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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, 1996

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)
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IOWA 36-2669023
- - -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or No.)
organization)

30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip code)

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

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

Name of each exchange
Title of each class on which registered
- - ----------------------------- -----------------------------
Common Shares, $1 par value American Stock Exchange

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 28, 1997, the aggregate market values of the registrant's
Common Shares, Series A Common Shares and Preferred Shares held by nonaffiliates
were approximately $2.2 billion, $15.4 million and $40.8 million, respectively.
The closing price of the Common Shares on February 28, 1997, was $40.00, 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 $40.00 times the number of Common Shares into
which it was convertible on February 28, 1997.

The number of shares outstanding of each of the registrant's classes of
common stock, as of February 28, 1997, is 54,145,158 Common Shares, $1 par
value, and 6,916,546 Series A Common Shares, $1 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Those sections or portions of the registrant's 1996 Annual Report to
Shareholders, and of the registrant's Notice of Annual Meeting and Proxy
Statement for its 1997 Annual Meeting of Shareholders, described in the cross
reference sheet and table of contents attached hereto are incorporated by
reference into Part II of this report.

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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS

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

PAGE NUMBER
OR REFERENCE(1)
---------------

Item 1. Business............................................. 3
Item 2. Properties........................................... 38
Item 3. Legal Proceedings.................................... 38
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 38
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 39 (2)
Item 6. Selected Financial Data.............................. 39 (3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 39 (4)
Item 8. Financial Statements and Supplementary Data.......... 39 (5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 39
Item 10. Directors and Executive Officers of the Registrant... 40 (6)
Item 11. Executive Compensation............................... 40 (7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 40 (8)
Item 13. Certain Relationships and Related Transactions....... 40 (9)
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 41

- - ---------

(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, 1996 ("Annual Report"), and
from the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its 1997 Annual Meeting of Shareholders (the "Proxy
Statement").

(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."

(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."

(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.

(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."

(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."

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TELEPHONE AND DATA SYSTEMS, INC.
30 NORTH LASALLE STREET, CHICAGO, ILLINOIS 60602
TELEPHONE (312) 630-1900

[LOGO]

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PART I
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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, 1996, the Company served
approximately 2.3 million customer units in 37 states, including 1,073,000
cellular telephones, 484,500 telephone access lines and 777,400 pagers. For the
year ended December 31, 1996, cellular operations provided 58% of the Company's
consolidated revenues; telephone operations provided 33%; and paging operations
provided 9%. 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 80.6%-owned subsidiary, United States Cellular Corporation [AMEX: USM]. U.S.
Cellular provides cellular telephone service to 1,073,000 customers through 131
majority-owned and managed ("consolidated") cellular systems serving
approximately 16% of the geography and approximately 8% of the population of the
48 contiguous United States. Since 1985, when the Company began providing
cellular service in Knoxville, Tennessee, the Company has expanded its cellular
networks and customer service operations to cover 140 managed markets in 27
states as of December 31, 1996. In total, the Company now operates nine market
clusters, of which five have a total population of more than two million, and
each of which has a total population of more than one million, plus one other
unclustered market. Overall, 81% of the Company's 25.1 million population
equivalents are in markets which are consolidated, 1% are in managed but not
consolidated markets and 18% are 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").
TDS Telecom currently operates 105 telephone companies serving 484,500 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 22 telephone companies and divested one
telephone company since the beginning of 1992. These net acquisitions added
90,400 access lines during this five-year period, while internal growth added
90,100 lines.

The Company conducts substantially all of its broadband personal
communications services operations through its 82.8%-owned subsidiary, Aerial
Communications, Inc. [NASDAQ: AERL], formerly American Portable Telecom, Inc.
[NASDAQ: APTI]. In March 1995, Aerial was the successful bidder for eight
broadband PCS licenses. The six 30 megahertz PCS licenses that are being
developed

cover the Major Trading Areas of Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus, and account for 27.6 million
population equivalents. Aerial has sold its licenses covering the Guam and
Alaska MTAs.

The Company conducts substantially all of its radio paging operations
through its 82.3%-owned subsidiary, American Paging, Inc. [AMEX: APP]. American
Paging offers radio paging and related services through its subsidiaries. Since
the beginning of 1992, the number of pagers in service increased from 236,800 to
777,400 at December 31, 1996, primarily from internal growth. APP provides
service in 21 states and the District of Columbia through 51 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 Personal Communications Services ("PCS") markets;
(x) references to "population equivalents" mean the population of a market,
based on 1996 Donnelley Marketing Service 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 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.

CELLULAR TELEPHONE OPERATIONS

The Company's cellular operations are conducted through U.S. Cellular and
subsidiaries. U.S. Cellular serves 1,073,000 customers through 131
majority-owned and managed cellular systems at December 31, 1996. Overall, U.S.
Cellular owned 25.1 million population equivalents in 204 markets.

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
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 competitors to initiate service in all of
its markets in the next one or two years. 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 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 are 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, most
of 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 Tulsa, Oklahoma and its Florida/Georgia
market cluster. Another digital technology, Code Division Multiple Access
("CDMA"), is expected to be deployed by U.S. Cellular in a commercial trial
during 1997. The Company may also deploy some CDMA digital radio channels in
other markets on a trial basis in the near future. 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 has begun on
an industry-wide basis; however this process is expected to take a number of
years.

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

A significant portion of the aggregate market value of TDS's Common Shares
is represented by the market value of TDS's interest in USM. From its inception
in 1983 until 1993, U.S. Cellular has principally been in a start-up phase.
Until 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 three years, U.S. Cellular
generated operations-driven net income and has significantly increased its
operating cash flows during that time. Management anticipates increasing growth
in cellular 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 accelerated 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 1994,
1995 and 1996, 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: Iowa, Wisconsin/Illinois, Missouri, Eastern
North Carolina/South Carolina, Virginia, West Virginia/Maryland/Pennsylvania,
Oregon/California, Washington/Oregon/Idaho, Indiana/Kentucky/Ohio, Maine/New
Hampshire/Vermont, Eastern Tennessee/Western North Carolina,
Oklahoma/Missouri/Kansas, Texas/Oklahoma, Florida/Georgia and Southwestern
Texas. See "U.S. Cellular's Cellular Interests." U.S. Cellular has acquired its
cellular interests through the wireline application process (21%), including
settlements and exchanges with other applicants, and through acquisitions (79%),
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.

U.S. Cellular has increased its population equivalents by 31% from
approximately 19.1 million at December 31, 1991, to approximately 25.1 million
at December 31, 1996. Markets managed by U.S. Cellular have increased from 91
markets at December 31, 1991, to 140 markets at December 31, 1996. As of
December 31, 1996, 82% of the Company's population equivalents represented
interests in markets U.S. Cellular manages compared to 66% at December 31, 1991.

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 over 5% 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, 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 three 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 1996, U.S. Cellular, or TDS for the benefit
of U.S. Cellular, completed the acquisition of controlling interests in two
markets and several additional minority interests representing approximately
400,000 population equivalents for an aggregate consideration of $56.1 million.
The consideration consisted of 1.1 million TDS Common Shares, 1,000 U.S.
Cellular Common Shares and $13.6 million in cash. U.S. Cellular reimbursed TDS
for TDS securities issued in the acquisitions through the issuance to TDS of 1.3
million U.S. Cellular Common Shares. U.S. Cellular also acquired several
minority interests representing approximately 600,000 pops from TDS for $102.8
million in cash.

COMPLETED DIVESTITURES AND EXCHANGES. During 1996, U.S. Cellular completed
the divestiture of controlling interests in eight markets plus one market
partition and minority interests in two other markets representing approximately
1.2 million population equivalents for an aggregate consideration of $176.5
million in cash. Also during 1996, U.S. Cellular completed an exchange
transaction which resulted in the acquisition of a controlling interest in one
market, representing 116,000 population equivalents, and the divestiture of one
market representing 97,000 population equivalents. U.S. Cellular also received
$11.3 million in cash pursuant to this exchange.

PENDING ACQUISITIONS, DIVESTITURES, AND EXCHANGES. At December 31, 1996,
U.S. Cellular had entered into an agreement to purchase a controlling interest
in one market representing approximately 213,000 population equivalents. U.S.
Cellular has also entered into an agreement with TDS to acquire minority
interests in two markets from TDS representing 104,000 population equivalents.
These pending transactions are expected to be completed during 1997.

In February 1997, U.S. Cellular announced that it had entered into an
exchange agreement with BellSouth Corporation, pursuant to which U.S. Cellular
will receive controlling interests in twelve contiguous markets adjacent to its
Iowa and Wisconsin/Illinois clusters. In exchange, U.S. Cellular will trade its
controlling interest in ten markets and investment interests in 13 markets and
pay cash, the amount of which is dependent upon certain factors. The transaction
is subject to various regulatory and other approvals.

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.

The Company has had voting control of U.S. Cellular since U.S. Cellular's
incorporation. TDS owned an aggregate of 69,396,227 shares of common stock of
U.S. Cellular at December 31, 1996, representing over 80% of the combined total
of U.S. Cellular's outstanding Common and Series A Common Shares and over 95% of
their combined voting power.

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
are not essential to its long-term strategies.

U.S. Cellular owned interests in cellular telephone systems in 204 markets
at December 31, 1996, representing 25.1 million population equivalents.
Including the controlling interest to be acquired from a third party and the two
minority interests to be acquired from TDS, U.S. Cellular owned or had the right
to acquire interests in cellular telephone systems in 207 markets at December
31, 1996, representing 25.4 million population equivalents. The following table
summarizes the growth in U.S. Cellular's population equivalents in recent years
and the development status of these population equivalents.

DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)

Operational Markets:
Majority-Owned and Managed........................................... 20,276 19,958 18,556 18,807 14,749
Minority-Owned and Managed (2)....................................... 401 513 1,206 1,179 2,069
Markets to be Managed, Net of Markets to be Divested (3)
To Be Majority-Owned................................................. 213 272 2,212 1,026 1,859
To Be Minority-Owned (2)............................................. -- -- -- 8 5
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed.............................. 20,890 20,743 21,974 21,020 18,682
Minority Interest in Markets Managed by Others......................... 4,501 3,990 3,745 3,547 3,642
--------- --------- --------- --------- ---------
Total................................................................ 25,391 24,733 25,719 24,567 22,324
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

- - ---------
(1) Based on 1996 Donnelley Marketing Services 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, 1996. 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.

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 and TDS owned or had the right to
acquire pursuant to definitive agreements as of December 31, 1996.

TOTAL CURRENT
AND ACQUIRABLE
POPULATION
CLUSTER/MAJOR SERVICE AREA 1996 POPULATION EQUIVALENTS
- - ------------------------------------------------------------------------------------------------ --------------- ---------------

MIDWEST REGIONAL MARKET CLUSTER:
Iowa.......................................................................................... 2,732,000 2,512,000
Wisconsin/Illinois............................................................................ 2,032,000 1,930,000
Missouri...................................................................................... 686,000 686,000
--------------- ---------------
Total Midwest Regional Market Cluster....................................................... 5,450,000 5,128,000
--------------- ---------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
Eastern North Carolina/South Carolina......................................................... 2,349,000 2,319,000
Virginia...................................................................................... 949,000 941,000
West Virginia/Maryland/Pennsylvania........................................................... 1,138,000 1,138,000
--------------- ---------------
Total Mid-Atlantic Regional Market Cluster.................................................. 4,436,000 4,398,000
--------------- ---------------
NORTHWEST REGIONAL MARKET CLUSTER:
Oregon/California............................................................................. 1,029,000 957,000
Washington/Oregon/Idaho....................................................................... 1,471,000 1,247,000
--------------- ---------------
Total Northwest Regional Market Cluster..................................................... 2,500,000 2,204,000
--------------- ---------------
INDIANA/KENTUCKY/OHIO MARKET CLUSTER:........................................................... 2,352,000 1,972,000
--------------- ---------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:..................................................... 1,689,000 1,631,000
--------------- ---------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER:........................................ 1,769,000 1,458,000
--------------- ---------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER:
Oklahoma/Missouri/Kansas...................................................................... 1,412,000 874,000
Texas/Oklahoma................................................................................ 694,000 498,000
--------------- ---------------
Total Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:............................... 2,106,000 1,372,000
--------------- ---------------
FLORIDA/GEORGIA MARKET CLUSTER.................................................................. 1,520,000 1,373,000
SOUTHWESTERN TEXAS MARKET CLUSTER:.............................................................. 1,224,000 1,213,000
--------------- ---------------
Other Operations:............................................................................... 141,000 141,000
--------------- ---------------
Total Managed Markets........................................................................... 23,187,000 20,890,000
Markets Managed by Others....................................................................... 4,501,000
---------------
Total Population Equivalents.................................................................... 25,391,000
---------------
---------------

Upon completion of the exchange transaction with BellSouth, U.S. Cellular
will acquire and divest interests in certain markets. The effect on population
and population equivalents is summarized below.

TOTAL POPULATION
EQUIVALENTS TO
BE ACQUIRED
1996 POPULATION (DIVESTED)
--------------- ----------------

Markets to be acquired from BellSouth......................................................... 4,050,000 3,952,000
Markets to be traded to BellSouth:
Markets Managed by U.S. Cellular (1)........................................................ 1,960,000 (1,916,000)
Markets Managed by Others (2)............................................................... (1,405,000)
----------------
Total Markets to be traded to BellSouth................................................... (3,321,000)
Markets to be Divested (3)
Markets Managed by U.S. Cellular............................................................ 236,000 (174,000)
Markets Managed by Others................................................................... (110,000)
----------------
Total Markets to be Divested.............................................................. (284,000)
----------------
Net Population Equivalents to be Acquired Related to BellSouth Transaction.............. 347,000
----------------
----------------
Summary of U.S. Cellular's Cellular Interests After the Completion of the Transaction with
BellSouth:
Total Managed Markets....................................................................... 25,041,000 22,752,000
Total Population Equivalents of Markets Managed by Others................................... 2,986,000
----------------
25,738,000
----------------
----------------

- - ---------
(1) Pursuant to the agreement with BellSouth, U.S. Cellular has agreed to
transfer to BellSouth a 100% interest in these markets. If U.S. Cellular
owns less than 100% of these markets at the time of completion of the
transaction, U.S. Cellular will pay cash to BellSouth in lieu of any
interests U.S. Cellular does not own at the time.

(2) In addition to these interests, U.S. Cellular will deliver to BellSouth
interests in two markets which are currently owned by TDS.

(3) As a result of the transaction with BellSouth, U.S. Cellular expects to
divest its interest in these markets.

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 other systems in which U.S. Cellular owns
or has a right to acquire 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 has continued to expand 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, US West, Ameritech, BellSouth, Centennial
Cellular Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard
Cellular Systems and others. Additionally, U.S. Cellular has implemented four
Signal Transfer Points which have allowed it to interconnect efficiently with
network providers such as Illuminet and the North American Cellular Network.

During 1997, U.S. Cellular intends to extend the network for its customers
through interconnection with additional system operators for call delivery and
hand-off. This expanded network will increase 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.

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. In late 1996, U.S. Cellular implemented its
new site on the WorldWideWeb to support its marketing efforts and to be a future
distribution channel. These U.S. Cellular-owned and managed locations are
designed to market cellular service to the consumer segment in a familiar
setting.

U.S. Cellular manages each cluster of markets from an administrative office
with a local staff, which typically includes 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
220 stand-alone retail stores by the end of 1996. These U.S. Cellular-owned and
operated businesses utilize rental facilities in high-traffic areas. U.S.
Cellular has implemented a uniform appearance of 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 larger merchandiser
and grocery stores. At December 31, 1996, U.S. Cellular had opened over 150
"stores within a store" in Wal-Mart and Kroger 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 Chrysler Corporation, Ford Motor Company, General
Motors, MCI, Radio Shack, Best Buy 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. 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 many of U.S. Cellular's customers
still use in-vehicle cellular telephones, most new 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 107 minutes per unit each month and generated retail revenue of
approximately $43 per month during 1996, compared to 95 minutes and $44 per
month in 1995. 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 $66 during 1996. Average
monthly service revenue per customer unit decreased approximately 8% during
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 several 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 certain information about customers and
market penetration in U.S. Cellular's managed operations.

YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993
-------------- -------------- -------------- --------------

(DOLLARS IN THOUSANDS)
Majority-owned and managed markets:
Cellular markets in operation (1).................... 131 137 130 116
Total population of markets in service (000s)........ 21,712 22,309 21,314 19,383
Customer Units:
at beginning of period (2)......................... 710,000 421,000 261,000 150,800
additions during period (2)........................ 561,000 426,000 250,000 165,300
disconnects during period (2)...................... 198,000 137,000 90,000 55,100
at end of period (2)............................... 1,073,000 710,000 421,000 261,000
Market penetration at end of period (3).............. 4.94% 3.18% 1.98% 1.35%
Consolidated revenues.................................. $ 707,820 $ 492,395 $ 332,404 $ 214,310
Depreciation expense................................... 74,631 57,302 39,520 25,665
Amortization expense................................... 34,208 32,156 25,934 19,362
Operating income (loss)................................ 87,366 42,755 17,385 (8,656)
Construction expenditures.............................. 248,123 210,878 167,164 92,915
Identifiable assets.................................... $ 2,116,592 $ 1,890,621 $ 1,584,142 $ 1,275,569

1992
------------

Majority-owned and managed markets:
Cellular markets in operation (1).................... 92
Total population of markets in service (000s)........ 15,014
Customer Units:
at beginning of period (2)......................... 97,000
additions during period (2)........................ 88,600
disconnects during period (2)...................... 34,800
at end of period (2)............................... 150,800
Market penetration at end of period (3).............. 1.00%
Consolidated revenues.................................. $ 139,929
Depreciation expense................................... 16,606
Amortization expense................................... 13,033
Operating income (loss)................................ (12,705)
Construction expenditures.............................. 56,033
Identifiable assets.................................... $ 858,795

- - ------------
(1) Represents the number of markets in which U.S. Cellular owned at least a 50%
interest and which it managed, including its reseller operation in 1992. 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.

The following table summarizes, by operating cluster, the total population,
U.S. Cellular's customer units and penetration for U.S. Cellular's consolidated
markets as of December 31, 1996.

OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- - ----------------------------------------------------------------- ---------- ---------- ------------

Iowa............................................................. 2,462,000 145,000 5.89%
Wisconsin/Illinois............................................... 2,032,000 71,000 3.49
Missouri......................................................... 686,000 32,000 4.66
Eastern North Carolina/South Carolina............................ 2,349,000 98,000 4.17
Virginia......................................................... 949,000 42,000 4.43
West Virginia/Maryland/Pennsylvania.............................. 1,138,000 46,000 4.04
Oregon/California................................................ 1,029,000 47,000 4.57
Washington/Oregon/Idaho.......................................... 1,370,000 74,000 5.40
Indiana/Kentucky/Ohio............................................ 1,801,000 88,000 4.89
Maine/New Hampshire/Vermont...................................... 1,476,000 73,000 4.95
Eastern Tennessee/Western North Carolina......................... 1,429,000 90,000 6.30
Oklahoma/Missouri/Kansas......................................... 1,412,000 93,000 6.59
Texas/Oklahoma................................................... 694,000 32,000 4.61
Florida/Georgia.................................................. 1,520,000 82,000 5.39
Southwestern Texas............................................... 1,224,000 47,000 3.84
Other Operations................................................. 141,000 13,000 9.22
---------- ---------- ---
21,712,000 1,073,000 4.94%
---------- ---------- ---
---------- ---------- ---

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. In 1996, the Company 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 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 the Company. 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 and makes regulation unnecessary. 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.

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. 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.

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 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. U.S. Cellular's next renewal applications for several
markets are due to be filed in 1997.

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 would enable cellular systems to determine
the precise location of the person making the emergency call. 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, 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 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 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 stayed the effect of the rules prescribing
interim rates because it has held that the 1996 Act requires that rate issues
are to be decided by the states. However, the FCC's rules requiring reciprocal
and symmetrical compensation remain in effect. If the U.S. Court of Appeals
sustains its earlier ruling, 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.

state Joint Board. Much of this implementation is proceeding in numerous,
concurrent proceedings with aggressive deadlines. The Company cannot predict the
full extent, nature 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
tele-communications 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 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.

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 is now considering how to implement 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. It is expected that the obligation to make some
kind of payments to support universal service will be expanded to include other
telecommunications service providers, including cellular carriers. It is not
known how those payments may be calculated or what revenue base may be used.
However, it is also possible that cellular carriers may become eligible to
receive universal service support payments in certain circumstances under the
new system.

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.

The FCC licensed the first two 30 MHz MTA frequency blocks in 1995 and the
30 MHz block which is reserved for small business entities in 1996, and has
announced the winning bidders in the D, E and F Block auctions in 1997. TDS's
subsidiary, Aerial Communications, Inc. ("Aerial"), was licensed in eight MTAs
for 30 MHz blocks but has sold its licenses for the Guam and Alaska MTAs. It is
now constructing PCS systems in the other six MTAs. See "Broadband PCS
Operations."

In compliance with FCC restrictions on common ownership of cellular and
broadband PCS interests in overlapping market areas, U.S. Cellular entered into
a series of arrangements for the divestiture or restructuring of certain of its
cellular interests in market areas where Aerial was awarded broadband PCS
licenses. A number of these proposed arrangements required FCC approval of
assignment or transfer of control applications before they could be consummated.
All of these applications have been approved by the FCC and have been
consummated. U.S. Cellular believes that it has taken reasonable steps to comply
with the FCC's cross-interest policies.

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. In 1996 the FCC announced rules, now scheduled to go into effect in
September 1997, dealing, INTER ALIA, with RF emissions from cellular towers of
less than 10 meters in height and cellular telephones. It is anticipated that
U.S. Cellular will be able to comply with RF tower emission standards and U.S.
Cellular believes that the cellular telephones it currently sells comply with
the standards.

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. In addition, states may still regulate
other terms and conditions of cellular service.

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.

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 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, conventional mobile
telephone and SMR systems, both of which are able to connect with the landline
telephone network. U.S. Cellular believes that conventional mobile telephone
systems and 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 implemented
in many other cities across the United States. ESMR providers have initiated
service in several areas where U.S. Cellular operates cellular systems. 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 several markets across the United
States, including 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 continue deployments of PCS
across all of the U.S. Cellular markets over the next one or two years. U.S.
Cellular anticipates that PCS competitors will build out the larger metropolitan
areas before the mid-sized metropolitan and rural areas where U.S. Cellular
operates. As a result, the effects of PCS competition may not reach U.S.
Cellular's markets as quickly as they may in other cellular operators' markets.

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.

TELEPHONE OPERATIONS

The Company's telephone operations are conducted through TDS Telecom and 105
telephone subsidiaries. These telephone companies, ranging in size from less
than 500 to more than 40,000 access lines, serve 484,500 access lines in 28
states.

TDS Telecom provides modern, high-quality local and long-distance telephone
service. Local service is provided by TDS Telecom's operating telephone
subsidiaries. Long-distance or toll service is provided through connections with
long-distance carriers, primarily AT&T and the Bell Operating Companies
("BOCs").

Future growth in telephone operations is expected to be derived from the
acquisition of additional telephone companies, from providing service to new or
presently unserved establishments, from business expansion in the areas served
by TDS Telecom, from upgrading existing customers to higher grades of service,
from increased usage of the network through both local and long-distance calling
and from providing additional services made possible by advances in technology.

The following table summarizes certain information regarding TDS Telecom's
telephone operations.

YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- ------------ ------------ ------------

(DOLLARS IN THOUSANDS)
Telephone Operations
Access lines*..................................... 484,500 425,900 392,500 356,200 321,700
% Residential................................... 79.9 80.6 81.3 82.0 83.1
% Business (nonresidential)..................... 20.1 19.4 18.7 18.0 16.9
Total revenues.................................... $ 402,629 $ 354,841 $ 306,341 $ 268,122 $ 238,095
% Local service................................. 27.4 26.8 26.8 26.9 27.4
% Network access and long-distance.............. 58.5 61.6 60.0 59.3 57.9
Depreciation and amortization expense............. $ 88,967 $ 77,354 $ 68,878 $ 59,562 $ 51,946
Operating income.................................. 103,358 98,240 91,606 79,110 72,217
Construction expenditures......................... 144,440 104,372 115,483 80,818 65,652
Total identifiable assets......................... $ 1,181,084 $ 1,058,241 $ 984,563 $ 829,489 $ 723,855

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

TELEPHONE ACQUISITIONS

TDS continually reviews attractive opportunities to acquire operating
telephone companies. Since January 1, 1992, TDS has acquired 22 telephone
companies serving a total of 90,400 access lines for an aggregate consideration
totaling $297.1 million. The consideration consisted of $59.5 million in cash
and notes, 155,000 Preferred Shares and 5.2 million Common Shares of the
Company. TDS also sold one telephone company serving 1,100 access lines in 1995.

The Company continually evaluates acquisition opportunities. Telephone
holding companies and others actively compete for the acquisition of telephone
companies and such acquisitions are subject to the consent or approval of
regulatory agencies in most states and, in some cases, to federal waivers that
may affect the form of regulation or amount of interstate cost recovery of
acquired telephone exchanges. While management believes that it will be
successful in making additional acquisitions, there can be no assurance that the
Company will be able to negotiate additional acquisitions on terms acceptable to
it or that regulatory approvals, where required, will be received.

The Company maintains shelf registration of its Common Shares and Preferred
Shares under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.

It is the Company's policy to preserve, insofar as possible, the local
management of each telephone company it acquires. The Company provides the
telephone subsidiaries 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 the following areas:
finance, accounting and treasury services; marketing; customer service; traffic;
engineering and construction; customer billing; rate administration; credit and
collection; and the development of administrative and procedural practices.

CONSTRUCTION AND DEVELOPMENT PROGRAM

In 1996, and continuing in 1997, TDS Telecom has expanded and upgraded its
service providing network in accordance with its first-to-market service
provisioning strategy. Utilizing state-of-the-art technologies such as Signaling
System 7 ("SS7"), Advance Calling Services ("ACS"), and fiber-fed Digital
Serving Areas ("DSA") to condition the network for the Integrated Services
Digital Network ("ISDN"), TDS Telecom will bring cutting edge telecommunications
services to its predominantly rural markets. TDS Telecom intends to utilize this
world-class network as a competitive advantage to protect and grow its customer
base in the increasingly competitive telecommunications industry. TDS Telecom
made significant progress in 1996 in network modernization through the
deployment of 425 miles of fiber optic cable and 207 DSAs. TDS Telecom further
embraced its strategic alliance with Lucent Technologies and Siemens Stromberg
Carlson by continuing its program of upgrading switching platforms. In 1996, 35
new switching systems, including eight hosts, were installed representing an
additional 50,900 lines

and making available an additional 50,900 lines of ISDN, SS7 and ACS. TDS
Telecom plans to install 530 additional miles of fiber optic cable and 214
additional DSAs in 1997. TDS Telecom's 1997 switching platform upgrade plans
include 45 additional switching systems including eight additional hosts
representing 43,900 lines, to bring the cumulative total Lucent and Siemens
installed lines to 276,000. As a result, TDS Telecom will make available to its
customers 45,300 additional lines of ISDN, SS7 and ACS. By the end of 1997, TDS
Telecom projects having 289,338 ISDN, 344,686 SS7, and 320,183 ACS cumulative
equipped lines representing 57%, 68% and 63%, respectively, of all equipped
lines.

In 1996, TDS Telecom continued its efforts to reduce costs while improving
its customer responsiveness by further deployment of its Transmission Control
Protocol/Internet Protocol ("TCP/IP") data network to an additional 55 operating
locations. The TCP/IP network is utilized by TDS Telecom's centralized network
management center ("NEMAC") to monitor the switching network for errors and
provide corrective action even before the customer realizes that a fault has
occurred. The TCP/IP data network also provides transport for TDS Telecom's
support and service centers, allowing for increased coverage of customer
inquiries and their related customer care systems. Rollout of the data network
to additional operating locations is planned for 1997.

TDS Telecom supplemented its revenue in 1996 with the deployment of
additional Internet nodes through its wholly owned Internet subsidiary, TDSNET.
TDSNET deployed 61 additional operating nodes in 1996 and expects to deploy at
least 30 more nodes in 1997. In 1996, voicemail deployment continued to 16 more
serving areas. TDS Telecom will continue to enhance its voice mail revenues in
1997 through the installation of an additional seven systems.

TDS Telecom's total 1997 capital budget is $130.0 million compared to actual
capital expenditures of $144.4 million in 1996 and $104.4 million in 1995.
Financing for the 1997 capital additions will be primarily provided by
internally generated funds and supplemented by federal long-term financing.

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"), agencies 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 make 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 (6.42% for its fiscal year ended September 30, 1996), 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 (6.72%
for a 35-year note at December 31, 1996).

Substantially all of TDS Telecom's telephone plant is pledged or is 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. Of the $301.6 million of underlying retained
earnings of telephone subsidiaries at December 31, 1996, $212.0 million was
available for the payment of dividends on the subsidiaries' common stock.

At December 31, 1996, TDS Telecom's operating telephone companies had
unadvanced loan commitments under the RUS, RTB and FFB loan programs aggregating
approximately $129.8 million, at a weighted average annual interest rate of
6.15%, to finance specific construction activities in 1997 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 applications
will be accepted or what the terms or interest rates of any future loan
commitments will be.

ACCESS REVENUES

TDS Telecom's operating telephone subsidiaries receive access revenue from
interstate and intrastate long- distance carriers as compensation for
originating and terminating their traffic. The interstate

and intrastate access rates charged include the cost of providing service plus a
fair rate of return. Access revenues account for approximately 55% of the
revenue generated by TDS Telecom's local exchange carrier ("LEC") subsidiaries.

TDS Telecom will file an interstate access rate tariff for one of its
operating subsidiaries in 1997. However TDS Telecom concurs in the National
Exchange Carrier Association ("NECA") interstate common line and traffic
sensitive tariffs for the remainder of its LEC subsidiaries. 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 toll rates and other matters relating to
interstate telephone service. On December 23, 1996, the FCC released a notice of
proposed rulemaking regarding interstate access revenues. In the notice, the FCC
stated its intention to reform the existing interstate access charge rules and
policies and sought comment from interested parties. The FCC did not indicate
what changes it will propose; however, final rules are expected by May 8, 1997.
The outcome of this and other rulemaking proceedings may affect the source and
nature of the operating companies' recovery of costs from the interstate
jurisdiction. In the past, the FCC has generally adopted transition rules when
changing cost recovery mechanisms to prevent abrupt rate and revenue changes.

The 1996 Act provides for reciprocal compensation for parties of 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 now pay access charges to wireless
carriers that terminate calls from LEC customers. Since this order raises
interconnection costs, the operating companies may adjust their charges to
recover such increased costs.

The FCC has also stated its intention to initiate review of current
procedures for separating incumbent LECs' service costs between the state and
federal jurisdictions. To the extent that cost allocations have been used in the
past to limit the costs a LEC must recover in local or intrastate access rates,
the proceeding may seek to shift costs to the states. To the extent that such
support is not made up in the new federal and state universal service
mechanisms, TDS Telecom may seek rate increases to offset any reductions in
interstate revenues.

Where applicable and subject to state regulatory approval, TDS Telecom's LEC
subsidiaries utilize intrastate access tariffs and participate in intrastate
revenue pools. However, many intrastate toll revenue pooling arrangements, 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 is likely to accelerate 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. Given the many regulatory issues still unresolved,
TDS Telecom cannot predict the cumulative nature or extent of impacts from
regulatory reform.

FEDERAL SUPPORT REVENUES

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 LEC subsidiaries provide
telephone service in rural areas and virtually all of them offer service to
low-income customers. To control the cost of universal service, the FCC capped
and indexed the universal service fund through 1996.

The 1996 Act codified universal service; set forth clear principles for
ensuring affordable access to modern telephone service nationwide; established
discounts for rural schools, libraries and 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.
The joint board convened and released its recommendation to the FCC on November
8, 1996. The joint board and FCC are considering controlling and reducing the
total amount of universal service support. The joint board has proposed not only
using forward-looking proxy costs to measure high cost support, but also using a
nationwide

average revenues-per-line benchmark that has the potential to underestimate
rural LECs' high costs and thus limit their high cost support. The FCC opened a
comment cycle on the joint board recommendation and TDS Telecom has filed
comments and reply comments.

One major principle of the 1996 Act is that support shall be specific,
predictable and sufficient. In its comments to the FCC, TDS Telecom stated its
position that rural telephone companies, as defined in the 1996 Act, should
continue to base their costs on embedded (historical) rather than proxy
(forward-looking) costs proposed by the joint board. This would ensure that
support is predictable and sufficient. Because the 1996 Act also attempted to
eliminate implicit subsidies, TDS Telecom also suggested in its filing with the
FCC that the cost to support universal service should be added to the end user
bills generated by all telecommunications carriers. Such an explicit surcharge
would ensure adequate support and eliminate the need for LECs to pursue local
service rate increases for the potential changes. The FCC is expected to issue
an Order on universal service by May 8, 1997.

The final rules to implement the universal service provisions of the 1996
Act could involve development of new support mechanisms and changes in the
eligibility criteria. In addition, some of TDS Telecom's LEC 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 decrease,TDS Telecom's LEC subsidiaries may
pursue local service rate increases to recover the difference.

Telephone company acquisition and investment decisions assume the ability to
recover the cost and a reasonable rate of return though local service, access
and support revenues. Significant changes in the universal service funding
system might affect the Company's acquisition strategy. TDS Telecom is pursuing
a strategy of network modernization to maintain a strong competitive position.
The speed of such network modernization may depend on favorable support and
access policies on the federal and state levels.

REGULATION

TDS Telecom's LEC 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, is 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, it
retains limited authority to regulate certain competitive practices in rural
telephone company service areas.

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.

Unless exempted, or granted suspension or modification, incumbent LECs 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 provide only those elements they choose to provide; (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.

As defined in the 1996 Act, TDS Telecom's LEC subsidiaries qualify as rural
telephone companies. Therefore, they enjoy an exemption from the incumbent LEC
requirements until they receive a bonafide

request for interconnection and the state commission lifts the exemption. 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.

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 sparked by the 1996 Act. TDS Telecom is preparing for
competition even though its operating subsidiaries remain governed by state
regulators. 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
ensure that any telecommunications reform measures treat rural areas fairly. The
ongoing changes in public policy and introduction of competition might affect
the earnings of the operating subsidiaries and TDS Telecom is not able to
predict the impact.

While the majority of TDS Telecom's LEC subsidiaries continue to operate in
a rate-of-return environment, a number of state commissions are proactively
negotiating alternative regulation plans with LECs. Price regulation, the most
common form of alternative regulation, focuses on the price of telecommunication
services. TDS Telecom's LEC subsidiaries in both Alabama and Michigan are
currently operating in a price-regulated environment, whereby the commissions in
those states are no longer reviewing earnings. For several years, the RBOCs and
some of the nation's larger LECs have operated under an FCC "price cap" plan,
where earnings can only be increased through productivity improvements. The LECs
determine the amount of productivity gains above an allowed return and then must
share the excess gains with their customers.

For 1997, TDS Telecom's telephone subsidiaries have neither elected price
caps nor the alternative FCC plan, which was designed for smaller LECs. Instead,
the operating subsidiaries will continue to abide by traditional rate-of-return
regulation for interstate purposes. 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 is currently considering whether to initiate a proceeding to
lower the allowed rate-of-return for rate-of-return LECs.

NECA filed a Petition for Rulemaking with the FCC, which proposes rule
revisions to allow incentive settlement options within the NECA pools. The FCC
has not acted on this petition yet. The settlement options allow LECs to remain
in the NECA pools and still enjoy incentives previously available only to
non-NECA participants. Management continues to evaluate opportunities under all
forms of regulation.

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 should not be higher in rural areas than in urban areas. The
statute is intended to ensure affordable long distance services even in TDS
Telecom's most remote exchanges.

COMPETITION

The 1996 Act will help introduce a new wave of competition in the
telecommunications industry. The 1996 Act embraced competition in
telecommunications as a national policy and also started the process of
deregulation. The 1996 Act applies expanded interconnection and other
requirements to local exchange telephone companies for the purpose of
stimulating competition. The Act establishes a framework for local service
competition and it establishes different standards for different types of
telecommunications carriers. The Act defines rural telephone companies ("RTC")
and provides them with an exemption from certain incumbent LEC obligations. All
TDS Telecom LECs meet the RTC definition and fall under the exemption. At a
minimum, this likely will delay certain forms of competition occurring in our
LECs while additional regulatory issues are resolved.

TDS Telecom believes there will eventually be open entry into nearly every
aspect of the telephone industry, including local service, interstate and
intrastate toll, switched and special access services and customer premises
equipment. Accordingly, TDS Telecom expects competition in the telephone
business to be dynamic and intense as a result of the entrance of new
competitors and the development of new technologies, products and services. To
face this increasing competition, TDS Telecom has strategically positioned
itself to provide customer intimacy and to provide complete solutions to
customers' telecommunication needs.

To position TDS Telecom as a customer-intimate organization, TDS Telecom is
dedicating resources to establishing a Virtual Business Office ("VBO"). The VBO
is an environment that is technically equipped to enable multiple local business
offices to perform customer contact functions as if they were a "virtual" office
in the eyes of the customer. VBO is TDS Telecom's solution to connect offices
together to better use resources and preserve local presence. Through extended
availability that coincides with customers' schedules and expectations, VBO will
help provide greater market coverage and customer service on the customer's
terms. It will also enable the business office teams to deliver high-quality
service to the customer through more efficient call answering capabilities,
provide continued focused local service to walk-in customers, and leverage voice
and customer service application technology.

TDS Telecom is providing the operating telephone companies with the most
advanced central office switching equipment possible in order to offer customers
up-to-date technology such as ISDN, Advanced Calling Services, High-Speed Data
access and Internet access. TDS Telecom sees expanded competition as an
opportunity to provide a broader range of services to a greater number of
potential customers. TDS Telecom plans to provide its customers bundled service
offerings and become a "one stop shop" for all its customers telecommunications
needs. In 1996,TDS Telecom entered into new competitive markets with products
like LAN and data structured wiring (connecting computers in multiple customer
locations), and resale of Direct Broadcast Satellite. TDS Telecom also expanded
its Internet access service through its subsidiary, TDSNET. TDS Telecom will
continue to seek additional attractive opportunities in competitive markets in
1997.

BROADBAND PCS OPERATIONS

The Company's broadband PCS operations are conducted through Aerial
Communications, Inc. and subsidiaries. Aerial is currently developing its PCS
licenses covering the MTAs of Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus. Aerial has commenced development
of a marketing program, intends to launch commercial services in its first
market in March 1997, and expects to complete initial construction of its PCS
networks within twelve months of launch of commercial service.

THE WIRELESS TELECOMMUNICATIONS INDUSTRY

PCS is the term used to describe the wireless telecommunications services
that will be offered by those companies that acquired or will acquire licenses
for radio spectrum (frequency range 1850-1990 MHz) in the FCC auctions and are
the newest entrants in the wireless telecommunications market. PCS will
initially compete directly with existing cellular telephone, paging and mobile
radio services. PCS will also include features which have not traditionally been
offered by cellular providers, such as: (i) the provision of all services to one
untethered, mobile number; (ii) lower-priced service options; and (iii) in the
near future, medium-speed data transmissions to and from portable computers,
advanced paging services and facsimile services. Aerial believes that these
enhanced features will contribute to the acceleration of growth in the wireless
telecommunications market. Aerial believes that PCS providers will be the first
wireless direct competitors to cellular providers and the first to offer mass
market all-digital mobile networks. In addition, PCS providers may be among the
first to be able to offer mass market wireless local loop applications, in
competition with switched and direct access local telecommunications services.

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 MSC may "hand off" the call 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.

Global System for Mobile Communications ("GSM"), Aerial's technology choice,
is not directly 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 late 1997. Because analog
cellular service is available nationwide, Aerial expects the PCS customers will
be able to roam into many service areas by analog cellular providers.

To date, in North America, nearly 20 PCS companies have chosen or are
expected to choose GSM. With the completion of the U.S. broadband PCS auctions,
license areas of GSM committed operators now total more than 260 million
population equivalents (representing 98.3% of the U.S. population). Aerial
anticipates that its customers will be able to roam throughout the United States
and Canada, either on other GSM-based PCS networks or by using dual-mode
handsets that also can be used on existing cellular networks.

Wireless customers generally are charged separately for monthly access, air
time, 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 air-time usage rates, which
usually are higher than standard air-time 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.

PRODUCTS AND SERVICES

Aerial's fundamental customer proposition will be an affordable, reliable,
high-quality mobile voice communications service. At the commencement of
commercial service, Aerial intends to offer coverage in those areas of the PCS
markets where most of the population lives and works. Subsequent construction of
its PCS networks will provide coverage which is competitive with that of current
cellular operators. Aerial will also provide roaming capabilities, through
agreements with other GSM operators and cellular operators.

Aerial will provide several distinct services and features, certain of which
are currently available only on PCS networks. These include:

THE SMART CARD. GSM technology employs a credit-card sized Smart Card which
contains a microchip containing detailed information about a customer's service
profile. The Smart Card will allow 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 will
provide easy-to-use, interactive menu-driven phones that will enable customers
to utilize the features available in a GSM network. These handsets will
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.

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 will provide 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 will emphasize the value of Aerial's
high-quality, innovative services and will be supported by heavily promoting the
Aerial brand name. This will be supported by a substantial advertising program.

Aerial plans to offer its services and products through traditional cellular
sales channels as well as through new, lower cost channels which increase the
quality of the typical sale. Aerial will utilize traditional sales channels
which include mass merchandisers and retail outlets, company retail stores,
sales agents and a direct sales force. 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 with 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 anticipates that market prices for two-way wireless services
generally will decline in the future based upon 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.

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). Each of these PCS
licensees is designing and constructing its respective networks. PCS PrimeCo's
networks are commercially operational in Houston and Tampa. Sprint Spectrum has
launched commercial service in Pittsburgh. The FCC has awarded the initial
licenses for the Block C spectrum and has recently announced the winning bidders
for the D, E and F Blocks. 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., U S WEST
NewVector Group, Inc., Bell Atlantic-NYNEX Mobile and Ameritech Cellular.

Aerial also expects to compete with other communications technologies that
now exist, such as paging, 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 will not be automatically
compatible with cellular systems, and vice versa. Aerial expects dual-mode
handsets to be available in late 1997, which will permit its customers to roam
by using the existing cellular wireless network in other markets. 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 different service providers in the same market.

REGULATION

REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the U.S.
pursuant to the Communications Act, and the rules, regulations and policies
promulgated by the FCC thereunder. Under the Communications Act, the FCC is
authorized to allocate, grant and deny licenses for PCS frequencies, 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 FCC regulations.

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 and makes regulation unnecessary. The FCC promulgated and
continues to promulgate regulations governing construction and 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 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. The FCC has awarded the initial licenses for the C Block spectrum
and has recently announced the winning bidders for the D, E and F Blocks.

An appeal has been taken to the FCC from the Bureau order by a party
alleging that some of the authorizations were granted to parties which had
engaged in collusion in the competitive bidding process. That party has also
sought review of the denial of its motion for a stay of the grant of A and B
Block authorizations. No allegation of collusion was made against TDS or Aerial.
Aerial would defend vigorously any challenges to the authorizations it has been
granted.

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.

In compliance with FCC restrictions on common ownership of cellular and
broadband PCS interests in overlapping market areas, United States Cellular,
another subsidiary of TDS, entered into a series of arrangements for the
divestiture or restructuring of certain of its cellular interests in market
areas where Aerial was awarded broadband PCS licenses. A number of these
proposed arrangements required FCC approval of assignment or transfer of control
applications before they could be consummated. These applications have been
approved by the FCC and have been consummated.

The grants of licenses to Aerial are also 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. A significant factor
affecting the schedule and cost of Aerial's network implementation will be the
relocation of existing private microwave facilities which operate on the same
frequencies to be used for Aerial's broadband PCS operations. Under the FCC's
policies, if Aerial decides that any existing microwave facility must be
relocated, it is required to provide substitute facilities at its own expense so
that the companies using these existing facilities may continue to have access
to the same or equivalent communications capabilities. The FCC concluded
proceedings in 1996 clarifying and changing its requirements for permissible
relocation costs, adopting incentives to encourage reliance on voluntary
relocation agreements and requiring the sharing of relocation costs where the
relocation of private microwave facilities benefits multiple broadband PCS
licenses.

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 regulations and requirements which may affect the business of
Aerial.

RECENT EVENTS. The FCC adopted certain significant decisions during 1996.
In one decision, the FCC required that all licensees register and obtain FCC
registration numbers for all of their antenna towers which require prior FAA
clearance. The FCC also amended its environmental protection rules to adopt new
guidelines and procedures for evaluating the environmental effects of RF
emissions.

The FCC has also 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 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.

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. Aerial cannot predict the full extent, nature 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 -- 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.

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 broadband PCS and
certain other 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
have been 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. The Eighth Circuit Court granted a stay
of certain rules adopted in the FCC orders pending its decision on the merits of
these appeals.

STATE AND LOCAL REGULATION. The scope of state 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 intrastate issues,
respectively.

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.

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 manages its radio paging business through American Paging, Inc.
and subsidiaries. American Paging provides wireless communications messaging
services in the United States with operations concentrated in Florida and in the
Mid-Atlantic and Midwest regions.

WIRELESS MESSAGING INDUSTRY

Paging is a wireless communications messaging technology which uses an
assigned radio frequency, licensed by the FCC, to contact a paging customer
within a geographic service area. Pagers 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 pager 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 land-line
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 paging 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 occurred in the 1990s which has resulted in the further
consolidation of the paging industry.

Manufacturers of pagers and transmission equipment have produced innovative
technological advances which are expected to continue to broaden the potential
market size for paging 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 paging services while reducing
equipment and airtime costs and equipment size. Narrowband PCS technology is
expected to greatly expand the messaging capacity of the paging infrastructure
and provide advanced two-way messaging and data services. Future service
offerings are expected to include acknowledgment paging, which allows customers
to confirm a message to the originator, as well as digitized voice paging,
two-way data conveyance to highly mobile devices such as lap-top computers and
Personal Digital Assistants ("PDA"), and other data transfer applications.

The following table summarizes certain information about American Paging's
operations.

YEAR ENDED OR AT DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ----------- -----------

(DOLLARS IN THOUSANDS)
Pagers in service......................................... 777,400 784,500 652,800 460,900 322,200
Total revenues............................................ $ 104,187 $ 107,150 $ 92,065 $ 75,363 $ 54,716
Depreciation and amortization expense..................... 33,777 24,692 17,178 13,392 10,412
Operating (loss).......................................... (36,626) (8,997) (169) (721) (5,447)
Additions to property and equipment....................... 32,517 26,527 28,966 21,454 14,277
Identifiable assets....................................... $ 153,374 $ 159,170 $ 146,107 $ 74,923 $ 57,080

COMPANY DEVELOPMENT

American Paging's business strategy is to promote above industry average
growth in customers, service revenue and operating cash flow by providing the
highest quality service through one of the industry's most technologically
advanced digital transmission systems with a focus on strong customer service
and competitive pricing.

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. The
licenses will eventually 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 throughout the
United States. However, commerical unavailability of the
ReFLEX25-Registered Trademark- protocol and related infrastructure and
subscriber device equipment necessary to offer these services has resulted in
American Paging suspending development of its PCS licenses. American Paging also
intends to continue exploring synergies with affiliated companies, such as
United States Cellular Corporation and Aerial Communications, Inc.

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 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 when 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.

ALLIANCES AND AFFILIATES. American Paging is a joint venture partner with
Nexus Telecommunication Systems Ltd. of Israel ("Nexus") in American Messaging
Services, LLC ("AMS"). AMS was formed to develop multiple applications and
distribution channels worldwide for a patented communications network that
provides two-way paging, location and telemetry services. In June 1996, AMS
constructed a beta-test system in Chicago to perform radio frequency and
infrastructure tests. The system is still being tested, while also serving as a
demonstration system for prospective customers of a Nexus-based technology.
American Paging has notified Nexus that it will stop funding AMS as of June 30,
1997. As a result, American Paging's interest in AMS may be diluted.

American Paging also has an agreement with Liazon, Inc. of Toronto for the
coordinated development and use of narrowband PCS and conventional PCP paging
frequencies in North America. Under the terms of the agreement, each company
will pursue its own PCS build out plans, but will have the added potential to
market North American coverage of advanced wireless messaging services. In a
related action, both the FCC and Industry Canada have provided conditional
authority for both companies to construct and operate transmitters in previously
restricted areas.

APP RESTRUCTURING

During the third quarter of 1995, American Paging began restructuring three
key operating areas: sales and marketing, administration, and customer service.
The impact on operations from these restructuring efforts was more severe than
originally anticipated, and results from operations were negatively impacted in
1995 and 1996. The changes implemented in 1996 caused disruptions in many
aspects of the business, and also resulted in additional restructuring costs
being recorded during 1996. These disruptions led to several senior management
changes including the appointment of a new President and Chief Executive Officer
and a new Vice President-Sales, Marketing and Field Operations in the second
half of 1996. Additionally, American Paging recently added a new Vice
President-Development and Engineering and a new Vice President-Finance and Chief
Financial Officer.

The first goal of the restructuring effort was to increase sales
productivity through improved direct sales efforts and improved customer mix.
Towards this end, American Paging increased the number of direct sales
representatives with the goal of increasing growth in units in service, revenue
and average monthly service revenue per unit ("ARPU"). During 1996, American
Paging increased the number of employees involved in the sales function to
approximately 60% of total employees, but improvements in units in service,
service revenue and ARPU growth were not achieved due to dislocations from
restructuring-related activities within the sales and customer support areas.
American Paging's strategy is to organize the department on a market segment
basis so that the sales and marketing employees will be better able to address
current customer demands, and also be more responsive to changes within those
market segments.

The second and third goals of the restructuring effort were to reduce
administrative expense and improve customer service. An integral part of
achieving these two goals was the consolidation of 17 geographically-dispersed
customer service and administrative units into a centralized Customer Telecare
Center ("CTC") located in Oklahoma City, Oklahoma. The CTC, opened in April
1996, now handles all back office activities including customer service, order
fulfillment, customer billing and collections, and is available 24 hours-a-day,
seven days-a-week. The process of implementing the CTC, as well as changing the
way American Paging sells, services and supports its customers, was very
disruptive to operations during 1996. As a result, restructuring-related
expenses recorded during 1996 include a

write-down of inventory identified as obsolete upon centralization of inventory
management at the CTC, as well as costs for duplicate staffing, employee
severance, and consulting and legal fees. In addition, during the consolidation
of customer information databases at the CTC, it became apparent that American
Paging's customer management and billing system did not provide the flexibility
necessary to support its future customer growth and retention. The creation and
successful operation of the CTC is critical to achieving American Paging's
objective of growth in units, service revenue and ARPU.

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 51 sales and service offices. It
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. Nationwide one-way and two-way
paging services are offered through American Paging's alliances with
nonaffiliated service providers.

Generally, a paging 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 pagers 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 pager'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 pager 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 page.

American Paging currently provides four types of pagers in all of its
markets: alphanumeric text display, numeric display, 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. It has the memory capability to store several numeric messages
which can be recalled by the customer when desired. 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.

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) pager rentals, (iii) pager warranties,
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
pager 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 pagers to agents at a small mark-up or at
cost. Agents then sell the pagers 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 paging
air time 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 paging unit for those who rent 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 paging 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 paging 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 in the wireless
telecommunications industry and the enhancement of current technologies will
likely create new products and services that are competitive with the paging
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 and makes regulation unnecessary. 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 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.

RECENT EVENTS. The FCC adopted certain significant decisions during 1996.
In one decision, the FCC amended its rules to allow paging and narrowband PCS
carriers to offer fixed wireless service on a co-primary basis with mobile
services. In another decision, the FCC required that all licensees register and
obtain FCC registration numbers for all of their antenna towers which require
prior FAA clearance. The FCC also amended its environmental protection rules to
adopt new guidelines and procedures for evaluating the environmental effects of
RF emissions.

In addition, the FCC initiated proceedings proposing to adopt market area
licensing to replace site-by-site licensing of paging base stations, to permit
geographic partitioning and spectrum disaggregation in the event market area
licensing is adopted, and to make changes affecting the licensing of local and
response channels in narrowband PCS services. The FCC has also announced its
intention to hold spectrum auctions for paging and narrowband PCS spectrum in
1997 if its market area licensing and narrowband PCS rule revisions are adopted.

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 1996 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.

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, nature 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.

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 have been 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. The Eighth Circuit Court of Appeals granted a stay of
certain rules adopted in the FCC orders pending its decision on the merits of
these appeals.

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.

OTHER SUBSIDIARIES

Subsidiaries of the Company provide custom printing (Suttle Press, Inc.);
and telemessaging services (Integrated Communications Services, Inc.).

EMPLOYEES

The Company enjoys satisfactory employee relations. As of December 31, 1996,
7,718 persons were employed by the Company, 153 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; and radio pagers and transmitting
equipment related to radio paging operations. As of December 31, 1996, TDS's
gross property, plant and equipment of approximately $2.7 billion consisted of
the following:

Cellular telephone........................... 31.8 %
Telephone.................................... 48.9
PCS.......................................... 12.2
Radio paging................................. 4.3
Other........................................ 2.8
------
100.0 %
------
------

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 and most of the tangible assets of the
cellular subsidiaries are subject to the lien of the mortgages securing the
funded debt of such companies. The Company 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 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

The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain landline or cellular telephone systems and
other interests. The Company does not believe that any such proceeding should
have a material adverse impact on 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 1996.

- - --------------------------------------------------------------------------------
PART II
- - --------------------------------------------------------------------------------

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

Except for information provided below, such information is incorporated by
reference from Exhibit 13, Annual Report sections entitled "TDS Stock and
Dividend Information" and "Market Price per Common Share by Quarter."

On November 4, 1996, AERL issued $226.2 million in aggregate principal
amount at maturity of Series A Zero Coupon Notes ("Notes") due in 2006. The
issue price of the Notes was 44.2% of the principal amount at maturity or $100
million, and there is no periodic payment of interest. The $100 million in
proceeds from the sale of the Notes were paid to Nokia Telecommunications, Inc.,
in satisfaction of all outstanding obligations and future obligations up to $100
million of AERL under a Credit Agreement dated June 19, 1996. The Notes and the
obligations under the Credit Agreement are fully and unconditionally guaranteed
by TDS at an annual fee rate of 3%. Such Notes and the TDS quarantee were issued
without registration under the Securities Act of 1933, as amended, pursuant to
an exemption therefrom in Rule 144A under such act.

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

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 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.

- - --------------------------------------------------------------------------------
PART III
- - --------------------------------------------------------------------------------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference from Proxy Statement sections entitled "Election
of Directors" and "Executive Officers."

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

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from Proxy Statement section entitled "Executive
Compensation" except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from Proxy Statement sections entitled "Security
Ownership of Management" and "Principal Shareholders."

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from Proxy Statement section entitled "Certain
Relationships and Related Transactions."

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

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*

- - ---------
* Incorporated by reference from Exhibit 13.

(2) Schedules

LOCATION
--------

Report of Independent Public Accountants on Financial Statement Schedules......... page 44
I. Condensed Financial Information of Registrant-Balance Sheets as of December
31, 1996 and 1995 and Statements of Income and Statements of Cash Flows for
each of the Three Years in the Period Ended December 31, 1996.............. page 45
II. Valuation and Qualifying Accounts for each of the Three Years in the Period
Ended December 31, 1996.................................................... page 49
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.

EXHIBIT
NUMBER DESCRIPTION
- - ------------------------------------------------------------------------------------------------------------

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 Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson 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 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.
10.5 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.
10.6(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.
10.6(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.
10.6(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.
10.7 1985 Incentive Stock Option 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 April 24, 1986.
10.8(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).
10.8(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).
10.8(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).
10.8(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).

EXHIBIT
NUMBER DESCRIPTION
- - ------------------------------------------------------------------------------------------------------------

10.8(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).
10.9 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.
10.10 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.
10.14 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.
10.15 Description of Terms of Signing Letter with Donald W. Warkentin dated June 7, 1995.

(b) Reports on Form 8-K filed during the quarter ended December 31, 1996.

TDS filed a Current Report on Form 8-K on December 19, 1996 dated December 16,
1996, which included a news release that announced the Company's Board of
Directors had authorized repurchases of up to 3,000,000 TDS Common Shares.

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

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 29, 1997 (except
with respect to the matter discussed in Note 16, as to which the date is
February 4, 1997). 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 29, 1997
(except with respect to the matter
discussed in Note 16, as to
which the date is February 4, 1997)

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- - --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)

BALANCE SHEETS

ASSETS
- - --------------------------------------------------------------------------------

DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1996 1995
- - -------------------------------------------------------------------------------------------

CURRENT ASSETS
Cash and cash equivalents $ 141 $ 1,867
Temporary investments 154 99
Notes receivable from affiliates 94,421 55,156
Advances to affiliates 1,616 1,816
Accounts receivable
Due from subsidiaries--Income taxes 16,211 25,890
Due from subsidiaries--Other 16,790 25,914
Other 2,903 4,895
Other current assets 2,572 2,710
----------------------
134,808 118,347

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

INVESTMENT IN SUBSIDIARIES
Underlying book value 2,351,057 2,121,651
Cost in excess of underlying book value at date of acquisition 112 1,987
----------------------
2,351,169 2,123,638

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

OTHER INVESTMENTS
Minority interests in telephone and cellular companies and other
investments 44,256 28,103

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

PROPERTY, PLANT and EQUIPMENT
Property, Plant and Equipment, net of accumulated depreciation 21,394 18,586

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

OTHER ASSETS AND DEFERRED CHARGES
Debt issuance expenses 2,030 2,175
Development and acquisition expenses 2,148 1,703
Other 54 3,700
----------------------
4,232 7,578
- - -------------------------------------------------------------------------------------------
$2,555,859 $2,296,252
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------

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

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- - --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------

DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1996 1995
- - -------------------------------------------------------------------------------------------

CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 1,810 $ 15,061
Notes payable 157,227 180,760
Notes payable to affiliates 47,990 37,086
Advances from affiliates -- 2,464
Accounts payable
Due to subsidiaries--Federal income taxes 8,407 14,405
Due to subsidiaries--Other 1,867 31,495
Other 1,108 5,379
Accrued interest 10,987 10,878
Accrued taxes (19,126) (6,837)
Other 7,711 4,931
----------------------
217,981 295,622
- - -------------------------------------------------------------------------------------------
DEFERRED LIABILITIES AND CREDITS
Investment tax credits (2,697) (1,934)
Income taxes 30,763 20,593
Postretirement benefits obligation other than pensions 626 11,216
Other 4,823 7,921
----------------------
33,515 37,796
- - -------------------------------------------------------------------------------------------
LONG-TERM DEBT, excluding current portion (Note B) 242,143 242,960
- - -------------------------------------------------------------------------------------------
REDEEMABLE PREFERRED SHARES, excluding current portion (Note A) 280 2,260
- - -------------------------------------------------------------------------------------------
NONREDEEMABLE PREFERRED SHARES 29,000 29,710
- - -------------------------------------------------------------------------------------------

COMMON STOCKHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 100,000,000
shares; issued and outstanding 54,237,180 and 51,137,426 shares,
respectively 54,237 51,137
Series A Common Shares, par value $1 per share; authorized
25,000,000 shares; issued and outstanding 6,916,546 and
6,893,101 shares, respectively 6,917 6,893
Common Shares issuable, 30,977 and 31,431 shares, respectively 1,461 1,496
Capital in excess of par value 1,661,093 1,417,514
Retained earnings 309,232 210,864
----------------------
2,032,940 1,687,904
----------------------
$2,555,859 $2,296,252
- - -------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------

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

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- - --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)

STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31,
-------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- - ----------------------------------------------------------------------------------------

Operating service revenues $ 61,239 $ 58,071 $ 49,455
Cost of sales and operating expenses 57,538 54,682 46,921
-------------------------------
Net operations 3,701 3,389 2,534
-------------------------------

Other income
Interest income received from affiliates 7,385 26,134 13,832
Other, net 4,843 (4,729) (1,707)
-------------------------------
12,228 21,405 12,125
-------------------------------

Income before interest and income taxes 15,929 24,794 14,659
Interest expense 15,790 32,233 22,954
Federal income tax expense (credit) (24,974) 7,340 2,205
-------------------------------
Corporate operations 25,113 (14,779) (10,500)
Equity in net income of subsidiaries and other
investments 103,026 123,395 70,321
-------------------------------

Net income $ 128,139 $ 108,616 $ 59,821
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------

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 $1.6
million, $103,000, $100,000, and $77,000 for the years 1997 through 2000,
respectively.
Note B: The annual requirements for principal payments on long-term debt are $232,000,
$742,000, $248,000, $258,000 and $270,000 for the years 1997 through 2001,
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.

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
- - --------------------------------------------------------------------------------
Telephone and Data Systems, Inc. (Parent)

STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994

- - -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 128,139 $ 108,616 $ 59,821
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 11,047 6,541 7,294
Gain on sale of investments (3,434) (408) --
Deferred taxes 5,432 5,364 8,804
Equity income (103,026) (123,395) (70,321)
Other noncash expense 677 1,317 691
Change in accounts receivable 20,795 (30,674) (2,194)
Change in accounts payable (39,897) 40,866 3,129
Change in accrued taxes (12,289) (4,713) (4,587)
Change in other assets and liabilities 2,849 1,401 (638)
-------------------------------------------
10,293 4,915 1,999
- - -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings -- 38,909 (130)
Repayment of long-term debt (2,815) (3,012) (3,137)
Change in notes payable (23,533) 83,131 91,629
Change in notes payable to affiliates 104,843 28,535 1,534
Change in advances from affiliates (2,464) 2,118 (3)
Common stock issued 5,114 8,078 11,185
Redemption of preferred shares (605) (9,609) (644)
Dividends paid (26,232) (23,971) (20,906)
-------------------------------------------
54,308 124,179 79,528
- - -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions
Value of assets acquired (121,053) (129,005) (215,658)
Common Shares issued 113,128 127,836 173,658
Preferred Shares issued -- -- 12,500
-------------------------------------------
Net cash paid for acquisitions (7,925) (1,169) (29,500)
Additions to property, plant and equipment (13,362) (7,899) (5,655)
Proceeds from sale of investments 500 4,800 --
Investments in subsidiaries (19,533) (302,722) (527)
Dividends from subsidiaries 17,953 17,690 17,373
Other investments (8,941) 1,169 (2,000)
Change in notes receivable from affiliates (35,165) 139,849 (65,350)
Change in advances to affiliates 200 20,200 (20,400)
Change in temporary investments (54) 85 (127)
-------------------------------------------
(66,327) (127,997) (106,186)
- - -------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,726) 1,097 (24,659)
CASH AND CASH EQUIVALENTS
Beginning of period 1,867 770 25,429
-------------------------------------------
End of period $ 141 $ 1,867 $ 770
- - -------------------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------

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

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- - --------------------------------------------------------------------------------

COLUMN A
DESCRIPTION COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E
- - ---------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER COLUMN D END OF
(DOLLARS IN THOUSANDS) PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ------------ ----------- ------------

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)
FOR THE YEAR ENDED DECEMBER 31, 1994
Deducted from deferred state tax asset:
For unrealized net operating losses (8,704) 327 (585) -- (8,962)
Deducted from accounts receivable:
For doubtful accounts (2,093) (9,710) -- 9,018 (2,785)
Deducted from marketable equity securities:
For unrealized loss (626) -- 626 -- --
- - -------------------------------------------------------------------------------------------------------------------------------

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
(CHIEF FINANCIAL OFFICER)
By: /S/ GREGORY J. WILKINSON
------------------------------------------
Gregory J. Wilkinson,
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

Dated March 20, 1996

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.

SIGNATURE TITLE DATE
- - -------------------------------------------------------------------- ----------- ---------------------

/S/ LEROY T. CARLSON DIRECTOR March 20, 1997
-----------------------------------------------
Leroy T. Carlson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 20, 1997
-----------------------------------------------
LeRoy T. Carlson, Jr.
/S/ MURRAY L. SWANSON DIRECTOR March 20, 1997
-----------------------------------------------
Murray L. Swanson
/S/ JAMES BARR III DIRECTOR March 20, 1997
-----------------------------------------------
James Barr III
/S/ RUDOLPH E. HORNACEK DIRECTOR March 20, 1997
-----------------------------------------------
Rudolph E. Hornacek
/S/ DONALD C. NEBERGALL DIRECTOR March 20, 1997
-----------------------------------------------
Donald C. Nebergall
/S/ HERBERT S. WANDER DIRECTOR March 20, 1997
-----------------------------------------------
Herbert S. Wander
/S/ WALTER C.D. CARLSON DIRECTOR March 20, 1997
-----------------------------------------------
Walter C.D. Carlson
/S/ LETITIA G.C. CARLSON DIRECTOR March 20, 1997
-----------------------------------------------
Letitia G.C. Carlson
/S/ DONALD R. BROWN DIRECTOR March 20, 1997
-----------------------------------------------
Donald R. Brown
/S/ GEORGE W. OFF DIRECTOR March 20, 1997
-----------------------------------------------
George W. Off

- - --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- - --------------------------------------------------------------------------------

EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- - ------------ ------------------------------------------------------------------------------------------------------------------

3.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report
on Form 8-A/A-2 dated December 20, 1994.

3.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2
dated December 20, 1994.

4.1 Articles of Incorporation, as amended, are hereby incorporated by reference to an exhibit to the Company's Report
on Form 8-A/A-2 dated December 20, 1994.

4.2 By-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Report on Form 8-A/A-2
dated December 20, 1994.

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.

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.

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.

EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- - ------------ ------------------------------------------------------------------------------------------------------------------

10.3 Stock Option Agreement, dated February 25, 1987, between the Company and Murray L. Swanson, 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 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.

10.5 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.

10.6(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.

10.6(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.

10.6(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.

10.7 1985 Incentive Stock Option 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 April 24, 1986.

10.8(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).

10.8(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).

10.8(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).

10.8(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).

10.9 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.

10.10 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.

10.11 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.

EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- - ------------ ------------------------------------------------------------------------------------------------------------------

10.12 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.

10.13 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.

10.14 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.

10.15 Description of Terms of Signing Letter with Donald W. Warkentin dated June 7, 1995.

11 Statement regarding computation of per share earnings.

12 Statements regarding computation of ratios.

13 Incorporated portions of 1996 Annual Report to Security Holders.

21 List of Subsidiaries of the Company.

23 Consent of independent public accountants.

27 Financial Data Schedules