EXHIBIT 13

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

Telephone and Data Systems, Inc. ("TDS" or the "Company") provides
high-quality telecommunications services to over 2.3 million cellular telephone,
telephone and radio paging customer units in 37 states and the District of
Columbia.

The accompanying financial statements present the results of operations of
the Company's three primary businesses: United States Cellular Corporation
("U.S. Cellular"), an 80.6%-owned subsidiary, TDS Telecommunications Corporation
("TDS Telecom"), a wholly owned subsidiary, and American Paging, Inc. ("American
Paging"), an 82.3%-owned subsidiary, as well as its developing personal
communications services ("PCS") business, Aerial Communications, Inc. ("Aerial",
formerly American Portable Telecom, Inc.), an 82.8%-owned subsidiary.

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

1996 MAJOR ACCOMPLISHMENTS

The Company made substantial progress during 1996 with excellent growth in
the cellular business and the rapid build out of the PCS business. The telephone
business continues to produce steady returns and strong cash flow, while the
paging business posted disappointing results.

U.S. Cellular continued its rapid growth during 1996. Customer units
increased 51%, exceeding the 1,000,000 mark, following a 69% increase in 1995.
The increase in customer units drove a 44% increase in revenues, a 48% increase
in cash flow and a 104% increase in operating income. The sale of non-strategic
cellular interests generated gains of $132.7 million and cash proceeds of $213.0
million. Capital expenditures to add cell sites, expand coverage and add
capacity totaled $219.4 million and expenditures for acquisitions totaled $56.1
million.

Aerial made substantial progress building its business this year. The focus
for 1996 was directed toward recruiting an experienced management team,
developing and executing a business plan, raising capital, and designing and
constructing networks in each of its markets. These activities significantly
increased expenses in 1996. PCS development expenses (included in "Investment
and Other Income (Expense)") increased to $43.9 million in 1996 from $7.8
million in 1995. Aerial had no revenues in 1996 as commercial service is not
expected to begin until March 1997.

Aerial's investment in property and equipment, including network design and
equipment, site acquisition and information system development costs, totaled
$312.6 million in 1996. To finance the development of its business, Aerial
completed an initial public offering in 1996 raising $195.3 million. Aerial also
negotiated a $200 million vendor financing arrangement for digital radio channel
and switching infrastructure equipment.

TDS Telecom continues to provide steady growth in revenues and cash flow.
Telephone access lines increased 14% resulting in a 13% increase in operating
revenues, a 10% increase in cash flow and a 5% increase in operating income. TDS
Telecom's investment in outside plant facilities and upgrades of recently
acquired companies for new customer growth and new digital switches totaled
$144.4 million, and expenditures for acquisitions totaled $88.1 million.

American Paging posted disappointing results for the year. During the third
quarter of 1995, American Paging launched a comprehensive restructuring
initiative relative to its sales and customer service organization. The
objectives of the restructuring were to increase sales through the direct
distribution channel, improve customer mix, lower administrative costs and
improve customer service.

The disruptions caused by the restructuring were more severe than
anticipated. Customer service and sales support was affected due to the
elimination of field service employees and problems with the customer management
and billing system. Sales and marketing activities, hurt by a high level of
employee turnover, produced no customer growth resulting in a 3% decline in
revenue. The decline in revenues combined with a 21% increase in operating
expenses caused operating losses to jump to $36.6 million in 1996 from $9.0
million in 1995.

-36-

To address these problems, American Paging appointed a new senior management
team, including a new President and CEO. The senior management team is in the
process of implementing a plan in 1997 centering on building a high quality,
focused sales and marketing organization, creating new, goal-oriented
distribution channel and pricing strategies, consolidating current systems to
reduce the cost of service and continually improving customer care practices.

RESULTS OF OPERATIONS

Telephone and Data Systems, Inc. reported net income available to common of
$126.3 million, or $2.08 per share, in 1996 compared to $102.0 million, or $1.74
per share, in 1995 and $58.0 million, or $1.06 per share, in 1994. Results of
operations primarily reflects significant cellular business unit growth and
steady telephone operations growth. Results of operations were negatively
impacted by Aerial's development costs as it proceeds to develop and construct
its PCS networks, as well as the losses incurred by American Paging. Gains on
sales of non-strategic cellular interests and other investments had a
significant impact on net income in 1996 and 1995.

Excluding PCS development costs and gains on the sales of cellular interests
and other investments, along with the related income taxes and minority
interest, net income available to common would have been $77.1 million or $1.27
per share, in 1996 compared to $68.1 million or $1.16 per share, in 1995 and
$53.2 million or $.98 per share in 1994.

OPERATING REVENUES increased 27% ($260.3 million) during 1996 and 31%
($223.6 million) during 1995 primarily as a result of growth in the cellular
telephone operations.

Cellular telephone revenues increased $215.4 million in 1996 and $160.0
million in 1995 on 51% and 69% increases in customer units, respectively, and
strong increases in inbound roaming revenues. Telephone revenues increased $47.8
million in 1996 and $48.5 million in 1995 as a result of acquisitions, increased
network usage, recovery of increased costs of providing long-distance services
and internal access line growth. Radio paging revenues decreased $3.0 million in
1996 and increased $15.1 million in 1995.

Cellular made up 58% of consolidated revenue in 1996, up from 45% in 1994.
Telephone and paging operations were 33% and 9% of consolidated revenue in 1996
and 42% and 13% in 1994, respectively.

OPERATING EXPENSES rose 29% ($238.2 million) in 1996 and 32% ($200.4
million) in 1995. Cellular telephone operating expenses increased $170.8 million
during 1996 and $134.6 million during 1995 due to the effects of additional
marketing and selling expenses to add new customers as well as the costs of
providing services to the larger customer base. Telephone operating expenses
increased $42.7 million during 1996 and $41.9 million during 1995 due to the
effects of acquisitions and growth in internal operations. Paging operating
expenses increased $24.7 million in 1996 and $23.9 million in 1995 due to
additional expenses to restructure certain business processes and additional
costs to serve current customers and to add new customers.

-37-

OPERATING INCOME increased 17% ($22.1 million) in 1996 and 21% ($23.2
million) in 1995. Cellular telephone operating income increased 104% ($44.6
million) in 1996 and 146% ($25.4 million) in 1995 reflecting the increase in
customers and revenues. Telephone operating income increased $5.1 million in
1996 and $6.6 million in 1995. Paging operating loss increased $27.6 million in
1996 and $8.8 million in 1995.

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

Operating Income
Cellular telephone.......................................... $ 87,366 $ 42,755 $ 17,385
Telephone................................................... 103,358 98,240 91,606
Radio paging................................................ (36,626) (8,997) (169)
-------------- -------------- --------------
$ 154,098 $ 131,998 $ 108,822
-------------- -------------- --------------
-------------- -------------- --------------
Operating Margins
Cellular telephone.......................................... 12.3% 8.7% 5.2%
Telephone................................................... 25.7% 27.7% 29.9%
Radio paging................................................ (35.2)% (8.4)% (.2)%
Consolidated................................................ 12.7% 13.8% 14.9%
-------------- -------------- --------------
-------------- -------------- --------------

In early 1997, Aerial expects to begin commercial service which will result
in Aerial's revenues and expenses being included in operating income. Operating
income is expected to decrease significantly in 1997 as a result of the
commencement of PCS operations.

INVESTMENT AND OTHER INCOME totaled $140.5 million in 1996, $103.9 million
in 1995 and $33.7 million in 1994.

CELLULAR INVESTMENT INCOME, the Company's share of income of cellular
markets in which the Company has a minority interest and follows the equity
method of accounting, increased 33% ($13.5 million) in 1996 and 56% ($14.6
million) in 1995 as income from the cellular markets increased. Cellular
investment income is net of amortization of license costs relating to these
minority interests.

GAIN ON SALE OF CELLULAR INTERESTS AND OTHER INVESTMENTS totaled $138.7
million in 1996, $86.6 million in 1995 and $7.5 million in 1994. TDS and U.S.
Cellular continue to assess the makeup of cellular holdings in order to maximize
the benefits derived from clustering markets. Certain markets, identified as
non-strategic, were sold or traded in the past few years resulting in the
recognition of gains.

PCS DEVELOPMENT COSTS totaled $43.9 million in 1996 and $7.8 million in
1995. Aerial has been devoting substantially all of its efforts to recruiting an
experienced management team, developing and executing a business plan, raising
capital, and designing and constructing its PCS networks. Costs incurred in the
development and administration of Aerial which do not relate to the design or
construction of specific identifiable assets have been expensed.

MINORITY SHARE OF INCOME, the minority shareholders' share of U.S.
Cellular's, American Paging's and Aerial's net income or loss and other minority
shareholders' and partners' share of subsidiaries' net income or loss, increased
$800,000 in 1996 and $16.8 million in 1995.

INTEREST EXPENSE decreased 16% ($8.0 million) in 1996 and increased 23%
($9.6 million) in 1995. Capitalized interest associated with expenditures for
PCS licenses and capitalized construction costs increased $14.4 million in 1996
and $13.2 million in 1995. Interest expense increased $6.9 million in 1996 and
$7.4 million in 1995 as a result of U.S. Cellular's convertible debt offering in
June of 1995. Interest expense from U.S. Cellular's vendor financing agreement
increased $5.3 million in 1995. TDS Telecom interest expense increased $1.2
million in 1996 and $1.4 million in 1995 due primarily to additional interest
expense of acquired telephone companies.

Corporate interest expense decreased $2.0 million in 1996 and increased $8.6
million in 1995 reflecting primarily changes in average short-term debt
balances. See "Financial Resources and Liquidity" for a further discussion of
short- and long-term debt.

-38-

TDS capitalized $27.6 million of interest expense in 1996 and $13.2 million
in 1995. Interest expense will increase significantly in 1997 when TDS
discontinues capitalizing interest upon commencement of Aerial's operations.

INCOME TAX EXPENSE increased 53% ($42.6 million) in 1996 and 99% ($40.3
million) in 1995, reflecting primarily the 36% and 83% increases in pretax
income, respectively. The effective income tax rates were 49% in 1996, 44% in
1995 and 40% in 1994. The increase in the 1996 effective tax rate reflects
additional income tax expense of approximately $10.0 million due to tax gains in
excess of book gains associated with the sale of certain cellular interests. The
lower 1994 rate reflects deferred income taxes provided on the book/tax basis
difference related to certain telephone acquisitions and certain income excluded
due to the dividend exclusion rules.

NET INCOME AVAILABLE TO COMMON was $126.3 million in 1996, $102.0 million in
1995 and $58.0 million in 1994. EARNINGS PER COMMON SHARE were $2.08 in 1996,
$1.74 in 1995 and $1.06 in 1994.

Net income available to common for 1996 and 1995 included significant gains
from the sale of cellular interest and other investments as well as significant
PCS development costs. The table below summarizes the effects of the gains and
PCS development costs (along with the related impact on income taxes and
minority interest) on net income available to common and earnings per share.

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)

NET INCOME AVAILABLE TO COMMON
Core Business................................................................. $ 77.1 $ 68.1 $ 53.2
Gains......................................................................... 64.5 40.6 5.8
PCS Development Costs......................................................... (15.3) (6.7) (1.0)
--------- --------- ---------
$ 126.3 $ 102.0 $ 58.0
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE
Core Business................................................................. $ 1.27 $ 1.16 $ .98
Gains......................................................................... 1.06 .69 .10
PCS Development Costs......................................................... (.25) (.11) (.02)
--------- --------- ---------
$ 2.08 $ 1.74 $ 1.06
--------- --------- ---------
--------- --------- ---------

TDS anticipates that start-up and development of high-quality networks and
the marketing of systems in Aerial's markets will reduce the rate of growth in
TDS's operating and net income from levels which would otherwise be achieved
during the next few years.

-39-

CELLULAR TELEPHONE OPERATIONS

TDS provides cellular telephone service through U.S. Cellular Corporation
[AMEX: USM]. Results of operations include 1,073,000 customer units at the end
of 1996 compared to 710,000 customer units at the end of 1995 and 421,000
customer units at the end of 1994.

YEAR ENDED OR AT DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- ------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER CUSTOMER AMOUNTS)

Operating Revenues
Local retail.................................................. $ 442,568 $ 289,518 $ 187,978
Inbound roaming............................................... 193,278 148,020 104,009
Long-distance and other....................................... 71,974 54,857 40,417
-------------- ------------- -------------
707,820 492,395 332,404
-------------- ------------- -------------
Operating Expenses
System operations............................................. 117,368 70,442 46,869
Marketing and selling......................................... 150,000 102,361 69,072
Cost of equipment sold........................................ 74,023 54,948 39,431
General and administrative.................................... 170,224 132,431 94,193
Depreciation.................................................. 74,631 57,302 39,520
Amortization.................................................. 34,208 32,156 25,934
-------------- ------------- -------------
620,454 449,640 315,019
-------------- ------------- -------------
Operating Income................................................ $ 87,366 $ 42,755 $ 17,385
-------------- ------------- -------------
-------------- ------------- -------------
Consolidated Markets:
Customers..................................................... 1,073,000 710,000 421,000
Markets....................................................... 131 137 130
Market penetration............................................ 4.94% 3.18% 1.98%
Cell sites in service......................................... 1,328 1,116 790
Average monthly service revenue per customer.................. $ 66.36 $ 72.48 $ 79.74
Churn rate per month.......................................... 1.9% 2.1% 2.3%
Marketing cost per gross customer addition.................... $ 367 $ 361 $ 408
-------------- ------------- -------------
-------------- ------------- -------------

OPERATING REVENUES increased 44% ($215.4 million) in 1996 and 48% ($160.0
million) in 1995. The revenue increases in 1996 and 1995 were driven by the 51%
and 69% growth in customer units and the 31% and 42% growth in inbound roaming
revenues, respectively. Acquisitions, which were not material in 1996, increased
operating revenues 13% ($44.2 million) in 1995. Average monthly revenue per
customer was $66.36 in 1996, $72.48 in 1995 and $79.74 in 1994.

LOCAL RETAIL REVENUE (charges to U.S. Cellular's customers for local system
usage) increased 53% ($153.0 million) in 1996 and 54% ($101.5 million) in 1995
due primarily to the 51% and 69% growth in customers, respectively. Local
minutes of use averaged 107 per month in 1996 and 95 per month in 1995 and 1994.
Average revenue per minute was $.40 in 1996, $.46 in 1995 and $.50 in 1994. U.S.
Cellular's use of incentive programs in 1996 and 1995 that encourage
lower-priced weekend and off-peak usage, in order to stimulate overall usage,
resulted in an increase in average minutes of use and a lower average revenue
per minute of use. Average monthly local retail revenue per customer was $42.54
in 1996, $44.03 in 1995 and $47.04 in 1994.

-40-

INBOUND ROAMING REVENUE (charges to customers of other systems who use U.S.
Cellular's cellular systems when roaming) increased 31% ($45.3 million) in 1996
and 42% ($44.0 million) in 1995 due to increased minutes of use. Minutes of use
increased 38% in 1996 and 60% in 1995. Average revenue per minute of use was
$.94 in 1996, $.99 in 1995 and $1.11 in 1994. Average monthly inbound roaming
revenue per U.S. Cellular customer was $18.58, $22.51 and $26.03 in 1996, 1995
and 1994, respectively. The decrease is the result of roaming revenue growing at
a slower rate than U.S. Cellular's customer base and negotiated reductions in
roaming rates.

LONG-DISTANCE AND OTHER REVENUE, including equipment sales, increased 31%
($17.1 million) in 1996 and 36% ($14.4 million) in 1995 primarily due to
increased long-distance revenue from the growth in the volume of long-distance
calls billed by U.S. Cellular.

The industry trend of declining average monthly retail revenue per customer
is believed to be related to the tendency of early customers in a market to be
the heaviest users during peak business hours. Newer customers have been added
through continued penetration of the consumer market, which tends to include
fewer peak business hour usage customers.

Management anticipates that average monthly revenue per customer will
continue to decrease as local retail revenue per minute of use declines due to
the usage patterns of incrementally added customers and as the growth rate of
the Company's customer base exceeds the growth rate of inbound roaming revenue,
diluting the roaming contribution per customer.

OPERATING EXPENSES increased 38% ($170.8 million) in 1996 and 43% ($134.6
million) in 1995. Acquisitions, which were not material in 1996, increased
operating expenses 13% ($40.7 million) in 1995. The increase in operating
expenses, excluding acquisition effects, is primarily due to the costs to expand
the customer base ($66.7 million in 1996 and $33.6 million in 1995); cost of
providing service to the expanding customer base ($46.9 million in 1996 and
$16.0 million in 1995); increased administrative expenses ($37.8 million in 1996
and $27.1 million in 1995) additional depreciation on the increased investment
in cell sites and equipment ($17.3 million in 1996 and $13.2 million in 1995)
and additional fraud charges ($13.9 million in 1996).

SYSTEM OPERATIONS EXPENSES increased 67% ($46.9 million) in 1996 and 50%
($23.6 million) in 1995 (34%, or $16.0 million excluding acquisitions) as a
result of increases in customer usage expenses, including significant increases
in fraud, and costs associated with operating the increased number of cell
sites.

Customer usage expenses (charges from other service providers for land line
connection, toll and roaming costs incurred by customers' use of systems other
than their local systems) grew 86% ($26.6 million) in 1996 and 62% ($13.4
million) in 1995. The increase was due primarily to inbound roaming usage.

Fraudulent use of U.S. Cellular's customers' telephone numbers increased
expenses $13.9 million to $18.0 million in 1996. U.S. Cellular continues to
implement procedures in its markets to combat this fraud, which is primarily
related to roaming usage.

Maintenance, utility and cell site expenses grew 18% ($6.5 million) in 1996
and 40% ($10.2 million) in 1995 reflecting the 19% and 41% increase in the
number of cell sites, respectively. The number of cell sites operated increased
to 1,328 in 1996 from 1,116 in 1995 and 790 in 1994.

MARKETING AND SELLING EXPENSES increased 47% ($47.6 million) in 1996 and 48%
($33.3 million) in 1995 (35%, or $24.3 million excluding acquisitions) due to
the increase in customer activations. COST OF EQUIPMENT SOLD increased 35%
($19.1 million) in 1996 and 39% ($15.5 million) in 1995 (23%, or $9.3 million
excluding acquisitions). Cost per gross customer addition (marketing and selling
expenses and cost of equipment sold less equipment revenues, divided by gross
customer additions) totaled $367 in 1996, $361 in 1995 and $408 in 1994.

GENERAL AND ADMINISTRATIVE EXPENSES increased 29% ($37.8 million) in 1996
and 41% ($38.2 million) in 1995 (29%, or $27.1 million excluding acquisitions).
The increases include the effects of an increase in expenses required to serve
the growing customer base and an expansion of both local administrative office
and corporate staff, resulting from growth in U.S. Cellular's business.

-41-

Operating cash flow increased 48% to $196.2 million in 1996 compared to a
60% increase to $132.2 million in 1995. The improvement was primarily due to the
growth in customers and revenue. U.S. Cellular continues to provide increasing
operating cash flow to support its operating and construction activities.

DEPRECIATION EXPENSE increased 30% ($17.3 million) in 1996 and 45% ($17.8
million) in 1995 (33%, or $13.2 million excluding acquisitions), reflecting
increases in average fixed asset balances of 34% and 48%, respectively.
AMORTIZATION EXPENSE increased 6% ($2.1 million) in 1996 and 24% ($6.2 million)
in 1995 (15%, or $4.0 million excluding acquisitions) due to increases in
deferred systems development costs in both years and license costs in 1995.

OPERATING INCOME was $87.4 million in 1996 compared to $42.8 million in 1995
and $17.4 million in 1994. Operating margins improved to 12.3% in 1996 from 8.7%
in 1995 and 5.2% in 1994. The improvement was primarily due to the substantial
growth in customers and revenue.

Management believes there exists a seasonality at U.S. Cellular in both
service revenues, which tend to increase more slowly in the first and fourth
quarters, and operating expenses, which tend to be higher in the fourth quarter
due to increased marketing activities and customer growth. This seasonality may
cause operating income to vary from quarter to quarter.

Competitors licensed to provide PCS services have initiated service in
certain U.S. Cellular markets in recent months. U.S. Cellular anticipates that
PCS operators will initiate service in several other of its markets in 1997 and
1998. U.S. Cellular's management is monitoring these and other PCS providers'
strategies, but cannot at this time anticipate what effect, if any, this
additional competition will have on U.S. Cellular's future strategies and
results.

TELEPHONE OPERATIONS

TDS manages its telephone service through TDS Telecommunications Corporation
("TDS Telecom"). TDS Telecom served 484,500 access lines at the end of 1996
compared to 425,900 access lines at the end of 1995 and 392,500 access lines at
the end of 1994 ("telephone operations"). TDS Telecom also manages a
long-distance provider, an Internet access provider and certain other
non-telephone operations ("other operations").

OPERATING REVENUE totaled $402.6 million in 1996, up 13% ($47.8 million)
from 1995 and totaled $354.8 million in 1995, up 16% ($48.5 million) from 1994.
The increases were due to the growth in telephone operations ($39.6 million in
1996 and $35.6 million in 1995) and additional other operations revenues ($8.0
million in 1996 and $13.3 million in 1995).

OPERATING EXPENSES totaled $299.3 million in 1996, up 17% ($42.7 million)
from 1995 and totaled $256.6 million in 1995, up 19% ($41.9 million) from 1994.
The increases were due to the growth in telephone operations ($33.6 million in
1996 and $29.8 million in 1995) and additional other operations expenses ($8.9
million in 1996 and $12.3 million in 1995).

Operating cash flow increased 10% to $192.3 million in 1996 compared to an
increase of 9% to $175.6 million in 1995 due primarily to the growth in
telephone operations. TDS Telecom continues to provide steadily growing
operating cash flow to support its construction activities.

OPERATING INCOME increased 5% ($5.1 million) in 1996 and increased 7% ($6.6
million) in 1995. The reduction in the growth rate of operating income was
caused by the the reduction in the telephone operating margins and other
operations margins.

-42-

Management expects TDS Telecom's revenues, operating income and operating
cash flow to increase modestly in 1997 from steady growth in operations. TDS
Telecom will continue to see pressures on revenue sources resulting from
regulatory changes and competitive pressures.

YEAR ENDED OR AT DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER CUSTOMER AMOUNTS)

Telephone Operations
Operating Revenue.................................................... $ 371,913 $ 332,287 $ 296,722
----------- ----------- -----------
Operating Expenses
Network operations................................................. 67,521 54,964 45,412
Depreciation and amortization...................................... 85,575 74,758 67,956
Customer operations................................................ 53,764 46,818 42,617
Corporate and other................................................ 62,276 58,998 49,706
----------- ----------- -----------
269,136 235,538 205,691
----------- ----------- -----------
Telephone Operating Income......................................... 102,777 96,749 91,031
----------- ----------- -----------
Other Operations
Revenues............................................................. 31,774 23,764 10,499
Expenses............................................................. 31,193 22,273 9,924
----------- ----------- -----------
Other Operations
Operating Income..................................................... 581 1,491 575
----------- ----------- -----------
Intercompany Eliminations
Revenues............................................................. (1,058) (1,210) (880)
Expenses............................................................. (1,058) (1,210) (880)
----------- ----------- -----------
Operating Income....................................................... $ 103,358 $ 98,240 $ 91,606
----------- ----------- -----------
----------- ----------- -----------
Companies.............................................................. 105 100 96
Access lines........................................................... 484,500 425,900 392,500
Growth in access lines from prior year-end:
Acquisitions......................................................... 33,100 13,500 19,700
Internal growth...................................................... 25,500 19,900 16,600
Telephone plant in service per access line............................. $ 2,461 $ 2,356 $ 2,283
Average monthly revenue per access line................................ $ 67.12 $ 66.87 $ 66.66
----------- ----------- -----------
----------- ----------- -----------

OPERATING REVENUE from telephone operations increased 12% ($39.6 million) in
1996 and 12% ($35.6 million) in 1995. Acquisitions increased telephone revenues
$18.8 million in 1996 and $16.8 million in 1995. Internal growth and increases
in the sales of custom calling features increased revenue by $8.0 million in
1996 and $6.0 million in 1995. Increased network usage resulted in revenue
increases of $4.5 million in 1996 and $5.8 million in 1995. Recovery of
increased costs of providing long-distance services resulted in increases in
revenue of $8.1 million in 1996 and $4.5 million in 1995. Average monthly
revenue per access line was $67.12 in 1996, $66.87 in 1995 and $66.66 in 1994.

OPERATING EXPENSES from telephone operations increased 14% ($33.6 million)
in 1996 and 15% ($29.8 million) in 1995. The effects of acquisitions increased
expenses 6% ($14.6 million) in 1996 and 7% ($13.8 million) in 1995. Depreciation
and amortization expenses increased 14% ($10.8 million) in 1996 and 10% ($6.8
million) in 1995 due primarily to increased investment in plant and equipment.
The development of a centralized network management center to provide more
effective network monitoring and maintenance and the development of groups to
explore new service offerings caused expenses to increase by $3.4 million and
$3.2 million, respectively, in 1996. These expenditures are expected to begin
producing cost efficiencies and new revenues in the next several quarters and
beyond. Additional routine maintenance activity and equipment write-offs
increased network expenses by $2.0 million in 1995. The remaining increase in
each year was due primarily to growth in internal operations.

-43-

OPERATING INCOME from telephone operations increased 6% ($6.0 million) in
1996 and increased 6% ($5.7 million) in 1995. The effects of acquisitions
increased operating income 4% ($4.2 million) in 1996 and 3% ($3.0 million) in
1995. The telephone operating margin was 27.6% in 1996, 29.1% in 1995 and 30.7%
in 1994. The reduction in operating margin was caused by earnings pressures from
regulatory agencies and long-distance providers and increased costs associated
with the development of the centralized network management center.

TDS Telecom is subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." The Company periodically reviews the criteria for applying
these provisions to determine whether continuing application of SFAS No. 71 is
appropriate. The Company believes that such criteria are still being met and
therefore has no current plans to change its method of accounting.

In analyzing the effects of discontinuing the application of SFAS No. 71,
management has determined that the useful lives of plant assets used for
regulatory and financial reporting purposes are consistent with generally
accepted accounting principles and therefore any adjustments to accumulated
depreciation would be immaterial, as would be the write-off of regulatory assets
and liabilities.

RADIO PAGING OPERATIONS

TDS manages its radio paging business through American Paging, Inc. [AMEX:
APP]. American Paging provided wireless messaging communications through its
digital radio transmission systems to 777,400 subscribers at the end of 1996
compared to 784,500 subscribers at the end of 1995 and 652,800 subscribers at
the end of 1994.

An integral part of the restructuring plan included the creation of a
Customer Telecare Center ("CTC"). The consolidation and transfer of back office
and customer service operations from 17 offices to the CTC created many
disruptions throughout American Paging. The process of eliminating field
administrative personnel and moving their duties to the CTC hurt customer
service and sales support due to early inefficiencies encountered in the
operation of the CTC. During the consolidation, it also became apparent that the
customer management and information system did not provide the flexibility
needed to support future customer growth and retention. American Paging is
currently assessing two potential customer management and billing systems.

Disruptions within the sales and marketing department led to an increase in
sales employee turnover which produced no customer growth and contributed to a
3% decline in revenue. The decline in revenues combined with a 21% increase in
expenses caused operating losses to jump to $36.6 million in 1996 from $9.0
million in 1995.

To address these problems, American Paging appointed a new senior management
team, including a new President and CEO. The senior management team began
implementing a plan in 1997 centering on building a high quality, focused sales
and marketing organization, creating new, goal-oriented distribution channel and
pricing strategies, consolidating current systems to reduce the cost of service
and continually improving customer care practices.

-44-

YEAR ENDED OR AT DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT AMOUNTS)

Operating Revenue............................................... $ 104,187 $ 107,150 $ 92,065
------------- ------------- -------------
Costs and Expenses
Cost of services.............................................. 30,092 24,062 19,347
Selling, general and administrative........................... 67,060 53,296 41,196
Cost of goods sold............................................ 9,884 14,097 14,513
Depreciation and amortization................................. 33,777 24,692 17,178
------------- ------------- -------------
140,813 116,147 92,234
------------- ------------- -------------
Operating (Loss)................................................ $ (36,626) $ (8,997) $ (169)
------------- ------------- -------------
------------- ------------- -------------
Pagers in service............................................... 777,400 784,500 652,800
Average monthly revenue per unit................................ $ 9.88 $ 10.57 $ 11.92
Transmitters in service......................................... 1,048 1,018 943
Churn rate per month............................................ 3.1% 2.5% 2.6%
Marketing cost per gross customer unit addition................. $ 94 $ 50 $ 41
------------- ------------- -------------
------------- ------------- -------------

OPERATING REVENUES decreased 3% ($3.0 million) in 1996 primarily as a result
of a 27% ($3.8 million) decline in equipment sales. Operating revenues increased
16% ($15.1 million) in 1995, primarily as a result of a 20% increase in the
number of pagers in service.

Average monthly revenue per unit declined 7% to $9.88 in 1996 and 11% to
$10.57 in 1995. The decline in average revenue per unit reflects competitive
pressures in 1996 and 1995 as well as a shift to lower revenue producing
reseller channels in 1995. As a part of the restructuring efforts, American
Paging is refocusing its marketing strategy to the higher revenue producing
direct distribution channel.

OPERATING EXPENSES increased 21% ($24.7 million) in 1996 and 26% ($23.9
million) in 1995. Restructuring costs totaled $9.3 million in 1996 and $2.9
million in 1995. Duplicate staffing, employee severance and legal and consulting
fees, included in selling, general and administrative expense, totaled $4.0
million in 1996 and $2.1 million in 1995. Write-offs of $5.3 million for
obsolete inventory, software and other assets, included in depreciation and
amortization expense, were recorded in 1996. During 1995, an $800,000 write-off
of assets retired was incurred as a result of the restructuring.

Operating expenses, excluding restructuring costs, increased 16% ($18.2
million) in 1996 and 23% ($21.0 million) in 1995. Costs of serving the customer
base and maintaining systems to provide system reliability and coverage
increased 25% ($6.0 million) in 1996 and 24% ($4.7 million) in 1995. Selling,
general and administrative expense increased 23% ($11.8 million) in 1996 and 24%
($10.0 million) in 1995. The cost per gross customer addition, excluding
customers added through acquisitions, was $94 in 1996 compared to $50 in 1995
and $41 in 1994. The large increase was due to the slow unit growth caused by
high employee turnover in the sales function coupled with the increase in sales
and marketing costs. Depreciation and amortization charges increased 19% ($4.6
million) in 1996 and 39% ($6.7 million) in 1995, reflecting increased investment
in pagers and related equipment. A change in useful lives of pagers and
transmitters adopted in 1994 increased depreciation expense by approximately
$1.7 million in 1995.

OPERATING LOSS was $36.6 million in 1996, $9.0 million in 1995 and $200,000
in 1994. Management expects American Paging to have modest success in attracting
and retaining new customers and holding down operating expenses. However,
management anticipates that American Paging will incur significant operating
losses again in 1997.

BROADBAND PERSONAL COMMUNICATIONS SERVICES TDS manages its broadband
personal communications services business through Aerial Communications, Inc.
[NASDAQ: AERL], formerly American Portable Telecom, Inc. Aerial's licenses
include the Major Trading Areas ("MTAs") of Minneapolis, Tampa-St.
Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus with 27.6
million population equivalents.

Aerial's focus in 1996 has been the development of its PCS business in its
MTAs. This focus will continue until the expected launch of commercial service
in early 1997. As of December 31, 1996, a total of 150

-45-

microwave paths have been cleared, with an additional 39 paths having agreements
with incumbents to be cleared. Management believes that sufficient paths have
been cleared to allow service launch in all six markets. Over 600 cell sites
have been secured as zoning and installation work continues. The National
Operations Center in Tampa is complete. Friendly user (customer) trials are
planned to conclude in the first quarter of 1997, with roll-out of commercial
service after successful customer trials.

Upon commencement of commercial operations, Aerial's revenues and expenses
will be included in operating income. Management expects to incur significant
expenditures for the continued development of PCS activities and start-up
operating losses during 1997.

To finance the development of its business, Aerial completed an initial
public offering in 1996 raising $195.3 million. Aerial also negotiated a $200
million vendor financing arrangement for digital radio channel and switching
infrastructure equipment. As part of the vendor financing arrangement, Aerial
issued 10-year 8.34% Series A Zero Coupon Notes due in 2006 for $100 million of
digital radio channel and switching equipment.

INFLATION

Management believes that inflation affects TDS's business to no greater
extent than the general economy.

FINANCIAL RESOURCES

TDS and its subsidiaries operate relatively capital-intensive businesses.
Rapid growth has caused expenditures for construction, expansion and acquisitio
programs to exceed internally generated cash flow. Accordingly, TDS has obtained
substantial funds from external sources to finance construction of cellular
telephone systems, to acquire PCS licenses, to build-out PCS markets and to fund
acquisitions. Although the steady internal cash flow from TDS Telecom and
increasing internal cash flow from U.S. Cellular have reduced the need for
external financing, Aerial's development and construction activities will
require substantial additional funds from external sources.

CASH FLOWS FROM OPERATING ACTIVITIES. TDS is generating substantial
internal funds from the rapid growth in customer units and revenues. Operating
cash flow (operating income plus depreciation and amortization) increased 19%
($62.2 million) to $385.7 million in 1996, and 24% ($63.2 million) to $323.5
million in 1995. The increases represent primarily cellular telephone operations
increases of 48% ($64.0 million) in 1996 and 60% ($49.4 million) in 1995. Cash
flows from other operating activities (investment and other income, interest and
income tax expense, and changes in working capital and other assets and
liabilities) required $90.7 million in 1996, $112.6 million in 1995, and $35.6
million in 1994.

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

Operating cash flow
Cellular telephone.................................................. $ 196,205 $ 132,213 $ 82,839
Telephone........................................................... 192,325 175,594 160,484
Radio paging........................................................ (2,849) 15,695 17,009
----------- ------------ -----------
385,681 323,502 260,332
Other operating activities............................................ (90,687) (112,626) (35,646)
----------- ------------ -----------
Cash flows from operating activiites.................................. $ 294,994 $ 210,876 $ 224,686
----------- ------------ -----------
----------- ------------ -----------

CASH FLOWS FROM FINANCING ACTIVITIES. TDS' long-term strategy is to provide
a strong yet flexible financial foundation for each of its principal
subsidiaries. Consolidated equity capital (common equity, preferred stock and
minority interest) was 68% of total capitalization at December 31, 1996,
compared to 73% at December 31, 1994. The change is primarily a result of
significant increases in long-term debt at U.S. Cellular and Aerial as well as
increases in TDS short-term debt. TDS targets a ratio of equity to total capital
in the range of 55% to 65%.

-46-

TDS has used short-term debt to finance its PCS, cellular telephone and
radio paging operations, for acquisitions and for general corporate purposes.
TDS takes advantage of attractive opportunities to retire short-term debt with
the proceeds from long-term debt, equity sales and sales of non-strategic
assets.

In 1996, Aerial received $195.3 million in an initial public offering of
Common Shares. In 1995, U.S. Cellular received approximately $221.5 million from
the sale of 20-year 6% zero coupon convertible debt and TDS sold $39.2 million
of Medium-Term Notes. In 1994, American Paging received $45.6 million in an
initial public offering of its Common Shares and TDS sold Common Shares for cash
totaling $4.9 million.

Aerial, U.S. Cellular and TDS Telecom have also used long-term debt to
finance their construction and development activities. In 1996, Aerial issued
10-year 8.34% zero coupon notes for $100 million of digital radio channel and
switching equipment. U.S. Cellular financed cellular system equipment and
construction costs totaling $59.5 million in 1995 and $18.0 million in 1994
under vendor financing arrangements. TDS Telecom telephone subsidiaries borrowed
$12.2 million in 1996, $12.0 million in 1995 and $16.8 million in 1994 under the
Rural Utility Service and the Rural Telephone Bank long-term federal government
loan programs to finance their telephone construction programs.

CASH FLOWS FROM INVESTING ACTIVITIES. TDS makes substantial investments
each year to acquire, construct, operate and maintain modern high-quality
communications networks and facilities with the intention of exceeding its
customers expectations as a basis for creating long-term value for shareowners.
In recent years, rapid changes in technology and new opportunities have required
substantial investments in revenue enhancing and cost reducing upgrades of the
Company's networks.

Cash expenditures for property, plant and equipment additions totaled $550.2
million in 1996, $360.0 million in 1995 and $319.7 million in 1994. In addition,
the acquisition and development of broadband and narrowband PCS licenses
required $26.5 million in 1996, $326.0 million in 1995 and $31.6 million in
1994. Cash used for acquisitions, excluding cash acquired, totaled $31.0 million
in 1996, $53.8 million in 1995 and $37.6 million in 1994. The sale of
non-strategic cellular assets and other investments provided $221.5 million in
net proceeds in 1996, $197.6 million in 1995 and $6.0 million in 1994.

PROPERTY, PLANT AND EQUIPMENT

The primary purpose of TDS's construction and expansion program is to
provide for significant customer growth, to upgrade service, to expand into new
communication areas, and to take advantage of service-

-47-

enhancing and cost-reducing technological developments. In 1996, the Company
invested a significant amount of money to develop and construct Aerial's
systems. The following table summarizes the Company's investments in its
communications networks and related facilities during the past three years.

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

Cellular telephone
Cell sites and equipment............................................ $ 133,832 $ 150,340 $ 128,479
Switching equipment................................................. 5,713 13,002 4,549
Systems development................................................. 28,753 10,148 9,886
Other............................................................... 79,825 37,388 24,250
------------ ----------- -----------
248,123 210,878 167,164
------------ ----------- -----------
Telephone
Central office...................................................... 47,208 38,697 46,618
Outside plant....................................................... 53,130 55,569 52,629
Other............................................................... 44,102 10,106 16,236
------------ ----------- -----------
144,440 104,372 115,483
------------ ----------- -----------
PCS
Cell sites and equipment............................................ 150,386 -- --
Switching equipment................................................. 123,470 -- --
Other............................................................... 38,713 8,521 --
------------ ----------- -----------
312,569 8,521 --
Less noncash items.................................................... (199,630) -- --
------------ ----------- -----------
112,939 8,521 --
------------ ----------- -----------
Radio paging
Pagers.............................................................. 12,081 15,582 15,641
Terminals and transmitters.......................................... 4,595 6,353 11,056
Customer Telecare Center............................................ 10,216 -- --
Other............................................................... 5,625 4,592 2,269
------------ ----------- -----------
32,517 26,527 28,966
------------ ----------- -----------
Other................................................................. 12,185 9,698 8,088
------------ ----------- -----------
$ 550,204 $ 359,996 $ 319,701
------------ ----------- -----------
------------ ----------- -----------

U.S. Cellular's capital additions include expenditures to add additional
cell sites and radio channels to expand coverage and add capacity. U.S. Cellular
constructed 242 cell sites in 1996, 292 in 1995 and 225 in 1994. TDS Telecom's
capital additions include expenditures for outside plant facilities and upgrades
of recently acquired companies for new customer growth and switch modernization.
TDS Telecom installed 35 digital switches in 1996, 39 in 1995 and 32 in 1994.
Aerial has completed the construction of the five planned switching centers and
the central Network Operations Center, cleared over 150 microwave paths and is
building over 600 cell sites.

The Company's expected 1997 property, plant and equipment additions reflect
the Company's construction and expansion programs and are anticipated to
aggregate approximately $810 million. In addition, Aerial's working capital and
operating expenses will require an estimated $255 million.

- The cellular capital additions budget totals approximately $300 million,
including about $258 million for new cell sites and about $30 million for
various information systems initiatives.

- The telephone capital additions budget totals approximately $130 million,
including about $56 million for new digital switches and other switching
facilities and $56 million for improvements to outside plant facilities.

-48-

- The PCS capital additions budget totals approximately $345 million,
including $255 million for switching equipment and $38 million for cell
sites. In addition, Aerial's working capital and operating expenses will
require an estimated $255 million.

- The radio paging capital additions are anticipated to total about $35
million, including $15 million for systems and transmitters and $16
million for pagers.

The Company expects to finance the budgeted additions to property, plant and
equipment primarily with internally generated cash, short-term and
intermediate-term financing, vendor financing and the sale of minority equity
interests in Aerial's MTAs to strategic investors.

ACQUISITIONS

TDS seeks to acquire cellular telephone and telephone interests which add
value to the organization. The table below summarizes interests acquired through
purchases and trades at the respective dates of acquisition during the last
three years and the aggregate consideration paid, net of cash acquired.

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Cellular interests acquired
Population equivalents (millions)........................................ .6 1.6 1.5
Units.................................................................... 17,000 79,000 18,000
Telephone interests acquired
Companies................................................................ 5 5 3
Access lines.............................................................. 33,100 13,500 19,700
Paging units acquired...................................................... -- 28,400 37,600
Consideration (millions)
Cash..................................................................... $ 31.0 $ 53.8 $ 37.6
TDS Common Shares........................................................ 113.1 127.8 173.7
TDS Preferred Shares..................................................... -- -- 12.5
USM Common Shares........................................................ -- 12.8 1.4
Other.................................................................... -- -- 1.4
--------- --------- ---------
Total Consideration.................................................... $ 144.1 $ 194.4 $ 226.6
--------- --------- ---------
--------- --------- ---------

The Company continually reviews attractive opportunities for the acquisition
of additional cellular and telephone companies.

TDS and U.S. Cellular continue to assess the makeup of cellular holdings in
order to maximize the benefits derived from clustering U.S. Cellular's markets.
As the number of opportunities for outright acquisitions of cellular interests
has decreased and as U.S. Cellular's clusters have grown to realize greater
economies of scale, U.S. Cellular's focus has shifted toward exchanges and sales
of non-strategic interests.

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 transfer
its controlling interests in ten markets, investment interests in 13 markets and
pay cash, the amount of which is dependent upon certain factors. U.S. Cellular
will receive controlling interests representing approximately 3.9 million
population equivalents ("pops") in the transaction, and will divest controlling
interests representing approximately 1.9 million pops and investment interests
representing 1.4 million pops. The transaction is subject to various regulatory
and other approvals.

U.S. Cellular expects that the completion of this transaction will have a
positive effect on its consolidated operations after the transition of operators
is complete. The transaction is also expected to significantly reduce investment
income immediately after it is completed. Because of the uncertainty of the
regulatory approval process, U.S. Cellular cannot estimate when the transaction
will be completed.

-49-

LIQUIDITY

The Company anticipates that the aggregate resources required for 1997 will
include approximately $810 million for capital spending and $255 million for
working capital and operating expenses for Aerial.

The Company is generating substantial internal funds from the rapid growth
in customer units and revenues. Operating cash flow (operating income plus
depreciation and amortization), primarily from cellular and telephone
operations, increased to $385.7 million in 1996 from $323.5 million in 1995 and
$260.3 million in 1994.

U.S. Cellular plans to finance its construction program primarily with
internally generated cash supplemented by short-term and intermediate-term
financing. TDS Telecom plans to finance its $130 million construction program
using internally generated cash supplemented by long-term financing from federal
government programs.

Aerial plans to finance its construction expenditures and working capital
requirements with short-term and intermediate-term financing, vendor financing
and sales of minority equity interests in MTAs to strategic investors.

TDS and its subsidiaries have cash and temporary investments totaling $119.3
million and longer-term investments totaling $32.4 million at December 31, 1996.
These investments are primarily the result of telephone operations' internally
generated cash. While certain regulated telephone subsidiaries' debt agreements
place limits on intercompany dividend payments, these restrictions are not
expected to affect the Company's ability to meet its cash obligations.

TDS and its subsidiaries also have access to a variety of external capital
sources. TDS and its subsidiaries had $653 million of bank lines of credit for
general corporate purposes at December 31, 1996. Unused amounts of such lines
totaled $496 million. These line of credit agreements provide for borrowings at
negotiated rates up to the prime rate.

TDS has a universal shelf registration statement which may be used from time
to time to issue debt securities and/or Common Shares for cash. As of December
31, 1996, $238.4 million remained unused on the universal shelf.

TDS and U.S. Cellular have shelf registration statements covering the
issuance of equity for acquisitions. In addition, the Company has issued Common
Shares for acquisitions pursuant to registration statements filed specifically
for particular acquisitions.

In December 1996, the Company authorized the repurchase of up to 3.0 million
TDS Common Shares over a period of three years. The Company plans to finance the
repurchase program using internally generated funds and borrowings under
short-term lines of credit. The Company may use repurchased shares to fund
acquisitions and for general corporate purposes. Subject to prevailing market
conditions, purchases may be made from time to time through open market
purchases or at negotiated prices in private transactions. The actual number of
Common Shares which may be repurchased will be subject to the trading price of
the Common Shares, the Company's financial position and other factors.

The Company anticipates requiring additional funding to finance Aerial's
expected capital expenditures and working capital requirements, to finance
acquisitions and for general corporate purposes. The timing and amount of such
funding requirements will depend on the timing of the completion of Aerial's
construction and operational plans, the timing of acquisitions, and other
relevant factors. There can be no assurance that sufficient funds will be
available to the Company on terms or at prices acceptable to the Company. If
sufficient funding is not made available to the Company on terms and prices
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. TDS and its subsidiaries anticipate
accessing public and private capital markets to issue debt and equity securities
only when capital requirements, financial market conditions and other factors
warrant.

-50-

PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 SAFE HARBOR CAUTIONARY STATEMENT

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

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

-51-

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

OPERATING REVENUES
Cellular telephone........................................................... $ 707,820 $ 492,395 $ 332,404
Telephone.................................................................... 402,629 354,841 306,341
Radio paging................................................................. 104,187 107,150 92,065
------------- ----------- -----------
1,214,636 954,386 730,810
------------- ----------- -----------
OPERATING EXPENSES
Cellular telephone........................................................... 620,454 449,640 315,019
Telephone.................................................................... 299,271 256,601 214,735
Radio paging................................................................. 140,813 116,147 92,234
------------- ----------- -----------
1,060,538 822,388 621,988
------------- ----------- -----------
OPERATING INCOME............................................................... 154,098 131,998 108,822
------------- ----------- -----------
INVESTMENT AND OTHER INCOME (EXPENSE)
Interest and dividend income................................................. 15,569 13,024 10,612
Cellular investment income, net of license cost amortization................. 54,150 40,666 26,018
PCS development costs........................................................ (43,950) (7,829) (1,709)
Gain on sale of cellular interests and other investments..................... 138,735 86,625 7,457
Other income (expense), net.................................................. 2,726 (2,771) 387
Minority share of income..................................................... (26,690) (25,858) (9,079)
------------- ----------- -----------
140,540 103,857 33,686
------------- ----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES........................................ 294,638 235,855 142,508
Interest expense............................................................... 42,853 50,848 41,251
------------- ----------- -----------
INCOME BEFORE INCOME TAXES..................................................... 251,785 185,007 101,257
INCOME TAX EXPENSE............................................................. 123,646 81,029 40,713
------------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE....................... 128,139 103,978 60,544
Cumulative Effect of Accounting Change......................................... -- -- (723)
------------- ----------- -----------
NET INCOME..................................................................... 128,139 103,978 59,821
Preferred Dividend Requirement................................................. (1,846) (1,934) (1,809)
------------- ----------- -----------
NET INCOME AVAILABLE TO COMMON................................................. $ 126,293 $ 102,044 $ 58,012
------------- ----------- -----------
------------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES (000S).......................................... 60,732 58,356 54,197
EARNINGS PER COMMON SHARE:
Before Cumulative Effect of Accounting Change................................ $ 2.08 $ 1.74 $ 1.07
Cumulative Effect of Accounting Change....................................... -- -- (.01)
------------- ----------- -----------
Net Income................................................................... $ 2.08 $ 1.74 $ 1.06
------------- ----------- -----------
------------- ----------- -----------
DIVIDENDS PER COMMON AND SERIES A COMMON SHARE................................. $ .40 $ .38 $ .36
------------- ----------- -----------
------------- ----------- -----------

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

-52-

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 128,139 $ 103,978 $ 59,821
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities
Cumulative effect of accounting change....................................... -- -- 723
Depreciation and amortization................................................ 231,583 191,504 151,511
Deferred taxes............................................................... 75,015 19,602 14,529
Investment income............................................................ (58,455) (43,188) (30,083)
Minority share of income..................................................... 26,690 25,858 9,079
Gain on sale of cellular interests and other investments..................... (138,735) (86,625) (7,457)
Noncash interest expense..................................................... 17,042 12,761 26
Other noncash expense........................................................ 24,022 16,946 15,669
Change in accounts receivable................................................ (28,687) (33,346) (22,401)
Change in accounts payable................................................... 23,531 (11,630) 31,714
Change in accrued taxes...................................................... (8,249) 6,252 (4,638)
Change in other assets and liabilities....................................... 3,098 8,764 6,193
----------- ----------- -----------
294,994 210,876 224,686
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings...................................................... 15,846 334,323 36,916
Repayment of long-term debt.................................................... (34,200) (30,734) (33,710)
Change in notes payable........................................................ (27,133) 80,351 92,318
Proceeds from the issuance of common stock..................................... 5,114 6,921 11,185
Minority partner capital (distributions) contributions......................... (4,100) 1,411 12,504
Redemption of preferred shares................................................. (605) (638) (9)
Dividends paid................................................................. (26,231) (23,972) (20,906)
Proceeds from the issuance of subsidiaries' stock.............................. 196,205 1,812 45,714
----------- ----------- -----------
124,896 369,474 144,012
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment..................................... (550,204) (359,996) (319,701)
Investments in cellular minority interests and license costs................... (23,134) (25,025) (25,494)
Distributions from partnerships................................................ 25,453 9,062 17,375
Investments in PCS licenses.................................................... (26,548) (326,035) (31,604)
Proceeds from investment sales................................................. 221,542 197,558 6,000
Change in other investments.................................................... (2,666) (3,632) 492
Acquisitions, excluding cash acquired.......................................... (31,019) (53,770) (37,552)
Change in temporary investments and marketable securities...................... (30,797) 11,871 (9,147)
----------- ----------- -----------
(417,373) (549,967) (399,631)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 2,517 30,383 (30,933)
CASH AND CASH EQUIVALENTS
Beginning of period............................................................ 55,116 24,733 55,666
----------- ----------- -----------
End of period.................................................................. $ 57,633 $ 55,116 $ 24,733
----------- ----------- -----------
----------- ----------- -----------

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

-53-

CONSOLIDATED BALANCE SHEETS--ASSETS

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

CURRENT ASSETS
Cash and cash equivalents............................................................... $ 57,633 $ 55,116
Temporary investments................................................................... 61,664 25,735
Construction funds...................................................................... 1,405 1,588
Accounts receivable
Due from customers, less allowance of $6,090 and $5,104, respectively................. 97,093 77,148
Other, principally connecting companies............................................... 84,119 68,196
Materials and supplies, at average cost............................................... 29,125 20,738
Other................................................................................. 15,031 12,689
------------- -------------
346,070 261,210
------------- -------------
INVESTMENTS
Cellular license acquisition costs, net of amortization................................. 1,088,409 1,075,820
Cellular minority interests............................................................. 206,390 158,559
Broadband PCS license acquisition costs................................................. 322,420 301,196
Narrowband PCS license acquisition costs................................................ 59,003 55,365
Franchise and other costs in excess of the underlying book value of subsidiaries, net of
amortization........................................................................... 181,845 168,608
Other investments....................................................................... 84,537 87,726
------------- -------------
1,942,604 1,847,274
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Cellular Telephone
In service and under construction..................................................... 846,005 674,450
Less accumulated depreciation......................................................... 195,251 144,423
------------- -------------
650,754 530,027
------------- -------------
Telephone
In service and under construction, substantially at original cost..................... 1,301,654 1,099,714
Less accumulated depreciation......................................................... 527,266 442,699
------------- -------------
774,388 657,015
------------- -------------
PCS
Primarily under construction.......................................................... 324,703 12,025
Less accumulated depreciation......................................................... 1,980 47
------------- -------------
322,723 11,978
------------- -------------
Radio Paging
In service and under construction..................................................... 113,000 102,385
Less accumulated depreciation......................................................... 61,528 42,933
------------- -------------
51,472 59,452
------------- -------------
Other
In service and under construction..................................................... 74,906 75,910
Less accumulated depreciation......................................................... 45,354 40,972
------------- -------------
29,552 34,938
------------- -------------
1,828,889 1,293,410
------------- -------------
OTHER ASSETS AND DEFERRED CHARGES......................................................... 83,406 67,188
------------- -------------
$ 4,200,969 $ 3,469,082
------------- -------------
------------- -------------

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

-54-

CONSOLIDATED BALANCE SHEETS -- LIABILITIES AND STOCKHOLDERS' EQUITY

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

CURRENT LIABILITIES
Current portion of long-term debt and preferred shares.................................. $ 38,197 $ 49,233
Notes payable........................................................................... 160,537 184,320
Accounts payable........................................................................ 205,427 113,995
Advance billings and customer deposits.................................................. 32,434 27,706
Accrued interest........................................................................ 11,777 11,573
Accrued taxes........................................................................... 3,194 11,415
Other................................................................................... 57,701 29,482
------------- -------------
509,267 427,724
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability....................................................... 183,792 103,206
Postretirement benefits obligation other than pensions.................................. 11,451 12,146
Other................................................................................... 19,663 22,943
------------- -------------
214,906 138,295
------------- -------------
LONG-TERM DEBT, excluding current portion................................................. 982,232 858,857
------------- -------------
REDEEMABLE PREFERRED SHARES, excluding current portion.................................... 280 1,587
------------- -------------
MINORITY INTEREST in subsidiaries......................................................... 432,343 328,544
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 1,417,513
Retained earnings....................................................................... 309,233 207,326
------------- -------------
2,032,941 1,684,365
------------- -------------
$ 4,200,969 $ 3,469,082
------------- -------------
------------- -------------

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

-55-

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

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

COMMON SHARES
Balance beginning of period............................................. $ 51,137 $ 47,938 $ 43,504
Add
Acquisitions.......................................................... 2,649 2,960 4,041
Dividend reinvestment, incentive and benefit plans.................... 100 186 175
Sales of Common Shares................................................ -- -- 100
Conversion of Preferred Shares........................................ 348 41 116
Conversion of Series A Common Shares.................................. 3 12 2
------------- ------------- -------------
Balance end of period................................................... $ 54,237 $ 51,137 $ 47,938
------------- ------------- -------------
SERIES A COMMON SHARES
Balance beginning of period............................................. $ 6,893 $ 6,887 $ 6,881
Add (Deduct)
Dividend reinvestment plan............................................ 27 18 8
Conversion to Common Shares........................................... (3) (12) (2)
------------- ------------- -------------
Balance end of period................................................... $ 6,917 $ 6,893 $ 6,887
------------- ------------- -------------
------------- ------------- -------------
COMMON SHARES ISSUABLE
Balance beginning of period............................................. $ 1,496 $ 1,995 $ 15,189
Add (Deduct)
Acquisitions.......................................................... 464 -- 1,995
Shares issued pursuant to acquisition agreements...................... (499) (499) (15,189)
------------- ------------- -------------
Balance end of period................................................... $ 1,461 $ 1,496 $ 1,995
------------- ------------- -------------
------------- ------------- -------------
CAPITAL IN EXCESS OF PAR VALUE
Balance beginning of period............................................. $ 1,417,513 $ 1,288,453 $ 1,069,022
Add (Deduct)
Acquisitions.......................................................... 111,305 125,886 182,812
Dividend reinvestment, incentive and benefit plans.................... 4,487 6,994 6,667
Sales of Common Shares................................................ -- -- 4,924
Capital stock expense................................................. (25) (124) (53)
Conversion of Preferred Shares........................................ 4,254 (3,127) 1,324
Gain on sale of subsidiary stock...................................... 123,246 714 21,184
Net unrealized gain (loss) on marketable equity securities............ 142 (2,090) 2,100
Income tax effects of capital stock transactions...................... 171 807 473
------------- ------------- -------------
Balance end of period................................................... $ 1,661,093 $ 1,417,513 $ 1,288,453
------------- ------------- -------------
------------- ------------- -------------
RETAINED EARNINGS
Balance beginning of period............................................. $ 207,326 $ 127,765 $ 89,689
Add net income.......................................................... 128,139 103,978 59,821
------------- ------------- -------------
335,465 231,743 149,510
------------- ------------- -------------
Deduct
Dividends
Common and Series A Common Shares................................... 24,274 21,910 19,287
Preferred Shares.................................................... 1,958 2,507 2,458
------------- ------------- -------------
26,232 24,417 21,745
------------- ------------- -------------
Balance end of period................................................... $ 309,233 $ 207,326 $ 127,765
------------- ------------- -------------
------------- ------------- -------------

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

-56-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of Telephone and Data Systems, Inc. and its
subsidiaries ("TDS" or the "Company") conform to generally accepted accounting
principles. The accounting records of the telephone subsidiaries are maintained
in accordance with the uniform systems of accounts prescribed by the regulatory
bodies under whose jurisdiction the subsidiaries operate.

NATURE OF OPERATIONS

TDS is a diversified telecommunications company which, at December 31, 1996,
provided high-quality telecommunications services to approximately 2.3 million
cellular telephone, telephone and radio paging customers in 37 states and the
District of Columbia. The Company conducts substantially all of its cellular
operations through its 80.6%-owned subsidiary, United States Cellular
Corporation [AMEX:USM], its telephone operations through its wholly owned
subsidiary, TDS Telecommunications Corporation ("TDS Telecom"), and its radio
paging operations through its 82.3%-owned subsidiary, American Paging, Inc.
[AMEX:APP]. The Company is developing its personal communications services
("PCS") operations through its 82.8%-owned subsidiary Aerial Communications,
Inc. [NASDAQ:AERL] (formerly American Portable Telecom, Inc.). PCS development
costs for each of the three years ended December 31, 1996 are set forth in the
Consolidated Statements of Income. See Note 14-Business Segment Information for
summary financial information on each business segment.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of TDS, its
majority-owned subsidiaries since acquisition and the cellular telephone
partnerships in which TDS has a majority general partnership interest. All
material intercompany items have been eliminated. Certain amounts reported in
prior years have been reclassified to conform to current period presentation.

TDS includes as investments in subsidiaries the value of the consideration
given and all direct and incremental costs relating to acquisitions accounted
for as purchases. All costs relating to unsuccessful negotiations for
acquisitions are expensed.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS

Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost, which
approximates market. Those investments with original maturities of more than 12
months are classified as marketable securities and are stated at amortized cost.

INVESTMENTS

Cellular license acquisition costs consist of costs incurred in acquiring
Federal Communications Commission ("FCC") licenses or minority interests which
have been awarded FCC licenses to provide cellular service. These costs include
amounts paid to license applicants and owners of interests in cellular entities
awarded licenses; amounts paid for legal, engineering, and consulting services;
amounts incurred by TDS in acquiring these interests; and goodwill. These costs
are capitalized and amortized through charges to expense over 40 years upon
commencement of operations. Amortization amounted to $28.5 million, $27.8

-57-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 (CONTINUED)
million and $24.2 million in 1996, 1995 and 1994, respectively. Accumulated
amortization of cellular license costs was $112.2 million and $90.6 million at
December 31, 1996 and 1995, respectively. Included in cellular license costs is
approximately $322 million and $363 million at December 31, 1996 and 1995,
respectively, of goodwill which resulted from various acquisitions structured to
be tax-free.

Investments in cellular minority interests consist of amounts invested in
cellular entities in which TDS holds a minority interest. The Company follows
the equity method of accounting, which recognizes TDS's proportionate share of
the income and losses accruing to it under the terms of its partnership or
shareholder agreements, for its long-term investments ($196.0 million and $146.1
million at December 31, 1996 and 1995, respectively). Income and losses from
these entities are reflected in the consolidated income statements on a pretax
basis. At December 31, 1996, the cumulative share of income from minority
cellular investments accounted for under the equity method was $184.3 million,
of which $94.7 million was undistributed. The cost method of accounting is
followed for certain minority interests managed by others ($10.4 million and
$12.5 million at December 31, 1996 and 1995, respectively).

Broadband and Narrowband PCS license acquisition costs consist of costs
incurred in acquiring PCS licenses ($341.8 million) and capitalized interest
($39.6 million). These costs will be amortized through charges to expense upon
commencement of operations.

Telephone franchise and other costs include the costs in excess of the
underlying book value of acquired telephone companies. Costs in excess of the
underlying book value relating to acquisitions initiated before November 1,
1970, aggregating $6.5 million, are not being amortized. Costs aggregating
$204.9 million and $186.9 million at December 31, 1996 and 1995, respectively,
relating to acquisitions since November 1, 1970, are being amortized on a
straight-line basis over a 40-year period. Amortization amounted to $4.9
million, $4.4 million and $3.3 million in 1996, 1995 and 1994, respectively.
Accumulated amortization of excess cost was $29.6 million and $24.7 million at
December 31, 1996 and 1995, respectively. Included in excess cost is
approximately $143 million and $142 million at December 31, 1996 and 1995,
respectively, of goodwill which resulted from various acquisitions structured to
be tax-free.

Other investments consist of the following:

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

Minority telephone and paging interests................................................ $ 20,989 $ 30,422
Long-term notes receivable............................................................. 14,974 16,419
Rural Telephone Bank Stock, at cost.................................................... 6,639 6,350
Marketable equity securities........................................................... 2,673 346
Marketable non-equity securities....................................................... 29,735 24,871
Other.................................................................................. 9,527 9,318
--------- ---------
$ 84,537 $ 87,726
--------- ---------
--------- ---------

The equity method of accounting is followed for minority telephone and
paging interests in which TDS holds common stock ownership of at least 20% or
can influence the policies of the affiliated company. At December 31, 1996, the
cumulative share of income from minority telephone and paging investments
accounted for under the equity method was $4.1 million, of which $2.2 million
was undistributed.

The Company's investment in debt securities with original maturities of more
than 12 months are classified as marketable non-equity securities and
held-to-maturity. They are stated at amortized cost.

-58-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 (CONTINUED)
Information regarding the Company's marketable nonequity securities is
summarized below.

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

Held-to-Maturity
U.S. Treasury and other U.S. government corporations and agencies
Aggregate Fair Value
Current.......................................................................... $ 46,622 $ 12,293
Noncurrent....................................................................... 29,882 25,200
Amortized Cost Basis
Current.......................................................................... 46,603 12,337
Noncurrent....................................................................... 29,735 24,871
Gross Unrealized
Holding Gains.................................................................... 175 343
Gross Unrealized...................................................................
Holding Losses................................................................... $ 8 $ 58
--------- ---------
--------- ---------

The noncurrent investments have contractual maturities of more than one to
five years at December 31, 1996. No sales or transfers of securities classified
as held-to-maturity occurred during 1996.

REVENUE RECOGNITION

TDS's revenues are recognized when earned. Telephone network access and
long-distance services are furnished jointly with other companies, primarily
AT&T and the Bell Operating Companies. Compensation for interstate access
services is based on tariffed access charges to interstate long-distance
carriers as filed by the National Exchange Carrier Association with the FCC on
behalf of TDS. Such compensation amounted to 32%, 33% and 31% of telephone
revenues in 1996, 1995 and 1994, respectively. Compensation for intrastate toll
and access services is based on tariffed access charges, cost separation
studies, nationwide average schedules or special settlement arrangements with
intrastate long-distance carriers. Network access and long-distance revenues
based on cost separation studies represent estimates pending completion and
acceptance of final cost studies. Management believes that recorded amounts
represent reasonable estimates of the final amounts.

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs
totaled $29.8 million, $17.2 million and $13.7 million for the years ended
December 31, 1996, 1995 and 1994, respectively.

EARNINGS PER COMMON SHARE

Earnings per Common Share were computed by dividing Net Income Available to
Common, less a minority income adjustment, by the weighted average number of
Common Shares, Series A Common Shares and dilutive common equivalent shares
outstanding during the year. The minority income adjustment, $271,000 and
$411,000 in 1995 and 1994, respectively, reflects the additional minority share
of USM's income computed as if all of USM's issuable securities were
outstanding. Dilutive common stock equivalents consist of Common Shares issuable
upon conversion of dilutive series of Preferred Shares and Common Share options.

Preferred dividend requirements include all dividends paid on Preferred
Shares which are not dilutive common stock equivalents. For the year ended
December 31, 1996, the preferred dividend requirement on all outstanding
Preferred Shares was $1.8 million.

-59-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES

Following are supplemental cash flow disclosures for interest and income
taxes paid, acquisitions and certain noncash transactions.

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

Interest paid.............................................................. $ 76,062 $ 49,414 $ 39,904
Income taxes paid.......................................................... 67,907 60,515 27,644
Common Shares issued by TDS for conversion of TDS Preferred Shares......... 4,602 948 1,714
Increase in PCS network equipment and prepaid infrastructure costs through
the issuance of long-term debt............................................ 100,000 -- --
Additions to property, plant and equipment financed through accounts
payable and accrued expenses.............................................. $ 87,109 $ 3,943 $ (9,958)
--------- --------- ---------
--------- --------- ---------

TDS has acquired operating telephone and paging companies, certain cellular
licenses and operating companies and certain other assets since January 1, 1994.
In conjunction with these acquisitions, the following assets were acquired and
liabilities assumed, and Common Shares and Preferred Shares issued:

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

Property, plant and equipment....................................... $ 55,692 $ 56,132 $ 47,400
Cellular licenses................................................... 95,447 129,510 169,845
Franchise and other costs........................................... 17,679 25,657 41,692
Minority interest................................................... (1,109) (1,941) (259)
Increase (decrease) in equity method investment in cellular
interests.......................................................... (3,641) 977 (15,586)
Long-term debt...................................................... (22,979) (9,254) (21,571)
Deferred credits.................................................... (6,205) (538) (6,225)
Other assets and liabilities, excluding cash and cash equivalents... 9,297 (6,143) 9,808
Common Shares issued and issuable................................... (113,128) (127,836) (173,658)
Preferred Shares issued............................................. -- -- (12,500)
USM Common Shares issued and issuable............................... (34) (12,794) (1,394)
------------ ------------ ------------
Decrease in cash due to acquisitions................................ $ 31,019 $ 53,770 $ 37,552
------------ ------------ ------------
------------ ------------ ------------

-60-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2

INCOME TAXES

TDS files a consolidated federal income tax return. Income tax provisions
charged to net income before the cumulative effect of an accounting change are
summarized as follows:

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

Current:
Federal................................................................ $ 31,356 $ 44,690 $ 20,921
State.................................................................. 17,275 16,736 4,873
Deferred:
Federal................................................................ 67,040 19,253 13,440
State.................................................................. 10,072 2,386 2,963
Amortization of deferred investment tax credits.......................... (2,097) (2,036) (1,484)
----------- --------- ---------
Total income tax expense................................................. $ 123,646 $ 81,029 $ 40,713
----------- --------- ---------
----------- --------- ---------

Investment tax credits resulting from investments in telephone plant and
equipment have been deferred and are being amortized over the service lives of
the related property.

The statutory federal income tax rate is reconciled to TDS's effective
income tax rate before the cumulative effect of an accounting change below.

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Statutory federal income tax rate................................................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit....................................... 8.3 6.9 5.1
Amortization of license acquisition costs and costs in excess of book value...... 1.7 2.4 3.5
Acquisition-related tax basis adjustment......................................... -- -- (2.7)
Dividend exclusion............................................................... -- (.1) (1.8)
Amortization of deferred investment tax credits.................................. (.8) (1.0) (1.5)
Effects of corporations not included in consolidated federal tax return.......... 1.7 2.1 1.4
Sale of cellular interests....................................................... 4.9 -- --
Other differences, net........................................................... (1.7) (1.5) 1.2
--------- --------- ---------
Effective income tax rate........................................................ 49.1% 43.8% 40.2%
--------- --------- ---------
--------- --------- ---------

The increase in the 1996 effective tax rate reflects additional income tax
expense due to tax gains in excess of book gains associated with the sale of
certain cellular interests. The lower 1994 rate reflects deferred income taxes
provided on the book/tax basis difference related to certain telephone
acquisitions and certain income excluded due to the dividend exclusion rules.

The total income tax expense for the year ended December 31, 1994, including
the cumulative effect of an accounting change was $40.3 million. The effective
income tax rate including the cumulative effect of an accounting change was
40.3% in 1994.

Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax bases.

The Company's current net deferred tax assets totaled $2.7 million and $3.2
million as of December 31, 1996 and 1995, respectively. The net current deferred
tax asset primarily represents the deferred tax effects of unearned revenues.

-61-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 (CONTINUED)
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of December 31, 1996 and 1995, are as follows:

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

Deferred Tax Asset:
Alternative minimum tax credit carryforward....................................... $ 10,433 $ 10,316
State operating loss carryforwards................................................ 17,055 10,537
Postretirement benefits........................................................... 4,819 4,502
Other............................................................................. 15,059 9,075
----------- -----------
47,366 34,430
Less valuation allowance............................................................ (16,891) (10,061)
----------- -----------
Net Deferred Tax Asset.............................................................. 30,475 24,369
----------- -----------
Deferred Tax Liability:
Property, plant and equipment..................................................... 86,056 83,131
Partnership investments........................................................... 26,965 20,047
Investment in equity securities................................................... 40,540 2,572
Minority share of USM income...................................................... (7,122) (1,500)
Effects of corporations not included in consolidated federal tax return........... 3,945 3,642
Licenses.......................................................................... 38,656 16,001
Other............................................................................. 25,227 3,682
----------- -----------
Total Deferred Tax Liability........................................................ 214,267 127,575
----------- -----------
Net Deferred Income Tax Liability................................................. $ 183,792 $ 103,206
----------- -----------
----------- -----------

At December 31, 1996, TDS had $10.4 million of federal alternative minimum
tax credit carryforward available to offset regular income tax payable in future
years. In addition, TDS had $267.7 million of state net operating loss
carryforward at December 31, 1996, expiring between 1996 and 2010, which
generated a $17.1 million deferred tax asset. A valuation allowance was
established for the state operating loss carryforwards since it is more likely
than not that a portion will expire before such carryforwards can be utilized.

TDS's telephone subsidiaries have recorded additional deferred income tax
liabilities related primarily to temporary differences not deferred under
rate-making policy. A corresponding regulatory asset or liability has been
established to offset these deferred income tax adjustments. The unamortized
regulated asset and liability balances are $4.3 million and $4.5 million,
respectively, as of December 31, 1996, and $5.0 million and $5.8 million,
respectively, as of December 31, 1995. These amounts are being amortized over
the lives of the related temporary differences.

NOTE 3

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost.

Telephone plant in service and under construction is stated at the original
cost of construction including the capitalized costs of certain taxes,
payroll-related expenses, and an allowance for funds used during construction
("AFUDC"). The composite weighted average AFUDC rates were 7.3%, 9.3% and 10.4%
in 1996, 1995 and 1994, respectively.

-62-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 (CONTINUED)

Renewals and betterments of units of property are added to telephone plant
in service. The original cost of depreciable property retired is removed from
plant in service and, together with removal cost less any salvage realized, is
charged to accumulated depreciation. Repairs and renewals of minor items of
property are included in plant operations expense. No gain or loss is recognized
on ordinary retirements of depreciable telephone property.

AERL capitalizes interest ($1.2 million in 1996) on certain work in process
expenditures. When the assets are placed in service, they will be depreciated
over their respective useful lives.

Certain costs relating to the development of computer software for internal
use are capitalized and are amortized over the estimated five-year life of the
software.

Depreciation is provided for book purposes using the straight-line method.
Composite depreciation rates, as applied to the average cost of depreciable
property, are as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------

Cellular Telephone............................................................... 10.4% 10.0% 10.5%
Telephone........................................................................ 7.2 7.1 7.5
PCS.............................................................................. 20.2 2.2 --
Radio Paging..................................................................... 27.9 22.1 23.1
Other............................................................................ 15.9 10.0 12.8
--- --- ---
--- --- ---

NOTE 4

ACQUISITIONS AND SALES

During 1996, 1995 and 1994, TDS and its subsidiaries completed the following
business combinations:

CONSIDERATION
-----------------------------
TDS AND USM
COMMON STOCK,
CASH, NOTES TDS PREFERRED
AND SHARES, AND
LONG-TERM SUBSIDIARY
DEBT PREFERRED STOCK
----------- ----------------
(DOLLARS IN THOUSANDS)

Acquisitions During 1996
Cellular interests............................................................ $ 13,596 $ 42,499
Majority interests in five telephone companies................................ 17,423 70,663
Acquisitions During 1995
Cellular interests............................................................ $ 41,885 $ 94,542
Majority interests in five telephone companies................................ 250 46,087
Paging interests.............................................................. 5,656 --
Acquisitions During 1994
Cellular interests............................................................ $ 29,599 $ 110,732
Majority interests in three telephone companies............................... 7,386 71,945
Paging interest............................................................... 4,875 4,875
----------- ----------------
----------- ----------------

-63-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 (CONTINUED)
Assuming that these acquisitions had taken place on January 1, 1995,
unaudited pro forma results of operations from continuing operations would have
been as follows:

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)

Operating revenues.............................................................. $ 1,229,053 $ 1,013,326
Net income...................................................................... 129,199 105,926
Earnings per share.............................................................. $ 2.08 $ 1.69
------------- -------------
------------- -------------

SALES OF CELLULAR AND OTHER INVESTMENTS

The $138.7 million gain in 1996 reflects the sales of non-strategic cellular
and other investments. USM sold its majority interests in eight markets and
minority interests in two other markets, received cash from the settlement of
two separate legal matters and received cash in an exchange of markets with
another cellular operator. AERL sold its majority interests in two markets.
These transactions, along with the sales of certain other investments by TDS,
generated net cash proceeds of $221.5 million.

The $86.6 million gain in 1995 reflects the sales and exchanges of
non-strategic cellular and other investments. USM sold its majority interests in
six markets and its minority interests in six markets during 1995. These sales,
along with the sales of marketable equity securities and certain other
investments by TDS, generated net cash proceeds of $197.6 million.

The $7.5 million gain in 1994 reflects the sale and exchange of
minority-owned cellular and telephone interests. The cellular gain represents
the excess of the fair market value of the cellular interests traded over the
book value of such interests. The Company also sold its minority interest in a
telephone company for preferred shares of the telephone company having a face
value of $5.9 million and $6.0 million in cash.

NOTE 5

NOTES PAYABLE

TDS has used short-term debt to finance its investments in PCS, cellular
telephone and radio paging operations, for acquisitions, and for general
corporate purposes. Long-term debt and equity financing from time to time have
retired such short-term debt. Proceeds from an AERL initial public offering
retired $131.2 million of short-term debt in 1996. (See Note 7-Sale of Stock by
Subsidiaries.) Proceeds from the sales of non-strategic cellular and other
investments from time to time in 1996 and 1995 have been used to retire
short-term debt. Proceeds from a USM convertible debt offering retired $131.4
million of short-term debt in 1995. Proceeds from an APP initial public offering
and TDS's sales of Common Shares retired $21.2 million of short-term debt in
1994.

TDS and its subsidiaries had $678.4 million of bank lines of credit for
general corporate purposes at December 31, 1996, $653.4 million of which were
committed. Unused amounts of such lines totaled $521.0 million, $496.0 million
of which were committed. These line-of-credit agreements provide for borrowings
at negotiated rates up to the prime rate.

-64-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 (CONTINUED)
Information concerning notes payable is shown in the table below:

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

Balance at end of period............................................... $ 160,537 $ 184,320 $ 98,608
Weighted average interest rate at end of period........................ 6.0% 6.3% 6.5%
Maximum amount outstanding during the period........................... $ 204,140 $ 184,320 $ 106,077
Average amount outstanding during the period (1)....................... $ 112,341 $ 139,671 $ 50,499
Weighted average interest rate during the period (1)................... 5.8% 6.4% 5.2%
----------- ----------- -----------
----------- ----------- -----------

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

(1) The average was computed based on month-end balances.

-65-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6

LONG-TERM DEBT

Long-term debt as of December 31, 1996 and 1995 is as follows:

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

Telephone and Data Systems, Inc. (Parent)
Medium-term notes, 8% to 10%, due through 2025.................................. $ 239,200 $ 239,200
Purchase contracts and other long-term notes 8% to 9.6%, due through 2003....... 3,175 3,676
------------ ------------
242,375 242,876
Less current portion............................................................ 232 418
------------ ------------
Total parent debt................................................................. 242,143 242,458
------------ ------------
Subsidiaries
RUS, RTB and FFB Mortgage Notes, due through 2031
0% to 2%...................................................................... 24,859 26,350
4% to 6%...................................................................... 178,499 172,231
6.04% to 9%................................................................... 103,800 84,464
9.5% to 11%................................................................... 1,213 1,233
------------ ------------
308,371 284,278
------------ ------------
6% zero coupon convertible debentures, matures June 15, 2015.................... 745,000 745,000
Unamortized discount............................................................ (494,893) (509,250)
------------ ------------
250,107 235,750
------------ ------------
Vendor financing, approximating 90-day Commercial Paper Rate plus 1.4% due
through 2002................................................................... 103,654 119,998
------------ ------------
8.34% zero coupon notes, matures November 1, 2006............................... 226,245 --
Unamortized discount............................................................ (122,502) --
------------ ------------
103,743 --
------------ ------------
Other long-term notes, 0% to 12.6%, due through 2009............................ 10,601 11,682
------------ ------------
776,476 651,708
Less current portion............................................................ 36,387 35,309
------------ ------------
Total subsidiaries' debt.......................................................... 740,089 616,399
------------ ------------
Total long-term debt.............................................................. $ 982,232 $ 858,857
------------ ------------
------------ ------------

The Company sold $39.2 million of senior unsecured debt securities in 1995
under its Medium-Term Note Program. The proceeds were used principally to retire
short-term debt, as well as for working capital and general corporate purposes.

The mortgage notes issued under certain loan agreements with the Rural
Utilities Service ("RUS"), Rural Telephone Bank ("RTB") and Federal Financing
Bank ("FFB"), agencies of the United States of America, are to be repaid in
equal monthly or quarterly installments covering principal and interest
beginning six months to three years after dates of issue and expiring through
2031. Substantially all telephone plant is pledged under RUS and RTB mortgage
notes and various other obligations of the telephone subsidiaries.

USM sold $745 million principal amount at maturity of 20-year zero coupon 6%
yield to maturity convertible redeemable debt in June 1995 with proceeds to the
Company of $221.5 million. No debt has been converted as of December 31, 1996.

-66-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 (CONTINUED)
USM has financing arrangements with an equipment vendor for cellular system
equipment and construction costs. The borrowings are collateralized by a secured
interest in some or all of the assets of USM's operating subsidiaries.
Borrowings have terms of seven years at an interest rate of 1.4% over the 90-day
Commercial Paper Rate (for a rate of 7.03% at December 31, 1996).

AERL sold $226 million principle amount at maturity of 10-year zero coupon
8.34% yield to maturity debt in November 1996 at an issue price of $100 million.
The proceeds were paid to AERL's equipment vendor in satisfaction of all
outstanding and future obligations up to $100 million. The notes are fully and
unconditionally guaranteed by TDS.

The annual requirements for principal payments on long-term debt are
approximately $36.6 million, $39.3 million, $36.8 million, $31.8 million and
$27.9 million for the years 1997 through 2001, respectively.

NOTE 7

MINORITY INTEREST IN SUBSIDIARIES

The following table summarizes the minority shareholders' and partners'
interests in the equity of consolidated subsidiaries.

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

USM
USM shareholders'................................................................. $ 285,835 $ 259,719
USM subsidiaries' partners'....................................................... 48,715 45,303
----------- -----------
334,550 305,022
TDS Telecom telephone subsidiaries'................................................. 21,810 17,108
AERL shareholders'.................................................................. 75,897 --
APP shareholders'................................................................... -- 6,280
Other............................................................................... 86 134
----------- -----------
$ 432,343 $ 328,544
----------- -----------
----------- -----------

SALE OF STOCK BY SUBSIDIARIES

USM issued Common Shares during 1996, 1995 and 1994 in connection with
acquisitions and employee stock purchase plans. AERL issued 12.3 million Common
Shares in an initial public offering (at a price of $17 per share) in 1996. The
initial public offering reduced TDS's ownership percentage from 100% to 82.8%.
APP issued Common Shares during 1996 and 1995 in connection with employee stock
purchase plans, and in 1994 issued 3.5 million Common Shares in an initial
public offering (at a price of $14 per share). The initial public offering
reduced TDS's ownership percentage from 100% to 82.5%. The USM, AERL and APP
Common Share transactions were recorded at fair market values which were either
less than or in excess of TDS's book value investment in USM, AERL and APP. TDS
adjusted its book value investment as a result of these issues and increased
capital in excess of par value $123.2 million, $714,000 and $21.2 million in
1996, 1995 and 1994, respectively.

NOTE 8

PREFERRED SHARES

TDS Cumulative Voting Preferred Shares have a stated value of $100 per
share. The 5,000,000 authorized Preferred Shares are issuable in series by the
Board of Directors who establish the terms of the issue. Those

-67-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 (CONTINUED)
issues which contain mandatory redemption features or which are redeemable at
the option of the holder are classified as Redeemable Preferred Shares. Those
issues which are not redeemable or which are redeemable at the option of TDS are
classified as Nonredeemable Preferred Shares.

REDEEMABLE PREFERRED SHARES

Redeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares with mandatory redemption features or which are
redeemable at the option of the holder. At December 31, 1996, 18,581 shares of
Redeemable Preferred Shares were outstanding, redeemable at $100 per share. All
other dividends are payable in cash.

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.

The following is a schedule of the Redeemable Preferred Shares' activity.

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

Balance, beginning of period............................................... $ 15,093 $ 25,001 $ 27,367
Add:
Stock dividends.......................................................... 113 546 839
Less:
Redemption of preferred.................................................. (9,456) (9,608) (1,005)
Conversion of preferred.................................................. (3,872) -- (1,000)
Expiration of redemption feature......................................... (20) (839) (1,200)
Change in redemption feature............................................. -- (7) --
--------- --------- ---------
1,858 15,093 25,001
Less current portion....................................................... 1,578 13,506 11,792
--------- --------- ---------
Balance, end of period..................................................... $ 280 $ 1,587 $ 13,209
--------- --------- ---------
--------- --------- ---------

NONREDEEMABLE PREFERRED SHARES

Nonredeemable Preferred Shares include outstanding series of TDS Cumulative
Voting Preferred Shares which have no mandatory redemption features. At December
31, 1996, 290,002 shares of Nonredeemable Preferred Shares were outstanding.
Outstanding Nonredeemable Preferred Shares are generally redeemable at the
option of TDS at $100 per share, plus accrued and unpaid dividends. At December
31, 1996, certain series of Preferred Shares are convertible into TDS Common
Shares. (See Note 9 -- Convertible Preferred Shares)

The following is a schedule of the Nonredeemable Preferred Shares activity.

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

Balance, beginning of period............................................... $ 29,710 $ 29,819 $ 16,833
Add:
Acquisitions............................................................. -- -- 12,500
Reclassification from Redeemable Preferred Shares........................ 20 839 1,200
Less:
Conversion of preferred.................................................. (730) (948) (714)
--------- --------- ---------
Balance, end of period..................................................... $ 29,000 $ 29,710 $ 29,819
--------- --------- ---------
--------- --------- ---------

-68-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9

COMMON STOCK ACQUISITIONS

During 1996, 1995 and 1994, TDS issued 2.6 million, 3.0 million and 4.0
million Common Shares, respectively, for the acquisition of cellular and
telephone interests.

COMMON SHARES ISSUABLE

Certain acquisition agreements require TDS to deliver 20,497 and 10,480
Common Shares in 1997 and 1998, respectively.

DIVIDEND REINVESTMENT, INCENTIVE AND BENEFIT PLANS

The following table summarizes Common and Series A Common Shares issued for
the employee stock ownership plans and dividend reinvestment plans described
below.

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Common Shares
Tax-deferred savings plan................................................ 36,269 40,624 30,764
Dividend reinvestment plan............................................... 28,827 105,001 85,754
Employee stock options, awards, stock appreciation rights and employee
stock purchase plan..................................................... 35,273 40,025 59,278
--------- --------- ---------
100,369 185,650 175,796
--------- --------- ---------
--------- --------- ---------
Series A Common Shares
Dividend reinvestment plan............................................... 26,445 17,855 7,783
--------- --------- ---------
--------- --------- ---------

TAX-DEFERRED SAVINGS PLAN. TDS has reserved 110,965 Common Shares for issue
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, USM Common Shares, AERL Common Shares, APP Common Shares or five
nonaffiliated funds.

DIVIDEND REINVESTMENT PLANS. TDS has reserved 486,015 Common Shares for
issue under the Automatic Dividend Reinvestment and Stock Purchase Plan and
192,254 Series A Common Shares for issue under the Series A Common Share
Automatic Dividend Reinvestment Plan. These plans enable holders of TDS's Common
Shares and Preferred Shares to reinvest cash dividends in newly issued Common
Shares and holders of Series A Common Shares to reinvest cash dividends in newly
issued Series A Common Shares. The purchase price of the shares is 95% of the
market value, based on the average of the daily high and low sales prices for
TDS's Common Shares on the American Stock Exchange for the ten trading days
preceding the date on which the purchase is made.

STOCK-BASED COMPENSATION PLANS

TDS has reserved 1,316,196 Common Shares for options granted and to be
granted to key employees. TDS has established certain plans that provide for the
grant of stock options and stock appreciation rights for the officers and
employees. The options are exercisable over a specified period not in excess of
ten years. The options expire from 1997 to 2006 or the date of the employee's
termination of employment, if earlier.

TDS accounts for stock options, stock appreciation rights ("SARS") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARS, measured on the
difference between the year-end market price of the Common Shares and SAR
prices, was $263,000, $408,000 and $218,000 in 1996, 1995 and 1994,
respectively. Had compensation cost for all plans been

-69-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 (CONTINUED)
determined consistent with Financial Accounting Standards Board Statement of
Accounting Standards ("SFAS") No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:

YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)

Net Income
As Reported....................................................................... $ 126,139 $ 103,978
Pro Forma......................................................................... $ 126,495 $ 103,316
Earnings per Common Share
As Reported....................................................................... $ 2.08 $ 1.74
Pro Forma......................................................................... $ 2.05 $ 1.73
----------- -----------
----------- -----------

Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

A summary of the status of the Company's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years ended is presented in the table
and narrative below:

WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES OPTION PRICES FAIR VALUES
--------- ------------- -----------

Stock Options:
Outstanding January 1, 1994 (107,661 exercisable)...................... 302,685 $ 15.35
Granted.............................................................. 221,275 $ 47.59
Exercised............................................................ (25,876) $ 5.30
Cancelled............................................................ (12,487) $ 27.47
---------
Outstanding December 31, 1994 (172,689 exercisable).................... 485,597 $ 30.25
Granted.............................................................. 59,995 $ 38.67 $ 14.84
Exercised............................................................ (26,101) $ 5.52
Cancelled............................................................ (3,046) $ 43.32
---------
Outstanding December 31, 1995 (240,160 exercisable).................... 516,445 $ 32.47
Granted.............................................................. 89,228 $ 41.00 $ 13.30
Exercised............................................................ (11,025) $ 13.10
Cancelled............................................................ (3,210) $ 39.89
---------
Outstanding December 31, 1996 (405,996 exercisable).................... 591,438 $ 34.08
--------- ------------- -----------
--------- ------------- -----------

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 5.6% and 6.6%; expected dividend yields of 1.0% and 1.0%; expected
lives of 5.1 years and 6.9 years and expected volatility of 20.5% and 25.0%.

Stock appreciation rights allow the grantee to receive an amount in cash or
Common Shares, or a combination thereof, equivalent to the difference between
the exercise price and the fair market value of the Common Shares on the
exercise date. The following table summarizes the SARs outstanding at $4.43 to
$36.60 per share. These rights expire March 1997, or the date of the employee's
termination of employment, if earlier. The fair value of each stock appreciation
right grant is estimated on the date of grant using the Black-

-70-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 (CONTINUED)
Scholes option pricing model with the following weighted-average assumptions
used for grants in 1996 and 1995, respectively: risk-free interest rates of 5.2%
and 5.5%; expected dividend yields of 1.0% and 1.0%; expected lives of 0.2 years
and 0.7 years; and expected volatility of 18.4% and 20.2%.

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Outstanding beginning of period............................................... 16,034 12,096 9,100
Granted..................................................................... 5,923 8,174 7,796
Exercised................................................................... (11,887) (4,236) (4,800)
--------- --------- ---------
Outstanding end of period..................................................... 10,070 16,034 12,096
--------- --------- ---------
--------- --------- ---------

Employee Stock Purchase Plan. TDS has reserved 201,638 Common Shares for
sale to the employees of TDS and its subsidiaries. The fair value of the
employees' purchase rights is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants rights in 1996: risk-free interest rate of 5.6%;
expected dividend yield of 1.0%; expected life of 0.5 year; and expected
volatility of 15.3%.

CONVERTIBLE PREFERRED SHARES

TDS convertible Preferred Shares are convertible into 933,838 Common Shares
(See Note 8 -- Nonredeemable Preferred Shares). TDS issued 347,707, 40,734 and
115,542 Common Shares in 1996, 1995 and 1994, respectively, for shares of TDS
and subsidiary preferred stock converted.

SERIES A COMMON SHARES

The holders of Common Shares and the outstanding Preferred Shares are
entitled to one vote per share. The holders of Series A Common Shares are
entitled to ten votes per share. Series A Common Shares are convertible, on a
share-for-share basis, into Common Shares. TDS has reserved 6,916,546 Common
Shares for possible issuance upon such conversion.

COMMON SHARE REPURCHASE PROGRAM

NOTE 10

COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION

The primary purpose of TDS's construction and expansion program is to
provide for normal growth, to upgrade telephone service, to expand into new
communication areas, and to take advantage of service-enhancing and
cost-reducing technological developments. The cellular capital additions budget
totals approximately $300 million for 1997, including about $258 million for new
cell sites and $30 million for various information systems initiatives. The
telephone capital additions budget totals approximately $130 million for 1997,
including about $56 million for new digital switches and other switching
facilities and $56 million for improvements to outside plant facilities. The PCS
capital additions budget totals approximately $345 million

-71-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 (CONTINUED)
for 1997, including $255 million for switching equipment and $38 million for
cell sites. The radio paging capital additions are anticipated to total
approximately $35 million in 1997, including $15 million for systems and
transmitters and $16 million for pagers.

PENDING ACQUISITIONS

At December 31, 1996, TDS has entered into definitive agreements to acquire
a controlling interest in one cellular market and one telephone company for an
aggregate consideration of approximately $39.8 million, primarily cash and TDS
Common Shares.

LEASE COMMITMENTS

TDS and its subsidiaries have leases for certain cellular plant facilities,
office space and data processing equipment, most of which are classified as
operating leases. For the years 1996, 1995 and 1994, rent expense for term
leases was $20.9 million, $13.6 million and $10.4 million, respectively, and
rent expense under cancelable and short-term leases was $7.6 million, $7.5
million and $6.5 million, respectively. At December 31, 1996, the aggregate
minimum rental commitments under noncancelable operating leases were as follows:

MINIMUM FUTURE
RENTAL PAYMENTS
--------------------
(DOLLARS IN
THOUSANDS)

1997.................................................................................... $ 21,917
1998.................................................................................... 19,428
1999.................................................................................... 17,353
2000.................................................................................... 15,348
2001.................................................................................... 13,367
Thereafter.............................................................................. $ 56,028
--------
--------

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 cellular telephone systems and other
interests. Management does not believe that any of such proceedings should have
a material adverse impact on the financial position or results of operations of
the Company.

NOTE 11

RESTRICTION ON COMMON STOCK DIVIDENDS

Under TDS's loan agreements at December 31, 1996, all of the consolidated
retained earnings were available for the payment of cash dividends on shares of
TDS common stock.

Certain regulated telephone subsidiaries may not transfer funds to the
parent in the form of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. All of the $326.6 million
underlying retained earnings of all TDS subsidiaries at December 31, 1996, was
available for the payment of dividends on the subsidiaries common stock. Of the
$2.7 billion underlying net assets of the TDS subsidiaries at December 31, 1996,
$2.1 billion was available for transfer to TDS.

-72-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12

INVESTMENTS IN UNCONSOLIDATED ENTITIES

The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited results of operations of the cellular and telephone
companies in which TDS's investments are accounted for by the equity method.

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

Assets
Current assets................................................................ $ 324,780 $ 266,967
Due from affiliates........................................................... 6,232 24,765
Property and other............................................................ 1,121,676 937,609
------------- -------------
$ 1,452,688 $ 1,229,341
------------- -------------
------------- -------------
Liabilities and Equity
Current liabilities........................................................... $ 277,743 $ 240,480
Due to affiliates............................................................. 21,020 31,501
Deferred credits.............................................................. 3,380 5,766
Long-term debt................................................................ 41,591 40,220
Partners' capital and stockholders' equity.................................... 1,108,954 911,374
------------- -------------
$ 1,452,688 $ 1,229,341
------------- -------------
------------- -------------

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

Results of Operations
Revenues........................................................ $ 1,394,781 $ 1,173,559 $ 892,530
Costs and expenses.............................................. (958,257) (808,008) (652,918)
Other income.................................................... 8,558 8,249 7,952
Interest expense................................................ (6,306) (6,414) (5,650)
Income taxes.................................................... (3,530) (4,670) (1,824)
Extraordinary item.............................................. (2,211) -- --
------------- ------------- ------------
Net income...................................................... $ 433,035 $ 362,716 $ 240,090
------------- ------------- ------------
------------- ------------- ------------

NOTE 13

EMPLOYEE BENEFIT PLANS

PENSION PLAN

The Company sponsors two qualified noncontributory defined contribution
pension plans. One plan (the "TDS Plan") provides benefits for the employees of
TDS, TDS Telecom and substantially all of the telephone company subsidiaries.
(Employees of certain telephone subsidiaries are covered under other pension
plans or receive direct pension payments.) The other plan provides pension
benefits for USM and AERL employees. Under these plans, pension costs are
calculated separately for each participant and are funded currently. TDS also
sponsors an unfunded non-qualified deferred compensation plan to supplement the
benefits under these plans to offset the reduction of benefits caused by the
limitation on annual employee compensation under the tax laws.

Total pension costs were $4.6 million, $4.6 million and $4.8 million in
1996, 1995 and 1994, respectively.

-73-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 (CONTINUED)
OTHER POSTRETIREMENT BENEFITS

The Company sponsors two defined benefit postretirement plans that cover
most of the employees of TDS and its telephone subsidiaries. One plan provides
medical benefits and the other plan provides life insurance benefits. Both plans
are contributory, with retiree contributions adjusted annually. The medical plan
anticipates future cost sharing changes that are consistent with the Company's
intent to increase retiree contributions by the health care cost trend rate. An
amount not to exceed 25% of the total contribution to the TDS Plan will be
contributed to fund the cost of the medical benefits annually. An additional
contribution equal to a reasonable amortization of the past service cost may be
made without regard to the 25% limitation described above. The Company will
limit overall contributions to the aggregate accruals recorded by its
subsidiaries. The Company's postretirement medical and life insurance plans are
currently underfunded. Total contributions to fund postretirement medical and
life insurance plans were $2.2 million, $3.1 million and $1.1 million in 1996,
1995 and 1994, respectively.

The following table sets forth the plans' funded status reconciled with the
amount shown in the Company's consolidated balance sheet at December 31, 1996:

LIFE
INSURANCE HEALTH
PLAN CARE PLAN TOTAL
----------- --------- ---------
(DOLLARS IN THOUSANDS)

Accumulated postretirement benefit obligation:
Retirees................................................................. $ 1,725 $ 3,144 $ 4,869
Fully eligible active plan participants.................................. 522 2,123 2,645
Other active plan participants........................................... 939 9,328 10,267
----------- --------- ---------
3,186 14,595 17,781
Plan assets at fair value.................................................. 1,305 8,954 10,259
----------- --------- ---------
Accumulated postretirement benefit obligation in excess of plan assets..... 1,881 5,641 7,522
Unrecognized prior service cost............................................ (68) (649) (717)
Unrecognized net gain from past experience different from that assumed and
from changes in assumptions............................................... 46 4,600 4,646
----------- --------- ---------
Accrued postretirement benefit cost at December 31, 1996................... $ 1,859 $ 9,592 $ 11,451
----------- --------- ---------
----------- --------- ---------

Net postretirement cost for 1996, 1995 and 1994 includes the following
components:

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

Service cost................................................................... $ 796 $ 588 $ 810
Interest cost on accumulated postretirement benefit obligation................. 1,125 1,082 1,116
Actual return on plan assets................................................... (753) (656) --
Net amortization and deferral.................................................. 99 204 (224)
--------- --------- ---------
Net postretirement cost........................................................ $ 1,267 $ 1,218 $ 1,702
--------- --------- ---------
--------- --------- ---------

For measurement purposes, a 10.2% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease over seven years to 6.1% and to remain at 6.1% thereafter. The
assumed rates of compensation increases and return on plan assets were 5.0% and
8.0%, respectively. The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health care cost trend
rates by one percentage point in each year would

-74-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 (CONTINUED)
increase the accumulated postretirement benefit obligation as of December 31,
1996, by $2.7 million and the aggregate of the service and interest cost
components of postretirement expense for the year then ended by $419,000.

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.

NOTE 14

BUSINESS SEGMENT INFORMATION

TDS's businesses are classified into four principal segments: Cellular
Telephone, Telephone, PCS and Radio Paging operations.

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

Revenues
Cellular...................................................... $ 707,820 $ 492,395 $ 332,404
Telephone..................................................... 402,629 354,841 306,341
Paging........................................................ 104,187 107,150 92,065
------------- ------------- -------------
Total....................................................... $ 1,214,636 $ 954,386 $ 730,810
------------- ------------- -------------
------------- ------------- -------------
Operating Income (Loss)
Cellular...................................................... $ 87,366 $ 42,755 $ 17,385
Telephone..................................................... 103,358 98,240 91,606
Paging........................................................ (36,626) (8,997) (169)
------------- ------------- -------------
Total....................................................... $ 154,098 $ 131,998 $ 108,822
------------- ------------- -------------
------------- ------------- -------------
Depreciation and Amortization Expense
Cellular...................................................... $ 108,839 $ 89,458 $ 65,454
Telephone..................................................... 88,967 77,354 68,879
Paging........................................................ 33,777 24,692 17,178
------------- ------------- -------------
Total....................................................... $ 231,583 $ 191,504 $ 151,511
------------- ------------- -------------
------------- ------------- -------------
Identifiable Assets
Cellular...................................................... $ 2,116,592 $ 1,890,621 $ 1,584,142
Telephone..................................................... 1,181,084 1,058,241 984,563
PCS........................................................... 638,412 318,265 20,473
Paging........................................................ 153,374 159,170 146,107
Parent and Other.............................................. 111,507 42,785 54,842
------------- ------------- -------------
Total....................................................... $ 4,200,969 $ 3,469,082 $ 2,790,127
------------- ------------- -------------
------------- ------------- -------------
Capital Expenditures
Cellular...................................................... $ 248,123 $ 210,878 $ 167,164
Telephone..................................................... 144,440 104,372 115,483
PCS........................................................... 112,939 8,521 --
Paging........................................................ 32,517 26,527 28,966
Parent and Other.............................................. 12,185 9,698 8,088
------------- ------------- -------------
Total....................................................... $ 550,204 $ 359,996 $ 319,701
------------- ------------- -------------
------------- ------------- -------------

-75-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts of Cash and Cash Equivalents, Temporary Investments and
Short-term Debt approximate fair value due to the short-term nature of these
instruments.

The carrying value and estimated fair value of the Company's long-term debt
was $1.0 billion and $969.5 million, respectively, at December 31, 1996, and
$894.6 million and $932.6 million, respectively, at December 31, 1995. The fair
value was estimated using discounted cash flow analysis based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The decrease in estimated fair value in 1996 was due to a change in the
incremental borrowing rate related to RUS, RTB and FFB Mortgage Notes.

At December 31, 1996 and 1995, the carrying value of the Company's
Redeemable Preferred Shares, $1.9 million, and $15.1 million, respectively, was
approximately equal to its fair value. The fair value was estimated using
discounted cash flow analysis based on the Company's current dividend yield on
issues of its non-convertible preferred shares and, for convertible series, the
net present value of the common stock to be issued upon conversion (valued at
quoted market prices).

It was not practicable to estimate the fair value of the Company's cost
method investments in other companies because of the lack of quoted market
prices. The carrying amounts at December 31, 1996 and 1995 represent the
original cost of the investments, which management believes is not impaired.

NOTE 16

SUBSEQUENT EVENT

Exchange of Markets with Another Cellular Operator. In February 1997, USM
entered into an exchange agreement with BellSouth Corporation pursuant to which
USM will receive controlling interests in twelve contiguous markets adjacent to
its Iowa and Wisconsin/Illinois clusters. In exchange, USM will divest its
controlling interests in ten markets and investment interests in 13 markets and
cash. USM will receive controlling interests representing approximately 3.9
million pops in the transaction, and will divest controlling interests
representing approximately 1.9 million pops and investment interests
representing approximately 1.4 million pops. The transaction is subject to
various regulatory and other approvals.

STANDBY LETTER OF CREDIT

The Company has entered into a standby letter of credit agreement effective
July 20, 1994 with a financial institution. This standby letter of credit, which
will not exceed $9.0 million, provides supplemental security in support of a
bank loan to an entity minority-owned by the Company. In the event of default
under the minority-owned entity's bank loan agreement, the bank may call upon
the Company's standby letter of credit to satisfy any amounts still due under
this loan agreement.

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SELECTED CONSOLIDATED FINANCIAL DATA

YEAR ENDED OR AT DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Operating Revenues.......................... $ 1,214,636 $ 954,386 $ 730,810 $ 557,795 $ 432,740
Operating Income............................ 154,098 131,998 108,822 69,733 54,065
Net Income Before Extraordinary Item and
Cumulative Effect of Accounting Changes.... 128,139 103,978 60,544 33,896 38,520
Extraordinary Item.......................... -- -- -- -- (769)
Cumulative Effect of Accounting Changes..... -- -- (723) -- (6,866)
Net Income.................................. 128,139 103,978 59,821 33,896 30,885
Net Income Available to Common.............. $ 126,293 $ 102,044 $ 58,012 $ 31,510 $ 28,648
Weighted Average Common Shares (000s)....... 60,732 58,356 54,197 47,266 39,074
Earnings per Common Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Changes............. $ 2.08 $ 1.74 $ 1.07 $ .67 $ .91
Extraordinary Item........................ -- -- -- -- (.02)
Cumulative Effect of Accounting Changes... -- -- (.01) -- (.17)
Net Income................................ $ 2.08 $ 1.74 $ 1.06 $ .67 $ .72
Pretax Profit on Revenues................... 20.7% 19.4% 13.9% 10.8% 15.8%
Effective Income Tax Rate (Before
Extraordinary Item and Cumulative Effect of
Accounting Changes)........................ 49.1% 43.8% 40.2% 43.9% 43.6%
Dividends per Common and Series A Common
Share...................................... $ .40 $ .38 $ .36 $ .34 $ .32

Cash and Cash Equivalents and Temporary
Investments................................ $ 119,297 $ 80,851 $ 44,566 $ 73,385 $ 58,145
Working Capital............................. (163,197) (166,514) (160,266) 16,025 (20,864)
Property, Plant and Equipment (Net)......... 1,828,889 1,293,410 1,063,656 846,089 695,623
Total Assets................................ 4,200,969 3,469,082 2,790,127 2,259,182 1,696,486
Notes Payable............................... 160,537 184,320 98,608 6,309 46,816
Long-term Debt (including current
portion)................................... 1,018,851 894,584 562,164 537,566 426,885
Redeemable Preferred Shares (including
current portion)........................... 1,858 15,093 25,001 27,367 27,967
Common Stockholders' Equity................. 2,032,941 1,684,365 1,473,038 1,224,285 877,419
Construction Expenditures................... $ 550,204 $ 359,996 $ 319,701 $ 200,984 $ 146,963
Current Ratio............................... .7 .6 .5 1.1 .9
Common Equity per Share..................... $ 33.23 $ 29.01 $ 26.85 $ 24.15 $ 21.27
Return on Equity............................ 6.8% 6.5% 4.4% 3.0% 4.8%
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS

OF TELEPHONE AND DATA SYSTEMS, INC.:

We have audited the accompanying consolidated balance sheets of Telephone
and Data Systems, Inc. (an Iowa corporation) and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telephone and Data Systems,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

/s/ 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)

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CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)

QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1996
Operating Revenues............................................. $ 263,387 $ 298,951 $ 315,924 $ 336,374
Operating Income............................................... 30,957 49,081 41,263 32,797
Gain on Sale of Cellular and Other Investments................. 41,758 86,494 7,797 2,686
Net Income..................................................... 33,689 59,692 22,669 12,089
Net Income Available to Common................................. 33,267 59,450 22,200 11,606
Net Income Available to Common -- Operations................. 12,959 18,969 19,271 10,852
Net Income Available to Common -- Gains...................... $ 20,308 $ 40,481 $ 2,929 $ 754
Weighted Average Common Shares (000s).......................... 59,393 61,259 61,321 61,305
Earnings per Common Share...................................... $ .56 $ .97 $ .36 $ .19
Earnings per Common Share -- Operations...................... .22 .31 .31 .18
Earnings per Common Share -- Gains........................... $ .34 $ .66 $ .05 $ .01

1995
Operating Revenues............................................. $ 209,975 $ 232,091 $ 256,508 $ 255,812
Operating Income............................................... 29,156 33,825 40,560 28,457
Gain on Sale of Cellular and Other Investments................. 19,488 16,886 43,375 6,876
Net Income..................................................... 23,193 22,580 42,596 15,609
Net Income Available to Common................................. 22,701 22,086 42,338 15,100
Net Income Available to Common -- Operations................. 13,908 12,185 21,256 14,227
Net Income Available to Common -- Gains...................... $ 8,793 $ 9,901 $ 21,082 $ 873
Weighted Average Common Shares (000s).......................... 57,292 58,508 59,038 58,741
Earnings per Common Share...................................... $ .39 $ .38 $ .72 $ .26
Earnings per Common Share -- Operations...................... .24 .21 .36 .24
Earnings per Common Share -- Gains........................... $ .15 $ .17 $ .36 $ .02

Note: Certain 1996 quarterly amounts were reclassified for current period
presentation.

Net Income Available to Common for 1996 and 1995 included significant gains from
the sales of cellular and other investments. The table above summarizes the
effect of the gains on Net Income Available to Common and Earnings per Common
Share.

Management believes there exists a seasonality at USM in both service revenues,
which tend to increase more slowly in the first and fourth quarters, and
operating expenses, which tend to be higher in the fourth quarter due to
increased marketing activities and customer growth. This seasonality may cause
operating income to vary from quarter to quarter.

In the first part of 1997, AERL is expected to begin commercial service which
will result in AERL's revenue and expenses being included in operating income.
Operating income is expected to decrease significantly in 1997 as a result of
the commencement of PCS operations.

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SHAREHOLDERS' INFORMATION

TDS STOCK AND DIVIDEND INFORMATION

TDS's Common Shares are listed on the American Stock Exchange ("AMEX") under
the symbol "TDS" and in the newspapers as "TeleData." As of February 28, 1997,
TDS Common Shares were held by 4,274 record owners and the Series A Common
Shares were held by 99 record owners. TDS has paid cash dividends on Common
Shares since 1974, and paid dividends of $.40 and $.38 per Common and Series A
Common Share during 1996 and 1995, respectively.

The Common Shares of United States Cellular Corporation, an 80.6%-owned
subsidiary of TDS, are listed on the AMEX under the symbol "USM" and in the
newspapers as "US Cellu." The Common Shares of American Paging, Inc., an
82.3%-owned subsidiary of TDS, are also listed on the AMEX under the symbol
"APP" and in the newspapers as "AmPaging." The Common Shares of Aerial
Communications, Inc., an 82.8%-owned subsidiary of TDS are listed on the NASDAQ
National Market under the symbol "AERL" and in the newspapers as "AerialComm."

MARKET PRICE PER COMMON SHARE BY QUARTER

TDS's Series A Common Shares and Preferred Shares are not actively traded
and therefore, quotations are not reported for such securities. Dividends on
TDS's Preferred Shares have been paid quarterly since the dates of issue. The
high and low sales prices of the Common Shares on the AMEX as reported by the
Dow Jones News Service are as follows:

1ST 2ND 3RD 4TH
--------- --------- --------- ---------

1996
High.............................................................. $ 48.75 48.88 45.63 40.50
Low............................................................... $ 39.00 43.38 37.75 34.75
Dividends Paid.................................................... $ .10 .10 .10 .10

1ST 2ND 3RD 4TH
--------- --------- --------- ---------

1995
High.............................................................. $ 46.38 39.38 42.88 43.25
Low............................................................... $ 36.13 36.00 36.38 35.63
Dividends Paid.................................................... $ .095 .095 .095 .095

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