Telephone and Data Systems, Inc. Management’s Discussion and Analysis of Results of Operation and Financial Condition Management’s Discussion and Analysis of Results of Operation and Financial Condition Illuminet Holdings, Inc. and VeriSign Inc. In 1999, TDS recognized a $327.1 million gain as a result of the AirTouch Communications, Inc. merger with Vodafone Group plc. TDS received $0.5 million as a final bankruptcy settlement in 2001 after recording an $80.4 million write-off of its investment in a paging entity that filed for bankruptcy protection in 2000. The sale of non-strategic cellular interests and the settlement of a legal matter resulted in gains of $96.1 million in 2000. The sale of other non-strategic minority cellular interests and other investments generated gains totaling $18.8 million in 1999. Investment income, TDS’s share of income in unconsolidated entities in which it has a minority interest, totaled $50.6 million in 2001, $38.7 million in 2000 and $31.3 million in 1999. TDS follows the equity method of accounting, which recognizes TDS’s proportionate share of the income and losses accruing to it under the terms of its partnership or shareholder agreements, where TDS’s ownership interest equals or exceeds 20% for corporations and 3% for partnerships. Investment income in 2000 included $8.0 million of equity losses on a paging investment while no such equity losses are included in 2001. Improved operating results of certain minority cellular interests in 2001 and 2000 also increased investment income.  Amortization of costs related to minority investments totaled $1.3 million in 2001, $10.3 million in 2000 and $12.9 million in 1999. The decrease in amortization costs in 2001 is related primarily to the write-off of the paging investment in 2000. Amortization of costs related to the paging investment totaled $7.7 million in 2000 and $10.3 million in 1999. Interest Expense increased 3% ($3.2 million) in 2001 and 1% ($575,000) in 2000. The increase in interest expense was related primarily to an increase in short-term debt, prior to the sale of $500 million of 7.6% Series A Notes in December 2001, offset somewhat by lower interest rates. Long-term interest expense declined by $6.3 million due to the reduction in U.S. Cellular Liquid Yield Option Notes (“LYONs”) debt. Income Tax Expense (Benefit) was a benefit of $44.9 million in 2001 and an expense of $149.5 million in 2000 and $251.0 million in 1999. The period to period change reflects primarily the changes in pretax income. The Company reported a loss from continuing operations before income taxes and minority interest in 2001. The income tax benefit recorded on such loss resulted in an income tax benefit rate of 26.1% in 2001. The effective tax rate was 43.1% in 2000 and 41.3% in 1999. Income from continuing operations before income taxes and minority interest includes gains and losses from marketable securities and other investments. The effective income tax rate excluding such gains and losses was 44.4%, 40.4% and 44.3% for the years ended December 31, 2001, 2000 and 1999, respectively. Minority share of income includes primarily the minority public shareholders’ share of U.S. Cellular’s net income, the minority shareholders’ or partners’ share of certain U.S. Cellular 24 subsidiaries’ net income or loss and other minority interests. U.S. Cellular’s minority public share of income includes minority share of gains of $9.0 million in 2000 and $30.6 million in 1999. There was no minority share of gains in 2001. Income (Loss) From Continuing Operations and  Diluted Earnings Per Share From Continuing Operations were significantly affected by gains and losses from marketable securities and other investments. Income and diluted earnings per share from continuing operations and from gains and losses are shown in the following table. Discontinued Operations. The merger of Aerial Communications, Inc. (“Aerial”) with VoiceStream was completed on May 4, 2000. TDS recognized a gain of $2,125.8 million, net of tax, or $35.06 diluted earnings per share on this transaction. The gain was reduced by $24.1 million, or $0.41 per share, in 2001 to reflect adjustments to estimates used during the closing in the calculation of income and other tax liabilities. In 1999, the loss on operations of Aerial, net of tax, reduced net income by $111.5 million, or $1.78 per share. Extraordinary Item – loss on debt extinguishment, net of minority interest, is related to U.S. Cellular’s retirement of LYONs. U.S. Cellular retired LYONs with an aggregate carrying value of $25.4 million and $63.6 million during 2001 and 2000, respectively, for cash totaling $32.0 million and $99.4 million, respectively. A loss, net of minority interest, of $5.7 million, or $0.10 loss per share, in 2001, and $30.5 million, or $0.51 loss per share, in 2000, reflects the difference between the purchase price and the carrying value. Cumulative Effect of Accounting Change, net of tax and minority interest reflects the implementation of Staff Accounting Bulletin 101 (“SAB 101”), “Revenue Recognition in Financial Statements” in 2000. U.S. Cellular defers recognition of wireless activation and reconnection fees to the accounting period when wireless service is provided to the customer. Under the prior method of accounting, wireless activation fees were recognized at the time the customer signed a wireless contract for service. The cumulative effect of this accounting change reduced net income in 2000 by $3.8 million, or $0.06 per share. TDS provides wireless telephone service through United States Cellular Corporation (“U.S. Cellular”), an 82.2%-owned subsidiary. U.S. Cellular owns, manages and invests in wireless markets throughout the United States. Growth in the customer base is the primary reason for the increase in U.S. Cellular’s results of operations in 2001 and 2000. The number of Telephone and Data Systems, Inc. Annual Report 2001 Telephone and Data Systems, Inc. Annual Report 2001 25 Wireless Telephone Operations Year Ended December 31,  2001 2000 1999 (Dollars in thousands) Operating Revenues Retail service $1,408,253 $1,227,590 $1,089,249 Inbound roaming 272,361 292,437 318,659 Long-distance and other  145,771 133,895 117,752 Service Revenues 1,826,385 1,653,922 1,525,660 Equipment sales 68,445 62,718 50,769 1,894,830 1,716,640 1,576,429 Operating Expenses System operations 421,114 350,507 368,070 Marketing and selling 297,239 303,721 272,729 Cost of equipment sold 124,028 139,654 124,058 General and administrative 434,579 364,747 325,758 Depreciation and amortization 300,658 265,698 229,972 1,577,618 1,424,327 1,320,587 Operating Income $ 317,212 $ 292,313 $ 255,842 Consolidated Markets: Markets 142 139 139 Market penetration 13.48% 12.29% 10.47% Cell sites in service 2,925 2,501 2,300 Average monthly service  revenue per customer unit $ 46.28 $ 49.21 $ 53.71 Churn rate per month  1.9% 2.0% 2.1% Cost per gross customer  addition $ 322 $ 330 $ 346 Employees 5,150 5,250 4,800 Year Ended December 31,  2001 2000 1999 (Dollars in thousands)  Minority Share of Income U.S. Cellular Minority Public  Shareholders  $(32,403) $(41,929) $(57,411) Subsidiaries’  Minority Interests (10,146) (7,629) (7,148) (42,549) (49,558) (64,559) Other Subsidiaries 1,393 (1,867) (558) $(41,156) $(51,425) $(65,117) Year Ended December 31,  2001 2000 1999 (Dollars in thousands, except per share amounts) Income From Continuing  Operations Operations $ 168,111 $ 154,753 $ 111,912 Gains (Losses) (336,359) (9,226) 179,414 $ (168,248) $ 145,527 $ 291,326 Diluted Earnings Per Share  From Continuing Operations Operations $ 2.86 $ 2.54 $ 1.78 Gains (Losses) (5.73) (0.15) 2.87 $ (2.87) $ 2.39 $ 4.65  – 200 – 150 – 100 – 50 – 0 168 112 155 Net Income from Continuing Operations, Excluding Gains $ Millions – 3.0 – 2.5 – 2.0 – 1.5 – 1.0 2.86 1.78 2.54 Diluted Earnings per Share from Continuing Operations,  Excluding Gains $ per share  – 3500 – 3250 – 3000 – 2750 – 2500 – 2250 – 2000 3,461 2,602 3,061 Cellular Units in Service Thousands of Units customer units increased 13% to 3,461,000 at December 31, 2001 and increased 18% to 3,061,000 at December 31, 2000. U.S. Cellular added 354,000 net new customer units from its marketing efforts and 46,000 customer units from acquisitions in 2001. In 2000, 483,000 net new customer units were added from marketing efforts while acquisition/divestiture activity reduced customer units by 24,000.