Management’s Discussion and Analysis of Results of Operation and Financial Condition Operating Revenues increased 10% ($178.2 million) in 2001 and 9% ($140.2 million) in 2000. The revenue increases were driven by the 13% and 18% growth in customer units in 2001 and 2000, respectively. Lower revenue per customer, due to competitive pricing pressures, incentive plans and consumer market penetration, has partially offset the revenue growth from the increase in the customer base. Average monthly service revenue per customer was $46.28 in 2001, $49.21 in 2000 and $53.71 in 1999. Management anticipates that average monthly service revenue per customer will continue to decrease as retail service and inbound roaming revenue per minute of use decline. Telephone and Data Systems, Inc. Retail service revenues (charges to U.S. Cellular’s customers for local system usage and usage of systems other than their local systems) increased 15% ($180.7 million) in 2001 and 13% ($138.3 million) in 2000 due primarily to the growth in customers. Average monthly retail service revenue per customer was $35.68 in 2001, $36.52 in 2000 and $38.35 in 1999. Local minutes of use averaged 216 per month in 2001, 157 per month in 2000 and 115 per month in 1999, while average retail service revenue per minute continued to decline. Competitive pressures and U.S. Cellular’s use of incentive programs and rate plans to stimulate overall usage resulted in the lower average monthly retail service revenue per minute of use. The decrease in average monthly retail service revenue per customer primarily reflects the increasing level of competition for wireless services and the continued penetration of the consumer market.  Inbound roaming revenues (charges to other wireless service providers whose customers use U.S. Cellular’s systems when roaming) decreased 7% ($20.1 million) in 2001 and 8% ($26.2 million) in 2000. Lower negotiated roaming rates have offset increased minutes of use, resulting in decreased roaming revenues in both years. Average monthly inbound roaming General and administrative expenses (costs of local business offices and corporate expenses) as a percent of service revenues were 23.8% in 2001, 22.1% in 2000 and 21.4% in 1999. The overall increases in administrative expenses include the effects of an increase in expenses required to serve the growing customer base and other expenses incurred related to the growth in U.S. Cellular’s business. Driven by additional costs incurred related to its customer care centers, which centralized certain customer service functions, administrative employee-related expenses increased $27.8 million in 2001 and $6.3 million in 2000. Costs to retain customers and to provide digital phone units to customers who migrated from analog to digital rate plans increased expenses by $9.8 million in 2001 and $27.1 million in 2000. Operating Expenses increased 11% ($153.3 million) in 2001 and 8% ($103.7 million) in 2000. Operating expenses as a percent of service revenue were 86.4% in 2001, 86.1% in 2000 and 86.6% in 1999. The overall increase in operating expenses was due primarily to the increase in general and administrative expenses ($69.8 million in 2001 and $39.0 million in 2000) and additional depreciation and amortization on the increased investment in cell sites and equipment ($35.0 million in 2001 and $35.7 million in 2000). The costs of providing service to the expanding customer base increased $70.6 million in 2001 and decreased $17.6 million in 2000. The costs of expanding the customer base decreased by $22.1 million in 2001 and increased $46.6 million in 2000. Long-distance and other service revenues increased 9% ($11.9 million) in 2001 and 14% ($16.1 million) in 2000. Average monthly long-distance and other revenue per customer was $3.70 in 2001, $3.99 in 2000 and $4.15 in 1999. Management anticipates that the increase in inbound roaming minutes of use will be proportionate to the growth in the number of customers throughout the wireless industry in 2002. However, as other wireless operators begin or expand service in U.S. Cellular markets, roaming partners could switch their business to these operators, further slowing the growth in U.S. Cellular’s inbound roaming minutes of use. Average inbound roaming revenue per minute of use is expected to continue to decline in the future, reflecting the general downward trend in negotiated rates. revenue per U.S. Cellular customer was $6.90 in 2001, $8.70 in 2000 and $11.22 in 1999. In 2001, the increase in minutes of use was in proportion to the growth in the number of customers throughout the wireless industry. In 2000, the increase in minutes of use was affected by certain pricing programs offered by other wireless companies that began in the second half of 1999. Wireless customers who sign up for these programs are given price incentives to roam in other markets, including U.S. Cellular’s markets, thus driving an increase in U.S. Cellular’s inbound roaming minutes of use. Costs of providing service (system operations expenses) as a percent of service revenues were 23.1% in 2001, 21.2% in 2000 and 24.1% in 1999. Systems operations expenses include customer usage expenses (charges from other service providers for wireline connection, toll and roaming costs incurred by customers’ use of systems other than their local systems), and maintenance, utility and cell site expenses. The increase in systems operations expense in 2001 was primarily due to a $38.8 million increase in the costs associated with customers roaming on other companies’ systems, a $19.6 million increase in the cost of maintaining the network and a $12.2 million increase related to the increased volume of minutes used on the systems. In 2000, systems operations expense decreased primarily due to the $39.3 million decrease in outbound roaming expenses reflecting a reduction in cost per minute of use related to the lower roaming prices in the industry. The decrease in 2000 was partially offset by the increased cost of local and roaming minutes used of $15.2 million and the increased cost of maintaining the network of $7.6 million. Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. These expenses less equipment sales revenue represent the cost to add a new customer. The cost to add a new customer was $322 in 2001, $330 in 2000 and $346 in 1999. Gross customer activations (excluding acquisitions) declined 5% in 2001 to 1,095,000 and rose 15% in 2000 to 1,154,000 from 1,000,000 in 1999. The decrease in cost per gross customer activation in 2001 and 2000 was primarily due to reductions in equipment subsidies provided by U.S. Cellular to its customers. A decrease in advertising expenses in 2000 also contributed to the lower cost per gross customer activation.  Depreciation and amortization expense as a percent of service revenues was 16.5% in 2001, 16.1% in 2000 and 15.1% in 1999. Depreciation expense increased 15% ($31.4 million) in 2001 and 11% ($21.1 million) in 2000, reflecting increases in average fixed asset balances of 20% and 13%, respectively. Increased fixed asset balances in both years resulted from the addition of new cell sites built to improve coverage and capacity and from upgrades to provide digital service. Amortization expense increased 6% ($3.5 million) in 2001 and 32% ($14.6 million) in 2000. The development costs related to U.S. Cellular’s new billing and information system, totaling $118 million, are being amortized over a seven-year period beginning in the fourth quarter of 1999 resulting in the increase in amortization expense in 2000. Competitors licensed to provide PCS services have initiated service in certain U.S. Cellular markets over the past several years. U.S. Cellular expects PCS operators to continue deployment of PCS in all its market clusters during 2002. U.S. Cellular’s management continues to monitor other wireless communications providers’ strategies to determine how this additional competition is affecting U.S. Cellular’s results. The effects of additional wireless competition have slowed customer growth in certain of U.S. Cellular’s markets. Coupled with the recent downturn in the nation’s economy, the effect of increased competition has caused U.S. Cellular customer growth in these markets to be slower than management had targeted for in 2001. Management anticipates that customer growth will be slower in the future, primarily as a result of the increase in the number of competitors in its markets and the maturation of the wireless industry. Management believes U.S. Cellular’s operating results reflect seasonality 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. Management expects service revenues to continue to grow during 2002; however, management anticipates that average monthly revenue per customer will continue to decrease as retail service and inbound roaming revenue per minute of use decline. Operating Income increased 9% ($24.9 million) to $317.2 million in 2001 from $292.3 million in 2000 and increased 14% ($36.5 million) in 2000 from $255.8 million in 1999. The improvement was primarily driven by the substantial growth in customer units and revenue. Operating margin, as a percent of service revenue, was 17.4% in 2001, 17.7% in 2000 and 16.8% in 1999. 27 Telephone and Data Systems, Inc. Annual Report 2001 Telephone and Data Systems, Inc. Annual Report 2001 26 – 2000 – 1750 – 1500 – 1250 – 1000 1,895 1,576 1,717 U.S. Cellular Operating Revenue $ Millions  Management’s Discussion and Analysis of Results of Operation and Financial Condition – 325 – 300 – 275 – 250 – 225 – 200 317 256 292 U.S. Cellular Operating Income $ Millions 