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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------
                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


 X      QUARTERLY REPORT  PURSUANT TO  SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended       March 31, 1998
                               -------------------------------------------------

                                       OR

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

For the transition period from________________________ to ____________________

                          Commission File Number 1-8251

--------------------------------------------------------------------------------
                        TELEPHONE AND DATA SYSTEMS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Iowa                                      36-2669023
  -----------------------------            ------------------------------
 (State or other jurisdiction of        (I.R.S. Employer Identification No.)
 incorporation or organization)

                   30 North LaSalle Street, Chicago, Illinois  60602 
          -----------------------------------------------------------------
              (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (312) 630-1900

                                 Not Applicable
             ------------------------------------------------------  
           (Former address of principal executive offices) (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X  No
                                       ---   ---
Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

                 Class                            Outstanding at April 30, 1998
      -----------------------------              -------------------------------
       Common Shares, $1 par value                      54,036,216 Shares
   Series A Common Shares, $1 par value                  6,939,280 Shares

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




<PAGE>




                        TELEPHONE AND DATA SYSTEMS, INC.
                        --------------------------------

                         1ST QUARTER REPORT ON FORM 10-Q
                         -------------------------------


                                      INDEX
                                      ----- 


                                                                       Page No.
                                                                       --------
Part I.      Financial Information

                Management's Discussion and Analysis of
                   Results of Operations and Financial Condition        2-12

                Consolidated Statements of Income -
                   Three Months Ended March 31, 1998 and 1997            13

                Consolidated Statements of Cash Flows -
                   Three Months Ended March 31, 1998 and 1997            14

                Consolidated Balance Sheets -
                   March 31, 1998 and December 31, 1997                15-16

                Notes to Consolidated Financial Statements             17-24


Part II.     Other Information                                           25


Signatures                                                               26




<PAGE>



                          PART I. FINANCIAL INFORMATION
                          -----------------------------
                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                ------------------------------------------------- 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
          -------------------------------------------------------------
                             AND FINANCIAL CONDITION
                             -----------------------


Telephone  and Data  Systems,  Inc.  ("TDS" or the  "Company")  is a diversified
telecommunications   company  which  provides  high-quality   telecommunications
services to over 2.5 million  cellular  telephone,  local telephone and personal
communications   service  ("PCS")  customer  units.   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.

TDS reported a 35%  increase in revenues for the first  quarter of 1998 on a 52%
growth in customers  since March 31, 1997.  United States  Cellular  Corporation
("U.S.  Cellular")  revenues  increased  33%  primarily due to a 56% increase in
customer units. TDS  Telecommunications  Corporation ("TDS Telecom")  reported a
10% increase in revenues on a 7% increase in access lines and increased activity
in its new business ventures.  Aerial  Communications,  Inc. ("Aerial") reported
revenues  of $30.7  million in the first  quarter of 1998 and  165,000  customer
units at March 31, 1998. Aerial launched service at the end of the first quarter
1997.  Expenses  incurred  by  Aerial  prior to the  launch of  operations  were
reported as PCS  Development  Costs  included  in  Investment  and Other  Income
(Expense).

Consolidated  cash flow and operating  income were down due to Aerial's  rapidly
increasing  operating  costs as it continues  the  challenge of  attracting  new
customers. U.S. Cellular's cash flow and operating income increased 46% and 41%,
respectively,   reflecting   the  increase  in  customers  and  the  effects  of
acquisitions.  TDS Telecom's cash flow and operating  income  declined by 7% and
25%,  respectively,  reflecting  increased  operating  expenses in the telephone
operations and start-up costs in the new business ventures.

Investment  and other income  totaled $223.9  million,  consisting  primarily of
$221.4  million  of  gains  from  the  sale  of  cellular  interests  and  other
investments  recorded in the first quarter of 1998.  Interest expense  increased
129% as a result of the  increase in short- and  long-term  debt  balances.  Net
income  available to common  increased seven fold over the first quarter of 1997
due mainly to significant  gains recorded on the sale of cellular  interests and
other investments.

TDS  completed  the  transfer of  substantially  all of the assets and  certain,
limited  liabilities of American  Paging,  Inc. to TSR Wireless  Holdings,  LLC,
effective March 31, 1998, pursuant to a previously  announced asset contribution
agreement.

RESULTS OF OPERATIONS
---------------------

Three Months Ended 3/31/98 Compared to Three Months Ended 3/31/97
-----------------------------------------------------------------

Telephone and Data Systems, Inc. reported net income available to common of 
$73.7 million, or

                                        2

<PAGE>



$1.20 per  share -  diluted,  in the first  quarter  of 1998,  compared  to $9.1
million,  or $.15 per share - diluted,  in the first quarter of 1997. Net income
for 1998  included  significant  gains from the sale of cellular  interests  and
other investments  totaling $112.5 million,  or $1.84 per share. Net income from
U.S. Cellular increased to $15.9 million, or $.26 per share, in 1998, from $14.9
million,  or $.24 per share,  in 1997. Net income from TDS Telecom  decreased to
$5.2 million,  or $.09 per share, in 1998 from $8.9 million,  or $.15 per share,
in 1997,  primarily due to the $6.6 million  decrease in operating  income.  Net
income from Corporate,  American Paging and Other increased to $11.9 million, or
$.19 per  share,  in 1998  from $3.8  million,  or $.06 per  share,  in 1997 due
primarily to increase in the tax benefit  associated with Aerial's  losses.  The
business  units compute  their federal  income taxes as if they filed a separate
return.  Any income tax benefits  used on a  consolidated  basis not used by the
business  units are  recorded by TDS, the parent  company.  TDS and the business
units have tax allocation agreements and policies under which the business units
are able to carry  forward  any  losses and  credits  and use them to offset any
future income tax liability to TDS.  Aerial's  activities  reduced net income by
$71.7 million,  or $1.18 per share,  in 1998 compared to $18.5 million,  or $.30
per share in 1997.

The table below  summarizes  the effects of the business  units and gains (along
with the related  impact on income  taxes and  minority  interest) on net income
available to common and earnings per share - diluted.


<TABLE>
<CAPTION>
                                               Three Months Ended March 31,
                                               -------------------------------
                                                  1998               1997
                                                  ----               ----
                                                 (Dollars in thousands, 
                                               except per share amounts)
<S>                                            <C>               <C>
Net Income Available to Common
   U.S. Cellular                               $      15,855     $      14,947
   TDS Telecom                                         5,203             8,921
   Aerial                                            (71,680)          (18,490)
   Corporate, American Paging and Other               11,868             3,758
   Gains                                             112,484                --
                                               -------------     -------------
                                               $      73,730     $       9,136
                                               =============     =============

Diluted Earnings Per Share
   U.S. Cellular                               $         .26     $         .24
   TDS Telecom                                           .09               .15
   Aerial                                              (1.18)             (.30)
   Corporate, American Paging and Other                  .19               .06
   Gains                                                1.84                --
                                               -------------     -------------
                                               $        1.20     $         .15
                                               =============     =============
</TABLE>

U.S. Cellular's  operating results were impacted by the effects of acquisitions,
sales and  exchanges,  primarily  those  related to the exchange of markets with
BellSouth Corporation  ("BellSouth").  The markets acquired in that transaction,
net of the markets divested,  generated increases in overall revenues, operating
expenses,  operating  cash  flow and  operating  income.  These  increases  were
primarily due to the increase in the U.S.  Cellular's  customer base as a result
of the exchange.

However,  the results of certain of U.S.  Cellular's  existing markets which are
adjacent to the markets acquired were negatively  impacted by the effects of the
exchange.  Specifically,  inbound  roaming  revenue  and,  to a  lesser  extent,
operating cash flow suffered the most negative impact

                                        3

<PAGE>



in these markets.  This impact was primarily due to the change in the nature and
pricing of transactions  in which customers from the acquired  markets use their
wireless phones when roaming in U.S. Cellular's  existing markets.  Prior to the
exchange,  U.S.  Cellular's existing markets recorded inbound roaming revenue at
premium  rates;  after the  exchange,  those  markets  recorded an  intercompany
transfer amount which is eliminated in U.S.  Cellular's  consolidated  financial
statements.

Overall, U.S. Cellular's revenues, operating cash flow and operating income were
positively impacted by the effects of the BellSouth exchange.

Operating  Revenues  increased 35% ($102.0  million) during the first quarter of
1998  primarily as a result of a 52%  increase in customer  units  served.  U.S.
Cellular  represented  59% ($60.6  million) of the total increase in revenues as
customer units  increased by 653,000 units,  or 56%, for the twelve months ended
March 31, 1998, to 1,817,000  units.  Aerial  represented 30% ($30.7 million) of
the  increase  as it added  over  165,000  units in its first  twelve  months of
operations. TDS Telecom represented 11% ($10.6 million) of the total increase in
revenues.  Access lines increased 7% for the twelve month period ended March 31,
1998 to 528,900 access lines.

U.S.  Cellular  revenues  increased 33% ($60.6 million) in 1998 reflecting a 56%
increase in customer units.  Local retail revenue  increased 41% ($49.1 million)
in the first quarter of 1998 due primarily to the 56% customer  growth.  Average
local minutes of use per retail customer  decreased by 5% to 95 in 1998 from 100
in 1997,  while  average  local retail  revenue per minute  totaled $.34 in 1998
compared to $.36 in 1997. U.S.  Cellular's use of incentive programs in 1997 and
1998  that  encourage  lower-priced  weekend  and  off-peak  usage,  in order to
stimulate overall usage,  resulted in a lower average revenue per minute of use.
Average  revenue  per minute  also  declined  due to  increased  amounts of bill
credits  given to new and current  customers as  incentives  to become or remain
customers.  Inbound roaming  revenue  (charges to customers of other systems who
use U.S.  Cellular's  cellular systems when roaming)  increased 2% ($900,000) in
the first quarter of 1998. Roaming transactions between U.S. Cellular's existing
markets and the acquired  markets,  and vice versa, are considered  intracompany
transactions in 1998, the revenue from those roaming transactions is recorded as
an offset to  customer  usage  expense  in the  current  year.  Roaming  traffic
involving the same markets would have been recorded as inbound  roaming  revenue
and customer usage expense in 1997. The 32% increase in roaming minutes used was
offset by  negotiated  reductions  in roaming  rates.  Average  inbound  roaming
revenue  per  minute  declined  by 22% to $.69 in 1998  from  $.88 in 1997.  The
addition of the acquired  markets also caused the elimination of certain inbound
roaming  revenues  between  U.S.  Cellular's  existing  markets and the acquired
markets.

Total  average  monthly  service  revenue per customer  decreased 17% ($8.84) to
$44.66 in the first quarter of 1998 from $53.50 in 1997.  Average  monthly local
retail  revenue per customer  declined 11% ($3.91) to $32.14 in 1998 from $36.05
in 1997 due primarily to competitive pressures, incentive programs being offered
to new and current  customers  to become or remain  customers,  consumer  market
penetration  and the effects of  acquisitions.  The  recently  acquired  markets
produced a lower amount of revenue per  customer  (approximately  20%),  thereby
reducing  the average  retail  revenue per  customer.  Average  monthly  inbound
roaming  revenue per customer  declined 35% ($4.78) to $8.73 in 1998 compared to
$13.51 in 1997.  This decrease is related to the decrease in roaming revenue per
minute,  the faster growth of U.S.  Cellular's  customer base as compared to the
growth of inbound roaming revenues and the

                                        4

<PAGE>



elimination of certain inbound roaming revenues between U.S. Cellular's existing
markets and the acquired markets.

TDS  Telecom  revenues  increased  10% ($10.6  million) in 1998 due to growth in
telephone operations ($8.7 million) and growth in other services ($2.2 million).
Telephone operations revenues increased primarily as a result of the recovery of
increased costs of providing  long-distance  services ($2.1 million),  increased
sale of customer premise equipment ($1.7 million), effects of acquisitions ($1.6
million), internal access line growth of 5% since March 31, 1997 ($1.5 million),
and increased network usage ($1.3 million). The number of telephone access lines
increased by 7% (5% from internal growth and 2% from acquisitions) to 528,900 at
March 31,  1998 from  493,000 at March 31,  1997.  Average  monthly  revenue per
access line  increased by 2% to $68.48 for the first quarter of 1998 from $67.24
in 1997.  The other  services  increase  was  primarily  driven by  increases in
revenues in the LAN wiring business of $1.4 million and from the Internet access
provider of $900,000.

Aerial revenues totaled $30.7 million in 1998,  consisting of service revenue of
$24.1 million and equipment sales revenues of $6.6 million.  Average revenue per
customer  declined to approximately $57 in the first quarter of 1998 as compared
to over $70 in the third and fourth quarter of 1997. During the first quarter, a
number of subscribers were deactivated for non-payment. Despite churn, including
Aerial-initiated  deactivations,  Aerial added over 40,000 customer units in the
first  quarter of 1998 and had over  165,000  customers  in service at March 31,
1998. Aerial did not have any revenues in the first quarter of 1997.

Operating  Expenses  rose 70% ($168.2  million) in the first quarter of 1998 due
primarily  to added  expenses at Aerial for the  development  of its markets and
added  expenses to serve the  growing  customer  base.  Aerial  represented  60%
($100.1  million) of the total  increase in operating  expenses,  while cellular
represented 30% ($50.9 million) and telephone represented 10% ($17.2 million) of
the total increase.

U.S.  Cellular  expenses  increased  32% ($50.9  million)  during  1998.  System
operations  expenses  increased  18%  ($5.7  million)  in  1998 as a  result  of
increases  in customer  usage  expenses  and costs  associated  with the growing
number of cell sites within U.S.  Cellular's  systems.  Customer  usage expenses
grew 19% ($3.7  million)  primarily due to the increase in net outbound  roaming
expense and the effects of  acquisitions.  Net outbound roaming usage expense is
the  result  of U.S.  Cellular  providing  a  larger  service  footprint  to its
customers while charging them local rates, which are lower than roaming rates it
is charged by other  carriers,  as an incentive  to become or remain  customers.
Maintenance,  utility  and cell  site  expenses  increased  17%  ($2.1  million)
reflecting  primarily  the increase in the number of cell sites to 1,786 in 1998
from 1,377 in 1997.

Marketing and selling expenses  increased 27% ($15.0 million),  including a $2.8
million  increase in cost of equipment sold reflecting costs incurred to add new
customers, increased advertising to promote the United States Cellular brand and
cellular wireless communications and the effects of acquisitions. Cost per gross
customer  addition  declined  to $313  in 1998  from  $324 in 1997  while  gross
customer activations  increased to 198,000 in 1998 from 157,000 in 1997. General
and  administrative  expenses  increased 34% ($15.1  million) due to the growing
customer base in existing markets and an expansion of local office and corporate
staff  necessitated by U.S.  Cellular's  growth and the effects of acquisitions.
Depreciation and amortization increased 50% ($15.1 million) primarily due to the
increase in average fixed assets

                                        5

<PAGE>



since March 31, 1997 as well as a reduction  in useful  lives of certain  assets
beginning in 1998 which increased  depreciation  expense by $3.5 million and the
effects of acquisitions.

TDS Telecom expenses  increased 22% ($17.2 million) during 1998 due to growth in
telephone  operations  ($11.5  million)  and to growth in other  services  ($6.0
million). Telephone operations increased primarily due to increased depreciation
and  amortization  ($2.3 million),  the effects of acquisitions  ($1.5 million),
increased sales of customer premise equipment ($1.3 million), increased costs to
support and maintain  information  systems ($1.2 million) and increased costs of
maintaining  the  centralized  network  management  center ($1.0  million).  The
remaining increase is due to growth in internal  operations,  including wage and
salary increases, staffing and inflation. Other services increased primarily due
to the growth in the LAN wiring business of $2.9 million, development activities
at a start-up  competitive  local exchange carrier of $2.1 million and growth at
the Internet access provider of $900,000.

Aerial's expenses totaled $100.1 million in 1998. Expenses incurred in the first
quarter of 1997 prior to the launch of service  totaled  $21.6  million and were
reported  as PCS  Development  Costs  as part of  Investment  and  Other  Income
(Expense). System operations expenses totaled $15.0 million reflecting the costs
of  operating   Aerial's  network,   primarily  cell  site  expenses,   landline
interconnection  charges and wages.  Marketing and selling expenses  incurred to
add new customers  totaled  $17.4  million while cost of equipment  sold totaled
$22.8  million.  General  and  administrative  expenses  totaled  $14.2  million
reflecting the expenses  associated  with the management and operating  teams as
well as overhead  expenses.  Customer  service  expenses  totaled  $10.9 million
primarily  for the  staffing  to  support  the  PCS  markets.  Depreciation  and
amortization totaled $19.7 million.

Operating  Income  was a  $(27.2)  million  loss in the  first  quarter  of 1998
compared to $41.9 million income in 1997  reflecting  the increased  expenses of
Aerial's  development  activities.  Aerial  incurred an operating  loss of $69.3
million  in the first  quarter of 1998 which  offset the U.S.  Cellular  and TDS
Telecom  operating  income.  U.S.  Cellular's  operating income increased 41% to
$33.2  million in the first  quarter  of 1998 and its  operating  income  margin
increased to 13.5% in 1998 from 12.7% in 1997.  TDS Telecom's  operating  income
declined  $6.6 million to $20.3  million  reflecting  $3.8 million of additional
operating  losses from other  services,  primarily the CLEC business and the LAN
wiring business,  and a $2.8 million decrease in telephone operating income. TDS
Telecom's  operating margin decreased to 17.5% in 1998 from 25.5% in 1997 due to
the impact of new business ventures and higher operating costs.

<TABLE>
<CAPTION>
                                              Three Months Ended March 31,
                                    -------------------------------------------
                                       1998            1997          Change
                                    -----------    -----------     -----------
                                             (Dollars in thousands)
<S>                                 <C>            <C>             <C> 
Operating Income (Loss)
 from Ongoing Operations
    U.S. Cellular                   $    33,155    $    23,445     $     9,710
    TDS Telecom                          20,315         26,907          (6,592)
    Aerial                              (69,313)            --         (69,313)
                                    -----------    -----------     -----------
                                        (15,843)        50,352         (66,195)
American Paging Operating (Loss)        (11,406)        (8,411)         (2,995)
                                    -----------    -----------     -----------
Operating Income (Loss)             $   (27,249)   $    41,941     $   (69,190)
                                    ===========    ===========     ===========
</TABLE>


                                        6

<PAGE>




TDS  completed  the  transfer of  substantially  all of the assets and  certain,
limited  liabilities  of American  Paging,  Inc. to TSR Wireless  Holdings,  LLC
pursuant  to a  previously  announced  asset  contribution  agreement.  American
Paging's  revenues are netted against its expenses with the resulting  operating
loss reported as American Paging Operating  (Loss).  American  Paging's revenues
totaled  $17.8  million and $24.6  million for the three  months ended March 31,
1998 and 1997,  respectively,  and  expenses  totaled  $29.2  million  and $33.0
million, respectively.  Effective in the second quarter of 1998, TDS will follow
the equity method of accounting for its interest in TSR Wireless  Holdings,  LLC
and will report  these  results as a component  of  Investment  and Other Income
(Expense).

Investment and Other Income (Expense)  totaled $223.9 million in 1998 and $(4.7)
million in 1997.

Gain on Sale of Cellular Interests and Other Investments  totaled $221.4 million
in the  first  quarter  of 1998  as the  Company  has  sold  or  traded  certain
non-strategic  minority  cellular  interests.  There were no asset  sales in the
first quarter of 1997.

PCS  Development  Costs totaled $21.6 million in 1997 reflecting the costs prior
to the launch of PCS service in Aerial markets.

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,  decreased 24% ($4.3 million) in the first quarter of 1998 primarily
due to the transfer of minority  interests to BellSouth in the fourth quarter of
1997.  Cellular  investment  income  is net of  amortization  of  license  costs
relating to these minority interests.

Minority  Share of Income  includes  the  minority  shareholders'  share of U.S.
Cellular's and Aerial's net income or loss, the minority partners' share of U.S.
Cellular's  operating  markets and other  minority  shareholders'  and partners'
share of  subsidiaries'  net income or loss.  The increase in minority  share of
income in the  first  quarter  is  primarily  due to the gains  from the sale of
cellular interests at U.S. Cellular,  which accounted for $(20.9) million of the
$(24.5) million of U.S. Cellular's minority shareholders' share of income.

<TABLE>
<CAPTION>
                                               Three Months Ended March 31,
                                       ---------------------------------------
                                            1998         1997          Change
                                       -----------    ----------   ------------
                                                  (Dollars in thousands)
<S>                                    <C>            <C>          <C>    
Minority Share of (Income) Loss
  United States Cellular
     Minority Shareholders' Share      $   (24,535)   $   (3,521)  $   (21,014)
     Minority Partners' Share               (1,182)       (2,865)        1,683
                                       -----------    ----------   -----------
                                           (25,717)       (6,386)      (19,331)
  Aerial Communications                     15,241         3,849        11,392
  Telephone Subsidiaries and Other          (1,077)         (222)         (855)
                                       -----------    ----------   -----------
                                       $   (11,553)   $   (2,759)  $    (8,794)
                                       ===========    ==========   ===========
</TABLE>


Interest  Expense  increased $17.8 million to $31.6 million in the first quarter
of  1998  primarily  due to a  reduced  amount  of  capitalized  interest  ($6.9
million), the increase in short-term debt

                                        7

<PAGE>



($4.2 million),  the increase in U.S.  Cellular's  long-term debt ($4.5 million)
and the  increase  in  Aerial's  long-term  debt  ($2.2  million).  The  Company
capitalized  $132,000 of interest in the first  quarter of 1998 and $7.1 million
in 1997 related to qualifying license and construction costs.

Minority  Interest in Income of  Subsidiary  Trust  totaled  $4.9 million in the
first quarter of 1998. This preferred dividend  requirement is the result of the
issuance  of  Company-Obligated  Mandatorily   Redeemable  Preferred  Securities
("Preferred  Securities")  in November 1997 and February 1998. In February 1998,
TDS  Capital  II, a  subsidiary  trust of TDS,  issued  6,000,000  of its  8.04%
Preferred Securties at $25 per Preferred Security. The sole asset of TDS Capital
II is $154.6 million principal amount of TDS's 8.04% Subordinated Debentures due
March 31, 2038.

Income Tax Expense  increased  $72.1 million in 1998 to $86.0 million  primarily
due to the  significant  gains  on the  sale of  cellular  interests  and  other
investments.

Net Income  Available to Common  increased $64.6 million to $73.7 million in the
first quarter of 1998 from $9.1 million in the first quarter of 1997.  The gains
from the sale of cellular interests and other investments totaled $112.5 million
in 1998.  Earnings Per Common Share - Diluted was $1.20 in the first  quarter of
1998 and $.15 in the first  quarter  of 1997.  Gains  from the sale of  cellular
interests and other investments contributed $1.84 per share.

Management  believes operating expenses tend to be higher in the fourth quarter,
particularly  at  U.S.  Cellular,  due to  increased  marketing  activities  and
customer growth.  This seasonality may cause operating income to be lower in the
fourth  quarter.  PCS  competitors  have  initiated  service  in certain of U.S.
Cellular's   markets  over  the  past  two  years.  U.S.  Cellular  expects  PCS
competitors  to  complete  initial  deployment  of PCS in portions of all of its
market clusters by the end of 1998. U.S.  Cellular has increased its advertising
to promote the United States  Cellular brand and to distinguish its service from
other wireless communications providers. U.S. Cellular's management continues to
monitor other wireless  communications  providers'  strategies to determine what
effects  additional  competition will have on U.S.  Cellular's future strategies
and results. TDS anticipates that Aerial will continue to incur operating losses
and generate  negative  cash flow as it  continues  to build its  customer  base
reducing TDS's cash flow, operating and net income during 1998.

FINANCIAL RESOURCES AND LIQUIDITY

TDS and its subsidiaries operate relatively capital-intensive  businesses. Rapid
growth has caused  expenditures  for  construction,  expansion  and  acquisition
programs to exceed internally generated cash flow. Accordingly, TDS has obtained
substantial funds from external sources to finance the build-out of PCS markets,
to fund acquisitions and for general  corporate  purposes.  Although  increasing
internal  cash flow from U.S.  Cellular and steady  internal  cash flow from TDS
Telecom 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 U.S. Cellular and TDS Telecom.  Cash flows from operating  activities
totaled  $28.1 million in the first quarter of 1998 compared to $54.7 million in
1997. The launch of Aerial's operations required substantial funds reducing cash
flows from operating  activities in 1998.  U.S.  Cellular's  operating cash flow
(operating income plus depreciation and amortization) totaled $78.4 million

                                        8

<PAGE>



in the first  quarter of 1998 (up 46%) while TDS Telecom's  operating  cash flow
totaled $47.1 million (down 7%).  Aerial's  start-up  activities  resulted in an
operating  cash  outflow of $49.6  million for the first  quarter of 1998.  Cash
flows for other operating activities (investment and other income,  interest and
income  tax  expense,  and  changes  in  working  capital  and other  assets and
liabilities)  required  $44.3  million  in the first  quarter  of 1998 and $48.9
million in 1997.

<TABLE>
<CAPTION>
                                               Three Months Ended March 31,
                                       -----------------------------------------
                                            1998         1997          Change
                                            ----         ----          ------
                                                 (Dollars in thousands)
<S>                                    <C>           <C>            <C>    
Operating cash flow
       U.S. Cellular                   $   78,422    $    53,606    $   24,816
       TDS Telecom                         47,130         50,765        (3,635)
       Aerial                             (49,617)            --       (49,617)
       American Paging                     (3,511)          (707)       (2,804)
                                       ----------    -----------    ----------
                                           72,424        103,664       (31,240)
Other operating activities                (44,311)       (48,936)        4,625
                                       ----------    -----------    ----------
                                       $   28,113    $    54,728    $  (26,615)
                                       ==========    ===========    ==========
</TABLE>

Cash Flows from Financing  Activities.  TDS has used  short-term debt to finance
its PCS operations, for acquisitions and for general corporate purposes. TDS has
taken  advantage  of  attractive   opportunities  from  time-to-time  to  reduce
short-term debt with proceeds from long-term debt and equity sales, and sales of
non-strategic assets.

Cash flows from financing  activities totaled $54.2 million in the first quarter
of 1998 compared to $90.9 million in 1997. In 1998, TDS received  $145.1 million
on the sale of 8.04% Trust Originated Preferred  Securities(sm)  ("TOPrS(sm)")1.
The proceeds from the issuance of the Trust Originated  Securities provided most
of the Company's  external  financing  during the first quarter of 1998 and were
used to reduce notes payable  balances.  Increases in  short-term  debt provided
most of the Company's external financing  requirements  during the first quarter
of 1997. The 1997  borrowings were used primarily to fund  expenditures  for PCS
construction and development activities and for stock repurchases.

In the first  quarter of 1998,  TDS  expended  $5.7  million for the purchase of
American  Paging common shares  pursuant to a tender offer. In the first quarter
of 1997, TDS purchased,  on the open market, 728,100 TDS Common Shares for $28.9
million and 350,000 U.S. Cellular Common Shares for $9.8 million.

Cash Flows From Investing  Activities.  TDS makes  substantial  investments each
year  to  acquire,   construct,   operate  and  maintain   modern   high-quality
communications  networks and facilities as a basis for creating  long-term value
for shareowners.  Cash flows from investing activities required $66.5 million in
the  first  quarter  of  1998  compared  to  $147.4  million  in  1997.  Capital
expenditures  required  $125.3  million  in 1998  and  $169.0  million  in 1997.
Aerial's  capital  expenditures  have decreased in 1998 because it has completed
its initial  build out program.  Acquisitions,  net of cash  acquired,  required
$52.3 million in 1998.  The sales of non-strategic cellular  interests and other
investments provided $96.4 million in 1998 reducing total cash flows
--------
          1 (sm) "Trust Originated Preferred Securities" and "TOPrS" are service
marks of Merrill Lynch & Co., Inc.

                                        9

<PAGE>



required for investing activities in 1998.

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-enhancing   and
cost-reducing  technological  developments.  Capital expenditures totaled $125.3
million in the first quarter of 1998  consisting  primarily of $69.1 million for
cellular  plant and equipment,  $30.7 million for telephone  plant and equipment
and $29.7 million for PCS property and equipment.  Capital  expenditures totaled
$169.0 million in 1997 consisting  primarily of $53.1 million for cellular plant
and equipment, $23.9 million for telephone plant and equipment and $84.6 million
for PCS property and equipment.

LIQUIDITY

TDS  anticipates  that the  aggregate  resources  required for 1998 will include
approximately $545 million for capital spending,  consisting of $330 million for
cellular capital additions, $140 million for telephone capital additions and $75
million for PCS capital  additions.  In addition,  Aerial's  working capital and
operating  expenses  will  require  an  estimated  $185  million.   The  Company
anticipates  financing these  expenditures  with internally  generated funds and
short-term financing.

U.S. Cellular plans to finance its cellular construction program using primarily
internally generated cash supplemented by short-term financing.  U.S. Cellular's
operating cash flow totaled $286.7 million for the twelve months ended March 31,
1998, up 35% ($73.9 million) from 1997.  U.S.  Cellular had $500 million of bank
lines of credit for general  corporate  purposes at March 31, 1998, all of which
was unused. These line of credit agreements provide for borrowings at the London
InterBank Offered Rate ("LIBOR") plus 26.5 basis points.

TDS Telecom plans to finance its construction program using primarily internally
generated  cash  supplemented  by long-term  financing  from federal  government
programs and  short-term  financing.  Operating cash flow totaled $193.0 million
for the twelve months ended March 31, 1998, down 2% ($4.9 million) from 1997. At
March 31,  1998,  TDS  Telecom  telephone  subsidiaries  had  $114.7  million in
unadvanced loan funds from federal government  programs to finance the telephone
construction program.

Aerial  plans to finance  its  construction  expenditures  and  working  capital
requirements  with  short-term  financing.  Aerial  is  currently   negotiating 
for additional  financing,  although   there   can  be    no   assurance   that
these    negotiations   will   be    completed    on   terms   or    prices
acceptable to it. Aerial issued 10-year 8.05% zero coupon notes for $100 million
in February 1998 in  satisfaction of all  outstanding  obligations  (aggregating
approximately   $84  million)  and  certain  future   obligations   (aggregating
approximately $16 million) of Aerial under the Nokia Credit Agreement.

TDS and its  subsidiaries  had cash and  temporary  investments  totaling  $84.2
million and  longer-term  cash  investments  totaling $19.7 million at March 31,
1998.  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 had

                                       10

<PAGE>



$650 million of bank lines of credit for general corporate purposes at March 31,
1998.  Unused  amounts of such lines totaled $200 million.  These line of credit
agreements provide for borrowings at negotiated rates up to the prime rate.

Management believes that TDS's internal cash flows and funds available from cash
and cash equivalents,  lines of credit,  and longer-term  financing  commitments
provide sufficient  financial  flexibility.  However,  the timing and amounts of
capital  expenditures and  acquisitions as well as working capital  requirements
and amounts needed for general corporate  purposes may vary throughout the year.
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.

Recent Developments

At a Special Meeting on April 27, 1998,  Shareholders of the Company  approved a
proposal (the "Tracking Stock Proposal") and two related  proposals which would,
among  other  things,  change  the  state of  incorporation  of TDS from Iowa to
Delaware and permit TDS to issue shares of tracking  stock which are intended to
reflect  the  performance  of the  Company's  interest  in its  three  principal
business units: TDS Telecom,  U.S. Cellular and Aerial.  The  reincorporation of
TDS into  Delaware is expected to take place in mid to late May,  following  the
receipt of regulatory approvals.

On April 17,  1998,  the Board of Directors  of the Company  determined  to take
certain action at the 1998 Annual Meeting of  Shareholders,  subject to approval
by  shareholders  of the Tracking  Stock  Proposal on April 27, 1998.  Since the
Tracking Stock  Proposal was approved at the Special  Meeting on April 27, 1998,
the Board of Directors will submit a proposal to  shareholders  at the Company's
1998  Annual  Meeting,  currently  expected  to occur in July 1998,  to consider
certain amendments to the Restated  Certificate of Incorporation of TDS Delaware
(the  "Restated  Certificate"),  which are  intended  to improve  the  corporate
governance  provisions of the Tracking Stock Proposal in certain  respects.  The
amendments that will be considered at the 1998 Annual Meeting are as follows:

          1.  The Restated Certificate would be amended to require a vote by the
          holders of a majority of the Common Shares and Series A Common Shares,
          each voting  separately as a class,  in connection  with any merger or
          consolidation of TDS that requires a shareholder vote.

          2.  The Restated Certificate would be amended to require a class vote 
          by the holders of a  majority  of the  Common  Shares to increase  the
          authorized number of Common Shares, and to require a class vote by the
          holders of a majority of the Series A Common  Shares to  increase  the
          authorized number of Series A Common Shares.

          3.  The Restated  Certificate would be amended to provide that TDS 
          would be subject to the  provisions  of Section 203 of the Delaware  
          General Corporation Law.

In connection with the Tracking Stock Proposal, TDS had made offers to each of 
U.S. Cellular

                                       11

<PAGE>



and Aerial to acquire the common stock of such  corporations  which TDS does not
own, in exchange  for  tracking  stock of TDS which would be intended to reflect
the separate performance of U.S. Cellular and Aerial, respectively.

TDS has held several  meetings  and  substantive  negotiations  with the special
committee of the board of directors  of Aerial  relating to the proposed  Aerial
Merger. Following the most recent meeting with TDS, the special committee of the
board of directors  of Aerial  advised TDS that it had  determined  to recommend
that the board of  directors  of Aerial  reject the offer by TDS to acquire  the
publicly-held  shares  of  Aerial  which TDS does not own.  The  Aerial  special
committee  has  advised  TDS that it would be  prepared  to  consider  a revised
proposal which "contains  increased  protections  designed to preserve  Aerial's
inherent value for its public stockholders and also embodies an increased equity
interest in the Aerial Group tracking stock for the Aerial public stockholders."
TDS intends to make a revised  proposal to the Aerial  special  committee and to
continue to seek an agreement to acquire the Aerial  Common  Shares that it does
not own on mutually acceptable terms.

With respect to the U.S. Cellular Merger, TDS has met once with, but has not yet
held  substantive  negotiations  with,  the  special  committee  of the board of
directors  of U.S.  Cellular,  which is  continuing  to conduct  due  diligence.
However,  the special  committee of the board of directors of U.S.  Cellular has
expressed  significant  reservations relating to the offer by TDS to acquire the
publicly-held  shares of U.S.  Cellular  that TDS does not own.  TDS  intends to
continue to seek an agreement to acquire the U.S. Cellular Common Shares that it
does not own on mutually acceptable terms.


PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  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.


                                       12

<PAGE>




<TABLE>
                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                ------------------------------------------------- 
                        CONSOLIDATED STATEMENTS OF INCOME
                        --------------------------------- 
                                    Unaudited
                                    --------- 
<CAPTION>
                                                      Three Months Ended
                                                           March 31,
                                             -------------------------------
                                                  1998               1997
                                                  ----               ----
                                                  (Dollars in thousands,
                                                  except per share amounts)
<S>                                          <C>                 <C>    
OPERATING REVENUES
    U.S. Cellular                            $       245,157     $    184,584
    TDS Telecom                                      116,215          105,571
    Aerial                                            30,746               --
                                             ---------------     ------------
                                                     392,118          290,155
                                             ---------------     ------------
OPERATING EXPENSES
    U.S. Cellular                                    212,002          161,139
    TDS Telecom                                       95,900           78,664
    Aerial                                           100,059               --
                                             ---------------     ------------
                                                     407,961          239,803
                                             ---------------     ------------
    Operating Income (Loss) from 
    Ongoing Operations                               (15,843)          50,352
    American Paging Operating (Loss)                 (11,406)          (8,411)
                                             ---------------     ------------

OPERATING INCOME (LOSS)                              (27,249)          41,941
                                             ---------------     ------------
INVESTMENT AND OTHER INCOME (EXPENSE)
    Interest and dividend income                       3,437            3,418
    Cellular investment income, net of
        license cost amortization                     13,605           17,920
    Gain on sale of cellular interests and other 
     investments                                     221,442               --
    PCS development costs                                 --          (21,614)
    Other income (expense), net                       (3,049)          (1,637)
    Minority share of income                         (11,553)          (2,759)
                                             ---------------     ------------
                                                     223,882           (4,672)
                                             ---------------     ------------

INCOME BEFORE INTEREST AND INCOME TAXES              196,633           37,269
Interest expense                                      31,613           13,814
Minority interest in income of subsidiary trust        4,896               --
                                             ---------------    -------------
INCOME BEFORE INCOME TAXES                           160,124           23,455
Income tax expense                                    85,954           13,838
                                             ---------------    -------------
NET INCOME                                            74,170            9,617
Preferred Dividend Requirement                          (440)            (481)
                                             ---------------    -------------
NET INCOME AVAILABLE TO COMMON               $        73,730    $       9,136
                                             ===============    =============

WEIGHTED AVERAGE COMMON SHARES (000s)                 60,750           61,184

EARNINGS PER COMMON SHARE - Basic            $          1.21    $         .15
                                             ===============    =============

EARNINGS PER COMMON SHARE - Diluted          $          1.20    $         .15
                                             ===============    =============
DIVIDENDS PER COMMON AND
  SERIES A COMMON SHARE                      $           .11    $        .105
                                             ===============    =============
                                             
<FN>
         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>
</TABLE>

                                       13

<PAGE>



<TABLE>
                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                    Unaudited
                                    ---------
<CAPTION>
                                                        Three Months Ended
                                                             March 31,
                                                   --------------------------
                                                       1998            1997
                                                       ----            ----
                                                        (Dollars in thousands)
<S>                                                <C>             <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                        $    74,170     $    9,617
 Add (Deduct) adjustments to reconcile net income
   to net cash provided by operating activities
           Depreciation and amortization                99,673         62,028
           Deferred taxes                               79,114          3,730
           Investment income                           (14,551)       (19,154)
           Minority share of income                     11,553          2,759
           Gain on sale of cellular interests and 
               other investments                      (221,442)            --
           Noncash interest expense                      8,424          5,805
           Other noncash expense                         4,166          5,240
           Change in accounts receivable                   (61)          (185)
           Change in accounts payable                  (12,945)        (8,598)
           Change in accrued taxes                       1,276          4,988
           Change in accrued interest                   (8,853)        (4,259)
           Change in other assets and liabilities        7,589         (7,243)
                                                   -----------     ----------
                                                        28,113         54,728
                                                   -----------     ----------
 CASH FLOWS FROM FINANCING ACTIVITIES                    
    Long-term debt borrowings                            1,848          2,840
    Repayments of long-term debt                        (5,496)        (8,373)
    Change in notes payable                            (75,670)       140,866
    Trust preferred securities                         145,050             --
    Dividends paid                                      (7,141)        (6,880)
    Repurchase of Common Shares                             --        (28,878)
    Purchase of subsidiary common stock                 (5,738)        (9,801)
    Other financing activities                           1,365          1,106
                                                   -----------     ----------
                                                        54,218         90,880
                                                   -----------     ----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Capital expenditures                              (125,314)      (169,024)
    Investments in and advances to cellular
        minority partnerships                           (5,430)        (6,146)
    Distributions from partnerships                      4,554          9,297
    Investments in PCS licenses                             --         (4,745)
    Proceeds from investment sales                      96,432             --
    Other investing activities                          (3,135)        (2,239)
    Acquisitions, net of cash acquired                 (52,275)            --
    Change in temporary investments and marketable
     securities                                         18,630         25,478
                                                   -----------     ----------
                                                       (66,538)      (147,379)
                                                   -----------     ----------
NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                      15,793         (1,771)
CASH AND CASH EQUIVALENTS -
    Beginning of period                                 51,008         57,633
                                                   -----------     ----------
    End of period                                  $    66,801     $   55,862
                                                   ===========     ==========

<FN>
         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>
</TABLE>

                                       14

<PAGE>



<TABLE>
                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                            
                                     ASSETS
                                     ------

<CAPTION>
                                                 (Unaudited)       
                                               March 31, 1998  December 31, 1997
                                               --------------  -----------------
                                                     (Dollars in thousands)

<S>                                              <C>              <C>    
CURRENT ASSETS
    Cash and cash equivalents                    $      66,801    $      51,008
    Temporary investments                               17,429           24,559
    Accounts receivable from customers and others      240,066          247,298
    Materials and supplies, at average cost,
        and other current assets                        62,285           85,419
                                                 -------------    -------------
                                                       386,581          408,284
                                                 -------------    -------------
INVESTMENTS
    Cellular license acquisition costs, net          1,175,668        1,190,917
    Cellular minority interests                        105,427          138,367
    PCS license acquisition costs, net                 317,917          319,918
    Franchise costs and other costs in excess of
        the underlying book value of subsidiaries, 
          net                                          184,839          180,669
    Marketable equity securities                       248,482            1,621
    Other investments                                  190,256          141,092
                                                 -------------    -------------
                                                     2,222,589        1,972,584
                                                 -------------    -------------
PROPERTY, PLANT AND EQUIPMENT
    Cellular telephone, net                            955,550          940,253
    Telephone, net                                     840,979          830,767
    PCS, net                                           618,937          604,104
    Radio paging, net                                       --           43,230
    Other, net                                          35,780           47,299
                                                 -------------    -------------
                                                     2,451,246        2,465,653
                                                 -------------    -------------
OTHER ASSETS AND DEFERRED CHARGES                      140,692          125,080
                                                 -------------    -------------
    TOTAL ASSETS                                 $   5,201,108    $   4,971,601
                                                 =============    =============


<FN>
         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>
</TABLE>

                                       15

<PAGE>



<TABLE>
                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                ------------------------------------------------- 

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------  

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

<CAPTION>
                                               (Unaudited)
                                              March 31, 1998   December 31, 1997
                                              --------------   -----------------
                                                   (Dollars in thousands)
<S>                                           <C>               <C>    
CURRENT LIABILITIES
    Current portion of long-term debt
        and preferred shares                  $      16,091     $        16,115
    Notes payable                                   450,615             527,587
    Accounts payable                                211,370             239,783
    Advance billings and customer deposits           29,218              33,640
    Accrued interest                                  9,441              18,284
    Accrued taxes                                     8,360               6,961
    Other current liabilities                        54,012              63,515
                                              -------------     ---------------
                                                    779,107             905,885
                                              -------------     ---------------

DEFERRED LIABILITIES AND CREDITS                    323,863             235,646
                                              -------------     ---------------
          
LONG-TERM DEBT, excluding current portion         1,292,311           1,264,218
                                              -------------     ---------------

REDEEMABLE PREFERRED SHARES, excluding
    current portion                                     175                 180
                                              -------------     ---------------

MINORITY INTEREST in subsidiaries                   419,564             416,566
                                              -------------     ---------------

COMPANY-OBLIGATED MANDATORILY REDEEMABLE
    PREFERRED SECURITIES of Subsidiary Trust
    Holding Solely Company Subordinated 
          Debentures (a)                            300,000             150,000
                                              -------------     ---------------

NONREDEEMABLE PREFERRED SHARES                       27,924              30,987
                                              -------------     ---------------
COMMON STOCKHOLDERS' EQUITY
    Common Shares, par value $1 per share            54,737              54,443
    Series A Common Shares, par value $1 per 
          share                                       6,936               6,936
    Common Shares issuable (12,584 and 10,480
      shares, respectively)                             549                 499
    Capital in excess of par value                1,667,551           1,663,749
    Unrealized gains on securities                   18,628                 683
    Treasury Shares, at cost (770,132 and 
          794,576 shares, respectively)             (29,768)            (30,682)
    Retained earnings                               339,531             272,491
                                              -------------     ---------------
                                                  2,058,164           1,968,119
                                              -------------     ---------------
    TOTAL LIABILITIES AND STOCKHOLDERS' 
          EQUITY                              $   5,201,108     $     4,971,601
                                              =============     ===============

<FN>
(a) As  described  in Note 5, the sole asset of TDS Capital I is $154.6  million
principal  amount of 8.5%  subordinated  debentures  due 2037 from TDS. The sole
asset of TDS Capital II is $154.6 million principal amount of 8.04% subordinated
debentures due 2038 from TDS.

         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>
</TABLE>

                                       16

<PAGE>



                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    The consolidated financial statements included herein have been prepared 
      by the Company, without audit, pursuant to the rules and regulations of 
      the Securities and Exchange Commission.  Certain information and footnote 
      disclosures normally included in financial statements prepared in 
      accordance with generally accepted accounting principles have been
      condensed or omitted pursuant to such rules and regulations, although the 
      Company believes that the disclosures are adequate to make the information
      presented not misleading.  It is suggested that these consolidated 
      financial statements be read in conjunction with the consolidated 
      financial statements and the notes thereto included in the Company's 
      latest annual report on Form 10-K.

      The accompanying  unaudited  consolidated financial statements contain all
      adjustments  (consisting  of only normal  recurring  items)  necessary  to
      present  fairly the  financial  position as of March 31, 1998 and December
      31,  1997,  and the  results  of  operations  and cash flows for the three
      months ended March 31, 1998 and 1997.  The results of  operations  for the
      three months ended March 31, 1998 and 1997, are not necessarily indicative
      of the results to be expected for the full year.

2.    At a  Special  Meeting  on April 27,  1998,  Shareholders  of the  Company
      approved  a proposal  (the  "Tracking  Stock  Proposal")  and two  related
      proposals   which  would,   among  other  things,   change  the  state  of
      incorporation  of TDS from Iowa to Delaware and permit TDS to issue shares
      of tracking  stock which are  intended to reflect the  performance  of the
      Company's  interest in its three principal  business  units:  TDS Telecom,
      U.S.  Cellular and Aerial.  The  reincorporation  of TDS into  Delaware is
      expected  to take  place in mid to late  May,  following  the  receipt  of
      regulatory approvals.

      On April 17, 1998,  the Board of Directors  of the Company  determined  to
      take certain action at the 1998 Annual Meeting of Shareholders, subject to
      approval by shareholders of the Tracking Stock Proposal on April 27, 1998.
      Since the Tracking Stock  Proposal was approved at the Special  Meeting on
      April  27,  1998,  the  Board  of  Directors  will  submit a  proposal  to
      shareholders at the Company's 1998 Annual Meeting,  currently  expected to
      occur  in July  1998,  to  consider  certain  amendments  to the  Restated
      Certificate of Incorporation of TDS Delaware (the "Restated Certificate"),
      which are intended to improve the corporate  governance  provisions of the
      Tracking Stock Proposal in certain  respects.  The amendments that will be
      considered at the 1998 Annual Meeting are as follows:

              1.  The Restated Certificate would be amended to require a vote by
              the holders of a majority of the Common Shares and Series A Common
              Shares,  each voting separately as a class, in connection with any
              merger or consolidation of TDS that requires a shareholder vote.

              2.  The Restated  Certificate  would be amended to require a class
              vote by the holders of a majority of the Common Shares to increase
              the  authorized  number of Common  Shares,  and to require a class
              vote by the holders of a majority of the Series A Common Shares to
              increase the authorized number of Series A Common Shares.

              3.  The Restated Certificate would be amended  to provide that TDS
              would be subject to

                                       17

<PAGE>




              the provisions of Section 203 of the Delaware General Corporation 
              Law.

      In connection  with the Tracking  Stock  Proposal,  TDS had made offers to
      each of U.S.  Cellular  and  Aerial to acquire  the  common  stock of such
      corporations which TDS does not own, in exchange for tracking stock of TDS
      which  would be  intended  to reflect  the  separate  performance  of U.S.
      Cellular and Aerial, respectively.

      TDS has  held  several  meetings  and  substantive  negotiations  with the
      special  committee  of the board of  directors  of Aerial  relating to the
      proposed  Aerial  Merger.  Following the most recent meeting with TDS, the
      special  committee of the board of directors of Aerial advised TDS that it
      had  determined to recommend  that the board of directors of Aerial reject
      the offer by TDS to acquire the  publicly-held  shares of Aerial which TDS
      does not own. The Aerial  special  committee has advised TDS that it would
      be prepared  to  consider a revised  proposal  which  "contains  increased
      protections  designed to preserve  Aerial's  inherent value for its public
      stockholders  and also embodies an increased equity interest in the Aerial
      Group tracking stock for the Aerial public  stockholders."  TDS intends to
      make a revised proposal to the Aerial special committee and to continue to
      seek an agreement to acquire the Aerial Common Shares that it does not own
      on mutually acceptable terms.

      With respect to the U.S.  Cellular Merger,  TDS has met once with, but has
      not yet held substantive  negotiations  with, the special committee of the
      board of directors of U.S.  Cellular,  which is  continuing to conduct due
      diligence.  However,  the special  committee  of the board of directors of
      U.S. Cellular has expressed significant reservations relating to the offer
      by TDS to acquire the publicly-held  shares of U.S. Cellular that TDS does
      not own.  TDS intends to continue to seek an agreement to acquire the U.S.
      Cellular Common Shares that it does not own on mutually acceptable terms.

3.    TDS completed the transfer of substantially all of the assets and certain,
      limited liabilities of American Paging, Inc. to TSR Wireless Holdings, LLC
      pursuant to a previously announced asset contribution agreement.  American
      Paging's  revenues  totaled  $17.8 million and $24.6 million for the three
      months ended March 31, 1998 and 1997,  respectively,  and expenses totaled
      $29.2  million and $33.0  million,  respectively.  Effective in the second
      quarter of 1998,  TDS will follow the equity method of accounting  for its
      interest in TSR Wireless Holdings,  LLC and will report these results as a
      component of Investment and Other Income (Expense).



                                       18

<PAGE>




4.    Marketable Equity Securities

      The following table lists the Company's  marketable  equity  securities at
March 31, 1998.

<TABLE>
<CAPTION>
                                               Cumulative                Net
                         Fair Market Original  Unrealized     Tax     Unrealized
                            Value      Cost       Gain       Effect     Gain
                          ---------  ---------  ---------  ---------  ----------
                                          (Dollars in thousands)
<S>                       <C>        <C>        <C>        <C>        <C>      
Investment in Air Touch   $ 241,889  $ 217,946  $  23,943  $   8,637  $  15,306
Other                         6,593      1,142      5,451      2,129      3,322
                          ---------  ---------  ---------  ---------  ---------
                          $ 248,482  $ 219,088  $  29,394  $  10,766  $  18,628
                          =========  =========  =========  =========  =========
</TABLE>

      The  cumulative  unrealized  gain,  net of taxes,  is  included  in Common
Shareholders' Equity.

5.    Company-Obligated Mandatorily Redeemable Preferred Securities of 
      Subsidiary Trust Holding Solely Company Subordinated Debentures

      In February 1998, TDS Capital II, a subsidiary trust (the "Trust") of TDS,
      issued  6,000,000 of its 8.04%  Company-Obligated  Mandatorily  Redeemable
      Preferred  Securities  (the  "Preferred  Securities") at $25 per Preferred
      Security.  Net proceeds from the issuance  totaled $145.1 million and were
      used to retire short-term debt.

      The sole asset of TDS  Capital II is $154.6  million  principal  amount of
      TDS's  8.04%  Subordinated  Debentures  due March 31, 2038 or such date to
      which the  maturity is  extended by TDS,  but in no event later than March
      31,  2047.  There  is a full  and  unconditional  guarantee  by TDS of the
      Trust's  obligations  under the Preferred  Securities issued by the Trust.
      However,  TDS's obligations are subordinate and junior in right of payment
      to certain other  indebtedness  of TDS. TDS has the right to defer payment
      of interest on the  Subordinated  Debentures  by  extending  the  interest
      payment  period,  at any  time,  for  up to 20  consecutive  quarters.  If
      interest  payment  on  the   Subordinated   Debentures  are  so  deferred,
      distributions  on the Preferred  Securities will also be deferred.  During
      any deferral, distributions will continue to accrue with interest thereon.
      In  addition,  during any such  deferral,  TDS may not  declare or pay any
      dividend  or other  distribution  on, or redeem  or  purchase,  any of its
      common stock.

      The  Subordinated  Debentures  are redeemable by TDS, in whole or in part,
      from time to time,  on or after  March 31,  2003,  or, in whole but not in
      part, at any time in the event of certain income tax circumstances. If the
      Subordinated  Debentures  are  redeemed,  the Trust must redeem  Preferred
      Securities  on a pro rata basis  having an  aggregate  liquidation  amount
      equal to the aggregate principal amount of the Subordinated  Debentures so
      redeemed.  In the event of the  dissolution,  winding up or termination of
      the Trust the holders of Preferred Securities will be entitled to receive,
      for each Preferred Security,  a liquidation amount of $25 plus accrued and
      unpaid distributions thereon to the date of payment, unless, in connection
      with the dissolution,  winding up or termination,  Subordinated Debentures
      are distributed to the holders of the Preferred Securities.

      The Preferred  Securities  are accounted for and reported in the Company's
      financial  statements  in the same  manner  as the 8.5%  Trust  Originated
      Preferred Securities issued by TDS Capital I in 1997.

                                       19

<PAGE>




6.    Long-term Debt

      Aerial sold $220  million  principal  amount at  maturity of 10-year  zero
      coupon 8.05% yield to maturity  debt in February 1998 at an issue price of
      $100 million. The unsecured notes are due in 2008 and there is no periodic
      payment of interest.  The proceeds were paid to Aerial's  equipment vendor
      in satisfaction of all then outstanding obligations and future obligations
      up to $100 million. The notes are fully and unconditionally  guaranteed by
      TDS.  The notes are subject to optional  redemption  beginning  in 2003 at
      redemption  prices which reflect  original  issue  discount  accrued since
      issuance.

7.    Gains from Sale of Cellular Interests and Other Investments

      Gains from the sale of cellular  interest  and other  investments  in 1998
      primarily  reflects gains  recorded on the sale of the Company's  minority
      interests in twelve markets to AirTouch Communications  Inc.  ("AirTouch")
      for AirTouch common shares and cash.

8.    Other Comprehensive Income

      In 1998, the Company adopted Statement of Financial  Accounting  Standards
      No.  130,  "Reporting  Comprehensive  Income,"  ("SFAS  No.  130"),  which
      requires  companies to report all of the changes in shareholder's  equity,
      except those resulting from investment by owners or distribution to owners
      ("Comprehensive  Income"). The Company's Comprehensive Income includes Net
      Income and Unrealized  Gains from  Marketable  Equity  Securities that are
      classified as  "available-for-sale".  The following  table  summarizes the
      Company's Comprehensive Income.
<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                              March 31,
                                                   ----------------------------
                                                       1998             1997
                                                   ------------    ------------
                                                       (Dollars in thousands)
             <S>                                   <C>             <C> 

             Net Income                            $     74,170    $      9,617
             Other Comprehensive Income -
                Unrealized gains on securities,
                net of tax of $10,301                    17,944              --
                                                   ------------    ------------
                                                   $     92,114    $      9,617
                                                   ============    ============
</TABLE>

9.    Earnings Per Share

      The Company adopted SFAS No. 128, "Earnings per Share," effective December
      31, 1997.  Earnings per Common Share for March 31, 1997 has been  restated
      to conform to current period presentation.


                                       20

<PAGE>




      The amounts used in computing  Earnings per Common Share and the effect on
      income  and the  weighted  average  number of Common  and  Series A Common
      Shares of dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
                                                           March 31,  March 31, 
                                                             1998       1997
                                                          ----------------------
                                                            (Dollars and shares 
                                                              in thousands)

    <S>                                                   <C>         <C>      
    Net Income                                            $   74,170  $   9,617
    Less: Preferred Dividends                                   (440)      (481)
                                                          ----------  ---------
    Net Income Available to Common used in Earnings
        per Share-Basic                                       73,730      9,136
    Reduction in preferred dividends if Preferred Shares
        converted into Common Shares                             402         --
    Minority income adjustment                                   (51)       (51)
                                                          ----------  ---------
    Net Income Available to Common used in Earnings
      per Share-Diluted                                   $   74,081  $   9,085
                                                          ==========  =========
    Weighted Average Number of Common Shares
        used in Earnings per Share-Basic                      60,750     61,184
    Effect of Dilutive Securities:
        Common Shares outstanding if Preferred
           Shares converted                                      927         --
        Stock options and stock appreciation rights              136        137
        Common Shares issuable                                    14         27
                                                          ----------  ---------
    Weighted Average Number of Common Shares
        used in Earnings per Share-Diluted                    61,827     61,348
                                                          ==========  =========
</TABLE>
                         

      For 1997, Preferred Shares convertible into 951,000 Common Shares were not
      included in computed  diluted  Earnings  per Common  Share  because  their
      effects were antidilutive.

      The minority income adjustment  reflects the additional  minority share of
      U.S.  Cellular's  income  computed as if all of U.S.  Cellular's  issuable
      securities were outstanding.

10.   Acquisition Effects

      Assuming that  acquisitions  accounted for as purchases  during the period
      January 1, 1997,  to March 31,  1998,  had taken place on January 1, 1997,
      unaudited pro forma results of operations from continuing operations would
      have been as follows:
<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                            March 31,
                                                      1998         1997
                                                   ---------    ----------
                                                 (Dollars in thousands, except
                                                      per share amounts)

      <S>                                          <C>          <C>       
      Operating revenues                           $ 392,118    $  313,361
      Net income                                      74,115        11,001
      Earnings per share - Basic                        1.21           .17
      Earnings per share - Diluted                 $    1.20    $      .17
</TABLE>



                                       21

<PAGE>




11.   Supplemental Cash Flow Information

      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 twelve
      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.

      TDS acquired certain cellular licenses,  operating companies and telephone
      companies in 1998. In conjunction with these  acquisitions,  the following
      assets were acquired and liabilities assumed and Common Shares issued.



<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                           March 31, 1998
                                                 -------------------------------
                                                   (Dollars in thousands, except
                                                         per share amounts)
      <S>                                               <C>                   
      Property, plant and equipment                     $                7,825
      Cellular licenses                                                 34,080
      Equity method investment in cellular interests                     4,927
      Franchise costs                                                    5,304
      Long-term debt                                                    (4,634)
      Deferred credits                                                    (991)
      Other assets and liabilities,
         excluding cash and cash equivalents                             7,972
      Decrease in Minority interest                                      7,820
      Common Shares issued                                             (10,028)
                                                        ----------------------
      Decrease in cash due to acquisitions              $               52,275
                                                        ======================
</TABLE>


The following table summarizes interest and income taxes paid, and other noncash
transactions.

<TABLE>
<CAPTION>
                                                         Three Months Ended
                                                               March 31,
                                                   ----------------------------
                                                         1998           1997
                                                         ----           ----
                                                        (Dollar in thousands)

      <S>                                          <C>             <C>         
      Interest Paid                                $     31,089    $     19,231
      Income Taxes Paid                                   8,347           4,209
      Common Shares issued by TDS for
         conversion of TDS Preferred Stock         $      3,063    $        261
</TABLE>



                                       22

<PAGE>




12.   Business Segment Information

      The following tables summarize business segment  information for the three
      months ended or at March 31, 1998, and 1997.

<TABLE>
U.S. CELLULAR OPERATIONS

<CAPTION>
                                                       Three Months Ended or at
                                                              March 31,
                                                  ------------------------------
                                                        1998            1997
                                                  -------------   --------------
                                                       (Dollars in thousands)

     <S>                                          <C>             <C>
     Operating Revenues
        Local service                             $     170,085   $     121,027
        Inbound roaming                                  46,206          45,340
        Long-distance and other                          28,866          18,217
                                                  -------------   -------------
                                                        245,157         184,584
                                                  -------------   -------------
     Operating Expenses
        System operations                                36,943          31,229
        Marketing and selling                            50,001          37,802
        Cost of equipment sold                           20,748          17,994
        General and administrative                       59,043          43,953
        Depreciation                                     35,920          21,509
        Amortization                                      9,347           8,652
                                                  -------------    ------------
                                                        212,002         161,139
                                                  -------------    ------------
     Operating Income                             $      33,155    $     23,445
                                                  =============    ============

     Additions to property, plant and equipment   $      69,093    $     53,062
     Identifiable assets                          $   2,714,381    $  2,164,997
</TABLE>



<TABLE>
AERIAL OPERATIONS
<CAPTION>
                                                      Three Months Ended or at
                                                             March 31,
                                                  ------------------------------
                                                      1998              1997
                                                  -------------    -------------
                                                       (Dollars in thousands)

        <S>                                       <C>              <C>         
        Operating Revenues                        $      30,746    $         --
                                                  -------------    -------------

        Operating Expenses
             Systems operations                          15,016              --
             Marketing and selling                       17,432              --
             Cost of equipment sold                      22,820              --
             General and administrative                  14,196              --
             Customer service                            10,899              --
             Depreciation                                17,807              --
             Amortization                                 1,889              --
                                                  -------------    ------------
                                                        100,059              --
                                                  -------------    ------------
        Operating (Loss)                          $     (69,313)   $         --
                                                  =============    ============

        Additions to property, plant and 
          equipment                               $      29,685    $     84,608
        Identifiable assets                       $     962,886    $    738,741
</TABLE>



                                       23

<PAGE>





<TABLE>
TDS TELECOM OPERATIONS
<CAPTION>
                                                       Three Months Ended or at
                                                              March 31,
                                                    ----------------------------
                                                        1998             1997
                                                    ----------      ------------
                                                       (Dollars in thousands)
        <S>                                         <C>             <C>    
        Telephone Operations
             Operating Revenues
                 Local service                     $    32,551      $    29,861
                 Network access and long-distance       60,846           56,592
                 Miscellaneous                          13,897           12,179
                                                    ----------      -----------
                                                       107,294           98,632
                                                    ----------      -----------
             Operating Expenses
                 Network operations                     20,678           18,030
                 Depreciation and Amortization          26,007           23,293
                 Customer operations                    17,509           14,897
                 Corporate and other                    18,948           15,456
                                                    ----------      -----------
                                                        83,142           71,676
                                                    ----------      -----------
             Telephone Operating Income                 24,152           26,956
                                                    ----------      -----------
        Other Operations
             Revenues                                    9,400            7,171
             Expenses                                   13,237            7,220
                                                    ----------      -----------

             Other Operating Income                     (3,837)             (49)
                                                    ----------      -----------
        Intercompany Eliminations
             Revenues                                     (479)            (232)
             Expenses                                     (479)            (232)
                                                    ----------      -----------
        Operating Income                            $   20,315      $    26,907
                                                    ==========      ===========

        Additions to property, plant and equipment  $   30,739      $    23,904
        Identifiable assets                         $1,305,207      $ 1,173,614
</TABLE>


<TABLE>
OTHER OPERATIONS
<CAPTION>
                                                       Three Months Ended or at
                                                              March 31,
                                                   -----------------------------
                                                      1998             1997
                                                   ------------    -------------
                                                       (Dollars in thousands)

        <S>                                        <C>             <C>
        Additions to property, plant and equipment
             Other                                 $    (4,203)    $     7,450
        Identifiable assets
             Other                                 $   218,634     $   238,514
</TABLE>



                                       24

<PAGE>




                           PART II. OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K.
------------------------------------------

        (a)  Exhibit 11 -  Computation  of earnings per common share is included
             herein as footnote 9 to the financial statements.

        (b)  Exhibit 12 - Statement regarding computation of ratios.

        (c)  Exhibit 27 - Financial Data Schedule

        (d)  Reports on Form 8-K filed during the quarter ended March 31, 1998:

        TDS filed a Current Report on Form 8-K on January 29, 1998 dated January
        28, 1998,  which  included a news release that  announced  the Company's
        fourth quarter of 1997 financial results.

        TDS  filed a Current  Report on Form 8-K on  February  12,  1998,  dated
        February 10, 1998,  which  included a news  release that  announced  the
        definitive  agreement between the Company and American Paging,  Inc. for
        TDS to acquire all of the issued and outstanding  shares of common stock
        of American Paging not already owned by TDS for $2.50 per share in cash.

        TDS filed a Current  Report on Form 8-K on March 26,  1998,  dated March
        24, 1998,  which  included a news release that  announced  the Company's
        filing of a  registration  statement  with the  Securities  and Exchange
        Commission  for an offering of its TDS  Telecommunications  Group Common
        Shares,  a class of common  stock of TDS,  pending  the  approval of the
        reincorporation  into  Delaware  by  shareholders,  which will track the
        performance of the TDS Telecom Group.







                                       25

<PAGE>





                                   SIGNATURES
                                   ----------


      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                        TELEPHONE AND DATA SYSTEMS, INC.
                        --------------------------------
                                  (Registrant)





Date      May 12, 1998                           MURRAY L. SWANSON
     ---------------------------             --------------------------
                                             Murray L. Swanson,
                                             Executive Vice President-Finance
                                             (Chief Financial Officer)



Date      May 12, 1998                         GREGORY J. WILKINSON
     --------------------------              ---------------------------
                                             Gregory J. Wilkinson,
                                             Vice President and Controller
                                             (Principal Accounting Officer)















                                       26

<PAGE>