.................................. Annual Report*
Consolidated Statements of Cash Flows.............................. Annual Report*
Consolidated Balance Sheets........................................ Annual Report*
Consolidated Statements of Common Stockholders' Equity............. Annual Report*
Notes to Consolidated Financial Statements......................... Annual Report*
Consolidated Quarterly Income Information (Unaudited).............. Annual Report*
Report of Independent Public Accountants........................... Annual Report*
</TABLE>

- ------------------------

* Incorporated by reference from Exhibit 13.

(2) Schedules

<TABLE>
<CAPTION>
LOCATION
----------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedules................................... page 73
I. Condensed Financial Information of Registrant-Balance Sheets as of December 31, 1997 and 1996 and
Statements of Operations and Statements of Cash Flows for each of the Three Years in the Period
Ended December 31, 1997.......................................................................... page 74
II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31,
1997............................................................................................. page 79
</TABLE>

All other schedules have been omitted because they are not applicable or not
required because the required information is shown in the financial statements
or notes thereto.

(3) Exhibits

The exhibits set forth in the accompanying Index to Exhibits are filed as a
part of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and May
25, 1984 is hereby incorporated by reference to the Company's Registration Statement on Form S-2, No.
2-92307.

10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981 is
hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-7, No.
2-74615.

10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated May 28, 1991 is hereby incorporated by
reference to Exhibit 10.2(b) to the Company's Annual Report Form 10-K for the year ended December 31,
1991.

10.3 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988, between
the Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1988.
</TABLE>

70
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.4 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company
and James Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991.

10.5(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby incorporated by reference
to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated March 31,
1988.

10.5(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby
incorporated by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.

10.5(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company is hereby
incorporated by reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.

10.6(a) Telephone and Data Systems, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).

10.6(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference
to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57257).

10.6(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No.
33-57257).

10.6(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference
to Exhibit 99.4 to the Company Registration statement on Form S-8 (Registration No. 33-57257).

10.6(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No.
33-57257).

10.7 Supplemental Executive Retirement Plan of the Company is hereby incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.

10.8 Deferred Compensation Agreement for Rudolph E. Hornacek dated November 30, 1995, is hereby incorporated
by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December
31, 1995.

10.12 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report in Form 10-Q for the quarterly period ended
September 30, 1996.

10.13 Description of Terms of Signing Letter with Donald W. Warkentin dated June 7, 1995, is hereby
incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.

10.14 TDS Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 of
the Company's Registration Statement on Form S-8 (Registration No. 333-23947).

10.15 Executive Deferred Compensation Agreement for James Barr III dated January 1, 1998.

10.16 Form of TDS Telecommunications Corporation Phantom Stock Option Incentive Agreement between TDS
Telecommunications Corporation and James Barr III.
</TABLE>

71
<PAGE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997.

TDS filed a Current Report on Form 8-K on December 2, 1997 dated November
18, 1997, which was filed for the purpose of filing as exhibits, certain
documents relating to the issuance and sale of 6,000,000 8.50% Trust Originated
Preferred Securities (liquidation amount $25 per Preferred Security) by TDS
Capital I, a statutory business trust formed under the laws of Delaware. The
Preferred Securities are fully and unconditionally guaranteed by the Company.

TDS filed a Current Report on Form 8-K on December 8, 1997 dated December 1,
1997, which included a news release issued by United States Cellular Corporation
that announced that TDS and U.S. Cellular entered into an agreement with
AirTouch Communications, Inc. to sell certain cellular systems for approximately
5.0 million shares of AirTouch and approximately $50 million in cash.

TDS filed a Current Report on Form 8-K on December 30, 1997 dated December
18, 1997, which included a news release relating to the announcement of a
corporate restructuring that would create three new classes of stock, commonly
known as "Tracking Stocks ".

TDS filed a Current Report on Form 8-K on December 30, 1997 dated December
23, 1997, which included a news release that announced a definitive agreement
between the Company and TSR Paging, Inc. to combine their respective paging
businesses.

72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES

To the Shareholders and Board of Directors of Telephone and Data Systems, Inc.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Telephone and Data Systems,
Inc. and Subsidiaries Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 28, 1998
(except with respect to the matters discussed in Note 5, "American Paging
Merger"; and in Note 16, as to which the date is February 18, 1998). Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The financial statement schedules listed
in Item 14(a)(2) are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These financial statement schedules have been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 28, 1998
(except with respect to the matters
discussed in Note 5, "American Paging Merger";
and Note 16, as to which the date is February 18, 1998)

73
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 271 $ 141
Temporary investments............................................................. 132 154
Accounts receivable
Due from subsidiaries--Income taxes............................................. 17,673 7,804
Due from subsidiaries--Other.................................................... 21,060 16,790
Other........................................................................... 6,407 2,903
Prepaid income taxes.............................................................. 16,975 19,126
Other current assets.............................................................. 4,287 2,572
------------- -------------
66,805 49,490
------------- -------------
INVESTMENT IN SUBSIDIARIES
Underlying book value............................................................. 2,271,567 2,351,057
Cost in excess of underlying book value at date of acquisition.................... -- 112
------------- -------------
2,271,567 2,351,169
------------- -------------
OTHER INVESTMENTS
Notes receivable from affiliates.................................................. 544,385 96,037
Minority interests and other investments.......................................... 50,846 44,256
------------- -------------
595,231 140,293
------------- -------------
PROPERTY AND EQUIPMENT
Property and Equipment, net of accumulated depreciation........................... 34,216 21,394
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES
Debt issuance expenses............................................................ 6,829 2,030
Development and acquisition expenses.............................................. 267 2,148
Other............................................................................. (28) 54
------------- -------------
7,068 4,232
------------- -------------
$ 2,974,887 $ 2,566,578
------------- -------------
------------- -------------
</TABLE>

The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.

74
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock............................. $ 1,538 $ 1,810
Notes payable..................................................................... 525,885 157,227
Notes payable to affiliates....................................................... -- 47,990
Accounts payable
Due to subsidiaries--Other...................................................... 763 1,867
Other........................................................................... 5,032 1,108
Accrued interest.................................................................. 10,892 10,987
Other............................................................................. 4,854 7,711
------------- -------------
548,964 228,700
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Income taxes...................................................................... 22,659 28,066
Postretirement benefits obligation other than pensions............................ 696 626
Other............................................................................. 7,241 4,822
------------- -------------
30,596 33,514
------------- -------------
LONG-TERM DEBT, excluding current portion (Note B).................................. 241,401 242,143
LONG-TERM DEBT - due to affiliates (Note D)......................................... 154,640 --
------------- -------------
396,041 242,143
------------- -------------
REDEEMABLE PREFERRED SHARES, excluding current portion (Note A)..................... 180 280
------------- -------------
NONREDEEMABLE PREFERRED SHARES...................................................... 30,987 29,000
------------- -------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and
outstanding 54,443,260 and 54,237,180 shares, respectively...................... 54,443 54,237
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares;
issued and outstanding 6,936,277 and 6,916,546 shares, respectively............. 6,936 6,917
Common Shares issuable, 10,480 and 30,977 shares, respectively.................... 499 1,461
Capital in excess of par value.................................................... 1,664,432 1,661,093
Treasury Shares, at cost, 794,576 shares.......................................... (30,682) --
Retained earnings................................................................. 272,491 309,233
------------- -------------
1,968,119 2,032,941
------------- -------------
$ 2,974,887 $ 2,566,578
------------- -------------
------------- -------------
</TABLE>

The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.

75
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating service revenues................................................ $ 72,372 $ 61,239 $ 58,071
Cost of sales and operating expenses...................................... 72,249 57,538 54,682
------------ ----------- -----------
Net operations.......................................................... 123 3,701 3,389
------------ ----------- -----------
Other income
Interest income received from affiliates................................ 32,945 7,385 26,134
Gain on sale of investments............................................. 10,307 3,434 408
Other, net.............................................................. (4,798) (2,139) (3,492)
------------ ----------- -----------
38,454 8,680 23,050
------------ ----------- -----------
Income before interest and income taxes................................... 38,577 12,381 26,439
Interest expense.......................................................... 44,482 15,790 37,028
Income tax expense (credit)............................................... (100,074) (28,522) 8,828
------------ ----------- -----------
Corporate operations...................................................... 94,169 25,113 (19,417)
Equity in net income (loss) of subsidiaries and other investments......... (103,718) 103,026 123,395
------------ ----------- -----------
Net income (loss)......................................................... $ (9,549) $ 128,139 $ 103,978
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.

Note A: The annual requirements for redemption of Redeemable Preferred Shares
are $1.3 million, $103,000, and $77,000 for the years 1998 through 2000,
respectively.

Note B: The annual requirements for principal payments on long-term debt are
$239,000, $248,000, $258,000, $270,000 and $283,000 for the years 1998
through 2002, respectively.

Note C: In 1996, the data processing subsidiary of the Parent company was merged
into the Parent company. Prior years' financial statements have been
restated to conform to current presentation.

Note D:In November 1997, TDS Capital I, a subsidiary trust ("the Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable
Preferred Securities (the "Preferred Securities") at $25 per Preferred
Security. Net proceeds from the issuance totaled $144.8 million and were
used to reduce short-term debt.

The sole asset of TDS Capital I is $154.6 million principal amount of
TDS's 8.5% Subordinated Debentures due December 31, 2037. There is a full
and unconditional guarantee by TDS of the Trust's obligations under the
Preferred Securities issued by the Trust. However, TDS's obligations are
subordinate and junior in right of payment to certain other indebtedness
of TDS. TDS has the right to defer payments of interest on the
Subordinated Debentures by extending the interest payment period, at any
time, for up to 20 consecutive quarters. If interest payments on the
Subordinated Debentures are so deferred, distributions on the Preferred
Securities will also be deferred. During any deferral, distributions will
continue to accrue with interest thereon. In addition, during any such
deferral, TDS may not declare or pay any dividend or other distribution
on, or redeem or purchase, any of its common stock.

The Subordinated Debentures are redeemable by TDS, in whole or in part,
from time to time, on or after November 18, 2002, or, in whole but not in
part, at any time in the event of certain income

76
<PAGE>
tax circumstances. If the Subordinated Debentures are redeemed, the Trust
must redeem Preferred Securities on a pro rata basis having an aggregate
liquidation amount equal to the aggregate principal amount of the
Subordinated Debentures so redeemed. In the event of the dissolution,
winding up or termination of the Trust, the holders of Preferred
Securities will be entitled to receive, for each Preferred Security, a
liquidation amount of $25 plus accrued and unpaid distributions thereon
to the date of payment, unless, in connection with the dissolution,
winding up or termination, Subordinated Debentures are distributed to the
holders of the preferred securities.

77
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TELEPHONE AND DATA SYSTEMS, INC. (PARENT)
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $ (9,549) $ 128,139 $ 103,978
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization......................................... 9,508 11,047 6,541
Gain on sale of investments........................................... (10,307) (3,434) (408)
Deferred taxes........................................................ (8,918) 5,432 5,364
Equity in net income (loss) of subsidiaries and other investments..... 103,718 (103,026) (123,395)
Other noncash expense................................................. (211) 677 1,317
Change in accounts receivable......................................... (19,063) 20,795 (30,674)
Change in accounts payable............................................ 3,598 (39,897) 40,866
Change in accrued taxes............................................... 2,151 (12,289) (4,870)
Change in other assets and liabilities................................ 435 2,849 1,401
----------- ----------- -----------
71,362 10,293 120
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings............................................... 144,788 -- 38,909
Repayment of long-term debt............................................. (735) (2,815) (3,012)
Change in notes payable................................................. 368,658 (23,533) 83,131
Change in notes payable to affiliates................................... (47,990) 104,843 28,535
Change in advances from affiliates...................................... -- (2,464) 2,118
Change in notes receivable from affiliates.............................. (451,048) (35,165) (149,345)
Change in advances to affiliates........................................ 1,616 200 20,200
Common stock issued..................................................... 5,225 5,114 8,078
Redemption of preferred shares.......................................... (359) (605) (9,609)
Dividends from subsidiaries............................................. 22,022 17,953 17,690
Dividends paid.......................................................... (27,191) (26,232) (23,971)
Repurchase of Common Shares............................................. (69,942) -- --
Purchase of subsidiary common stock..................................... (9,801) -- --
----------- ----------- -----------
(64,757) 37,296 12,724
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions
Value of assets acquired.............................................. (8,767) (121,053) (129,005)
Common Shares issued.................................................. 3,601 113,128 127,836
Preferred Shares issued............................................... 3,000 -- --
----------- ----------- -----------
Net cash paid for acquisitions...................................... (2,166) (7,925) (1,169)
Capital expenditures.................................................... (20,957) (13,362) (7,899)
Proceeds from sale of investments....................................... 20,886 500 4,800
Investments in subsidiaries............................................. (7,111) (19,533) (8,733)
Other investments....................................................... 2,851 (8,941) 1,169
Change in temporary investments......................................... 22 (54) 85
----------- ----------- -----------
(6,475) (49,315) (11,747)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 130 (1,726) 1,097
CASH AND CASH EQUIVALENTS
Beginning of period..................................................... 141 1,867 770
----------- ----------- -----------
End of period........................................................... $ 271 $ 141 $ 1,867
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The Notes to Consolidated Financial Statements, included in the Annual
Report, are an integral part of these statements.

78
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------- ------------- ------------ ------------ ----------- -----------
COLUMN A COLUMN B COLUMN C-1 COLUMN C-2 COLUMN D COLUMN E
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1997
Deducted from deferred state tax asset:
For unrealized net operating losses....... $ (16,891) $ 877 $ (12,987) $ -- $ (29,001)
Deducted from accounts receivable:
For doubtful accounts................... (6,090) (39,107) -- 30,095 (15,102)
FOR THE YEAR ENDED DECEMBER 31, 1996
Deducted from deferred state tax asset:
For unrealized net operating losses....... (10,061) 239 (7,069) -- (16,891)
Deducted from accounts receivable:
For doubtful accounts................... (5,104) (22,432) -- 21,446 (6,090)
FOR THE YEAR ENDED DECEMBER 31, 1995
Deducted from deferred state tax asset:
For unrealized net operating losses....... (8,962) 3,905 (5,004) -- (10,061)
Deducted from accounts receivable:
For doubtful accounts................... (2,785) (16,648) -- 14,329 (5,104)
</TABLE>

79
<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.

TELEPHONE AND DATA SYSTEMS, INC.

By: /s/ LEROY T. CARLSON
-----------------------------------------
LeRoy T. Carlson
CHAIRMAN

By: /s/ LEROY T. CARLSON, JR.
-----------------------------------------
LeRoy T. Carlson, Jr.
PRESIDENT, (CHIEF EXECUTIVE OFFICER)

By: /s/ MURRAY L. SWANSON
-----------------------------------------
Murray L. Swanson
EXECUTIVE VICE PRESIDENT--FINANCE

By: /s/ GREGORY J. WILKINSON
-----------------------------------------
Gregory J. Wilkinson
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

Dated March 26, 1998

Pursuant to the requirements 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 dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ LEROY T. CARLSON
- ------------------------------ Director March 26, 1998
LeRoy T. Carlson

/s/ LEROY T. CARLSON, JR.
- ------------------------------ Director March 26, 1998
LeRoy T. Carlson, Jr.

/s/ MURRAY L. SWANSON
- ------------------------------ Director March 26, 1998
Murray L. Swanson

/s/ JAMES BARR III
- ------------------------------ Director March 26, 1998
James Barr III

/s/ RUDOLPH E. HORNACEK
- ------------------------------ Director March 26, 1998
Rudolph E. Hornacek

/s/ DONALD R. BROWN
- ------------------------------ Director March 26, 1998
Donald R. Brown
</TABLE>

80
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ DONALD C. NEBERGALL
- ------------------------------ Director March 26, 1998
Donald C. Nebergall

/s/ HERBERT S. WANDER
- ------------------------------ Director March 26, 1998
Herbert S. Wander

/s/ WALTER C.D. CARLSON
- ------------------------------ Director March 26, 1998
Walter C.D. Carlson

/s/ LETITIA G.C. CARLSON
- ------------------------------ Director March 26, 1998
Letitia G.C. Carlson

/s/ GEORGE W. OFF
- ------------------------------ Director March 26, 1998
George W. Off

/s/ MARTIN L. SOLOMON
- ------------------------------ Director March 26, 1998
Martin L. Solomon
</TABLE>

81
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- -----------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the third quarter ended September 30, 1997.

3.2 By-laws, as amended, are hereby incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the second quarter ended June 30, 1997.

4.1 Articles of Incorporation, as amended, are hereby incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the third quarter ended September 30, 1997.

4.2 By-laws, as amended, are hereby incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the second quarter ended June 30, 1997.

4.3 The Indenture and Supplemental Indentures for the Company's Series A, B, C, D, E and F Subordinated
Debentures are not being filed as exhibits because the total authorized subordinated debentures do
not exceed 10% of the total assets of the Company and its Subsidiaries. The Company agrees to furnish
a copy of such Indentures and Supplemental Indentures if so requested by the Commission.

4.4 The Indenture between the Company and Harris Trust and Savings Bank, Trustee, dated February 1, 1991,
under which the Company's Medium-Term Notes are issuable, is hereby incorporated by reference to the
Company's Current Report on Form 8-K filed on February 19, 1991.

4.5 Revolving Credit Agreement, dated as of May 19, 1995, among TDS and the First National Bank of
Boston, as agent, is hereby incorporated by reference to the registrant's Form 8-K dated May 19,
1995.

4.6 The Trust Indenture dated as of November 4, 1996 between Aerial Communications, Inc. as issuer, the
Company as guarantor, and The First National Bank of Chicago, as trustee for Aerial's Series A Zero
Coupon Notes, is hereby incorporated by reference to Exhibit 4.1 to Aerial's Form 8-K filed on
November 29, 1996.

4.7 The Subordinated Indenture, dated October 15, 1997 and the Supplemental Indenture dated November 18,
1997, by and between the Company and the First National Bank of Chicago, as Trustee under which the
Trust Originated Preferred Securities are issuable, are hereby incorporated by reference to Exhibits
4.3 and 4.4, respectively, to the Company's Current Report on Form 8-K filed on December 2, 1997,
dated November 18, 1997.

4.8 The Preferred Securities Guarantee Agreement, dated as of November 18, 1997, by and among the Company
and The First National Bank of Chicago, as Guarantee Trustee for the benefit of the holders of Trust
Preferred Securities of the Trust, is hereby incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K filed on December 2, 1997, dated November 18, 1997.

9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit
to Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-1, No. 33-12943.

9.1(b) Amendment dated as of May 9, 1991 to the Voting Trust Agreement dated as of June 30, 1989, is hereby
incorporated by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.

9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as
amended, is hereby incorporated by reference to Exhibit 9.1(c) to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
</TABLE>

82
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.1 Salary Continuation Agreement for LeRoy T. Carlson dated May 20, 1977, as amended May 22, 1981 and
May 25, 1984 is hereby incorporated by reference to the Company's Registration Statement on Form S-2,
No. 2-92307.

10.2(a) Supplemental Benefit Agreement for LeRoy T. Carlson dated March 21, 1980, as amended March 20, 1981,
is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form
S-7, No. 2-74615.

10.2(b) Memorandum of Amendment to Supplemental Benefit Agreement dated as of May 28, 1991, is hereby
incorporated by reference to Exhibit 10.2(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.

10.3 Stock Appreciation Rights Award and Non-Qualified Stock Option Agreement, dated March 14, 1988,
between the Company and LeRoy T. Carlson, Jr., is hereby incorporated by reference to an exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31, 1988.

10.4 Stock Option and Stock Appreciation Rights Award Agreement dated January 15, 1990 between the Company
and James Barr III, is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.

10.5(a) 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby incorporated by
reference to Exhibit A to the Company's definitive Notice of Annual Meeting and Proxy Statement dated
March 31, 1988.

10.5(b) Amendment #1 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby
incorporated by reference to Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.

10.5(c) Amendment #2 to 1988 Stock Option and Stock Appreciation Rights Plan of the Company, is hereby
incorporated by reference to Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.

10.6(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.4 to the Company Registration statement on Form S-8 (Registration No.
33-57257).

10.7 Supplemental Executive Retirement Plan of the Company is hereby incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.

10.8 Deferred Compensation Agreement for Rudolph E. Hornacek dated November 30, 1995 is hereby
incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
</TABLE>

83
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.9 Securities Loan Agreement, dated June 13, 1995, between TDS and Merrill Lynch & Co. is hereby
incorporated by reference to Exhibit 99.1 to the Form 8-K dated June 16, 1995 of United States
Cellular Corporation.

10.10 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation
is hereby incorporated by reference to Exhibit 99.2 to the Form 8-K dated June 16, 1995 of United
States Cellular Corporation.

10.11 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular
Corporation is hereby incorporated by reference to Exhibit 99.3 to the Form 8-K dated June 16, 1995
of United States Cellular Corporation.

10.12 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.

10.14 TDS Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1
of the Company's Registration Statement on Form S-8 (Registration No. 333-23947).

10.15 Executive Deferred Compensation Agreement for James Barr III dated January 1, 1998.

10.16 Form of TDS Telecommunications Corporation Phantom Stock Option Incentive Agreement between TDS
Telecommunications Corporation and James Barr III.

11 Statement regarding computation of per share earnings.

12 Statements regarding computation of ratios.

13 Incorporated portions of 1997 Annual Report to Security Holders.

21 List of Subsidiaries of the Company.

23 Consent of independent public accountants.

27.1 Financial Data Schedules for the year ended December 31, 1997.

27.2 Financial Data Schedules for the year ended December 31, 1995, as restated.

27.3 Financial Data Schedules for the first, second and third quarters of 1996 and the year ended December
31, 1996, as restated.

27.4 Financial Data Schedule for the second quarter ended June 30, 1997, as restated.
</TABLE>

84
<PAGE>
[LOGO]
TELEPHONE AND DATA SYSTEMS, INC.

30 North LaSalle Street
Chicago, Illinois 60602
312/630-1900

<PAGE>

EXHIBIT 10.15
[LOGO]

EXECUTIVE DEFERRED COMPENSATION
AGREEMENT

THIS AGREEMENT, entered into this 1ST DAY OF JANUARY, 1998, by and
between JIM BARR III, (hereinafter referred to as "Executive") and TDS
Telecommunications Corporation, (hereinafter referred to as "Company"), a
Delaware corporation, located at 301 South Westfield Road, Madison, WI, 53717.

W I T N E S S E T H:

WHEREAS, the Executive is now and will in the future be rendering
valuable services to the Company, and the Company desires to assure the
continued loyalty, service and counsel of the Executive; and

WHEREAS, the Executive desires to defer a portion of his or her salary
until retirement, resignation, disability or death, or to a specific date
greater than one year from the date of this agreement.

NOW, THEREFORE, in consideration of the covenants and agreements herein
set forth, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto covenant and agree as
follows:

1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to establish
and maintain a book reserve (the "Deferred Compensation Account")
for the purpose of measuring the amount of deferred compensation
payable under this Agreement. Credits shall be made to the Deferred
Compensation Account as follows:

(a) On each issuance of the Executive's biweekly payroll check,
(scheduled for the 15th and the last day of each month),
during the Executive's continued active employment with the
Company, there shall be deducted an amount equivalent to 89
(EIGHTY-NINE) percent of the Executive's gross compensation
for the pay period which will be credited to the Deferred
Compensation Account. The first deduction will occur on the
Executive's biweekly payroll check dated JANUARY 23, 1998.

(b) Commencing on JANUARY 31, 1998, and on the last day of each
month thereafter during the Executive's continued employment
with the Company, there shall be credited to the Deferred
Compensation Account (before any amount is credited for the
month then ending pursuant to paragraph 1(a), interest
compounded monthly computed at a rate equal to one-twelfth
(1/12) of the average thirty (30) year Treasury Bond rate of
interest (as published in the Wall Street Journal for the last
day of the

-1-

<PAGE>

preceding month) plus 1.25 percentage points. Semi-annual
reports which specify the amount credited to the Executive's
Deferred Compensation Account during the previous period
(amount deferred plus interest) and the then current balance,
shall be provided to the Executive.

(c) The Deferred Compensation percentage elected in section 1(a)
shall be deducted and credited to the Deferred Compensation
Account for all compensation paid to the Executive, including
bonus and retroactive pay increases.

(d) The Executive may elect to defer additional amounts from gross
compensation. The additional amounts deferred will
approximate the amount withheld biweekly as the Executive's
share of OASDI taxes. Deductions of the additional amounts
will begin with the Executive's biweekly payroll check after
the OASDI wage limit has been reached and continue until the
end of the year.

i) ____________ Check here for this paragraph to apply.

ii) ____________ Additional amount to be deducted.

(e) The Executive may terminate participation in the Agreement
with respect to the deferral of future compensation at any
time. In the event the Executive elects to make such a
discontinuance, he or she shall remain eligible to receive the
benefits under Section 2 with respect to amounts already
deferred. Previously deferred amounts are not payable until
retirement, resignation, disability or death. After a
discontinuance, Executive may not again elect to participate
with respect to future deferrals until a subsequent calendar
year.

(f) The Deferred Compensation percentage selected in 1(a) shall be
in effect for the entire plan year unless participation is
terminated. The Executive may not elect to change the
percentage until a new plan year commences. An election under
paragraph shall be in effect until the end of the calendar
year unless participation is terminated.

(g) All or a portion of the bonuses that an executive receives will
be credited to the Executive's Deferred Compensation account.

i) _________________ Check here for this paragraph to apply.

ii) _________________ This additional percentage of my bonus(es)
should be credited to the deferred
compensation account.

-2-

<PAGE>

2. PAYMENT OF DEFERRED COMPENSATION.

(a) In the event the Executive terminates his/her employment for
whatever reason, the Company must compute the "Ending Balance"
in the Deferred Compensation Account. This Ending Balance
shall include all deferrals and interest as of the last day of
the preceding month, and any deferrals made in the current
month. In the event that the Executive becomes disabled,
his/her employment shall for these purposes be deemed to
terminate on the first day of the month in which he/she begins
to receive long term disability payments provided by the
Company's insurance carrier (thus, the Ending Balance shall be
computed as of the preceding month). Payment of deferred
compensation under these events will be in accordance with the
Executive's payment method election in paragraph 2(e).

(b) The Executive must elect the payment method for receiving
his/her Ending Balance either in a lump sum or in an indicated
number of installments. This determination must be made at the
time of execution of the agreement in Section 2(e) and will
apply to all deferrals. Any amendment changing the
installment method of payment must be made at least two (2)
years prior to the termination of employment to be considered
effective.

(c) In the event the Executive chooses the installment option, the
Executive must inform the Company of the number of
installments he or she wishes to receive. The installments
will be paid quarterly (not to exceed 20 quarters) commencing
with the fifteenth day of the quarter following the quarter in
which the Executive's service with the Company terminates.
Installments will then be paid on the fifteenth day of each
succeeding calendar quarter until the Ending Balance and all
accrued interest, which includes interest earned during the
installment period, has been paid. If the Executive chooses
the lump sum option, such sum must be paid within forty-five
(45) days after the Executive's service with the Company
terminates.

(d) If the Executive dies prior to the total distribution of the
Ending Balance, the Company shall pay an amount equal to the
then current balance including accrued interest in the
Deferred Compensation Account, in a lump sum within forty-five
(45) days following the Executive's death to the Executive's
Designated Beneficiary (as hereinafter defined). However, if
the Executive is married at the time of death, the Executive
may designate (at the time of entering this Agreement or upon
a subsequent marriage) that the payments specified in 2(c)
shall continue to the spouse. If such spouse dies before all
payments are made, the procedures in 3(a) and 3(b) shall apply.

(e) Payment of Deferred Compensation Election (choose one option):

i) CHECK Lump sum distribution; or
-------------

-3-

<PAGE>

ii) _______________ Installment method. The amount of each
installment shall be equal to one- ____________ (cannot be
less than one-twentieth) of the Ending Balance plus accrued
interest compounded monthly for the preceding calendar
quarter.

If the Executive does not fully complete the blanks shown in
paragraph 2(e), Executive will receive the lump sum option.

(f) The Executive must elect the deferral date for receiving
his/her Ending Balance. This date is to be either retirement,
or a specific date greater than one year from the date of this
agreement. This determination must be made at the time of
execution of the agreement in Section 2(g) and will apply to
all deferrals.

(g) Election of Deferral Date (choose one option):

i) CHECK Retirement; or
-----------
ii) ____________ Specific Date: _______________ (must be
greater than one year from the date of this agreement)

If the executive does not fully complete the blanks shown in
paragraph 2(g), Executive will receive the retirement deferral
option.

(h) In the event of an unforeseeable emergency, the Executive may
make withdrawals from the Deferred Compensation Account in an
amount equal to that which is reasonably necessary to satisfy
the emergency. An unforeseeable emergency means a severe
financial hardship to the Executive resulting from a sudden
and unexpected illness or accident of the Executive or of a
dependent (as defined in Internal Revenue Code Section 152(a))
of the Executive, loss of the Executive's property due to
casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control
of the Executive. The circumstances that will constitute an
emergency will depend upon the facts of each case, but, in any
case, payment may not be made to the extent that such hardship
is or may be relieved (a) through reimbursement or
compensation by insurance or otherwise; (b) by liquidation of
the Executive's assets, to the extent the liquidation of such
assets would not itself cause severe financial hardship; or
(c) by cessation of deferrals under this Agreement. Examples
of what are not considered to be unforeseeable emergencies
include the need to send an Executive's child to college or
the desire to purchase a home.

In the event the Company approves the payment of a withdrawal
due to an unforeseeable emergency, such payment shall be made
by the Company to the Executive in a lump sum within
forty-five (45) days after approval of such request.

-4-

<PAGE>

3. DESIGNATION OF BENEFICIARIES.

(a) The Executive may designate a beneficiary to receive any
amount payable pursuant to paragraph 2(c) (the "Designated
Beneficiary") by executing or filing with the Company during
his/her lifetime, a Beneficiary Designation in the form
attached hereto. The Executive may change or revoke any such
designation by executing and filing with the Company during
his/her lifetime a new Beneficiary Designation. If the
Executive is married and names someone other than his/her
spouse (e.g., child) as beneficiary, the spouse must consent
by signing the designated area of the Beneficiary Designation
form in the presence of a Notary Public.

(b) If any Designated Beneficiary predeceases the Executive, or if
any corporation, partnership, trust or other entity which is a
Designated Beneficiary is terminated, dissolved, becomes
insolvent, is adjudicated bankrupt prior to the date of the
Executive's death, or if the Executive fails to designate a
beneficiary, then the following persons in the order set forth
below shall receive the entire amount specified in paragraph
2(c) above, which the previous Designated Beneficiary would
have been entitled to receive:

i) Executive's spouse, if living; otherwise
ii) Executive's then living descendants, per stirpes; and
otherwise;
iii) Executive's estate

4. MISCELLANEOUS.

(a) The right of the Executive or any other person to any payment of
benefits under this Agreement may not be assigned, transferred,
pledged or encumbered.

(b) If the Company finds that any person to whom any amount is
payable under this Agreement is unable to care for his/her
affairs because of illness or accident, or is under any legal
disability which prevents the Executive from caring for his or
her affairs, any payment due (unless a prior claim therefor
shall have been made by a duly appointed guardian, committee
or other legal representative) may be made to the spouse, a
child, a parent, or a brother or sister of such person, or to
any party deemed by the Company to have incurred expenses for
such person otherwise entitled to payment, in such manner and
proportions as the Company may determine. Any such lump sum
payment, as discussed in 2(d), shall be a complete discharge
of the liability of the Company under this Agreement for such
payment.

-5-

<PAGE>

(d) The Executive is considered to be a general unsecured creditor
of the Company with regard to the deferred compensation
amounts to which this Agreement pertains.

(e) The deferred amounts under this Agreement are unfunded for tax
and ERISA purposes.

(f) The Company must deduct from all payments made hereunder all
applicable federal or state taxes required to be withheld from
such payments.

(g) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof.

(h) In the event any provision of this Agreement is held illegal or
invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Agreement, and the Agreement
must be construed and enforced as if the illegal or invalid
provision had not been included.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

TDS TELECOMMUNICATIONS CORPORATION
("COMPANY"):

By: /s/ William G. Grabel
---------------------------------

EXECUTIVE:

By: /s/ James Barr III
---------------------------------

-6-

<PAGE>

EXHIBIT 10.16

TDS TELECOMMUNICATIONS CORPORATION
PHANTOM STOCK OPTION INCENTIVE PLAN AGREEMENT

This Phantom Stock Option Incentive Plan Agreement (the "Agreement") is
entered into by and between TDS Telecommunications Corporation, a Delaware
corporation (the "Company") and (the "Participant"), as of September
30, 1997, pursuant to the provisions of the TDS Telecommunications
Corporation's Phantom Stock Incentive Plan (the "Plan") as described in this
Agreement and the Long-Term Incentive Program for TDS Telecom Executives
dated July, 1997, prepared by Towers Perrin (the "Outline"), a copy of which
has been previously furnished to the Participant.

1. PURPOSE. The purpose of the Plan is to provide deferred compensation to
certain key employees of the Company. Such deferred compensation shall be
based upon the award of stock options, the value of which is related to the
appreciation in the value of the common stock of the Company.

2. GRANTS. Annual awards of stock options (the "Options") shall be made to
the Participant. The number of such Options shall be determined exclusively
by the Company. The Participant shall receive on an annual basis
certificates reflecting the number of Options awarded for that year (the
"Certificate").

3. ACCOUNTING OF OPTIONS. Options awarded to a Participant shall be
credited to an Options Account (the "Account") established and maintained for
the Participant. The Account for the Participant shall be the record of the
Options awarded annually to the Participant and is solely for accounting
purposes.

4. VESTING OF OPTIONS. The Options awarded in each calendar year shall
vest in accordance with the Outline.

5. VALUATION OF OPTIONS. For purposes of the Plan, the value of the
Options shall be determined in accordance with the Outline.

6. TIME AND MANNER OF EXERCISE OF OPTIONS. The Options consist of two
components (i) automatic options and (ii) performance options.

6.1. EXERCISE OF OPTIONS.

(a) TERM. The automatic options and performance options shall
vest and become exercisable as provided in the Outline. Options may not
be exercised until they have vested. All Options shall be exercisable
until July 1, 2003 (the "Expiration Date").

(b) DISABILITY. If the Participant ceases to be employed by the
Company by

<PAGE>

reason of Disability, the only Options that shall be exercisable are
those that have been granted to the Participant on or before the
effective date of the Participant's termination of employment. All
exercisable Options may be exercised by the Participant (or the
Participant's Legal Representative) from (i) the date such Options, or a
portion thereof, vest until sixty (60) days thereafter or (ii) until the
Expiration Date, whichever period is shorter. If the Participant shall
die within such period, the Options shall be exercisable by the
beneficiary or beneficiaries duly designated by the Participant or, if
none, the Participant's Legal Representative or, if none, the person to
whom the Participant's rights hereunder shall pass by will or by
applicable laws of descent and distribution, to the same extent the
Options were exercisable by the Participant on the date of the
Participant's death, for a period commencing on the date the Options, or
a portion thereof, vest and ending sixty (60) days thereafter or until
the Expiration Date, whichever period is shorter. For purposes of the
Plan, the term "Disability" shall mean a total physical disability
which, in the Company's judgment, prevents the Participant from
performing substantially such Participant's employment duties and
responsibilities for a continuous period of at least six (6) months.
The term "Legal Representative" as used in the Plan shall mean a
guardian, legal representative or other person acting in a similar
capacity with respect to the Participant.

(c) RETIREMENT. If the Participant ceases to be employed by the
Company by reason of the Participant's retirement after attainment of
age 65 or by electing to retire pursuant to the Company's early
retirement plan, if any, the only Options that shall be exercisable are
those that have been granted to the Participant on or before the
effective date of the Participant's termination of employment. All
exercisable Options may be exercised by the Participant (or the
Participant's Legal Representative) from (i) the date such Options, or a
portion thereof, vest until sixty (60) days thereafter or (ii) until the
Expiration Date, whichever period is shorter. If the Participant shall
die within such period, the Options shall be exercisable by the
beneficiary or beneficiaries duly designated by the Participant, or if
none, the Participant's Legal Representative or, if none, the person to
whom the Participant's rights hereunder shall pass by will or by
applicable laws of descent and distribution, to the same extent the
Options were exercisable by the Participant on the date of the
Participant's death, for a period commencing on the date the Options, or
a portion thereof, vest and ending sixty (60) days thereafter or until
the Expiration Date, whichever period is shorter.

(d) DEATH. If the Participant ceases to be employed by the
Company by reason of death, the only Options that shall be exercisable
are those that have been granted to the Participant on or before the
date of death. After the date of death, the Options, or a portion
thereof, may be exercised by the beneficiary or beneficiaries duly
designated by the Participant or, if none, the executor or administrator
of the Participant's estate or, if none, the person to whom the
Participant's rights hereunder shall pass by will or by applicable laws
of descent and distribution for a period commencing on the date the
Options, or a portion thereof vest and ending sixty (60) days thereafter
or until the Expiration Date, whichever period is shorter.

(e) OTHER TERMINATION OF EMPLOYMENT. If the Participant ceases to
be

<PAGE>

employed by the Company for any reason other than Disability,
retirement after attainment of age 65, resignation of employment with
the prior consent of the Company's Board of Directors (as evidenced in
the Company's minute book), or death, the Options shall be exercisable
only to the extent it is exercisable on the effective date of the
Participant's termination of employment and after such date may be
exercised by the Participant (or the Participant's Legal Representative)
for a period of sixty (60) days after the effective date of the
Participant's termination of employment or until the Expiration Date,
whichever period is shorter. If the Participant shall die within such
period, the Options shall be exercisable only to the extent they are
exercisable on the date of death and after the date of death may be
exercised by the beneficiary or beneficiaries duly designated by the
Participant or, if none, the Participant's Legal Representative or, if
none, the person to whom the Participant's rights hereunder shall pass
by will or by applicable laws of descent and distribution for a period
of one hundred twenty (120) days after the date of death or until the
Expiration Date, whichever period is shorter. Notwithstanding the first
sentence of this subsection (e), if the Participant ceases to be
employed by the Company or an Affiliate on account of the Participant's
negligence, willful misconduct, competition with the Company or an
Affiliate or misappropriation of confidential information of the Company
or an Affiliate, the Options and Participant's ability to exercise such
Options shall terminate on the date the Participant's employment
terminates unless such Options terminate earlier pursuant to Section 6.2.

(f) NON-ELIGIBLE POSITION. If the Participant remains employed by
the Company but in an ineligible position, the only Options that shall
be exercisable are those that have been granted to the Participant on or
before the effective date of the Participant's termination or
resignation from the eligible position. All exercisable Options may be
exercised by the Participant (or the Participant's Legal Representative)
from (i) the date such Options, or a portion thereof, vest until sixty
(60) days thereafter or (ii) until the Expiration Date, whichever period
is shorter. If the Participant shall die within such period, the Options
shall be exercisable only to the extent they are exercisable on the date
of death and after the date of death may be exercised by the beneficiary
or beneficiaries duly designated by the Participant or, if none, the
Participant's legal representative or, if none, the person to whom the
Participant's rights hereunder shall pass by will or by applicable laws
of dissent and distribution, to the same extent the Options were
exercisable by the Participant on the date of the Participant's death,
for a period commencing on the date, the Options, or a portion thereof,
vest and ending sixty (60) days thereafter or until the Expiration Date,
whichever period is shorter.

6.2. FORFEITURE OF OPTIONS UPON COMPETITION WITH COMPANY OR ANY
AFFILIATE OR MISAPPROPRIATION OF CONFIDENTIAL INFORMATION. Notwithstanding
any other provision herein, the Options granted pursuant to this Agreement
shall not be exercisable on or after any date on which the Participant (a)
enters into competition with the Company or an Affiliate, or (b)
misappropriates confidential information of the Company or an Affiliate, as
determined by the Company in its sole discretion, and, accordingly, shall be
terminated and thereby forfeited to the extent it has not been exercised as
of such date.

<PAGE>

For purposes of the preceding sentence, the Participant shall be treated
as entering into competition with the Company or an Affiliate if the
Participant (i) directly or indirectly, individually or in conjunction with
any person, firm or corporation, has contact with any customer of the Company
or an Affiliate or any prospective customer which has been contacted or
solicited by or on behalf of the Company or an Affiliate for the purpose of
soliciting or selling to such customer or prospective customer any product or
service, except to the extent such contact is made on behalf of the Company
or an Affiliate, or (ii) otherwise competes with the Company or an Affiliate
in any manner or otherwise engages in the business of the Company or an
Affiliate.

The Participant shall be treated as misappropriating confidential
information of the Company or an Affiliate if the Participant (i) uses
Confidential Information (as described below) for the benefit of anyone other
than the Company or such Affiliate, as the case may be, or discloses the
Confidential Information to anyone not authorized by the Company or such
Affiliate, as the case may be, to receive such information, (ii) upon
termination of employment, makes any summaries of, takes any notes with
respect to, or memorizes any information or takes any Confidential
Information or reproductions thereof from the facilities of the Company or an
Affiliate, or (iii) upon termination of employment or upon the request of the
Company or an Affiliate, fails to return all confidential information then in
the Participant's possession. "Confidential Information" shall mean any
confidential and proprietary drawings, reports, sales and training manuals,
customer lists, computer programs, and other material embodying trade secrets
or confidential technical, business, or financial information of the Company
or an Affiliate.

6.3. METHOD OF EXERCISE. Subject to the limitations set forth in this
Agreement, the Options evidenced by the Certificates may be redeemed by the
holder of the Certificates (1) by giving written notice to the Senior Vice
President-Human Resources and Administration of the Company at least fifteen
(15) days prior to the exercise date specified in such notice, which notice
shall specify the number of whole Options to be exchanged by the Participant
for cash. The amount of cash received by the Participant shall be determined
by taking the most recent Company common stock price as determined by the
formula described in the Outline minus the common stock price on the date the
Options are granted. The most recent stock price will be calculated and in
effect on the date that TDS TELECOM's financial results are released to the
investment community. The number of Options that may be exercised at any one
time is (i) all of the exercisable Options or (ii) increments of at least
five hundred (500) Options.

6.4. FULL OR PARTIAL CANCELLATION OF OPTIONS. In the event that rights
to redeem all or a portion of the Options expire or are unexercised, canceled
or forfeited, the holder shall promptly return the Certificates to the
Company. If the holder continues to have rights to redeem a portion of the
Options granted under the Plan, the Company shall, within ten (10) days of
the holder's delivery of the Certificate to the Company, either (i) mark the
Certificate to indicate the number of Options which have not expired or been
exercised, canceled or forfeited or (ii) issue to the holder a substitute
Certificate applicable to such rights, which shall otherwise be substantially
similar to the previous Certificate in form and substance. If the holder
does not return the Certificate to the Company, cancellation of the Options,
to the extent they have expired, been canceled or forfeited shall nonetheless
be effective.

<PAGE>

7. ADDITIONAL TERMS AND CONDITIONS OF OPTIONS.

7.1. OPTIONS SUBJECT TO ACCEPTANCE OF AWARD. The Options shall become
null and void unless the Participant shall accept the Options by executing
this Agreement in the space provided at the end hereof and returning it to
the Company.

7.2. TRANSFERABILITY OF OPTIONS. The Options may not be transferred by
the Participant other than (i) by will or the laws of descent and
distribution, (ii) pursuant to a beneficiary designation effective on the
Participant's death, or (iii) to a Permitted Transferee. During the
Participant's lifetime the Options are exercisable only by the Participant
(or the Participant's Legal Representative) or a Permitted Transferee.
Except as permitted by the foregoing, the Options may not be sold,
transferred, assigned, pledged, hypothecated, encumbered or otherwise
disposed of (whether by operation of law or otherwise) or be subject to
execution, attachment or similar process. Upon any attempt to so sell,
transfer, assign, pledge, hypothecate, encumber or otherwise dispose of the
Options, the Options and all rights hereunder shall immediately become null
and void. For purposes of this Agreement, the term "Permitted Transferee"
shall mean (i) a Participant's spouse, (ii) any of the Participant's lineal
descendants or (iii) a trust or similar arrangement of which such spouse,
lineal descendant of the Participant, or one or more of such persons are the
only current beneficiaries.

7.3. AGREEMENT BY PARTICIPANT. As a condition precedent to any exercise
of the Options, the holder shall comply with all regulations and requirements
of any regulatory authority having control of or supervision over the
issuance or delivery of the Options and, in connection therewith, shall
execute any documents which the Company shall in its sole discretion deem
necessary or advisable.

7.4. ADJUSTMENT. In the event of any initial public offering of stock
during the Plan's existence, the Company will make an equitable adjustment
rollover into options of the newly public company. If any other event shall
occur which in the judgment of the Company would warrant an adjustment to the
number of Options, such adjustment shall be authorized and made by the
Company upon such terms and conditions as it may deem equitable and
appropriate. To the extent that any such event or action taken under this
Section 7.4 shall entitle the holder of the Options to exercise additional
Options, the Options subject to this Agreement shall be deemed to include
such additional Options. If any such adjustment would result in a fractional
Option, the Company shall pay the holder in connection with the exercise of
the Option occurring after such adjustment, an amount in cash determined by
multiplying (i) the fraction of such Option (rounded to the nearest
hundredth) by (ii) the excess, if any, of (A) the price of a share of common
stock on the exercise date minus (B) the price of a share as of the grant
date. Any determination made by the Company under this Section 7.4 shall be
final, binding and conclusive.

7.5. CHANGE IN CONTROL. (a) Notwithstanding any other provision of
this Agreement or any provision of the Plan, in the event of a Change in
Control, the Options shall become immediately exercisable in full. In the
event of a Change in Control pursuant to sub section (b)(2) below, there may
be substituted for each Option, the number and class of shares into which
each Option of the Company stock shall be converted pursuant to such Change
in Control.

<PAGE>

In the event of such a substitution, the price per share of stock then
subject to the Options shall be appropriately adjusted by the Company, but in
no event shall the aggregate value of the Options multiplied by the price for
such shares be greater than the aggregate value of the Options multiplied by
the price for the shares of stock subject to the Options prior to the Change
in Control.

(b) For purposes of this Agreement, "Change in Control" shall mean:

(1) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Exchange
Act, of 25% or more of the combined voting power of the then
outstanding securities of the Company entitled to vote generally on
matters (without regard to the election of directors) (the
"Outstanding Voting Securities"), excluding, however, the
following: (i) any acquisition directly from the Company or an
Affiliate (excluding any acquisition resulting from the exercise of
an exercise, conversion or exchange privilege, unless the security
being so exercised, converted or exchanged was acquired directly
from the Company or an Affiliate), (ii) any acquisition by the
Company or an Affiliate, (iii) any acquisition by an employee
benefit plan (or related trust) sponsored or maintained by the
Company or an Affiliate, (iv) any acquisition by any corporation
pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of subsection (2) of this Section 7.5(b), or (v) any
acquisition by the following persons: (A) LeRoy T. Carlson or his
spouse, (B) any child of LeRoy T. Carlson or the spouse of any such
child, (C) any grandchild of LeRoy T. Carlson, including any child
adopted by any child of LeRoy T. Carlson, or the spouse of any such
grandchild, (D) the estate of any of the persons described in
clauses (A)-(C), (E) any trust or similar arrangement (including
any acquisition on behalf of such trust or similar arrangement by
the trustees or similar persons) provided that all of the current
beneficiaries of such trust or similar arrangement are persons
described in clauses (A)-(C) or their lineal descendants, or (F)
the voting trust which expires on June 30, 2009, or any successor
to such voting trust, including the trustees of such voting trust
on behalf of such voting trust (all such persons, collectively, the
"Exempted Persons");

(2) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company (a "Corporate Transaction"), excluding, however, a
Corporate Transaction pursuant to which (i) all or substantially
all of the individuals or entities who are the beneficial owners of
the Outstanding Voting Securities immediately prior to such
Corporate Transaction will beneficially own, directly or
indirectly, more than 51% of the combined voting power of the
outstanding securities of the corporation resulting from such
Corporate Transaction (including, without limitation, a corporation
which as a result of such transaction owns, either directly or
indirectly, the Company or all or substantially all of the
Company's assets) which are entitled to vote generally on matters

<PAGE>

(without regard to the election of directors), in substantially the
same proportions relative to each other as the shares of
Outstanding Voting Securities are owned immediately prior to such
Corporate Transaction, (ii) no Person (other than the following
Person: (v) the Company or an Affiliate, (w) any employee benefit
plan (or related trust) sponsored or maintained by the Company or
an Affiliate, (x) the corporation resulting from such Corporate
Transaction, (y) the Exempted Persons, and (z) any Person which
beneficially owned, immediately prior to such Corporate
Transaction, directly or indirectly, 25% or more of the Outstanding
Vote Securities) will beneficially own, directly or indirectly, 25%
or more of the combined voting power of the outstanding securities
of such corporation entitled to vote generally on matters (without
regard to the election of directors) and (iii) individuals who were
members of the Company's Board of Directors will constitute at
least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or

(3) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company.

7.6. COMPLIANCE WITH APPLICABLE LAW. The Options are subject to the
condition that if the listing, registration or qualification of the shares of
stock subject to the Options upon any securities exchange or under any law,
or the consent or approval of any governmental body, or the taking of any
other action is necessary or desirable, the Options may not be exercised, in
whole or in part, unless such listing, registration, qualification, consent
or approval shall have been effected or obtained, free of any conditions not
acceptable to the Company. The Company agrees to use reasonable efforts to
effect or obtain any such listing, registration, qualification, consent or
approval.

7.7. DELIVERY OF CERTIFICATES. Upon the exercise of the Options, in
whole or in part, the Participant shall deliver or cause to be delivered one
or more Certificates representing the number of Options redeemed against full
payment therefor.

7.8. OPTIONS CONFER NO RIGHTS AS STOCKHOLDER. The holder of the Options
shall not be entitled to any privileges of ownership with respect to shares
of Company's common stock subject to the Options.

8. MISCELLANEOUS PROVISIONS.

8.1. OPTIONS CONFER NO RIGHTS TO CONTINUED EMPLOYMENT. In no event
shall the granting of the Options or the acceptance of the Options by the
Participant give or be deemed to give the Participant any right to continued
employment by the Company or Affiliate.

8.2. DECISIONS OF COMPANY. The Company shall have the right to resolve
all questions which may arise in connection with the Options or their
exercise. Any interpretation, determination or other action made or taken by
the Company regarding the Plan or this Agreement shall be final, binding and
conclusive.

<PAGE>

8.3. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of any successor or successors of the Company and any person or
persons who shall, upon the death of the Participant, acquire any rights
hereunder in accordance with this Agreement or the Plan.

8.4. NOTICES. All notices, requests or other communications provided
for in this Agreement shall be made in writing either (a) by actually
delivery to the party entitled thereto, (b) by mailing in the United States
mails to the last known address of the party entitled thereto, via certified
or registered mail, postage prepaid and return receipt requested, or (c) by
telecopy with confirmation of receipt. The notice shall be deemed to be
received in case of delivery, on the date of its actual receipt by the party
entitled thereto, in case of mailing by certified or registered mail, five
days following the date of such mailing, and in the case of telecopy, on the
date of confirmation of receipt.

8.5. GOVERNING LAW. The Options, this Agreement, and all determinations
made and actions taken pursuant hereto and thereto, to the extent not
governed by the laws of the United States, shall be governed by the laws of
the State of Wisconsin and construed in accordance therewith without regard
to principles of conflicts of laws.

8.6. COUNTERPARTS. This Agreement may be executed in counterparts each
of which shall be deemed an original and both of which together shall
constitute one and the same instrument.

8.7 WITHHOLDING. The Company shall have the right to deduct from all
amounts paid pursuant to the Plan any taxes required by law to be withheld
with respect to such awards.

8.8 UNFUNDED PLAN. The Plan shall at all times be entirely unfunded
and no provision shall at any time be made with respect to segregating assets
of the Company for payment of any benefits hereunder. The Participant shall
not have any interest in any particular assets of the Company by reason of
the right to receive a benefit under the Plan and the Participant shall only
have the rights of a general unsecured creditor of the Company with respect
to any rights under the Plan.

TDS TELECOMMUNICATIONS CORPORATION

By: ________________________________________
________________________________________

PARTICIPANT

______________________________________________
______________________________________________

<PAGE>

<PAGE>
EXHIBIT 11

TELEPHONE AND DATA SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<S> <C>
Net (Loss)....................................................................... $ (9,549)
Less: Preferred Dividends........................................................ (1,892)
---------
Net (Loss) Available to Common used in Earnings per Share--Basic................. $ (11,441)
Minority Income Adjustment....................................................... (100)
---------
Net (Loss) Available to Common used in Earnings per Share--Diluted............... $ (11,541)
---------
---------
Weighted average number of Common and Series A Common Shares Used in Earnings per
Share--Basic................................................................... 60,211
Effect of Dilutive Securities:
Common Shares outstanding if Preferred Shares converted........................ --
Stock Options and Stock Appreciation Rights.................................... --
Common Shares Issuable......................................................... --
---------
Weighted average number of Common and Series A Common Shares Used in Earnings per
Share--Diluted................................................................. 60,211
---------
---------
Earnings per Common Share--Basic................................................. $ (.19)
---------
---------
Earnings per Common Share--Diluted............................................... $ (.19)
---------
---------
</TABLE>

Note: The minority income adjustment reflects the additional minority share of
U.S. Cellular's income computed as if all of U.S. Cellular's issuable
securities were outstanding.

<PAGE>
EXHIBIT 12

TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS)

<TABLE>
<S> <C>
EARNINGS:
Income from Continuing Operations before Income Taxes.......................... $ 19,010
Add (Deduct):
Minority Share of Losses..................................................... (43,409)
Earnings on Equity Method.................................................... (76,945)
Distributions from Minority Subsidiaries..................................... 56,413
Amortization of Capitalized Interest......................................... 1,301
Minority share of income in majority-owned subsidiaries that have fixed
charges.................................................................... 22,125
---------
(21,505)
Add fixed charges:
Consolidated interest expense................................................ 90,473
Interest Portion ( 1/3) of Consolidated Rent Expense......................... 14,480
Amortization of debt expense and discount on indebtedness.................... 795
---------
$ 84,243
---------
---------
FIXED CHARGES:
Consolidated interest expense.................................................. $ 90,473
Capitalized interest........................................................... 11,035
Interest Portion ( 1/3) of Consolidated Rent Expense........................... 14,480
Amortization of debt expense and discount on indebtedness...................... 795
---------
$ 116,783
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES............................................... 0.72
---------
---------
Tax-Effected Redeemable Preferred Dividends.................................... $ 213
Fixed Charges.................................................................. 116,783
---------
Fixed Charges and Redeemable Preferred Dividends............................. $ 116,996
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES AND REDEEMABLE PREFERRED DIVIDENDS............ 0.72
---------
---------
Tax-Effected Preferred Dividends............................................... $ 3,498
---------
---------
Fixed Charges.................................................................. 116,783
---------
Fixed Charges and Preferred Dividends........................................ $ 120,281
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... .70
---------
---------
</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Telephone and Data Systems, Inc. ("TDS" or the "Company") provides
high-quality telecommunications services to approximately 3.2 million cellular
telephone, telephone, personal communications services ("PCS") telephone and
radio paging customer units in 37 states and the District of Columbia.

The accompanying financial statements present the results of operations of
the Company's primary businesses: United States Cellular Corporation ("U.S.
Cellular"), an 81%-owned subsidiary, TDS Telecommunications Corporation ("TDS
Telecom"), a wholly owned subsidiary, Aerial Communications, Inc. ("Aerial"), an
83%-owned subsidiary, and American Paging, Inc. ("American Paging"), an
82%-owned subsidiary. See "Proposed Corporate Restructuring" and "Combination of
American Paging and TSR Paging."

TDS's long-term business development strategy is to expand its operations
through internal growth and acquisitions, and to explore and develop
telecommunications businesses that management believes utilize TDS's expertise
in customer-based telecommunications.

1997 OVERVIEW

TDS reported a net loss available to common and earnings per share--diluted
of $11.4 million, or $.19 per share, in 1997 compared to net income available to
common of $126.2 million, or $2.07 per share, in 1996 and $101.5 million, or
$1.74 per share, in 1995. Net income available to common from U.S. Cellular and
TDS Telecom increased 45% in 1997 and 23% in 1996. The excellent growth at U.S.
Cellular and steady growth at TDS Telecom in 1997 was overshadowed by large
start-up losses at Aerial due to the costs associated with the launch of service
in all six PCS markets. Net income included significant gains on the sale of
cellular interests and other investments in 1996 and 1995.

The table below summarizes the effects of the business units and gains
(along with the related impact of income taxes and minority interest) on net
income (loss) available to common and earnings per share--diluted.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET INCOME (LOSS) AVAILABLE TO COMMON
U.S. Cellular and TDS Telecom........................................... $ 135.1 $ 93.4 $ 75.7
Aerial.................................................................. (129.4) (15.3) (6.7)
American Paging......................................................... (33.0) (16.4) (8.1)
Gains................................................................... 15.9 64.5 40.6
--------- --------- ---------
$ (11.4) $ 126.2 $ 101.5
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE--DILUTED
U.S. Cellular and TDS Telecom........................................... $ 2.25 $ 1.54 $ 1.30
Aerial.................................................................. (2.15) (.25) (.11)
American Paging......................................................... (.55) (.27) (.14)
Gains................................................................... .26 1.05 .69
--------- --------- ---------
$ (.19) $ 2.07 $ 1.74
--------- --------- ---------
--------- --------- ---------
</TABLE>

U.S. Cellular continued its outstanding growth during 1997. Customer units
increased by 637,000 units, or 59% (442,000 units, or 41%, excluding customers
added through acquisitions), to 1.7 million customer units, following a 363,000
unit, or 51%, increase in 1996. The increase in customer units drove a 29%
increase in revenues, a 33% increase in cash flow and a 48% increase in
operating income. Capital expenditures to add cell sites, expand coverage and
add capacity totaled $318.7 million and expenditures for acquisitions totaled
$128.8 million.

TDS Telecom continued to provide steady growth in revenues and cash flow.
Telephone access lines increased 6% resulting in a 12% increase in operating
revenues and a 3% increase in cash flow. Operating income decreased 4% as TDS
Telecom incurred additional expenses related to the development and marketing of
its new business ventures, an Internet access provider, a structured wiring
business and a competitive local exchange company ("CLEC"). TDS Telecom's
investment in outside plant facilities and new digital switches to maintain and
enhance the quality of service and offer new revenue opportunities totaled
$151.5 million.

1
<PAGE>

Aerial launched service in all of its markets prior to the end of the second
quarter. A total of 125,000 net customers were added by the end of 1997. Service
was launched across its markets with approximately 600 cell sites in place,
which provided wide-area metropolitan coverage in its Major Trading Areas
("MTAs"). By the end of 1997, it had 1,044 cell sites in service and had
extended coverage to approximately 80% of the population in its MTAs.

Aerial's operating results reflect the high cost of launching service.
Revenues totaled $56.0 million, operating cash flow, a negative $157.5 million
and operating loss totaled $196.6 million. Aerial's investment in property and
equipment, including network design and equipment, site acquisition and
information systems totaled $274.7 million in 1997.

RESULTS OF OPERATIONS

OPERATING REVENUES increased 25% ($291.7 million) during 1997 and 25%
($237.5 million) during 1996 primarily as a result of growth at U.S. Cellular
and TDS Telecom in 1997 and 1996 as well as the start-up of PCS operations at
Aerial in 1997.

U.S. Cellular revenues increased $196.9 million in 1997 and $199.8 million
in 1996 on 59% and 51% increases in customer units and 13% and 31% increases in
inbound roaming revenues, respectively. TDS Telecom revenues increased $48.6
million in 1997 and $40.8 million in 1996 as a result of recovery of increased
costs of providing long-distance services, internal access line growth,
acquisitions and increased network usage. Aerial revenues totaled $56.0 million
since start-up of operations in mid-1997. American Paging revenues decreased
$9.8 million in 1997 and $3.0 million in 1996 reflecting competitive pricing
declines.

U.S. Cellular contributed 60% of consolidated revenue in 1997, up from 51%
in 1995 reflecting revenue growth rates substantially higher than the other
business units. TDS Telecom and American Paging contributed 30% and 6% of
consolidated revenue in 1997 and 38% and 11% in 1995, respectively. Aerial
contributed 4% of consolidated revenue in 1997.

OPERATING EXPENSES rose 44% ($448.8 million) in 1997 and 27% ($216.1
million) in 1996. The increase in expenses includes Aerial's expenses subsequent
to the launch of service in 1997 as well as added expenses from the growth in
operations at U.S. Cellular and TDS Telecom in 1997 and 1996.

PCS operating expenses totaled $252.5 million in 1997 reflecting the costs
of operating Aerial's network, marketing, selling and advertising and promotion
expenses, cost of equipment sold, customer service expenses as well as general
and administrative expenses. U.S. Cellular operating expenses increased $154.7
million during 1997 and $155.1 million during 1996 due to the effects of
additional marketing and selling expenses to add new customers as well as the
costs of providing services to the larger customer base. TDS Telecom operating
expenses increased $52.7 million during 1997 and $36.3 million during 1996 due
to growth in internal operations, the development and start-up of new business
ventures and the effects of acquisitions. American Paging operating expenses
decreased $11.1 million in 1997 and increased $24.7 million in 1996.

OPERATING INCOME declined to a negative $3.7 million in 1997 from $153.4
million in 1996 reflecting strong growth at U.S. Cellular offset by Aeriel's
costs of launching service. Operating income increased to $153.4 million in 1996
from $132.0 million in 1995 reflecting growth in operations at U.S. Cellular,
offset somewhat by increased losses at American Paging. U.S. Cellular's
operating income increased 48% ($42.2 million) in 1997 and 104% ($44.6 million)
in 1996 reflecting the increase in customers and revenues. U.S. Cellular's
operating margin has increased steadily to 14.8% in 1997 from 12.8% in 1996 and
8.9% in 1995. TDS Telecom's operating income decreased $4.1 million in 1997 and
increased $4.5 million in 1996. The decrease in TDS Telecom's operating income
was primarily due to operating losses from new business ventures. TDS Telecom's
operating margin continued its decline to 22.2% in 1997 from 26.0% in 1996 and
27.7% in 1995 due primarily to the development of new business ventures which
have lower margins than traditional telephone operations as well as earnings
pressures on telephone operations from regulatory agencies and long-distance
providers. Aerial's operating loss

2
<PAGE>

totaled $196.6 million in 1997, reflecting the costs associated with launching
service in all six markets. American Paging's operating loss decreased $1.3
million in 1997 and increased $27.6 million in 1996.

Management expects Aerial to generate significant losses in 1998 as it
continues to build its customer base. Upon completion of a December 1997
agreement between TDS and TSR Paging, Inc. to combine their respective paging
businesses, TDS will follow the equity method of accounting for its 30% interest
in the new combined company and will report these results as a component of
Investment and Other Income. This combination is expected to be completed in the
first half of 1998. See "Combination of American Paging and TSR Paging."

INVESTMENT AND OTHER INCOME (EXPENSE) totaled $114.0 million in 1997, $141.2
million in 1996 and $103.9 million in 1995. Investment and other income
(expense) includes interest and dividend income, cellular investment income,
gain on sale of cellular interests and other investments, PCS development costs
and minority share of income.

CELLULAR INVESTMENT INCOME, the Company's share of income of cellular
markets in which the Company has a minority interest and follows the equity
method of accounting, increased 42% ($22.8 million) in 1997 and 35% ($14.1
million) in 1996. Cellular investment income is net of amortization of license
costs relating to these minority interests. Cellular investment income is
expected to decrease in 1998 as a result of the transfer of certain minority
interests to BellSouth Corporation ("BellSouth") in the fourth quarter of 1997
and the pending transfer of certain other minority interests to AirTouch
Communications, Inc. in 1998. See "Financial Resources--Acquisitions, Trades and
Sales."

GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totaled $41.4
million in 1997, $138.7 million in 1996 and $86.6 million in 1995. TDS and U.S.
Cellular continue to assess the makeup of cellular holdings in order to maximize
the benefits derived from clustering markets. Certain markets, identified as
non-strategic, were sold or traded in the past few years resulting in the
recognition of gains.

PCS DEVELOPMENT COSTS totaled $21.6 million in 1997, $43.9 million in 1996
and $7.8 million in 1995. Expenses incurred by Aerial prior to the launch of
operations in March 1997 to recruit an experienced management team, develop and
execute a business plan, raise capital and design and construct its PCS networks
were recorded in Other Income (Expense). Revenues and expenses incurred
subsequent to the launch of service have been included as a component of
operating income.

MINORITY SHARE OF INCOME includes the minority shareholders' share of U.S.
Cellular's, Aerial's and American Paging's net income or loss, the minority
partners' share of U.S. Cellular's operating markets net income or loss and
other minority shareholders' and partners' share of subsidiaries' net income or
loss. The change in 1997 is primarily

3
<PAGE>

related to the increased losses of Aerial allocated to its minority
shareholders. Minority shareholders of American Paging are not allocated losses
in 1997 as American Paging's shareholders' equity is negative.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minority Share of (Income) Loss
U.S. Cellular
Minority Shareholders' Share.................................... $ (21,264) $ (25,179) $ (19,046)
Minority Partners' Share........................................ (12,298) (13,743) (7,902)
---------- ---------- ----------
(33,562) (38,922) (26,948)
Aerial.......................................................... 43,038 4,944 --
American Paging................................................. -- 6,368 2,781
Telephone Subsidiaries and Other................................ (2,663) 920 (1,691)
---------- ---------- ----------
$ 6,813 $ (26,690) $ (25,858)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

INTEREST EXPENSE increased 113% ($48.4 million) in 1997 and decreased 16%
($8.0 million) in 1996. Interest expense increased in 1997 due to increased
interest expense from larger short-term debt balances ($19.6 million), a smaller
amount of capitalized interest ($16.6 million), additional interest expense from
U.S. Cellular's sale of debt in 1997 and Aerial's zero coupon notes issued in
late 1996 ($11.7 million). Interest expense decreased in 1996 because of
increased capitalized interest ($14.4 million) which offset additional interest
from U.S. Cellular's sale of convertible debt in 1995 ($6.0 million).

TDS and Aerial capitalized interest totaling $11.0 million in 1997, $27.6
million in 1996 and $13.2 million in 1995 on expenditures for PCS licenses and
construction costs. The Company stops capitalizing interest on qualifying assets
when those assets are placed in service.

MINORITY INTEREST IN INCOME OF SUBSIDIARY TRUST totaled $1.5 million in
1997. In November 1997, TDS Capital I, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. The sole
asset of TDS Capital I is $154.6 million principal amount of TDS's 8.5%
Subordinated Debentures due December 31, 2037.

INCOME TAX EXPENSE decreased $95.1 million in 1997 to $28.6 million and
increased $42.6 million to $123.6 million in 1996, reflecting primarily the
changes in pretax income.

NET INCOME (LOSS) AVAILABLE TO COMMON was ($11.4 million) in 1997, $126.2
million in 1996 and $101.5 million in 1995. EARNINGS PER COMMON SHARE--DILUTED
was ($.19) in 1997, $2.07 in 1996 and $1.74 in 1995.

4
<PAGE>

CELLULAR TELEPHONE OPERATIONS

TDS provides cellular telephone service through U.S. Cellular. Results of
operations include 1,710,000 customer units at the end of 1997 compared to
1,073,000 customer units at the end of 1996 and 710,000 customer units at the
end of 1995.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
CUSTOMER AMOUNTS)
<S> <C> <C> <C>
Operating Revenues
Local retail................................................... $ 568,578 $ 414,815 $ 277,439
Inbound roaming................................................ 217,499 193,278 148,020
Long-distance and Other........................................ 90,888 71,975 54,857
----------- ----------- -----------
876,965 680,068 480,316
----------- ----------- -----------
Operating Expenses
System operations.............................................. 153,137 117,368 70,442
Marketing and selling.......................................... 175,117 127,689 92,180
Cost of equipment sold......................................... 82,302 74,024 54,948
General and administrative..................................... 204,487 164,782 130,533
Depreciation................................................... 97,591 74,631 57,302
Amortization................................................... 34,788 34,208 32,156
----------- ----------- -----------
747,422 592,702 437,561
----------- ----------- -----------
Operating Income................................................. $ 129,543 $ 87,366 $ 42,755
----------- ----------- -----------
----------- ----------- -----------
Consolidated Markets:
Customers...................................................... 1,710,000 1,073,000 710,000
Markets........................................................ 134 131 137
Market penetration............................................. 7.11% 4.94% 3.18%
Cell sites in service.......................................... 1,748 1,328 1,116
Average monthly service revenue per customer................... $ 54.18 $ 63.69 $ 70.64
Churn rate per month........................................... 1.9% 1.9% 2.1%
Marketing cost per gross customer addition..................... $ 313 $ 327 $ 335
Employees...................................................... 4,600 3,800 3,175
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

OPERATING REVENUES increased 29% ($196.9 million) in 1997 and 42% ($199.8
million) in 1996. The revenue increases in 1997 and 1996 were driven by the 59%
(41% excluding customers added through acquisitions) and 51% growth in customer
units and the 13% and 31% growth in inbound roaming revenues, respectively.
Customer units grew by 637,000 units in 1997 as compared to 363,000 units in
1996. The units added in 1997 include 195,000 units from acquisitions, primarily
related to the exchange with BellSouth which occurred at the end of October
1997. Average monthly service revenue per customer was $54.18 in 1997, $63.69 in
1996 and $70.64 in 1995. Average monthly service revenue per customer continues
to decline due to roaming revenues increasing at a slower rate than the U.S.
Cellular customer base, competitive pricing pressures, incentive programs and
consumer market penetration. Management anticipates that average monthly service
revenue per customer will continue to decrease as local retail and inbound
roaming revenue per minute of use decline.

LOCAL RETAIL REVENUE (charges to U.S. Cellular's customers for local system
usage) increased 37% ($153.8 million) in 1997 and 50% ($137.4 million) in 1996
due primarily to the growth in customers. Average monthly local retail revenue
per customer was $36.11 in 1997, $39.87 in 1996 and $42.19 in 1995. Local
minutes of use averaged 103 per month in 1997, 107 per month in 1996 and 95 per
month in 1995. Average revenue per minute was $.35 in 1997, $.37 in 1996 and
$.44 in 1995. U.S. Cellular's use of incentive programs that encourage lower-
priced weekend and off-peak usage, in order to stimulate overall usage, and the
increased amounts of bill credits given to customers as incentive to become or
remain customers resulted in the decrease in average monthly local retail
revenue per minute which in turn caused the decrease in average monthly local
retail revenue per customer. The industry trend of declining average monthly
retail revenue per customer is believed to be related to the continued
penetration of the consumer market, which tends to include fewer peak business
hour usage customers and the effects of increased competition in the industry.

5
<PAGE>

INBOUND ROAMING REVENUE (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) increased 13% ($24.2 million) in 1997
and 31% ($45.3 million) in 1996 due to increased minutes of use offset somewhat
by negotiated reductions in roaming rates. Minutes of use increased 27% in 1997
and 38% in 1996. Average revenue per minute of use was $.83 in 1997, $.92 in
1996 and $.99 in 1995. Average monthly inbound roaming revenue per U.S. Cellular
customer was $13.81, $18.58 and $22.51 in 1997, 1996 and 1995, respectively. The
decrease is the result of U.S. Cellular's customer base growing at a faster rate
than roaming revenue and negotiated reductions in roaming rates.

LONG-DISTANCE AND OTHER REVENUE, including equipment sales, increased 26%
($18.9 million) in 1997 and 31% ($17.1 million) in 1996 primarily due to
increased long-distance revenue from the growth in the volume of long-distance
calls billed by U.S. Cellular.

OPERATING EXPENSES increased 26% ($154.7 million) in 1997 and 35% ($155.1
million) in 1996. The increase in operating expenses is primarily due to the
costs to expand the customer base ($55.7 million in 1997 and $54.6 million in
1996); increased administrative expenses ($39.7 million in 1997 and $34.2
million in 1996); the cost of providing service to the expanding customer base
($35.8 million in 1997 and $46.9 million in 1996); and additional depreciation
on the increased investment in cell sites and equipment ($23.0 million in 1997
and $17.3 million in 1996).

MARKETING AND SELLING EXPENSES (salaries, commissions and expenses of field
sales and retail personnel and offices; agent expenses; advertising and public
relations expenses) increased 37% ($47.4 million) in 1997 and 39% ($35.5
million) in 1996 due to the increase in customer activations. Gross customer
activations (excluding acquisitions) rose 33% in 1997 to 746,000 from 563,000 in
1996. The 1996 gross customer activations increased 44% to 563,000 from 392,000
in 1995. U.S. Cellular incurred significant increases in advertising costs to
promote the United States Cellular-Registered Trademark- brand name and to add
new customers. Cost of equipment sold increased 11% ($8.3 million) in 1997 and
35% ($19.1 million) in 1996 reflecting the increase in units sold offset
somewhat by falling manufacturer equipment prices per unit. Cost per gross
customer addition (marketing and selling expenses and cost of equipment sold
less equipment revenues, divided by gross customer additions) totaled $313 in
1997, $327 in 1996 and $335 in 1995.

GENERAL AND ADMINISTRATIVE EXPENSES (costs of local business offices and
corporate expenses) increased 24% ($39.7 million) in 1997 and 26% ($34.2
million) in 1996. The increases include the effects of an increase in expenses
required to serve the growing customer base and an expansion of both local
administrative office and corporate staff, resulting from growth in U.S.
Cellular's business. Employee-related expenses increased $19.4 million in 1997
and $15.6 million in 1996, primarily due to an increase in the number of
administrative employees in each year. Also, bad debt expense increased $8.0
million in 1997 and $5.0 million in 1996, primarily due to the increased
penetration of the consumer market.

SYSTEM OPERATIONS EXPENSES increased 30% ($35.8 million) in 1997 and 67%
($46.9 million) in 1996 as a result of increases in customer usage expenses and
costs associated with operating the increased number of cell sites.

Customer usage expenses (charges from other service providers for landline
connection, toll and roaming costs incurred by customers' use of systems other
than their local systems) grew 32% ($24.3 million) in 1997 and 116% ($40.4
million) in 1996. The increase was due primarily to roaming usage and increased
minutes of use. Net outbound roaming usage expense is a result of offering U.S.
Cellular's customers increasingly larger service footprints in which their calls
are billed at local rates. In certain cases these service footprints include
other operators' service areas. U.S. Cellular pays roaming rates to the other
carriers for calls its customers make in these areas, while charging these
customers a local rate which is usually lower than the roaming rate. The
increase in 1996 also relates to increases in fraud-related costs. These
fraud-related costs totaled $6.5 million in 1997, $18.0 million in 1996 and $4.1
million in 1995. U.S. Cellular continues to implement procedures in its markets
to combat this fraud, which is primarily related to roaming usage.

Maintenance, utility and cell site expenses grew 27% ($11.5 million) in 1997
and 18% ($6.5 million) in 1996 reflecting the 32% and 19% increase in the number
of cell sites, respectively. The number of cell sites operated increased to
1,748 in 1997 from 1,328 in 1996 and 1,116 in 1995.

Operating cash flow increased 33% to $261.9 million in 1997 compared to a
48% increase to $196.2 million in 1996. The improvement was primarily due to the
growth in customers and revenue. U.S. Cellular continues to provide increasing
operating cash flow to support its construction activities.

6
<PAGE>

DEPRECIATION EXPENSE increased 31% ($23.0 million) in 1997 and 30% ($17.3
million) in 1996, reflecting increases in average fixed asset balances of 35%
and 34%, respectively.

OPERATING INCOME was $129.5 million in 1997 compared to $87.4 million in
1996 and $42.8 million in 1995. Operating margins improved to 14.8% in 1997 from
12.8% in 1996 and 8.9% in 1995. The improvement was primarily due to the
substantial growth in customers and revenue.

Management believes there exists a seasonality at U.S. Cellular in both
service revenues, which tend to increase more slowly in the first and fourth
quarters, and operating expenses, which tend to be higher in the fourth quarter
due to increased marketing activities and customer growth. This seasonality may
cause operating income to vary from quarter to quarter.

Competitors licensed to provide PCS services have initiated service in
certain U.S. Cellular markets in the past eighteen months. U.S. Cellular expects
PCS operators to complete initial deployment of PCS in portions of all its
market clusters by the end of 1998. U.S. Cellular's management continues to
monitor other wireless communications providers' strategies to determine what
effect this additional competition will have on U.S. Cellular's future
strategies and results. While the effects of additional wireless competition
have slowed customer growth in certain of U.S. Cellular's markets, the overall
effect on total customer growth to date has not been material.

7
<PAGE>

TELEPHONE OPERATIONS

TDS provides landline telephone service through TDS Telecom. TDS Telecom
served 515,500 access lines at the end of 1997 compared to 484,500 access lines
at the end of 1996 and 425,900 access lines at the end of 1995 ("telephone
operations"). TDS Telecom also owns a long-distance provider, an Internet access
provider, a structured wiring business and a competitive local exchange company
("other services").

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER ACCESS LINE AMOUNTS)
<S> <C> <C> <C>
Operating Revenues
Telephone Revenues
Local Service................................................... $ 122,826 $ 110,501 $ 95,184
Network Access and Long Distance................................ 235,725 213,113 195,575
Miscellaneous................................................... 53,829 48,299 41,528
----------- ----------- ---------
Total Telephone Revenues...................................... 412,380 371,913 332,287
Other Services.................................................... 33,516 24,747 23,764
Intercompany Revenues............................................. (1,693) (1,058) (1,210)
----------- ----------- ---------
Total Operating Revenues...................................... 444,203 395,602 354,841
----------- ----------- ---------
Operating Expenses
Telephone Expenses
Network Operations.............................................. 80,487 67,521 54,964
Depreciation and Amortization................................... 95,278 85,575 74,758
Customer Operations............................................. 65,167 53,764 46,818
Corporate Operations............................................ 68,454 62,276 58,998
----------- ----------- ---------
Total Telephone Expenses...................................... 309,386 269,136 235,538
Other Services.................................................... 37,897 24,816 22,273
Intercompany Expenses............................................. (1,693) (1,058) (1,210)
----------- ----------- ---------
Total Operating Expenses...................................... 345,590 292,894 256,601
----------- ----------- ---------
Operating Income.................................................... $ 98,613 $ 102,708 $ 98,240
----------- ----------- ---------
----------- ----------- ---------
Companies........................................................... 106 105 100
Access lines........................................................ 515,500 484,500 425,900
Growth in access lines from prior year-end:
Acquisitions...................................................... 3,200 33,100 13,500
Internal growth................................................... 27,800 25,500 19,900
Telephone plant in service per access line.......................... $ 2,488 $ 2,461 $ 2,356
Average monthly revenue per access line............................. $ 68.78 $ 67.10 $ 66.82
Employees........................................................... 2,350 2,160 1,925
----------- ----------- ---------
----------- ----------- ---------
</TABLE>

OPERATING REVENUES totaled $444.2 million in 1997, up 12% ($48.6 million)
from 1996 and totaled $395.6 million in 1996, up 11% ($40.8 million) from 1995.
The increases were due to the growth in telephone revenues and other services
revenues.

Operating revenues from telephone operations increased 11% ($40.5 million)
in 1997 and 12% ($39.6 million) in 1996. Acquisitions increased telephone
revenues $8.1 million in 1997 and $18.8 million in 1996. Recovery of increased
costs of providing long-distance services resulted in increases in revenue of
$12.1 million in 1997 and $8.1 million in 1996. Internal growth and increases in
the sales of custom-calling features increased revenue by $8.7 million in 1997
and $8.0 million in 1996. Increased sales of customer premise equipment,
including digital broadcast satellites, increased revenues by $6.1 million in
1997 and $2.2 million in 1996. Increased network usage resulted in revenue
increases of $5.7 million in 1997 and $4.5 million in 1996. Average monthly
revenue per access line was $68.78 in 1997, $67.10 in 1996 and $66.82 in 1995.

Operating revenues from other services increased 35% ($8.8 million) in 1997
and 4% ($1.0 million) in 1996. The increase in 1997 is primarily due to
increases in the structured wiring business ($6.0 million) and the Internet
business ($2.8 million).

8
<PAGE>

OPERATING EXPENSES totaled $345.6 million in 1997, up 18% ($52.7 million)
from 1996 and totaled $292.9 million in 1996, up 14% ($36.3 million) from 1995.
The increases were due to the growth in telephone expenses and additional other
services expenses.

Operating expenses from telephone operations increased 15% ($40.3 million)
in 1997 and 14% ($33.6 million) in 1996. The effects of acquisitions increased
expenses 2% ($6.2 million) in 1997 and 6% ($14.6 million) in 1996. Depreciation
and amortization expenses increased 11% ($9.7 million) in 1997 and 14% ($10.8
million) in 1996 due primarily to increased investment in plant and equipment.
Cost of goods sold for customer premise equipment, including digital broadcast
satellite, increased operating expenses by $5.2 million in 1997. Increased
marketing and advertising campaigns increased expenses by $4.7 million in 1997.
Increased investment in systems and systems support in 1997 resulted in an $8.4
million increase in expenses. The development of a centralized network
management center to provide more effective network monitoring and maintenance
increased expenses by $1.8 million in 1997 and $3.4 million in 1996. The costs
to explore new business increased expenses by $3.2 million in 1996. The
remaining increase in each year was due primarily to growth in internal
operations.

Operating expenses from other services increased 53% ($13.1 million) in 1997
and 11% ($2.5 million) in 1996. The increase in 1997 is primarily due to
increases in the structured wiring business ($7.6 million) and the Internet
business ($3.2 million) as well as costs related to the start-up of the CLEC
business.

OPERATING CASH FLOW increased 3% to $196.7 million in 1997 compared to an
increase of 9% to $191.2 million in 1996 due primarily to the growth in
telephone operations. TDS Telecom continues to provide steadily growing
operating cash flow to support its construction activities.

OPERATING INCOME decreased 4% ($4.1 million) in 1997 and increased 5% ($4.5
million) in 1996. Operating income from telephone operations increased $200,000
to $103.0 million in 1997 from $102.8 million in 1996 and increased $6.0 million
in 1996 from $96.7 million in 1995. The effects of acquisitions increased
operating income 2% ($1.9 million) in 1997 and 4% ($4.2 million) in 1996. The
telephone operating margin was 25.0% in 1997, 27.6% in 1996 and 29.1% in 1995.
The reduction in operating margin was caused by earnings pressures from
regulatory agencies and long-distance providers and expenses incurred in the
development of new business ventures. Operating loss from other services was
$4.4 million in 1997 and $100,000 in 1996 as compared to an operating income of
$1.5 million in 1995, reflecting the expenses associated with the start-up of
the Internet business in late 1995, the structured wiring business in mid-1996
and the CLEC business in 1997.

TDS Telecom is subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." The Company periodically reviews the criteria for applying
these provisions to determine whether continuing application of SFAS No. 71 is
appropriate. The Company believes that such criteria are still being met and
therefore has no current plans to change its method of accounting.

In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore, any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.

BROADBAND PERSONAL COMMUNICATIONS SERVICES

TDS manages its broadband personal communications services business through
Aerial. Aerial's licenses include the Major Trading Areas ("MTAs") of
Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus. The preparation of each of its markets for initial service launch and
the development of its PCS business was Aerial's center of attention in 1997.
Aerial launched service in the first of its six markets on March 27, 1997 and
completed the launch of its last market in June. Across all six markets, Aerial
launched service with approximately 600 cell sites in service. At the end of
1997, Aerial served 125,000 customers and had 1,044 cell sites in service.

Operating results reflect the revenues and expenses of Aerial since the
initiation of service on March 27, 1997, when Aerial ceased to be a development
stage enterprise. Expenses for the periods prior to March 27 are reported

9
<PAGE>

as PCS Development Expenses included in the "Investment and Other Income
(Expense)" section of the Income Statement.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
------------------------------------
1997 1996 1995
------------ ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER CUSTOMER AMOUNTS)
<S> <C> <C> <C>
Operating Revenues................................................. $ 55,952 $ -- $ --
------------ ---------- ----------
Operating Expenses
Systems Operations............................................... 30,655 -- --
Marketing and selling............................................ 45,974 -- --
Cost of equipment sold........................................... 71,454 -- --
General and administrative....................................... 44,467 -- --
Customer service................................................. 20,882 -- --
Depreciation and amortization.................................... 39,071 -- --
------------ ---------- ----------
252,503 --
------------ ---------- ----------
Operating (loss)................................................... $ (196,551) $ -- $ --
------------ ---------- ----------
------------ ---------- ----------
Customers.......................................................... 125,000 -- --
Market penetration................................................. .45% -- --
Cell sites in service.............................................. 1,044 -- --
Average monthly service revenue per customer....................... $ 73.56 -- --
Churn rate per month............................................... 4.5% -- --
Employees.......................................................... 1,414 424 50
------------ ---------- ----------
------------ ---------- ----------
</TABLE>

OPERATING REVENUES totaled $56.0 million in 1997. Service revenues
consisting of charges for access, airtime and value-added services provided to
Aerial's customers who use its network and charges for long-distance calls made
on its systems totaled $32.3 million. The average monthly service revenue per
customer was $73.56 in 1997. Equipment sales revenues consisting of units sold
to retailers, independent agents and customers totaled $23.6 million. The
average revenue per unit sold was $124.

OPERATING EXPENSES totaled $252.5 million in 1997 reflecting the costs of
operating Aerial's network, marketing, selling and advertising and promotion
expenses, cost of equipment sold, customer service expenses as well as general
and administrative expenses. SYSTEMS OPERATIONS expenses totaled $30.7 million
reflecting the costs of operating Aerial's network, primarily cell site
expenses, landline interconnection and toll charges and employee costs.
MARKETING AND SELLING EXPENSES totaled $46.0 million reflecting an aggressive
advertising campaign that accompanied the launch of service and continued
throughout 1997. Marketing and selling expenses primarily consist of salaries
and benefits of sales and marketing personnel, sales commissions, the cost of
promotions and the cost of print, radio and television advertising. COST OF
EQUIPMENT SOLD totaled $71.5 million reflecting the cost of equipment sold to
customers and independent retailers and agents. The average cost per unit sold
was $374. GENERAL AND ADMINISTRATIVE EXPENSES totaled $44.5 million reflecting
the expenses associated with the management and operating teams as well as
overhead expenses. CUSTOMER SERVICE EXPENSES totaled $20.9 million primarily for
customer service activity at Aerial's national operations center to support the
PCS markets. DEPRECIATION AND AMORTIZATION totaled $39.1 million.

OPERATING LOSS totaled $196.6 million in 1997. Management expects Aerial to
generate significant losses in 1998 as it continues to build its customer base.

RADIO PAGING OPERATIONS

TDS manages its radio paging business through American Paging. American
Paging provided wireless messaging communications through its digital radio
transmission systems to 811,100 pagers at the end of 1997 compared to 777,400
pagers at the end of 1996 and 784,500 pagers at the end of 1995.

COMBINATION OF AMERICAN PAGING AND TSR PAGING

In December 1997, TDS announced an agreement with TSR Paging, Inc. ("TSR")
to combine their respective paging businesses. On February 10, 1998 the board of
directors of American Paging approved a merger agreement providing for the
acquisition by TDS of all the issued and outstanding shares of American Paging
not owned by TDS

10
<PAGE>

for cash in an amount equal to $2.50 per share, approximately $9.1 million in
total. Upon consummation of the merger, TDS will contribute substantially all of
the assets and certain, limited liabilities of American Paging, and TSR will
contribute all of its assets and liabilities to a new limited liability company.
The asset contribution agreement provides that, subject to adjustment, TDS will
have a 30% interest and TSR will have a 70% interest in the new company. The
formation of the new company, while subject to a number of conditions, including
consummation of the merger and regulatory approvals, is expected to occur in the
first half of 1998. TDS will adopt the equity method of accounting for its
investment in the new company. TDS will not have any funding requirements once
the combination is completed.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C>
Operating revenue............................................. $ 94,413 $ 104,187 $ 107,150
----------- ----------- -----------
Costs and expenses
Cost of services............................................ 27,822 26,712 22,294
Selling, general and administrative......................... 62,089 70,441 55,064
Cost of goods sold.......................................... 7,769 9,883 14,097
Depreciation and amortization............................... 32,040 33,777 24,692
----------- ----------- -----------
129,720 140,813 116,147
----------- ----------- -----------
Operating (Loss).............................................. $ (35,307) $ (36,626) $ (8,997)
----------- ----------- -----------
----------- ----------- -----------
Pagers in service............................................. 811,100 777,400 784,500
Average monthly revenue per unit.............................. $ 9.17 $ 9.88 $ 10.57
Transmitters in service....................................... 1,049 1,048 1,018
Churn rate per month.......................................... 2.6% 3.1% 2.5%
Employees..................................................... 621 837 717
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

OPERATING REVENUES decreased 9% ($9.8 million) in 1997, primarily due to
competitive pricing declines. Operating revenues decreased 3% ($3.0 million) in
1996 primarily as a result of a 27% ($3.8 million) decline in equipment sales.
Average monthly revenue per unit declined 7% to $9.17 in 1997 and 7% to $9.88 in
1996.

OPERATING EXPENSES decreased 8% ($11.1 million) in 1997 and increased 21%
($24.7 million) in 1996 reflecting the effects of restructuring charges. In
1996, American Paging recorded restructuring expenses of $9.3 million related to
subleasing office space, employee severance, outplacement services and
consulting services ($4.0 million) and write-offs of certain assets ($5.3
million) compared to $2.9 million of restructuring charges in 1995. American
Paging experienced significant employee turnover as a result of the
restructuring in 1996 which resulted in increased costs to recruit and train new
employees. Also, in 1996, the cost of service increased primarily due to the
increase in third-party reseller expense related to the increase in nationwide
units in service and the costs to increase system capacity.

OPERATING LOSS was $35.3 million in 1997, $36.6 million in 1996 and $9.0
million in 1995. Upon the completion of the merger with TSR, TDS will adopt the
equity method of accounting for this investment.

INFLATION

Management believes that inflation affects TDS's business to no greater
extent than the general economy.

FINANCIAL RESOURCES

TDS and its subsidiaries operate relatively capital-intensive businesses.
Rapid growth has caused expenditures for construction, expansion and acquisition
programs to exceed internally generated cash flow. Accordingly, in recent years,
TDS and its principal subsidiaries have obtained substantial funds from external
sources to acquire PCS licenses, to finance PCS construction, start-up and
development costs and to fund acquisitions. Although the increasing internal
cash flow from U.S. Cellular and the steady internal cash flow from TDS Telecom
have reduced the need for external financing, Aerial's development and
construction activities have required substantial additional funds from external
sources.

11
<PAGE>

CASH FLOWS FROM OPERATING ACTIVITIES. TDS is generating substantial internal
funds from the rapid growth in customer units and revenues at U.S. Cellular and
steady growth at TDS Telecom. The launch of PCS operations, however, required
substantial funds, thereby reducing cash flows from operating activities in
1997. Cash flows from operating activities totaled $206.5 million in 1997,
$295.0 million in 1996 and $210.9 million in 1995.

Aerial's market launch activities also substantially reduced operating cash
flow in 1997. Operating cash flow (operating income plus depreciation and
amortization) decreased 23% to $297.9 million in 1997 from $384.5 million in
1996 and $323.5 million in 1995. Aerial's operations reduced operating cash flow
by $157.5 million in 1997. U.S. Cellular's operating cash flow increased 33%
($65.7 million) to $261.9 million in 1997, and 48% ($64.0 million) to $196.2
million in 1996 while TDS Telecom's operating cash flow increased 3% ($5.5
million) to $196.7 million in 1997, and 9% ($15.6 million) to $191.2 million in
1996. Cash flows from other operating activities (investment and other income,
interest and income tax expense and changes in working capital and other assets
and liabilities) required $91.3 million in 1997, $89.5 million in 1996, and
$112.6 million in 1995.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating cash flow
U.S. Cellular.................................................. $ 261,922 $ 196,205 $ 132,213
TDS Telecom.................................................... 196,679 191,167 175,595
Aerial......................................................... (157,480) -- --
American Paging................................................ (3,267) (2,849) 15,695
------------ ----------- ------------
297,854 384,523 323,503
Other operating activities..................................... (91,347) (89,529) (112,627)
------------ ----------- ------------
$ 206,507 $ 294,994 $ 210,876
------------ ----------- ------------
------------ ----------- ------------
</TABLE>

CASH FLOWS FROM FINANCING ACTIVITIES. TDS's long-term strategy is to
maintain a strong yet flexible financial foundation. Consolidated equity capital
(common equity, preferred stock, trust originated preferred securities and
minority interest) was 59% of total capitalization at December 31, 1997,
compared to 68% and 66% at December 31, 1996 and 1995, respectively. The reduced
equity capital percentage to total capitalization in 1997 is primarily a result
of increases in long-term debt at U.S. Cellular and Aerial and the increase in
TDS's short-term debt. TDS targets a ratio of equity to total capital in the
range of 55% to 65%.

Cash flows from financing activities totaled $547.6 million in 1997, $124.9
million in 1996 and $369.5 million in 1995. TDS has required significant funds
from external sources to finance PCS construction, start-up and development
activities in 1997 and 1996 and the purchase of the PCS licenses in 1995. TDS
has used short-term debt to finance these PCS expenditures, as well as to
finance its radio paging operations, for acquisitions and for general corporate
purposes.

TDS takes advantage of attractive opportunities to retire short-term debt
with proceeds from long-term debt and equity financing, including sales of debt
and equity securities by subsidiaries. Proceeds from the issuance of long-term
debt and equity securities totaled $392.0 million, $195.3 million and $260.7
million in 1997, 1996 and 1995, respectively. Proceeds from the sales of
non-strategic cellular and other investments from time to time in 1997, 1996 and
1995 have also been used to retire short-term debt. TDS has cash management
arrangements with its subsidiaries under which the subsidiaries may from time to
time deposit excess cash with TDS for investment under TDS's cash management
program. Deposits made under the arrangements are available to the subsidiaries
on demand and bear interest each month at the 30-day Commercial Paper Rate as
reported in The Wall Street Journal, plus 1/4%, or such higher rate as TDS may
at its discretion offer on such deposits.

In 1997, TDS received net proceeds of $144.8 million on the sale of 8.5%
Trust Originated Preferred Securities-SM-. U.S. Cellular received $247.0 million
on the sale of 10-year 7.25% notes and used the proceeds to repay existing
balances on the vendor financing arrangements, to finance the cash requirements
for the BellSouth exchange and for general corporate purposes. In 1996, Aerial
received $195.3 million in an initial public offering of Common Shares. In 1995,
U.S. Cellular received $221.5 million from the sale of 20-year 6% zero coupon
convertible debt and TDS sold $39.2 million of Medium-Term Notes.

- ----------

- -SM-"Trust Originated Preferred Securities" is a service mark of Merrill Lynch &
Co. Inc.

12
<PAGE>

Aerial, TDS Telecom and U.S. Cellular have also used long-term debt to
finance their construction and development activities. In 1996, Aerial issued
10-year 8.34% zero coupon notes for $100 million of digital radio channel and
switching equipment. The $100 million proceeds of the sale of the notes were
paid to Nokia Telecommunications, Inc. ("Nokia") in satisfaction of all
outstanding obligations and future obligations up to $100 million under a $200
million Credit Agreement between Aerial and Nokia ("Nokia Credit Agreement").
TDS Telecom telephone subsidiaries borrowed $15.0 million in 1997, $12.2 million
in 1996 and $12.0 million in 1995 under the Rural Utility Service and the Rural
Telephone Bank long-term federal government loan programs to finance their
telephone construction programs. U.S. Cellular financed cellular system
equipment and construction costs totaling $59.5 million in 1995 under vendor
financing arrangements.

In 1997, TDS purchased 1.8 million TDS Common Shares for $69.9 million. In
December 1996, TDS authorized the repurchase of up to 3.0 million TDS Common
Shares over a period of three years. A total of 1.0 million shares were
subsequently reissued, primarily for acquisitions. TDS has paid dividends of
$.42, $.40 and $.38 per Common and Series A Common Share in 1997, 1996 and 1995,
respectively. Aggregate dividends paid on Common and Preferred Shares, excluding
dividends reinvested, totaled $27.2 million in 1997, $26.2 million in 1996 and
$24.0 million in 1995.

CASH FLOWS FROM INVESTING ACTIVITIES. TDS makes substantial investments each
year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities as a basis for creating long-term value
for shareowners. In recent years, rapid changes in technology and new
opportunities have required substantial investments in revenue enhancing and
cost reducing upgrades of the Company's networks. In addition, the Company has
made substantial investments to enter the PCS business.

Cash flows from investing activities totaled $760.7 million in 1997, $417.4
million in 1996 and $550.0 million in 1995 primarily for capital expenditures,
the purchase of PCS licenses and acquisitions. Cash expenditures for capital
additions totaled $786.3 million in 1997, $550.2 million in 1996 and $360.0
million in 1995. The acquisition of broadband and narrowband PCS licenses
required $326.0 million in 1995. Cash used for acquisitions, excluding cash
acquired, totaled $129.0 million in 1997, $31.0 million in 1996 and $53.8
million in 1995. The sale of non-strategic cellular assets and other investments
provided net proceeds of $84.2 million in 1997, $221.5 million in 1996 and
$197.6 million in 1995. Distributions from partnerships totaled $56.4 million in
1997, $25.5 million in 1996 and $9.1 million in 1995.

13
<PAGE>

CAPITAL EXPENDITURES

The primary purpose of TDS's construction and expansion program is to
provide for significant customer growth, to upgrade service, to expand into new
communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. The following table summarizes the
Company's investments in its communications networks and related facilities
during the past three years.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Cellular
Cell sites and equipment....................................... $ 238,797 $ 133,832 $ 150,340
Switching equipment............................................ 5,457 5,713 13,002
Systems development............................................ 40,949 28,753 10,148
Other.......................................................... 33,545 79,825 37,388
------------- ----------- -----------
318,748 248,123 210,878
------------- ----------- -----------
TDS Telecom
Central office................................................. 52,479 47,208 38,697
Outside plant.................................................. 60,974 53,130 55,569
Systems development............................................ 9,127 20,497 7,137
Other.......................................................... 28,880 23,605 2,969
------------- ----------- -----------
151,460 144,440 104,372
------------- ----------- -----------
Aerial
Cell sites and equipment....................................... 291,922 150,386 --
Switching equipment............................................ 38,428 53,170 --
Systems development............................................ 55,553 26,277 --
Other.......................................................... 1,815 12,436 8,521
Prepaid network infrastructure................................. (70,300) 70,300 --
------------- ----------- -----------
317,418 312,569 8,521
Less noncash items............................................. (42,709) (199,630) --
------------- ----------- -----------
274,709 112,939 8,521
------------- ----------- -----------
American Paging.................................................. 18,624 32,517 26,527
------------- ----------- -----------
Other.......................................................... 22,776 12,185 9,698
------------- ----------- -----------
$ 786,317 $ 550,204 $ 359,996
------------- ----------- -----------
------------- ----------- -----------
</TABLE>

U.S. Cellular's capital additions include expenditures to add additional
cell sites and radio channels to expand coverage and add capacity. U.S. Cellular
constructed 331 cell sites in 1997, 242 in 1996 and 292 in 1995. TDS Telecom's
capital additions include expenditures for switch modernization and outside
plant facilities to maintain and enhance the quality of service and offer new
revenue opportunities. TDS Telecom installed 32 digital switches in 1997, 35 in
1996 and 39 in 1995. Aerial has completed the construction of the five planned
switching centers, the central Network Operations Center and has over 1,000 cell
sites in service.

The Company's expected 1998 property, plant and equipment additions reflect
the Company's construction and expansion programs and are anticipated to
aggregate approximately $545 million. In addition, Aerial's working capital and
operating expenses will require an estimated $175 million.

- The cellular capital additions budget totals approximately $330 million,
including about $240 million for new cell sites and about $90 million for
various information systems initiatives.

- The telephone capital additions budget totals approximately $140 million,
including about $50 million for new digital switches and other switching
facilities and $35 million for improvements to outside plant facilities.

- The PCS capital additions budget totals approximately $75 million,
including $20 million for cell sites, $25 million for switching equipment
and $15 million for systems development. In addition, Aerial's working
capital and operating expenses will require an estimated $175 million.

14
<PAGE>

ACQUISITIONS, TRADES AND SALES

TDS continually reviews attractive opportunities for the acquisition of
additional telecommunications companies which add value to the organization. TDS
and U.S. Cellular continue to assess the makeup of cellular holdings in order to
maximize the benefits derived from clustering U.S. Cellular's markets. As the
number of opportunities for outright acquisitions of cellular interests has
decreased and as U.S. Cellular's clusters have grown to realize greater
economies of scale, U.S. Cellular's focus has shifted toward exchanges and sales
of non-strategic interests.

Cash expenditures (excluding cash acquired) for acquisitions totaled $129.0
million in 1997, $31.0 million in 1996 and $53.8 million in 1995. TDS completed
an exchange with BellSouth in 1997, completed the acquisition of controlling
interests in two cellular markets and one telephone company in 1997, two
cellular markets and five telephone companies in 1996 and eleven cellular
markets and five telephone companies in 1995 and increased its ownership of
certain cellular interests during the last three years for an aggregate
consideration (consisting of cash, TDS Common Shares, TDS Preferred Shares, and
U.S. Cellular Common Shares) totaling $174.7 million, $144.1 million and $194.4
million, respectively.

In October 1997, U.S. Cellular completed an exchange with BellSouth.
Pursuant to the exchange, U.S. Cellular received majority interests representing
approximately 4.0 million pops in exchange for majority interests representing
2.0 million pops, minority interests representing 1.2 million pops and a net
amount of $86.7 million in cash. The majority interests U.S. Cellular received
are in 12 markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana
clusters.

In December 1997, U.S. Cellular announced that AirTouch will acquire
noncontrolling interests in 11 markets owned by U.S. Cellular and TDS. AirTouch
will issue approximately 5,000,000 shares of its common stock and pay
approximately $54.2 million in cash to U.S. Cellular and TDS in exchange for
these interests. Management expects that it will record a significant pretax
gain upon the completion of the sales transactions. The sales are expected to be
completed in the first half of 1998.

LIQUIDITY

The Company anticipates that the aggregate resources required for 1998 will
include approximately $545 million for capital spending, consisting of $330
million for cellular capital additions, $140 million for telephone capital
additions and $75 million for PCS capital additions. In addition, Aerial's
working capital and operating expenses will require an estimated $175 million.

U.S. Cellular plans to finance its construction program primarily with
internally generated cash supplemented by short-term financing. U.S. Cellular's
operating cash flow totaled $261.9 million in 1997 (approximately 82% of 1997
capital expenditures) up 33% ($65.7 million) from 1996. U.S. Cellular also
received $52.4 million in distributions from minority partnership interests and
$61.1 million from the proceeds of investment sales to supplement operating cash
flow. At December 31, 1997, U.S. Cellular had $500 million of bank lines of
credit for general corporate purposes, all of which was available.

TDS Telecom plans to finance its construction program using internally
generated cash supplemented by long-term financing from federal government
programs. Operating cash flow totaled $196.7 million in 1997 (approximately 130%
of 1997 capital expenditures) up 3% ($5.5 million) from 1996. At December 31,
1997, TDS Telecom telephone subsidiaries had $112.0 million in unadvanced loan
funds from federal government programs to finance the telephone construction
program. These loan commitments have a weighted average annual interest rate of
5.71%.

Aerial plans to finance its construction expenditures and working capital
requirements with borrowings under the TDS lines of credit and vendor financing.
Aerial issued 10-year 8.05% zero coupon notes for $100 million in February 1998
to finance digital radio channel and switching infrastructure equipment. The
$100 million proceeds from the sale were paid to Nokia in satisfaction of all
outstanding obligations and certain future obligations of Aerial under the Nokia
Credit Agreement.

TDS and its subsidiaries had cash and temporary investments totaling $75.6
million and longer-term investments totaling $32.6 million at December 31, 1997.
These investments are primarily the result of telephone operations' internally
generated cash. While certain regulated telephone subsidiaries' debt agreements
place limits on intercompany dividend payments, these restrictions are not
expected to affect the Company's ability to meet its cash obligations.

15
<PAGE>

TDS had $644 million of bank lines of credit for general corporate purposes
at December 31, 1997 of which $118 million was unused. These line of credit
agreements provide for borrowings at negotiated rates up to the prime rate.

In February 1998, TDS received net proceeds of $145 million on the sale of
6.0 million 8.04% Trust Originated Preferred Securities at $25 per Preferred
Security. The net proceeds were used to repay certain short-term indebtedness.

Subject to the approval of the Tracking Stock Proposal by shareholders, the
Company intends to, among other things, offer and sell Telecom Group Shares in a
public offering for cash, and allocate the net proceeds to the Telecom Group.
The Company intends to file with the SEC a registration statement on Form S-3
relating to the registration of between 10,000,000 and 17,000,000 Telecom Group
Shares. This offering is expected to commence promptly after the approval of the
Tracking Stock Proposal by shareholders, subject to prevailing market conditions
and other factors. Management estimates proceeds of approximately $150 million
from the offering which the Telecom Group would use to repay obligations to TDS,
and which TDS would use to repay certain short-term indebtedness.

Management believes that TDS's internal cash flows and funds available from
cash and cash equivalents, lines of credit, and longer-term financing
commitments provide sufficient financial flexibility. However, the timing and
amounts of capital expenditures and acquisitions as well as working capital
requirements and amounts needed for general corporate purposes may vary
throughout the year. There can be no assurance that sufficient funds will be
available to the Company on terms or at prices acceptable to the Company. If
sufficient funding is not made available to the Company on terms and prices
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. TDS and its subsidiaries anticipate
accessing public and private capital markets to issue debt and equity securities
only when capital requirements, financial market conditions and other factors
warrant.

TDS has assessed, and continues to assess, the impact of the Year 2000 Issue
on its reporting systems and operations. The Company believes that modifying its
reporting systems and operations is not a material event and is taking steps to
make its systems Year 2000 compliant. The Year 2000 Issue exists because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits would always be "19". Unless
corrected, this shortcut is expected to cause problems when the century date
occurs. On that date, some computer programs may recognize the date as January
1, 1900 instead of January 1, 2000. This may cause systems to incorrectly
process critical financial and operational information, or stop processing
altogether. The cost of addressing the Year 2000 Issue to date was not material
to the Company's results of operations or financial condition, and management
believes that the costs to be incurred in 1998 and 1999 will not be material to
future operating results or financial condition. If management's steps are not
successful in making the systems Year 2000 compliant, it could have a material
adverse effect on results of operations.

PROPOSED CORPORATE RESTRUCTURING

The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of TDS and of TDS's three principal
business groups ("Tracking Groups"), thereby enhancing shareholder value over
the long term, while at the same time enabling TDS's businesses to preserve the
benefits of being part of a consolidated enterprise. The Tracking Stock Proposal
is expected to:

- provide TDS with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups;

- enable TDS to more effectively tailor employee benefit plans to provide
incentives to employees of the Tracking Groups;

- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives;

16
<PAGE>

- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.

Pursuant to the Tracking Stock Proposal each issued Preferred Share, Common
Share and Series A Common Share of TDS would be converted into a new Preferred
Share, Common Share and Series A Common Share, respectively, of the new TDS
Delaware Corporation. In addition, the Tracking Stock Proposal would authorize
three new classes of common stock, to be designated as United States Cellular
Group Common Shares (the "Cellular Group Shares"), TDS Telecommunications Group
Common Shares (the "Telecom Group Shares") and Aerial Communications Group
Common Shares (the "Aerial Group Shares"). The Cellular Group Shares, when
issued, are intended to reflect the separate performance of the United States
Cellular Group (the "Cellular Group"), which consists of TDS's interest in
United States Cellular Corporation, a subsidiary of TDS operating and investing
in cellular telephone companies and properties ("U. S. Cellular"). The Telecom
Group Shares, when issued, are intended to reflect the separate performance of
the TDS Telecommunications Group (the "Telecom Group"), which primarily consists
of TDS's interest in TDS Telecommunications Corporation, a subsidiary of TDS
operating landline telephone companies ("TDS Telecom"). The Aerial Group Shares,
when issued, are intended to reflect the separate performance of the Aerial
Communications Group (the "Aerial Group"), which consists of TDS's interest in
Aerial Communications, Inc., a subsidiary of TDS providing broadband personal
communications services ("Aerial").

Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
intends to:

- issue Cellular Group Shares in exchange for all of the Common Shares of
U.S. Cellular which are not owned by TDS, subject to approval by the
board of directors and the shareholders of U.S. Cellular, (the "U.S.
Cellular Merger"),

The shares of Tracking Stock which would be issued in the Distribution
would represent an approximately 75% interest in the common equity value of
TDS in each Tracking Group (the "Outstanding Interest"). When considering the
shares of Tracking Stock which would also be issued in the Telecom Public
Offering, the U.S. Cellular Merger and the Aerial Merger, as well as the
Distribution, the Outstanding Interest would initially represent in the
aggregate an approximately 80% interest in each Tracking Group. Upon
completion of all of the Transactions as contemplated, approximately 20% of
the common shareholders' value of each Tracking Group would initially be
retained (the "Retained Interest") in a residual group (the "TDS Group"),
along with all other interests held by TDS.

17
<PAGE>

and Aerial Group, respectively, and does not anticipate paying dividends on the
Cellular Group or the Aerial Group Shares in the foreseeable future. Future
dividends on the shares of common stock will be payable when, as and if declared
by the Board out of the lesser of (1) all funds of TDS legally available
therefor and (2) the available dividend amount with respect to the relevant
Group.

Subject to the completion of the U.S. Cellular Merger and the Aerial Merger,
TDS intends to terminate certain intercompany agreements between TDS and U.S.
Cellular and Aerial, respectively. Thereafter, some or all of the policies
between TDS and such subsidiaries would be determined solely by methods that
management of TDS believes to be reasonable. Many of such policies would
continue the arrangements which presently exist between TDS and U.S. Cellular or
Aerial pursuant to the intercompany agreements, but TDS would have no
contractual obligation to continue such policies after the intercompany
agreements have been terminated.

If the Tracking Stock Proposal is approved by shareholders and implemented
by the Board, following the issuance of the Tracking Stocks, TDS will prepare
and file with the Securities and Exchange Commission consolidated financial
statements of TDS and financial statements of the Cellular Group, the Telecom
Group and the Aerial Group for so long as the respective Tracking Stock is
outstanding, and the TDS Group for as long as any Tracking Stock is outstanding.
Although the financial statements of the Cellular Group, the Telecom Group, the
Aerial Group, and the TDS Group will separately report the assets, liabilities
(including contingent liabilities) and shareholders' equity of TDS attributed to
the Cellular Group, the Telecom Group, the Aerial Group, and the TDS Group, such
attribution will not affect the legal title to such assets or responsibility for
such liabilities. Holders of the Cellular Group, the Telecom Group, and the
Aerial Group Common Shares will be, and holders of TDS Common Shares and Series
A Common Shares will continue to be, shareholders of TDS. TDS and its
subsidiaries will each continue to be responsible for their respective
liabilities.

LEGAL PROCEEDINGS. On December 29, 1997, a party, which claims to be a
holder of U.S. Cellular Common Shares, filed a putative class action complaint
on behalf of common stockholders of U.S. Cellular in the Court of Chancery of
the State of Delaware in New Castle County. The complaint names as defendants
TDS, U.S. Cellular, and the directors of U.S. Cellular. The complaint alleges a
breach of fiduciary duties by the defendants and seeks to have the U.S. Cellular
Merger enjoined or, if it is consummated, to have it rescinded and to recover
unspecified damages, fees and expenses. The defendants have been served with the
complaint in this case but have not yet responded to the complaint. The time for
the defendants to respond has been extended. The timing for a response will be
determined based on discussions between counsel for plaintiffs and defendants,
but a response is not expected to take place for at least one or more months. On
January 30, 1998, a virtually identical complaint has been filed by an
individual. None of the defendants have been served with this complaint. It is
expected that these cases will be consolidated.

18
<PAGE>

months. On February 6, 1998, a virtually identical complaint has been filed by a
second individual. None of the defendants have been served with this complaint.
It is expected that these cases will be consolidated.

The Company intends to vigorously defend against these lawsuits. However,
there can be no assurance that such lawsuits will not have a material adverse
effect on the Company or the transactions contemplated by the Proxy
Statement/Prospectus.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES AND THEREFORE,
ACTUAL RESULTS MAY DIFFER MATERIALLY. TDS UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.

IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN MARKETS IN WHICH TDS OPERATES; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY;
CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE
LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS OPERATIONS; AND
UNANTICIPATED CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION RATES, CHURN
RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN OUR MARKETS. READERS
SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS.

19
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
OPERATING REVENUES
Cellular...................................................................... $ 876,965 $ 680,068 $ 480,316
Telephone..................................................................... 444,203 395,602 354,841
PCS........................................................................... 55,952 -- --
Radio paging.................................................................. 94,413 104,187 107,150
------------- ------------- -------------
1,471,533 1,179,857 942,307
------------- ------------- -------------
OPERATING EXPENSES
Cellular...................................................................... 747,422 592,702 437,561
Telephone..................................................................... 345,590 292,894 256,601
PCS........................................................................... 252,503 -- --
Radio paging.................................................................. 129,720 140,813 116,147
------------- ------------- -------------
1,475,235 1,026,409 810,309
------------- ------------- -------------
OPERATING INCOME (LOSS)......................................................... (3,702) 153,448 131,998
------------- ------------- -------------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income.................................................. 13,660 15,569 13,024
Cellular investment income, net of license cost amortization.................. 77,620 54,799 40,666
Gain on sale of cellular interests and other investments...................... 41,438 138,735 86,625
PCS development costs......................................................... (21,614) (43,950) (7,829)
Other (expense) income, net................................................... (3,938) 2,727 (2,771)
Minority share of loss (income)............................................... 6,813 (26,690) (25,858)
------------- ------------- -------------
113,979 141,190 103,857
------------- ------------- -------------
INCOME BEFORE INTEREST AND INCOME TAXES......................................... 110,277 294,638 235,855
Interest expense................................................................ 89,744 42,853 50,848
Minority interest in income of subsidiary trust................................. 1,523 -- --
------------- ------------- -------------
INCOME BEFORE INCOME TAXES...................................................... 19,010 251,785 185,007
Income tax expense.............................................................. 28,559 123,646 81,029
------------- ------------- -------------
NET INCOME (LOSS)............................................................... (9,549) 128,139 103,978
Preferred Dividend Requirement.................................................. (1,892) (1,957) (2,509)
------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO COMMON........................................... $ (11,441) $ 126,182 $ 101,469
------------- ------------- -------------
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES (000S)........................................... 60,211 60,464 57,456
EARNINGS PER COMMON SHARE--BASIC................................................ $ (.19) $ 2.09 $ 1.77
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER COMMON SHARE--DILUTED.............................................. $ (.19) $ 2.07 $ 1.74
------------- ------------- -------------
------------- ------------- -------------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE.................................. $ .42 $ .40 $ .38
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

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

20
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................................. $ (9,549) $ 128,139 $ 103,978
Add (Deduct) adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization................................................... 301,556 231,075 191,504
Deferred taxes.................................................................. 17,236 75,015 19,603
Investment income............................................................... (83,395) (57,947) (43,188)
Minority share of income (loss)................................................. (6,813) 26,690 25,858
Gain on sale of cellular interests and other investments........................ (41,438) (138,735) (86,625)
Noncash interest expense........................................................ 24,289 17,042 12,761
Other noncash expense........................................................... 16,561 24,022 16,946
Change in accounts receivable................................................... (41,900) (28,687) (33,346)
Change in materials and supplies................................................ (25,827) (2,395) (2,999)
Change in accounts payable...................................................... 32,498 23,531 (11,630)
Change in accrued taxes......................................................... 7,612 (8,249) 6,252
Change in other assets and liabilities.......................................... 15,677 5,493 11,762
------------ ------------ ------------
206,507 294,994 210,876
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings....................................................... 260,099 15,846 334,323
Repayment of long-term debt..................................................... (121,958) (34,200) (30,734)
Change in notes payable......................................................... 368,858 (27,133) 80,351
Trust preferred securities...................................................... 144,788 -- --
Dividends paid.................................................................. (27,193) (26,231) (23,972)
Proceeds from the issuance of subsidiaries' stock............................... -- 195,265 --
Repurchase of Common Shares..................................................... (69,942) -- --
Other financing activities...................................................... (7,064) 1,349 9,506
------------ ------------ ------------
547,588 124,896 369,474
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................ (786,317) (550,204) (359,996)
Investments in cellular investment entities and license costs................... (20,084) (23,134) (25,025)
Distributions from investments.................................................. 56,413 25,453 9,062
Investments in PCS licenses..................................................... (5,034) (26,548) (326,035)
Proceeds from investment sales.................................................. 84,230 221,542 197,558
Acquisitions, net of cash acquired.............................................. (128,979) (31,019) (53,770)
Change in temporary investments and marketable securities....................... 36,422 (30,797) 11,871
Other investing activities...................................................... 2,629 (2,666) (3,632)
------------ ------------ ------------
(760,720) (417,373) (549,967)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............................. (6,625) 2,517 30,383
CASH AND CASH EQUIVALENTS
Beginning of period............................................................. 57,633 55,116 24,733
------------ ------------ ------------
End of period................................................................... $ 51,008 $ 57,633 $ 55,116
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

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

21
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS--ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................................................ $ 51,008 $ 57,633
Temporary investments............................................................................ 24,559 61,664
Construction funds............................................................................... 775 1,405
Accounts receivable
Due from customers, less allowance of $15,102 and $6,090, respectively......................... 148,811 97,093
Other, principally connecting companies........................................................ 98,487 84,119
Materials and supplies, at average cost.......................................................... 55,127 29,125
Other............................................................................................ 29,517 15,031
------------ ------------
408,284 346,070
------------ ------------
INVESTMENTS
Cellular license costs, net of amortization...................................................... 1,190,917 1,088,409
Cellular minority interests...................................................................... 138,367 206,390
Broadband PCS license acquisition costs, net of amortization..................................... 319,918 322,420
Franchise and other costs in excess of the underlying book value of subsidiaries, net of
amortization.................................................................................... 180,669 181,845
Other investments................................................................................ 142,713 144,840
------------ ------------
1,972,584 1,943,904
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Cellular
In service and under construction................................................................ 1,212,575 846,005
Less accumulated depreciation.................................................................... 272,322 195,251
------------ ------------
940,253 650,754
------------ ------------
Telephone
In service and under construction, substantially at original cost................................ 1,420,890 1,293,779
Less accumulated depreciation.................................................................... 590,123 524,418
------------ ------------
830,767 769,361
------------ ------------
PCS
In service and under construction................................................................ 642,122 324,703
Less accumulated depreciation.................................................................... 38,018 1,980
------------ ------------
604,104 322,723
------------ ------------
Radio Paging
In service and under construction................................................................ 118,275 113,000
Less accumulated depreciation.................................................................... 75,045 61,528
------------ ------------
43,230 51,472
------------ ------------
Other
In service and under construction................................................................ 96,809 82,781
Less accumulated depreciation.................................................................... 49,510 48,202
------------ ------------
47,299 34,579
------------ ------------
2,465,653 1,828,889
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES................................................................ 125,080 82,106
------------ ------------
$ 4,971,601 $ 4,200,969
------------ ------------
------------ ------------
</TABLE>

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

22
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred shares........................................... $ 16,115 $ 38,197
Notes payable.................................................................................... 527,587 160,537
Accounts payable................................................................................. 239,783 205,427
Advance billings and customer deposits........................................................... 33,640 32,434
Accrued interest................................................................................. 18,284 11,777
Accrued taxes.................................................................................... 6,961 3,194
Accrued compensation............................................................................. 23,386 10,279
PCS microwave relocation costs................................................................... 7,354 17,046
Other............................................................................................ 32,775 30,376
------------ ------------
905,885 509,267
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................................ 202,680 183,792
Postretirement benefits obligation other than pensions........................................... 11,364 11,451
Other............................................................................................ 21,602 19,663
------------ ------------
235,646 214,906
------------ ------------
LONG-TERM DEBT, excluding current portion........................................................ 1,264,218 982,232
------------ ------------
REDEEMABLE PREFERRED SHARES, excluding current portion........................................... 180 280
------------ ------------
MINORITY INTEREST in subsidiaries................................................................ 416,566 432,343
------------ ------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
COMPANY SUBORDINATED DEBENTURES (a)............................................................. 150,000 --
------------ ------------
NONREDEEMABLE PREFERRED SHARES................................................................... 30,987 29,000
------------ ------------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000 shares; issued and outstanding
54,443,260 and 54,237,180 shares, respectively.................................................. 54,443 54,237
Series A Common Shares, par value $1 per share; authorized 25,000,000 shares; issued and
outstanding 6,936,277 and 6,916,546 shares, respectively........................................ 6,936 6,917
Common Shares issuable, 10,480 and 30,977 shares, respectively................................... 499 1,461
Capital in excess of par value................................................................... 1,664,432 1,661,093
Treasury Shares, at cost, 794,576 shares......................................................... (30,682) --
Retained earnings................................................................................ 272,491 309,233
------------ ------------
1,968,119 2,032,941
------------ ------------
$ 4,971,601 $ 4,200,969
------------ ------------
------------ ------------
</TABLE>

- ---------

(a) As described in Note 9, the sole asset of TDS Capital I is $154.6 million
principal amount of 8.5% subordinated debentures due 2037 from TDS.

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

23
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES A COMMON CAPITAL IN
COMMON COMMON SHARES EXCESS OF TREASURY RETAINED
SHARES SHARES ISSUABLE PAR VALUE SHARES EARNINGS
--------- ----------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1994.......................... $ 47,938 $ 6,887 $ 1,995 $ 1,288,453 $ -- $ 127,765
Net Income.......................................... -- -- -- -- -- 103,978
Dividends
Common and Series A Common Shares................. -- -- -- -- -- (21,910)
Preferred Shares.................................. -- -- -- -- -- (2,507)
Acquisitions........................................ 2,948 -- -- 125,231 -- --
Dividend reinvestment, incentive and benefit
plans.............................................. 186 18 -- 6,994 -- --
Conversion of Preferred Shares...................... 43 -- -- (2,962) -- --
Conversion of Series A Common Shares................ 12 (12) -- -- -- --
Shares issued pursuant to acquisition agreements.... 10 -- (499) 489 -- --
Other............................................... -- -- -- (692) -- --
--------- ----------- --------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1995.......................... 51,137 6,893 1,496 1,417,513 -- 207,326
Net Income.......................................... -- -- -- -- -- 128,139
Dividends
Common and Series A Common Shares................. -- -- -- -- -- (24,274)
Preferred Shares.................................. -- -- -- -- -- (1,958)
Acquisitions........................................ 2,635 -- 464 110,648 -- --
Dividend reinvestment, incentive and benefit
plans.............................................. 100 27 -- 4,487 -- --
Conversion of Preferred Shares...................... 352 -- -- 4,422 -- --
Conversion of Series A Common Shares................ 3 (3) -- -- -- --
Shares issued pursuant to acquisition agreements.... 10 -- (499) 489 -- --
Gain on sale of subsidiary stock.................... -- -- -- 114,056 -- --
Other............................................... -- -- -- 9,478 -- --
--------- ----------- --------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1996.......................... 54,237 6,917 1,461 1,661,093 -- 309,233
Net (Loss).......................................... -- -- -- -- -- (9,549)
Dividends
Common and Series A Common Shares................. -- -- -- -- -- (25,300)
Preferred Shares.................................. -- -- -- -- -- (1,893)
Acquisitions........................................ -- -- -- 3,601 39,084 --
Repurchase Common Shares............................ -- -- -- -- (69,942) --
Dividend reinvestment, incentive and benefit
plans.............................................. 122 19 -- 4,707 176 --
Conversion of Preferred Shares...................... 68 -- -- 1,419 -- --
Shares issued pursuant to acquisition agreements.... 16 -- (723) 707 -- --
Other............................................... -- -- (239) (7,095) -- --
--------- ----------- --------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1997.......................... $ 54,443 $ 6,936 $ 499 $ 1,664,432 $ (30,682) $ 272,491
--------- ----------- --------- ------------ ---------- -----------
--------- ----------- --------- ------------ ---------- -----------
</TABLE>

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

24
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--PROPOSED CORPORATE RESTRUCTURING

The Board of Directors of Telephone and Data Systems, Inc. (the "Board")
has adopted a proposal which, if approved by shareholders and implemented by
the Board, would authorize the Board to issue three new classes of common
stock and change the state of incorporation of Telephone and Data Systems,
Inc. ("TDS" or "The Company") from Iowa to Delaware (the "Tracking Stock
Proposal"). The three new classes of stock are intended to separately reflect
the performance of the Company's cellular telephone, landline telephone and
personal communications services businesses ("Tracking Stocks").

The Tracking Stocks are intended to result in greater market recognition of
the value (individually and collectively) of the Company and of the Company's
three principal business groups ("Tracking Groups"), thereby enhancing
shareholder value over the long term, while at the same time enabling the
Company's businesses to preserve the benefits of being part of a consolidated
enterprise. The Tracking Stock Proposal is expected to:

- provide the Company with greater flexibility in raising capital and making
acquisitions, using equity securities specifically related to the Tracking
Groups,

- enable the Company to more effectively tailor employee benefit plans to
provide incentives to employees of the Tracking Groups,

- provide shareholders with the opportunity to invest in separate securities
that specifically reflect the underlying businesses, depending upon their
investment objectives, and

- permit shareholders to continue to invest in all of the TDS businesses
through the Common Shares and the Series A Common Shares.

The Cellular Group Shares, when issued, are intended to reflect the separate
performance of the Cellular Group, which consists of the Company's interest in
United States Cellular Corporation, a subsidiary of the Company. The Telecom
Group Shares, when issued, are intended to reflect the separate performance of
the Telecom Group, which primarily consists of the Company's interest in TDS
Telecommunications Corporation, a subsidiary of the Company. The Aerial Group
Shares, when issued, are intended to reflect the separate performance of the
Aerial Group, which consists of the Company's interest in Aerial Communications,
Inc., a subsidiary of the Company.

Subject to approval of the Tracking Stock Proposal by shareholders, the
Company intends to:

- issue Cellular Group Shares in exchange for all of the Common Shares of
U.S. Cellular which are not owned by the Company, subject to approval by
the board of directors and the shareholders of U.S. Cellular (the "U.S.
Cellular Merger"),

- issue Aerial Group Shares in exchange for all of the Common Shares of
Aerial which are not owned by the Company, subject to approval by the
board of directors and the shareholders of Aerial (the "Aerial Merger"),
and

It is currently expected that the Distribution would take place in July 1998
or later, after the completion of the Telecom Public Offering, the U.S. Cellular
Merger and the Aerial Merger.

The TDS Series A Common Shares and Common Shares will continue to be
outstanding and are intended to reflect the performance of the Cellular Group,
the Telecom Group and the Aerial Group to the extent of the Retained Interest in
the respective groups, and to reflect the performance of the other assets and
businesses attributed to the TDS Group.

Subject to the completion of the U.S. Cellular Merger and the Aerial
Merger, the Company intends to terminate certain intercompany agreements
between the Company and U.S. Cellular and Aerial, respectively. Thereafter,
some or all of the policies between the Company and such subsidiaries would
be determined solely by methods that management of the Company believes to be
reasonable. Many of such policies would continue the arrangements which
presently exist between the Company and U.S. Cellular or Aerial pursuant to
the intercompany agreements, but the Company would have no contractual
obligation to continue such policies after the intercompany agreements have
been terminated.

If the Tracking Stock Proposal is approved by the shareholders and
implemented by the Board, following the issuance of the Tracking Stocks, the
Company will prepare and file with the Securities and Exchange Commission,
consolidated financial statements of the Company and financial statements of
the Cellular Group, the Telecom Group and the Aerial Group for so long as the
respective Tracking Stock is outstanding and the TDS Group for as long as any
Tracking Stock is outstanding.

For additional information regarding the Tracking Stock Proposal, see
"Proposed Corporate Restructuring" in Management's Discussion and Analysis of
Results of Operations and Financial Condition.

25
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Telephone and Data Systems, Inc. is a diversified telecommunications
company which, at December 31, 1997, provided high-quality telecommunications
services to approximately 3.2 million cellular telephone, telephone, personal
communications services ("PCS") and radio paging customers in 37 states and
the District of Columbia. The Company conducts substantially all of its
cellular telephone operations through its currently 81.1%-owned subsidiary,
United States Cellular Corporation, its telephone operations through its
currently wholly owned subsidiary, TDS Telecommunications Corporation, its
PCS operations through its currently 82.5%-owned subsidiary, Aerial
Communicatons, Inc., and its radio paging operations through its currently
81.9%-owned subsidiary, American Paging, Inc. ("American Paging"). See Note
14--Business Segment Information for summary financial information on each
business segment.

The Company has an agreement with a nonaffiliated third party to contribute
assets and certain liabilities of American Paging to a newly formed company. See
Note 5--Acquisitions, Exchanges and Divestitures.

26
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PRINCIPLES OF CONSOLIDATION

The accounting policies of TDS conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of TDS,
its majority-owned subsidiaries since acquisition and the cellular partnerships
in which TDS has a majority general partnership interest. All material
intercompany items have been eliminated. Investments in entities in which the
Company does not have a controlling interest are generally accounted for using
the equity method.

TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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.

Certain amounts reported in prior years have been reclassified to conform to
current period presentation.

CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS

Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost. Those
investments with original maturities of more than 12 months are classified as
marketable securities and are stated at amortized cost.

The carrying amounts of Cash and Cash Equivalents and Temporary Investments
approximate fair value due to the short-term nature of these investments.

INVESTMENTS

Cellular license costs consist of costs incurred in acquiring Federal
Communications Commission ("FCC") licenses or minority interests which have been
awarded FCC licenses to provide cellular service. These costs include amounts
paid to license applicants and owners of interests in cellular entities awarded
licenses and all direct and incremental costs relating to acquiring the
licenses. These costs are capitalized and amortized through charges to expense
over 40 years upon commencement of operations. Amortization amounted to $29.8
million, $28.5 million and $27.8 million in 1997, 1996 and 1995, respectively.
Accumulated amortization of cellular license costs was $129.6 million and $112.2
million at December 31, 1997 and 1996, respectively. Included in cellular
license costs is approximately $281 million and $322 million at December 31,
1997 and 1996, respectively, of goodwill related to various acquisitions
structured to be tax-free.

Cellular minority interests consist of cellular entities in which TDS holds
a minority interest. The Company follows the equity method of accounting, which
recognizes TDS's proportionate share of the income and losses accruing to it
under the terms of its partnership or shareholder agreements where the Company's
ownership interest equals or exceeds 3% ($135.5 million and $196.0 million at
December 31, 1997 and 1996, respectively). Income and losses from these entities
are reflected in the consolidated income statements on a pretax basis. At
December 31, 1997, the cumulative share of income from minority cellular
investments accounted for under the equity method was $263.3 million, of which
$121.9 million was undistributed. The cost method of accounting is followed for
certain minority interests where the Company's ownership interest is less than
3% ($2.8 million and $10.4 million at December 31, 1997 and 1996, respectively).

Broadband PCS license costs consist of costs incurred in acquiring PCS
licenses ($284.9 million) and capitalized interest ($39.7 million). These costs
are amortized over 40 years upon commencement of operations. Amortization
amounted to $4.7 million in 1997. Accumulated amortization of Broadband PCS
license costs was $4.7 million at December 31, 1997.

27
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Franchise and other costs include the costs in excess of the underlying book
value of acquired telephone companies. Costs aggregating $209.1 million and
$205.1 million at December 31, 1997 and 1996, respectively, relating to
acquisitions since November 1, 1970, are being amortized on a straight-line
basis over a 40-year period. Amortization amounted to $5.2 million, $4.9 million
and $4.4 million in 1997, 1996 and 1995, respectively. Accumulated amortization
of excess cost was $34.9 million and $29.6 million at December 31, 1997 and
1996, respectively. Costs in excess of the underlying book value relating to
acquisitions initiated before November 1, 1970, aggregating $6.5 million, are
not being amortized. Included in franchise and other costs is approximately $135
million and $143 million at December 31, 1997 and 1996, respectively, of
goodwill related to various acquisitions structured to be tax-free.

Other investments consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Narrowband PCS license costs........................................................................ $ 60,304 $ 60,304
Minority investments................................................................................ 25,073 23,633
Long-term notes receivable.......................................................................... 10,691 14,974
Rural Telephone Bank Stock, at cost................................................................. 7,175 6,639
Marketable equity securities........................................................................ 1,621 2,673
Marketable non-equity securities.................................................................... 31,024 29,735
Other............................................................................................... 6,825 6,882
----------- -----------
$ 142,713 $ 144,840
----------- -----------
----------- -----------
</TABLE>

At December 31, 1997, the cumulative share of income from minority
investments accounted for under the equity method was $6.3 million, of which
$3.9 million was undistributed.

The Company's investment in debt securities with original maturities of more
than 12 months are classified as marketable non-equity securities and
held-to-maturity. They are stated at amortized cost.

Information regarding the Company's marketable non-equity securities is
summarized below.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Held-to-Maturity
U.S. Treasury and other U.S. government corporations and agencies
Aggregate Fair Value
Current.......................................................................................... $ 10,025 $ 46,622
Noncurrent....................................................................................... 31,921 29,882
Amortized Cost Basis
Current.......................................................................................... 10,529 46,603
Noncurrent....................................................................................... 31,024 29,735
Gross Unrealized Holding Gains..................................................................... 393 174
Gross Unrealized Holding Losses.................................................................... $ -- $ 8
</TABLE>

The noncurrent investments have contractual maturities of more than one to
five years at December 31, 1997 and 1996. No sales or transfers of securities
classified as held-to-maturity occurred during 1997 and 1996.

IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 1996, the Company implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under SFAS No. 121, the Company is required to review long-lived assets and
certain identifiable

28
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

intangibles for impairment whenever events or changes in circumstances indicate
that the book value of a long-lived asset is not recoverable. An impairment loss
would be recognized whenever the review demonstrates that the book value of a
long-lived asset is not recoverable. The implementation of SFAS No. 121 did not
have an impact on the Company's financial position or results of operations.

REVENUE RECOGNITION

TDS's revenues are recognized when earned. TDS's telephone subsidiaries
participate in revenue pools with other telephone companies for interstate
revenue and for certain intrastate revenue. Such pools are funded by toll
revenue and/or access charges within state jurisdiction and by access charges in
the interstate market. Revenues earned through the various pooling processes are
initially recorded based on the Company's estimates.

ADVERTISING COSTS

The Company expenses advertising costs as incurred.

EARNINGS PER COMMON SHARE

The Company adopted SFAS No. 128, "Earnings per Share," effective December
31, 1997. Earnings per Common Share amounts for 1996 and 1995 have been restated
to conform to current period presentation. The effect of this accounting change
was to increase Earnings per Common Share--Basic by $.01 and $.03 in 1996 and
1995, respectively. The adoption of SFAS No. 128 had no effect on Earnings per
Common Share--Diluted.

The amounts used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common Shares of
dilutive potential common stock are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ----------- -----------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C>
Net Income (Loss)...................................................................... $ (9,549) $ 128,139 $ 103,978
Less: Preferred Dividends.............................................................. (1,892) (1,957) (2,509)
---------- ----------- -----------
Net Income (Loss) Available to Common used in Earnings per Share-- Basic............... (11,441) 126,182 101,469
Reduction in preferred dividends if Preferred Shares converted into Common Shares...... -- 671 998
Minority Income Adjustment............................................................. (100) (152) (271)
---------- ----------- -----------
Net Income (Loss) Available to Common used in Earnings per Share-- Diluted............. $ (11,541) $ 126,701 $ 102,196
---------- ----------- -----------
---------- ----------- -----------
Weighted Average Number of Common Shares used in Earnings per Share--Basic............. 60,211 60,464 57,456
Effect of Dilutive Securities:
Common Shares outstanding if Preferred Shares converted.............................. -- 543 1,033
Stock Options and Stock Appreciation Rights.......................................... -- 165 159
Common Shares issuable............................................................... -- 28 33
---------- ----------- -----------
Weighted Average Number of Common Shares used in Earnings per Share--Diluted........... 60,211 61,200 58,681
---------- ----------- -----------
---------- ----------- -----------
</TABLE>

For 1997, Preferred Shares convertible into 917,000 Common Shares, 130,000
stock options and stock appreciation rights and 15,000 Common Shares issuable in
the future were not included in computing diluted Earnings per Common Share
because their effects were antidilutive. For 1996 and 1995, Preferred Shares
convertible into 428,000 and 477,000 Common Shares, respectively, were not
included in computing diluted Earnings per Common Share because their effects
were antidilutive.

29
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The minority income adjustment reflects the additional minority share of
U.S. Cellular's income computed as if all of U.S. Cellular's issuable securities
were outstanding.

SUPPLEMENTAL CASH FLOW DISCLOSURES

Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and certain noncash transactions.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid............................................................................ $ 70,741 $ 52,835 $ 49,475
Income taxes paid........................................................................ 10,743 67,967 60,515
Common Shares issued for conversion of Preferred Shares.................................. 1,487 4,602 948
Increase in PCS network equipment and prepaid infrastructure costs through the issuance
of long-term debt and interim financing................................................ 84,335 100,000 --
Additions to property, plant and equipment financed through accounts payable and accrued
expenses............................................................................... $ 46,104 $ 87,109 $ 3,943
</TABLE>

TDS has acquired operating telephone companies, certain cellular licenses
and operating companies and certain other assets since January 1, 1995. In
conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment.......................................................... $ 120,365 $ 55,692 $ 56,132
Cellular licenses...................................................................... 137,409 95,447 129,510
(Decrease) increase in investment in cellular minority interests....................... (89,205) (3,641) 977
Franchise and other costs.............................................................. 2,452 17,679 25,657
Long-term debt......................................................................... (4,857) (22,979) (9,254)
Deferred credits....................................................................... 1,104 (6,205) (538)
Other assets and liabilities, excluding cash and cash equivalents...................... 7,396 8,188 (8,084)
Common Shares issued and issuable...................................................... (42,685) (113,128) (127,836)
Preferred Shares issued................................................................ (3,000) -- --
U.S. Cellular Common Shares issued and issuable........................................ -- (34) (12,794)
----------- ----------- -----------
Decrease in cash due to acquisitions................................................... $ 128,979 $ 31,019 $ 53,770
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

30
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INCOME TAXES

TDS files a consolidated federal income tax return. Income tax provisions
charged to net income are summarized as follows:

Investment tax credits resulting from investments in telephone plant and
equipment have been deferred and are being amortized over the service lives of
the related property.

A reconciliation of income tax expense and the amount computed by applying
the statutory federal income tax rate (35%) to income before income taxes is as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal income tax rate........................................................ $ 6,653 $ 88,125 $ 64,752
State income taxes, net of federal benefit............................................... 6,958 17,358 12,067
Amortization of license acquisition costs and costs in excess of book value.............. 5,276 4,280 4,440
Dividend exclusion and other permanent items............................................. 752 377 (250)
Amortization of deferred investment tax credits.......................................... (519) (2,014) (1,850)
Effects of corporations not included in consolidated federal tax return.................. 1,409 2,351 2,035
Sale of cellular interests............................................................... 5,549 12,337 --
Rate difference of federal net operating loss............................................ 1,246 -- --
Regulatory adjustment.................................................................... 101 624 595
Deferred investment tax credit........................................................... 399 365 197
Other differences, net................................................................... 735 (157) (957)
---------- ----------- ---------
Income tax expense....................................................................... $ 28,559 $ 123,646 $ 81,029
---------- ----------- ---------
---------- ----------- ---------
</TABLE>

Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax bases.

The Company's current net deferred tax assets totaled $3.7 million and $2.7
million as of December 31, 1997 and 1996, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of unearned revenues.

31
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--INCOME TAXES (CONTINUED)

The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset:
Net operating loss carryforwards.................................................................. $ 55,363 $ 17,055
Taxes on acquisitions............................................................................. 54,134 --
Alternative minimum tax credit carryforward....................................................... 21,205 10,433
Postretirement benefits........................................................................... 4,819 4,819
Amortization of deferred charges.................................................................. 1,614 10,990
Other............................................................................................. 3,511 4,069
----------- -----------
140,646 47,366
Less valuation allowance............................................................................ (29,001) (16,891)
----------- -----------
Net Deferred Tax Asset............................................................................ 111,645 30,475
----------- -----------
Deferred Tax Liability:
Property, plant and equipment..................................................................... 134,672 86,056
Investment in equity securities................................................................... 64,603 40,540
Licenses.......................................................................................... 55,756 38,656
Partnership investments........................................................................... 25,687 26,965
Capitalized interest.............................................................................. 18,721 17,810
Other............................................................................................. 14,886 4,240
----------- -----------
Total Deferred Tax Liability........................................................................ 314,325 214,267
----------- -----------
Net Deferred Income Tax Liability................................................................. $ 202,680 $ 183,792
----------- -----------
----------- -----------
</TABLE>

At December 31, 1997, TDS had $21.2 million of federal alternative minimum
tax credit carryforward available to offset regular income tax payable in future
years. TDS had $60.5 million of federal net operating loss carryforward
(generating a $19.9 million deferred tax asset) at December 31, 1997, expiring
in 2012 which is available to offset future consolidated taxable income. In
addition, TDS had $496.7 million of state net operating loss carryforward
(generating a $35.5 million deferred tax asset) at December 31, 1997, expiring
between 1997 and 2012 which is available to offset future taxable income
primarily of the individual subsidiaries which generated the loss. A valuation
allowance was established for the state operating loss carryforwards since it is
more likely than not that a portion will expire before such carryforwards can be
utilized.

NOTE 4--PROPERTY PLANT AND EQUIPMENT

CELLULAR

Cellular property, plant and equipment is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. The provision for depreciation as a percentage of depreciable property,
plant and equipment was 10.3%, 10.4% and 10.0% in 1997, 1996 and 1995,
respectively.

32
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)

Cellular property, plant and equipment in service and under construction
consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating plant and equipment..................................................................... $ 923,480 $ 641,600
Buildings and leasehold improvements.............................................................. 136,023 86,533
Office furniture, equipment and vehicles.......................................................... 89,987 71,674
Land.............................................................................................. 63,085 46,198
------------- -----------
$ 1,212,575 $ 846,005
------------- -----------
------------- -----------
</TABLE>

TELEPHONE

Telephone property, plant and equipment is stated at the original cost of
construction including the capitalized costs of certain taxes, payroll-related
expenses, and an allowance for funds used during construction ("AFUDC"). AFUDC,
a noncash item of nonoperating income, totaled $686,000, $825,000 and $682,000
in 1997, 1996 and 1995, respectively. The composite weighted average rates were
5.5%, 7.3% and 9.3% in 1997, 1996 and 1995, respectively. The amount of such
allowance has varied principally as a result of changes in the level of
construction work in process and in the cost of capital.

Renewals and betterments of units of property are added to telephone plant
in service. The original cost of depreciable property retired is removed from
plant in service and, together with removal cost less any salvage realized, is
charged to accumulated depreciation. Repairs and renewals of minor items of
property are included in plant operations expense. No gain or loss is recognized
on ordinary retirements of depreciable telephone property.

Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Composite depreciation rates, as applied to the
average cost of depreciable property were 7.4%, 7.2% and 7.1% in 1997, 1996 and
1995, respectively.

Telephone property, plant and equipment in service and under construction
consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and buildings.............................................................................. $ 67,203 $ 67,181
Central office equipment........................................................................ 399,016 372,008
Cable and wire.................................................................................. 719,945 639,537
Furniture and office equipment.................................................................. 112,921 77,046
Vehicles and other equipment.................................................................... 42,632 39,928
Plant under construction........................................................................ 52,677 59,213
Non-regulated investments and other............................................................. 26,496 38,866
------------- -------------
$ 1,420,890 $ 1,293,779
------------- -------------
------------- -------------
</TABLE>

The Company's telephone operations follow accounting for regulated
enterprises prescribed by SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation." Management periodically reviews the criteria for applying
these provisions to determine whether continuing application of SFAS No. 71 is
appropriate. Management believes that such criteria are still being met and
therefore has no current plans to change its method of accounting.

In analyzing the effect of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore, any adjustments to
telecommunications plant would be immaterial, as would be the write-off of
regulatory assets and liabilities.

33
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)

PCS

PCS property, plant and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets. The provision for depreciation as a percentage of depreciable
property, plant and equipment was 10.9%, 20.2% and 2.2% in 1997, 1996 and 1995,
respectively.

PCS property, plant and equipment in service and under construction consists
of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Network............................................................................................. $ 514,525 $ --
Information systems................................................................................. 83,950 15,951
Office equipment.................................................................................... 15,800 3,180
Leasehold improvements and other.................................................................... 8,466 1,442
Work in process..................................................................................... 19,381 233,830
Prepaid network infrastructure costs................................................................ -- 70,300
----------- -----------
$ 642,122 $ 324,703
----------- -----------
----------- -----------
</TABLE>

Work in process includes expenditures for the design, construction and
testing of the Company's PCS networks as well as the cost to relocate dedicated
private microwave links currently operating in the Company's spectrum in its PCS
markets. Work in process also includes the costs associated with developing
information systems. The Company capitalized interest on certain of its work in
process expenditures totaling $6.0 million and $1.2 million in 1997 and 1996,
respectively. When assets are placed in service, the Company transfers the
assets to the appropriate property and equipment category.

Prepaid network infrastructure costs include the excess of the proceeds from
the sale of notes over the Company's current obligations (i.e. financed
purchases under a Credit Agreement with Nokia Telecomunications, Inc.) to Nokia.
The Company paid Nokia for a portion of 1997 equipment purchases by reducing the
amount of the prepaid balance by the cost of the equipment purchased. Nokia paid
the Company monthly interest on the unused portion of the note proceeds.

RADIO PAGING

Radio Paging property, plant and equipment is stated at original cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. The provision for depreciation as a percentage of
depreciable property, plant and equipment was 24.6%, 27.9% and 22.1% in 1997,
1996 and 1995, respectively.

Radio Paging property, plant and equipment in service and under construction
consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Subscriber devices.................................................................................. $ 41,059 $ 39,714
Terminals and transmitters.......................................................................... 48,181 44,251
Computer equipment.................................................................................. 16,402 16,595
Furniture and fixtures.............................................................................. 10,515 10,314
Other............................................................................................... 2,118 2,126
----------- -----------
$ 118,275 $ 113,000
----------- -----------
----------- -----------
</TABLE>

34
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--PROPERTY PLANT AND EQUIPMENT (CONTINUED)

OTHER

Other property, plant and equipment is stated at original cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
assets. The provision for depreciation as a percentage of depreciable property,
plant and equipment was 12.3%, 15.9% and 10.0% in 1997, 1996 and 1995,
respectively.

Other property, plant and equipment in service and under construction
consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Computer equipment..................................................................................... $ 54,062 $ 42,682
Furniture and fixtures................................................................................. 18,710 15,772
Cable, printing and other equipment.................................................................... 12,138 11,737
Work in progress....................................................................................... 11,899 5,055
Capital leases......................................................................................... -- 7,535
--------- ---------
$ 96,809 $ 82,781
--------- ---------
--------- ---------
</TABLE>

Certain costs relating to the development of computer software for internal
use are capitalized and are amortized over the estimated five-year life of the
software.

NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES

During 1997, 1996 and 1995, TDS and its subsidiaries completed the following
business combinations:

<TABLE>
<CAPTION>
CONSIDERATION
-----------------------------
TDS AND USM
COMMON STOCK,
AND TDS
CASH PREFERRED SHARES
----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Acquisitions During 1997
Cellular interests........................................................................... $ 128,828 $ 32,486
Telephone interests.......................................................................... 151 13,200
Acquisitions During 1996
Cellular interests........................................................................... $ 13,596 $ 42,499
Telephone interests.......................................................................... 17,423 70,663
Acquisitions During 1995
Cellular interests........................................................................... $ 41,885 $ 94,542
Telephone interests.......................................................................... 250 46,087
Paging interests............................................................................. 5,656 --
----------- --------
</TABLE>

Assuming that these acquisitions had taken place on January 1, 1996,
unaudited pro forma results of operations from continuing operations would have
been as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Operating Revenues.............................................................................. $ 1,576,361 $ 1,277,309
Net Income...................................................................................... 11,680 142,078
Earnings per Common Share--Basic................................................................ .19 2.29
Earnings per Common Share--Diluted.............................................................. $ .19 $ 2.27
------------- -------------
</TABLE>

35
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)

EXCHANGE OF MARKETS WITH BELLSOUTH

In October 1997, U.S. Cellular completed an exchange with BellSouth
Corporation. Pursuant to the exchange, U.S. Cellular received majority interests
representing approximately 4.0 million population equivalents in exchange for
majority interests representing 2.0 million population equivalents, minority
interests representing 1.2 million population equivalents and a net amount of
$86.7 million in cash. The majority interests U.S. Cellular received are in 12
markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.

SALES OF CELLULAR AND OTHER INVESTMENTS

The $41.4 million gain in 1997 reflects the sales of non-strategic cellular
and other investments. U.S. Cellular sold its majority interests in one market
and one market partition, minority interests in two other markets and received
cash from the settlement of a legal matter. These sales, along with the sales of
certain other investments by TDS, generated net cash proceeds of $84.2 million.

The $138.7 million gain in 1996 reflects the sales of non-strategic cellular
and other investments. U.S. Cellular sold its majority interests in eight
markets and minority interests in two other markets, received cash from the
settlement of two separate legal matters and received cash in an exchange of
markets with another cellular operator. Aerial sold its majority interests in
two markets. These transactions, along with the sales of certain other
investments by TDS, generated net cash proceeds of $221.5 million.

The $86.6 million gain in 1995 reflects the sales and exchanges of
non-strategic cellular and other investments. U.S. Cellular sold its majority
interests in six markets and its minority interests in six markets during 1995.
These sales, along with the sales of marketable equity securities and certain
other investments by TDS, generated net cash proceeds of $197.6 million.

PENDING SALES OF MINORITY INTERESTS

In December 1997, the Company announced that AirTouch Communications, Inc.
("AirTouch") will acquire interests owned by U.S. Cellular and TDS in cellular
systems in 11 markets. AirTouch will issue approximately 5,000,000 shares of its
common stock and pay approximately $54.2 million in cash to U.S. Cellular and
TDS in exchange for these interests, which represent approximately 900,000
population equivalents. U.S. Cellular has also entered into an agreement to sell
its minority interests in two other markets for $37.6 million in cash.
Management expects that it will record a significant pretax gain upon the
completion of the sales transaction. The sales are expected to be completed in
the first half of 1998.

AMERICAN PAGING MERGER

In December 1997, the Company announced an agreement with TSR Paging, Inc.
("TSR") to combine their respective paging businesses. On February 10, 1998, the
board of directors of American Paging approved a merger agreement providing for
the acquisition by TDS of all of the issued and outstanding shares of American
Paging not owned by TDS for cash in an amount equal to $2.50 per share,
approximately $9.1 million in total. Upon consummation of the merger, TDS will
contribute substantially all of the assets and certain, limited liabilities of
American Paging, and TSR will contribute all of its assets and liabilities to a
new limited liability company. The asset contribution agreement provides that,
subject to adjustment, TDS will have a 30% interest and TSR will have a 70%
interest in the new company. The formation of the new company, while subject to
a number of conditions, including consummation of the merger and regulatory
approvals, is expected to occur in the first half of 1998. TDS will adopt the
equity method of accounting for its investment in the new company. TDS will not
have any funding requirements once the combination is completed.

36
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)

The following table summarizes the assets and liabilities which TDS would
contribute to the new company.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current assets
Cash.................................................................................................. $ 3,058
Temporary investments................................................................................. 61
Accounts receivable................................................................................... 9,051
Inventory............................................................................................. 6,851
Other................................................................................................. 1,076
Property, plant and equipment, net...................................................................... 41,762
Narrowband PCS license.................................................................................. 60,901
Other investments....................................................................................... 429
Deferred assets......................................................................................... 10,959
Current liabilities
Accounts payable...................................................................................... (942)
Advance billings and customer deposits................................................................ (6,827)
Accrued taxes......................................................................................... (42)
----------
$ 126,337
----------
----------
</TABLE>

NOTE 6--NOTES PAYABLE

TDS has used short-term debt to finance its investments in PCS and radio
paging operations, for acquisitions and for general corporate purposes.
Long-term debt and equity financing from time to time, including sales of debt
and equity securities by subsidiaries, have reduced such short-term debt.
Proceeds from the issuance of long-term debt and equity securities retired
$241.4 million, $131.2 million and $131.4 million of short-term debt in 1997,
1996 and 1995, respectively. Proceeds from the sales of non-strategic cellular
and other investments from time to time in 1997, 1996 and 1995 have also been
used to retire short-term debt.

TDS had $644.2 million of bank lines of credit for general corporate
purposes at December 31, 1997, all of which were committed. Unused amounts of
such lines totaled $117.9 million, all of which were committed. These line of
credit agreements provide for borrowings at negotiated rates up to the prime
rate.

U.S. Cellular had $500.0 million of bank lines of credit for general
corporate purposes as of December 31, 1997, all of which were unused. These line
of credit agreements provide for borrowings at the London InterBank Offered Rate
("LIBOR") plus 26.5 basis points, due quarterly.

The carrying amount of short-term debt approximates fair value due to the
short-term nature of these instruments.

Information concerning notes payable is shown in the table below:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at end of period......................................................... $ 527,587 $ 160,537 $ 184,320
Weighted average interest rate at end of period.................................. 6.3% 6.0% 6.3%
Maximum amount outstanding during the period..................................... $ 587,683 $ 204,140 $ 184,320
Average amount outstanding during the period (1)................................. $ 407,965 $ 112,341 $ 139,671
Weighted average interest rate during the period (1)............................. 6.1% 5.8% 6.4%
----------- ----------- -----------
</TABLE>

- ---------

(1) The average was computed based on month-end balances.

37
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT

Long-term debt is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Telephone and Data Systems, Inc. (Parent)
Medium-term notes, 8% to 10%, due through 2025................................................ $ 239,200 $ 239,200
Purchase contracts and other long-term notes, 9% to 14%, due through 2003..................... 2,440 3,175
------------- -------------
Total Parent................................................................................ 241,640 242,375
------------- -------------
Subsidiaries
RUS, RTB and FFB Mortgage Notes, due through 2031, various rates averaging 5.5% in 1997, 5.4%
in 1996 and 5.4% in 1995.................................................................... 313,012 308,371
------------- -------------
6% zero coupon convertible redeemable debentures, maturing in 2015............................ 745,000 745,000
Unamortized discount.......................................................................... (479,670) (494,893)
------------- -------------
265,330 250,107
------------- -------------
7.25% notes, maturing in 2007................................................................. 250,000 --
------------- -------------
Vendor financing, approximating 90-day Commercial Paper Rate plus 1.4% due through 2002....... -- 103,654
------------- -------------
8.34% zero coupon notes, maturing in 2006..................................................... 226,245 226,245
Unamortized discount.......................................................................... (114,161) (122,502)
------------- -------------
112,084 103,743
------------- -------------
Interim vendor financing...................................................................... 84,355 --
------------- -------------
Other long-term notes, 0% to 12.6%, due through 2009.......................................... 12,613 10,601
------------- -------------
Total Subsidiaries.......................................................................... 1,037,394 776,476
------------- -------------
Total long-term debt............................................................................ 1,279,034 1,018,851
------------- -------------
Less current portion.......................................................................... 14,816 36,619
------------- -------------
Total long-term debt............................................................................ $ 1,264,218 $ 982,232
------------- -------------
------------- -------------
</TABLE>

The Medium-Term Notes ("MTNs") carry original maturities of 12 to 30 years,
maturing at various times from 2003 to 2025. The MTNs may be redeemed by the
Company at par value beginning in 1999.

The RUS, RTB and FFB Mortgage Notes issued under certain loan agreements
with the Rural Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and
Federal Financing Bank ("FFB"), agencies of the United States of America, are to
be repaid in equal monthly or quarterly installments covering principal and
interest beginning six months to three years after dates of issue and expiring
through 2031. Substantially all telephone plant is pledged under RUS and RTB
mortgage notes and various other obligations of the telephone subsidiaries.

U.S. Cellular sold $745 million principal amount at maturity of 20-year zero
coupon 6% yield to maturity convertible redeemable debt in June 1995 with
proceeds to the Company of $221.5 million. The unsecured notes are due in 2015
and there is no periodic payment of interest. The notes are convertible at any
time into 9.475 U.S. Cellular Common Shares per $1,000 of notes. Beginning in
2000, U.S. Cellular may redeem, or the holder may call, the notes at the issue
price plus accrued interest.

U.S. Cellular sold $250 million principal amount of 7.25% unsecured senior
notes in 1997 with proceeds to the Company of $247.0 million. The notes are due
2007 and interest is payable semi-annually. Beginning 2004, U.S. Cellular may
redeem the notes at principal amount plus accrued interest. U.S. Cellular used a
portion of the net proceeds to repay the outstanding vendor financing balance.

38
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--LONG-TERM DEBT (CONTINUED)

U.S. Cellular had financing arrangements with an equipment vendor for
cellular system equipment and construction costs. The borrowings were
collateralized by a secured interest in some or all of the assets of U.S.
Cellular's operating subsidiaries. Borrowings had terms of seven years at an
interest rate of 1.4% over the 90-day Commercial Paper Rate (for a rate of 7.03%
at December 31, 1996).

Aerial sold $226 million principal amount at maturity of 10-year zero coupon
8.34% yield to maturity debt in 1996 at an issue price of $100 million. The
unsecured notes are due in 2006 and there is no periodic payment of interest.
The proceeds were paid to Aerial's equipment vendor in satisfaction of all then
outstanding and future obligations up to $100 million. The notes are fully and
unconditionally guaranteed by TDS. The notes are subject to optional redemption
beginning in 2001 at redemption prices which reflect original issue discount
accrued since issuance.

The annual requirements for principal payments on long-term debt are
approximately $14.8 million, $15.8 million, $15.6 million, $15.3 million and
$15.2 million for the years 1998 through 2002, respectively.

The carrying value and estimated fair value of the Company's Long-term Debt
were approximately equal at December 31, 1997 and 1996, respectively. The fair
value of the Company's long-term debt was estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.

NOTE 8--MINORITY INTEREST IN SUBSIDIARIES

The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Cellular
U.S. Cellular shareholders'....................................................................... $ 305,478 $ 285,835
U.S. Cellular subsidiaries' partners'............................................................. 53,908 48,715
----------- -----------
359,386 334,550

Aerial shareholders'................................................................................ 33,692 75,897
TDS Telecom telephone subsidiaries'................................................................. 23,293 21,810
Other............................................................................................... 195 86
----------- -----------
$ 416,566 $ 432,343
----------- -----------
----------- -----------
</TABLE>

SALE OF STOCK BY SUBSIDIARIES

Aerial issued 12.3 million Common Shares in 1996 in an initial public
offering (at a price of $17 per share). The initial public offering reduced
TDS's ownership percentage from 100% to 82.8%. The Aerial Common Share offering
was recorded at a fair market value which was more than TDS's book value
investment in Aerial. TDS adjusted its book value investment as a result of this
issue and increased capital in excess of par value $114.1 million in 1996.

NOTE 9--COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES

In November 1997, TDS Capital I, a subsidiary trust (the "Trust") of TDS,
issued 6,000,000 of its 8.5% Company-Obligated Mandatorily Redeemable Preferred
Securities (the "Preferred Securities") at $25 per Preferred Security. Net
proceeds from the issuance totaled $144.8 million and were used to retire
short-term debt.

39
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES
(CONTINUED)

Preferred Securities issued by the Trust. However, TDS's obligations are
subordinate and junior in right of payment to certain other indebtedness of TDS.
TDS has the right to defer payments of interest on the Subordinated Debentures
by extending the interest payment period, at any time, for up to 20 consecutive
quarters. If interest payments on the Subordinated Debentures are so deferred,
distributions on the Preferred Securities will also be deferred. During any
deferral, distributions will continue to accrue with interest thereon. In
addition, during any such deferral, TDS may not declare or pay any dividend or
other distribution on, or redeem or purchase, any of its common stock.

The Subordinated Debentures are redeemable by TDS, in whole or in part, from
time to time, on or after November 18, 2002, or, in whole but not in part, at
any time in the event of certain income tax circumstances. If the Subordinated
Debentures are redeemed, the Trust must redeem Preferred Securities on a pro
rata basis having an aggregate liquidation amount equal to the aggregate
principal amount of the Subordinated Debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trust, the holders of Preferred
Securities will be entitled to receive, for each Preferred Security, a
liquidation amount of $25 plus accrued and unpaid distributions thereon to the
date of payment, unless, in connection with the dissolution, winding up or
termination, Subordinated Debentures are distributed to the holders of the
preferred securities.

NOTE 10--PREFERRED SHARES

TDS Cumulative Voting Preferred Shares have a stated value of $100 per
share. The 5,000,000 authorized Preferred Shares are issuable in series by the
Board of Directors who establish the terms of the issue. Those issues which
contain mandatory redemption features or which are redeemable at the option of
the holder are classified as Redeemable Preferred Shares. Those issues which are
not redeemable or which are redeemable at the option of TDS are classified as
Nonredeemable Preferred Shares.

REDEEMABLE PREFERRED SHARES

Redeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares with mandatory redemption features or which are
redeemable at the option of the holder. At December 31, 1997, 14,794 shares of
Redeemable Preferred Shares were outstanding, redeemable at $100 per share.

The annual requirements for redemption of Redeemable Preferred Shares are
$1,299,100, $103,000 and $77,300 for the years 1998 through 2000, respectively.

40
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--PREFERRED SHARES (CONTINUED)

The following is a schedule of the Redeemable Preferred Shares' activity.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................................................................ $ 1,858 $ 15,093 $ 25,001
Add:
Stock dividends........................................................................... -- 113 546
Less:
Redemption of preferred................................................................... (359) (9,456) (9,608)
Conversion of preferred................................................................... -- (3,872) --
Expiration of redemption feature.......................................................... (20) (20) (839)
Change in redemption feature.............................................................. -- -- (7)
--------- --------- ---------
1,479 1,858 15,093
Less current portion........................................................................ 1,299 1,578 13,506
--------- --------- ---------
Balance, end of period...................................................................... $ 180 $ 280 $ 1,587
--------- --------- ---------
--------- --------- ---------
</TABLE>

NONREDEEMABLE PREFERRED SHARES

Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. At December
31, 1997, 309,873 shares of Nonredeemable Preferred Shares were outstanding.
Outstanding Nonredeemable Preferred Shares are generally redeemable at the
option of TDS at $100 per share, plus accrued and unpaid dividends. At December
31, 1997, certain series of Preferred Shares are convertible into TDS Common
Shares. (See Note 11--Convertible Preferred Shares)

The following is a schedule of the Nonredeemable Preferred Shares activity.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period............................................................... $ 29,000 $ 29,710 $ 29,819
Add:
Acquisition.............................................................................. 3,000 -- --
Reclassification from Redeemable Preferred Shares........................................ 20 20 839
Less:
Conversion of preferred.................................................................. (1,031) (730) (948)
Redemption of preferred.................................................................. (2) -- --
--------- --------- ---------
Balance, end of period..................................................................... $ 30,987 $ 29,000 $ 29,710
--------- --------- ---------
--------- --------- ---------
</TABLE>

NOTE 11--COMMON STOCK

COMMON STOCK ACQUISITIONS

During 1997, 1996 and 1995, TDS issued 998,783, 2,634,408 and 2,947,777
Common Shares, respectively, for the acquisition of cellular and telephone
interests. The 1997 Common Shares issued for acquisitions are reissued Treasury
Shares. (See Common Share Repurchase Program)

COMMON SHARES ISSUABLE

A certain acquisition agreement requires TDS to deliver 10,480 Common Shares
in 1998.

41
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--COMMON STOCK (CONTINUED)

DIVIDEND REINVESTMENT, INCENTIVE AND COMPENSATION PLANS

The following table summarizes Common and Series A Common Shares issued for
the employee stock ownership plans and dividend reinvestment plans described
below.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Common Shares
Tax-deferred savings plan................................................................ 32,354 36,269 40,624
Dividend reinvestment plan............................................................... 25,273 28,827 105,001
Stock-based compensation plans........................................................... 64,367 35,273 40,025
--------- --------- ---------
121,994 100,369 185,650
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan............................................................... 19,731 26,445 17,855
--------- --------- ---------
--------- --------- ---------
</TABLE>

TAX-DEFERRED SAVINGS PLAN. TDS had reserved 78,558 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, U.S.Cellular Common Shares, Aerial Common Shares, American Paging
Common Shares or five nonaffiliated funds.

DIVIDEND REINVESTMENT PLANS. TDS had reserved 460,742 Common Shares for
issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and
172,523 Series A Common Shares for issue under the Series A Common Share
Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common
Shares and Preferred Shares to reinvest cash dividends in newly issued Common
Shares and holders of Series A Common Shares to reinvest cash dividends in newly
issued Series A Common Shares. The purchase price of the shares is 95% of the
market value, based on the average of the daily high and low sales prices for
TDS's Common Shares on the American Stock Exchange for the ten trading days
preceding the date on which the purchase is made.

STOCK-BASED COMPENSATION PLANS

TDS had reserved 1,291,107 Common Shares for options granted and to be
granted to key employees. TDS has established certain plans that provide for the
grant of stock options to officers and employees. The options are exercisable
over a specified period not in excess of ten years. The options expire from 1998
to 2006 or the date of the employee's termination of employment, if earlier.

TDS accounts for stock options, stock appreciation rights ("SARs") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARs, measured on the
difference between the year-end market price of the Common Shares and SAR
prices, was $91,000, $263,000 and $408,000 in 1997, 1996 and 1995, respectively.
Had compensation cost for all plans been determined consistent with SFAS

42
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--COMMON STOCK (CONTINUED)

No. 123, the Company's net income (loss) and earnings per share would have been
reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income (Loss)
As Reported......................................................................... $ (9,549) $ 128,139 $ 103,978
Pro Forma........................................................................... (13,506) 126,495 103,316
Earnings per Common Share-Basic
As Reported......................................................................... (.19) 2.09 1.77
Pro Forma........................................................................... (.26) 2.06 1.75
Earnings per Common Share-Diluted
As Reported......................................................................... (.19) 2.07 1.74
Pro Forma........................................................................... $ (.26) $ 2.05 $ 1.73
------------ ----------- -----------
</TABLE>

Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

A summary of the status of the Company's stock option plans at December 31,
1997, 1996 and 1995 and changes during the years ended is presented in the table
and narrative below:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES OPTION PRICES FAIR VALUES
--------- ------------- -----------
<S> <C> <C> <C>
Stock Options:
Outstanding January 1, 1995
(172,689 exercisable)................................................................ 485,597 $ 30.25
Granted.............................................................................. 59,995 $ 38.67 $ 14.84
Exercised............................................................................ (26,101) $ 5.52
Cancelled............................................................................ (3,046) $ 43.32
---------
Outstanding December 31, 1995
(240,160 exercisable)................................................................ 516,445 $ 32.47
Granted.............................................................................. 89,228 $ 41.00 $ 13.30
Exercised............................................................................ (11,025) $ 13.10
Cancelled............................................................................ (3,210) $ 39.89
---------
Outstanding December 31, 1996
(405,996 exercisable)................................................................ 591,438 $ 34.08
Granted.............................................................................. 68,137 $ 43.90 $ 10.61
Exercised............................................................................ (43,824) $ 19.51
Cancelled............................................................................ (41,243) $ 40.78
---------
Outstanding December 31, 1997
(492,917 exercisable)................................................................ 574,508 $ 35.87
--------- -------------
--------- -------------
</TABLE>

STOCK OPTIONS. The fair value of each option grant was estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.1%, 5.6% and 6.6%; expected dividend
yields of 1.0%, 1.0% and 1.0%; expected lives of 5.0 years, 5.1 years and 6.9
years and expected volatility of 19.2%, 20.5% and 25.0%.

STOCK APPRECIATION RIGHTS allowed the grantee to receive an amount in cash
or Common Shares, or a combination thereof, equivalent to the difference between
the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expired March 1997. The fair value of each stock
appreciation right grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rates of 4.9%, 5.2% and 5.5%; expected dividend

43
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--COMMON STOCK (CONTINUED)

yields of 1.0%, 1.0% and 1.0%; expected lives of 0.1 year, 0.2 year and 0.7
year; and expected volatility of 20.5%, 18.4% and 20.2%.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Outstanding beginning of period............................................................. 10,070 16,034 12,096
Granted................................................................................... 630 5,923 8,174
Exercised................................................................................. (10,700) (11,887) (4,236)
--------- --------- ---------
Outstanding end of period................................................................... -- 10,070 16,034
--------- --------- ---------
--------- --------- ---------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN. TDS had reserved 159,816 Common Shares for
sale to the employees of TDS and its subsidiaries. The fair value of the
employees' purchase rights was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants rights in 1997 and 1996, respectively: risk-free
interest rate of 5.6% and 5.6%; expected dividend yield of 1.0% and 1.0%;
expected lives of 1.2 years and 0.5 year; and expected volatility of 16.9% and
15.3%.

CONVERTIBLE PREFERRED SHARES

TDS convertible Preferred Shares are convertible into 932,011 Common Shares.
(See Note 10--Nonredeemable Preferred Shares) TDS issued 56,365, 347,707 and
40,734 Common Shares in 1997, 1996 and 1995, respectively, for TDS preferred
shares converted and 11,345 and 3,781 Common Shares in 1997 and 1996,
respectively, for subsidiary preferred stock converted.

SERIES A COMMON SHARES

The holders of Common Shares and the outstanding Preferred Shares are
entitled to one vote per share. The holders of Series A Common Shares are
entitled to ten votes per share. Series A Common Shares are convertible, on a
share-for-share basis, into Common Shares. TDS has reserved 6,936,277 Common
Shares for possible issuance upon such conversion.

COMMON SHARE REPURCHASE PROGRAM

In December 1996, the Company authorized the repurchase of up to 3.0 million
TDS Common Shares over a period of three years. The Company plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. The Company may use repurchased shares to fund
acquisitions and for other corporate purposes. Subject to prevailing market
conditions, purchases may be made from time to time through open market
purchases or at negotiated prices in private transactions. The actual number of
Common Shares which may be repurchased will be subject to the trading price of
the Common Shares, the Company's financial position and other factors.

Through December 31, 1997, the Company purchased 1,798,100 Common Shares for
$69.9 million. The Company reissued 1,003,524 Common Shares primarily for
acquisitions.

NOTE 12--EMPLOYEE BENEFIT PLANS

PENSION PLAN

The Company sponsors two qualified noncontributory defined contribution
pension plans. One plan (the "TDS Plan") provides benefits for the employees of
TDS, TDS Telecom and substantially all of the telephone company subsidiaries.
(Employees of certain telephone subsidiaries are covered under other pension
plans or receive direct pension payments.) The other plan provides pension
benefits for U.S. Cellular and Aerial employees. Under these plans, pension
costs are calculated separately for each participant and are funded currently.
TDS also sponsors an unfunded non-qualified deferred compensation plan to
supplement the benefits under these plans to offset the reduction of benefits
caused by the limitation on annual employee compensation under the tax laws.

44
<PAGE>

TELEPHONE AND DATA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--EMPLOYEE BENEFIT PLANS (CONTINUED)

Total pension costs were $5.3 million, $4.6 million and $4.6 million in
1997, 1996 and 1995, respectively.