Telephone and Data Systems, Inc. Management’s Discussion and Analysis of Results of Operation and Financial Condition Wireline Telephone Operations TDS operates its wireline telephone business through TDS Telecommunications Corporation (“TDS Telecom”), a wholly- owned subsidiary. TDS Telecom served 847,900 access lines at the end of 2001, an increase of 134,600 lines over 2000. At the end of 2000, TDS Telecom served 713,300 lines, an increase of 75,700 lines over 1999. TDS Telecom provides service through local telephone operations, or Incumbent Local Exchange carrier (“ILEC”) companies, and through Competitive Local Exchange carrier (“CLEC”) companies. – 900 – 800 – 700 – 600 – 500 – 400 848 638 713 CELC TDS TELECOM Access Lines Thousands of Units ILEC TDS Telecom’s local telephone companies served 650,700 access lines at the end of 2001 compared to 601,200 at the end of 2000 and 571,700 at the end of 1999. Local telephone operations have grown through acquisitions and internal growth. Acquisitions added 43,400 lines in 2001 and 10,200 lines in 2000, and internal growth added 6,100 lines in 2001 and 19,300 lines in 2000. Internal growth in access lines has slowed, reflecting the softening of the economy. TDS Telecom’s competitive local exchange companies served 197,200 access lines at the end of 2001 compared to 112,100 at the end of 2000 and 65,900 at the end of 1999. Internal growth in access lines has increased as CLEC operations have increased their presence in current markets and expanded into new markets.  Operating Revenues increased 14% ($83.5 million) to $693.7 million in 2001, and 12% ($64.3 million) to $610.2 million in 2000. The increase was due to the growth in local telephone operations, including acquisitions, and the expansion of competitive local exchange activities. Year Ended December 31,  2001 2000 1999 (Dollars in thousands) Local Telephone Operations Operating Revenues Local Service  $179,529 $ 168,775 $ 152,290 Network access and  long-distance  319,410 285,738 269,188 Miscellaneous 77,878 74,468 71,052 576,817 528,981 492,530 Operating Expenses Operating expenses  283,114 261,884 250,994 Depreciation and  amortization 131,787 124,389 117,443 414,901 386,273 368,437 Local Telephone  Operating Income  $161,916 $ 142,708 $ 124,093 Competitive Local  Exchange Operations Operating Revenues $118,812 $ 84,720 $ 55,173 Operating Expenses Operating expenses 144,211 90,619 58,808 Depreciation and  amortization 17,574 9,056 5,907 161,785 99,675 64,715 Competitive Local Exchange Operating (Loss) $ (42,973) $ (14,955) $ (9,542) Intercompany revenue  elimination (1,917) (3,485) (1,786) Intercompany expense elimination (1,917) (3,485) (1,786) Operating Income  $118,943 $ 127,753 $ 114,551 Access lines (ILEC) 650,700 601,200 571,700 Access lines (CLEC) 197,200 112,100 65,900 Growth in ILEC access lines: Acquisitions 43,400 10,200 500 Internal growth 6,100 19,300 23,700 Average monthly revenue  per ILEC access line  $ 77.76 $ 74.75 $ 73.00 Employees 3,410 2,820 2,590 28 Telephone and Data Systems, Inc. Annual Report 2001 Telephone and Data Systems, Inc. Annual Report 2001 29 Management’s Discussion and Analysis of Results of Operation and Financial Condition – 700 – 650 – 600 – 550 – 500 – 450 694 546 610 TDS TELECOM Operating Revenue $ Millions  Operating Expenses totaled $574.8 million in 2001, up 19% ($92.3 million) from 2000, and totaled $482.5 million in 2000, up 12% ($51.1 million) from 1999. Operating Income decreased 7% ($8.8 million) in 2001 and increased 12% ($13.2 million) in 2000. TDS Telecom’s overall operating margin was 17.1% in 2001, 20.9% in 2000 and 21.0% in 1999. Operating revenues increased 9% ($47.8 million) to $576.8 million in 2001 and 7% ($36.5 million) to $529.0 million in 2000. Average monthly revenue per local telephone access line was $77.76 in 2001, $74.75 in 2000 and $73.00 in 1999. The majority of the increase in average monthly revenue per local telephone access line in 2001 is related to the increase in long- distance revenues. The increases in all years reflect growth in local service revenues. Local telephone operating revenues are anticipated to continue their pattern of moderate growth. Local service revenues (provision of local telephone exchange service within the franchise serving area of TDS Telecom’s local telephone companies) increased 6% ($10.8 million) in 2001 and 11% ($16.5 million) in 2000. Average monthly local service revenue per customer was $24.20 in 2001, $23.85 in 2000 and $22.57 in 1999. Acquisitions increased revenues by $4.8 million in 2001. Access line growth, excluding acquisitions, of 1.0% in 2001 and 3.4% in 2000, resulted in increases in revenues of $3.5 million and $6.7 million, respectively. The sale of custom calling and advanced features increased revenues by $2.6 million in 2001 and $4.9 million in 2000. Operating income  increased 14% ($19.2 million) to $161.9 million in 2001 and 15% ($18.6 million) to $142.7 million in 2000 from $124.1 million in 1999. The local telephone operating margin was 28.1% in 2001, 27.0% in 2000 and 25.2% in 1999. The increase in operating margin was caused by the growth in revenue along with the emphasis on controlling costs. Local telephone operating expenses are expected to increase due to inflation while additional revenues and expenses are expected from new or expanded product offerings. The increases in local telephone expenses related primarily to the cost of providing Internet service, the sale of long-distance service, acquisitions and wage and benefit increases. TDS Telecom has emphasized cost containment measures to offset rising costs. The sale of long-distance service by TDS Telecom increased expenses by $10.7 million in 2001 and $1.7 million in 2000. Acquisitions increased cash expenses by $10.0 million in 2001. Depreciation and amortization expenses increased 6% ($7.4 million) in 2001, including $3.1 million from acquisitions, and 6% ($6.9 million) in 2000 as a result of increased investment in plant and equipment. Operating expenses increased 7% ($28.6 million) in 2001 and 5% ($17.8 million) in 2000. Local telephone expenses as a percent of local telephone revenues were 71.9% in 2001, 73.0% in 2000 and 74.8% in 1999. Local telephone expenses are anticipated to increase due to inflation and new revenue-producing programs and to level off somewhat as a percent of operating revenues. Miscellaneous revenues (charges for (i) leasing, selling, installing and maintaining customer premise equipment, (ii) providing billing and collection services, (iii) providing Internet services and (iv) selling of digital broadcast satellite receivers) increased 5% ($3.4 million) in 2001 and 5% ($3.4 million) in 2000. Average monthly miscellaneous revenue per customer was $10.50 in 2001, $10.52 in 2000 and $10.53 in 1999. Network access and long-distance revenues (compensation for carrying interstate and intrastate long-distance traffic on TDS Telecom’s local telephone networks) increased 12% ($33.7 million) in 2001 and 6% ($16.6 million) in 2000. Average monthly network access and long-distance revenue per customer was $43.06 in 2001, $40.38 in 2000 and $39.90 in 1999. Revenues increased by $16.3 million in 2001 and $2.4 million in 2000 as TDS Telecom began selling long-distance service to its customers in the third quarter of 2000. Revenue generated from access minute growth due to increased network usage increased $7.1 million in 2001 and $8.3 million in 2000. Acquisitions increased revenues by $6.5 million in 2001. Compensation from state and national revenue pools due to increased costs of providing network access increased $4.3 million in 2001 and $2.3 million in 2000.  Local Telephone Operations