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


                       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         September  30, 1997
                               --------------------------------
                                       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 October 31, 1997
          Common Shares, $1 par value              52,633,558 Shares
     Series A Common Shares, $1 par value           6,933,233 Shares

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




<PAGE>




                        TELEPHONE AND DATA SYSTEMS, INC.

                         3RD 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        2-13

                Consolidated Statements of Income -
                   Three Months and Nine Months Ended
                   September 30, 1997 and 1996                           14

                Consolidated Statements of Cash Flows -
                   Nine Months Ended September 30, 1997 and 1996         15

                Consolidated Balance Sheets -
                   September 30, 1997 and December 31, 1996            16-17

                Notes to Consolidated Financial Statements             18-22


Part II.     Other Information                                           23


Signatures                                                               24




<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 2.7  million  cellular  telephone,  local  telephone,  personal
communications  service ("PCS") and radio paging 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.

During the first nine months of 1997, U.S. Cellular continued with strong growth
in  customers,  revenues and  earnings,  Aerial  launched  service in all of its
markets,  TDS Telecom continued with steady growth and American Paging continued
its turnaround  efforts.  Revenues  increased 24% primarily as a result of a 23%
increase in customer units.  The  commencement  of PCS operations  significantly
reduced operating cash flows, operating income and net income as compared to the
first nine months of 1996.  Strong increases in cash flow from U.S. Cellular and
solid growth from TDS Telecom were offset by Aerial's start-up  activities which
resulted in an 11% decline in operating cash flow and a 62% decline in operating
income.  Net income to common  declined 79% to $24.0  million as a result of the
losses incurred in the start-up of the PCS markets and smaller gains on the sale
of cellular interests and other investments.

United States Cellular Corporation ("U.S. Cellular"), TDS's 80.9%-owned cellular
subsidiary,  continued  its rapid  growth  during the first nine months of 1997.
Customer  units  increased  44% to  1,357,000.  The  increase in customer  units
resulted in a 29%  increase in revenues,  a 33% increase in operating  cash flow
and a 47% increase in operating income.

TDS Telecommunications Corporation ("TDS Telecom"), TDS's wholly owned telephone
subsidiary, continued to provide solid growth with a 17% increase in revenues, a
10%  increase in  operating  cash flow and a 4% increase  in  operating  income.
Telephone access lines increased by 6% to 506,600.

Aerial  Communications,  Inc.  ("Aerial"),  TDS's  82.6%-owned  PCS  subsidiary,
launched  service  in all six of its  markets  between  March  and June of 1997.
Customer  units totaled nearly 65,000 at September 30, 1997.  Aerial's  revenues
and expenses incurred  subsequent to the launching of service have been included
in operating  income.  Operating  cash flow was a negative  $96.3  million while
operating  loss totaled  $116.2  million.  Costs incurred prior to the launch of
service,  (PCS  development  costs  included  in  "Investment  and Other  Income
(Expense)") totaled $21.6 million in 1997 and $24.3 million in 1996.

American Paging, Inc. ("American Paging"),  TDS's 82.0%-owned paging subsidiary,
reported a 1% increase in units in service to 792,800.  Revenues  declined by 9%
primarily as a result of competitive  pricing pressures.  Operating loss totaled
$24.8 million for the first nine months of 1997.


                                        2

<PAGE>



RESULTS OF OPERATIONS

Nine Months Ended 9/30/97 Compared to Nine Months Ended 9/30/96

Telephone  and Data  Systems,  Inc.  reported net income  available to common of
$24.0 million,  or $.40 per share, in the first nine months of 1997, compared to
$115.3 million, or $1.89 per share, in the first nine months of 1996. Net income
available to common from U.S.  Cellular and TDS Telecom  increased 62% to $114.8
million,  or $1.90 per  share,  in the first  nine  months of 1997,  from  $70.7
million,  or $1.16 per share,  in the first nine  months of 1996.  Aerial's  PCS
development and start-up activities reduced net income and earnings per share by
$79.7 million,  or $1.32 per share, in 1997 and $8.7 million, or $.14 per share,
in 1996.  American Paging's activities reduced net income and earnings per share
by $23.5  million,  or $.39 per share,  in 1997 and $10.5  million,  or $.17 per
share in 1996. Net income  included gains on the sale of cellular  interests and
other investments of $12.5 million, or $.21 per share in 1997 and $63.7 million,
or $1.04 per share in 1996.

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

                                              Nine Months Ended September 30,
                                              -------------------------------
                                                   1997             1996
                                              -------------     -------------

                                                  (Dollars in thousands, 
                                                except per share amounts)
Net Income Available to Common
   U.S. Cellular and TDS Telecom              $     114,836     $      70,748
   Aerial                                           (79,709)           (8,711)
   American Paging                                  (23,542)          (10,474)
   Gains                                             12,450            63,718
                                              -------------     -------------
                                              $      24,035     $     115,281
                                              =============     =============
Earnings Per Share
   U.S. Cellular and TDS Telecom              $        1.90     $        1.16
   Aerial                                             (1.32)             (.14)
   American Paging                                     (.39)             (.17)
   Gains                                                .21              1.04
                                              -------------     -------------
                                              $         .40     $        1.89
                                              =============     =============

Operating  Revenues  increased 24% ($209.1 million) during the first nine months
of 1997 primarily as a result of a 23% increase in customer units served to over
2.7 million units at September 30, 1997. U.S.  Cellular  contributed 67% ($140.8
million) of the total  increase in revenues and most of the increase in customer
units, while TDS Telecom  contributed 24% ($49.9 million) and Aerial contributed
12% ($25.8 million) of the total increase in revenues.

U.S. Cellular revenues  increased 29% ($140.8 million) in 1997 on a 44% increase
in  customer  units and strong  inbound  roaming  revenues.  Cellular  customers
increased to 1,357,000 at September 30, 1997 from 940,000 at September 30, 1996.
Total average  monthly service revenue per customer was $56.58 in the first nine
months of 1997 and $64.96 in 1996.  Average monthly service revenue per customer
continues to decline due to roaming  revenues  increasing  at a slower rate than
the U.S.  Cellular  customer  base,  competitive  pricing  pressures,  incentive
programs and consumer market penetration.

Local retail revenue  increased 36% ($107.6 million) in the first nine months of
1997 due  primarily to the 44% customer  growth.  Average  monthly  local retail
revenue per customer was $37.30 in the

                                        3

<PAGE>



first nine months of 1997 and $40.54 in 1996.  Average  local minutes of use per
retail  customer  decreased  slightly  to 105 in 1997  from 106 in  1996,  while
average local retail revenue per minute totaled $.36 in 1997 compared to $.38 in
1996.  U.S.  Cellular's  increasing  use of incentive  programs  that  encourage
lower-priced weekend and off-peak usage, in order to stimulate overall usage and
the increased amounts of bill credits given to customers as incentives to become
or remain  customers  resulted in the decrease in average  monthly  local retail
revenue per minute  which in turn caused the decrease in average  monthly  local
retail revenue per customer.  Inbound roaming  revenue  (charges to customers of
other systems who use U.S.  Cellular's  cellular systems when roaming) increased
17%  ($23.9  million)  in the first nine  months of 1997.  The growth in roaming
revenue is due to a 28% increase in minutes used offset  somewhat by  negotiated
reductions in roaming rates.  Average inbound roaming revenue per minute totaled
$.86 in 1997 and $.93 in 1996.  Average  monthly  inbound  roaming  revenue  per
customer was $14.97 in 1997 compared to $18.88 in 1996.  The decrease is related
to the faster growth of U.S.  Cellular's customer base as compared to the growth
of inbound roaming revenues.

Beginning  on  January 1,  1997,  U.S.  Cellular  changed  its income  statement
presentation  of certain  credits for free or  reduced-price  air time or access
given to  customers  on their  monthly  bills.  The  foregone  revenues  are now
reported as a reduction of local retail revenue instead of marketing and selling
expense (for new customers) and general and administrative  expense (for current
customers).  Amounts in the affected  revenue and expense  categories  have been
reclassified for previous years, throughout this Form 10-Q. Operating income and
net income are not affected by this change.

TDS  Telecom  revenues  increased  17% ($49.9  million) in 1997 due to growth in
telephone  operations  ($32.0  million)  and growth in other  operations  ($17.9
million).  Telephone operations revenues increased as a result of the effects of
recovery of increased costs of providing  long-distance services ($9.7 million),
acquisitions  ($8.1  million),  internal  access  line  growth  ($4.4  million),
increased  network usage ($4.1 million) and increased  sale of customer  premise
equipment ($3.1 million).  The number of telephone  access lines increased 6% to
506,600 at  September  30, 1997 from  479,700 at  September  30,  1996.  Average
monthly revenue per access line increased to $67.90 for the first nine months of
1997  from  $66.16  in  1996.  Other  operations   include  the  revenues  of  a
long-distance  provider,  a recently  acquired  cellular interest as well as TDS
Telecom's new business  ventures which include an Internet access provider and a
structured  wiring  business.  The  increase  in other  operations  revenues  is
primarily  related to the effects of the  acquisition  of the cellular  interest
($11.2 million) and from the Internet access provider and the structured  wiring
business ($5.3 million).

Aerial revenues  totaled $25.8 million in 1997 consisting of service revenues of
$12.9  million and equipment  sales  revenues of $12.9 million for units sold to
retailers,  independent agents and customers.  At September 30, 1997, Aerial had
nearly 65,000 customers in service. Average revenue per unit was over $70.00 for
the third quarter of 1997, the first full quarter of operations.

American Paging revenues  decreased 9% ($7.4 million) in 1997 due to competitive
pricing declines, a decrease in the average number of units in service and lower
equipment sales revenue.  Average revenue per unit decreased 6% to $9.31 in 1997
from $9.92 in 1996.  As of  September  30, 1997,  units in service  increased to
792,800 from 788,300 a year ago.  However,  over the past twelve months units in
service  reached a low of 767,400 at March 31, 1997  resulting  in a decrease in
average number of units in service.

Operating  Expenses  rose 38% ($284.2  million) in the first nine months of 1997
due primarily to added expenses to serve the growing  customer base and expenses
attributable to the Aerial's start-up  activities.  Aerial's start-up activities
represented 50% ($142.0 million) of the increase while U.S. Cellular represented
37% ($105.2 million) and TDS Telecom represented 16% ($46.9 million),  primarily
due to the increase in customers.

                                        4

<PAGE>



U.S.  Cellular  expenses  increased  25% ($105.2  million)  during 1997.  System
operations  expenses  increased  37%  ($29.8  million)  in 1997 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 46% ($22.1 million)  primarily due to increased roaming usage and increased
minutes of use,  primarily  related to the 44% increase in customer  units.  Net
outbound roaming usage expense is a result of offering U.S. Cellular's customers
increasingly  larger service footprints in which their calls are billed at local
rates.  In certain  cases these  service  footprints  include  other  operators'
service areas.  U.S. Cellular pays roaming rates to the other carriers for calls
its customers make in these areas,  while charging those  customers a local rate
which is usually lower than the roaming rate.   Maintenance,
utility and cell site expenses increased 24% ($7.7 million) reflecting primarily
the  increase  in the  number of cell sites to 1,556 in 1997 from 1,270 in 1996.
Marketing  and selling  expenses  incurred to add new  customers  increased  29%
($39.1  million),  including a $5.8 million  increase in cost of equipment sold.
Cost per  gross  customer  addition  declined  to $322 in 1997 from $331 in 1996
while gross  customer  activations  increased to 494,000 in 1997 from 373,000 in
1996. General and  administrative  expenses increased 17% ($20.9 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.  Depreciation and
amortization  increased  19% ($15.4  million)  primarily  due to the increase in
average fixed assets since September 30, 1996.

TDS Telecom expenses  increased 22% ($46.9 million) during 1997 primarily due to
growth in telephone  operations  ($26.7 million) and growth in other  operations
($20.2 million).  Telephone operations increased primarily due to the effects of
growth in  internal  operations  ($10.7  million),  increased  depreciation  and
amortization  ($7.1 million) and acquisitions  ($6.2 million).  Other operations
include the expenses of a long-distance  provider,  a recently acquired cellular
interest  as well as TDS  Telecom's  new  business  ventures  which  include  an
Internet access provider and a structured wiring business. The increase in other
operations  expenses is primarily  related to the effects of the  acquisition of
the cellular  interest ($10.3 million) and from the Internet access provider and
the structured wiring business ($6.9 million).

Aerial expenses,  included in operating expenses,  totaled $142.0 million in the
first nine months of 1997.  Expenses  incurred  in the first  quarter of 1997 of
$21.6  million,  prior to the launch of the first  market,  are  included in PCS
Development Costs as part of Other Income.  System  operations  expenses totaled
$13.9 million reflecting the costs of operating Aerial's network, primarily cell
site expenses, landline interconnection charges and wages. Marketing and selling
expenses  reflecting an aggressive  advertising  campaign that  accompanied  the
launch of service and  continued  throughout  the third  quarter,  totaled $27.0
million  while  cost of  equipment  sold  totaled  $40.8  million.  General  and
administrative expenses totaled $33.7 million reflecting the expenses associated
with the management and operating teams as well as overhead  expenses.  Customer
service expenses totaled $6.8 million  primarily for the staffing to support the
PCS markets. Depreciation and amortization totaled $19.8 million.

American Paging expenses decreased 9% ($9.9 million) in the first nine months of
1997.   During  the  first  nine  months  of  1996,   American  Paging  recorded
restructuring  expenses of $9.3  million  related to  subleasing  office  space,
employee  severance,  out  placement  services  and  consulting  services  ($4.0
million) and write-offs of certain assets ($5.3 million).


                                        5

<PAGE>



Operating  Income decreased 62% ($75.1 million) in the first nine months of 1997
reflecting the effects of Aerial's start-up activities offset somewhat by strong
(47%) growth in U.S. Cellular's operating results. The strong growth in cellular
operating income is reflected in the cellular margin improvements. TDS Telecom's
margin decreased due primarily to TDS Telecom's new business ventures.

                                           Nine Months Ended September 30,
                              --------------------------------------------------
                                      1997            1996            Change
                               -------------    -------------     --------------
                                               Dollars in thousands)
Operating Income
    U.S. Cellular              $     110,511    $      74,937     $      35,574
    TDS Telecom                       76,708           73,711             2,997
    Aerial                          (116,170)              --          (116,170)
    American Paging                  (24,845)         (27,347)            2,502
                               -------------    -------------     --------------
                               $      46,204    $     121,301     $     (75,097)
                               =============    =============     ==============
Operating Margins
    U.S. Cellular                       17.4%            15.2%
    TDS Telecom                         22.6%            25.5%
    Aerial                                N/M              N/M
    American Paging                       N/M              N/M
    Consolidated                         4.3%            14.1%

N/M = Not Meaningful

Investment and Other Income  (Expense)  totaled $67.1 million in 1997 and $136.6
million  in 1996.  Gain on Sale of  Cellular  Interests  and  Other  Investments
totaled  $24.4  million in the first nine  months of 1997 and $136.0  million in
same  period of 1996 as the  Company  has sold or traded  certain  non-strategic
cellular  interests and sold other  investments.  PCS Development  Costs totaled
$21.6 million in 1997 and $24.3 million in 1996. Effective with the beginning of
the second  quarter of 1997,  all costs  associated  with  Aerial's  markets are
included in operating income. Cellular Investment Income, the Company's share of
income of  cellular  markets in which the Company  has a minority  interest  and
follows the equity method of accounting,  increased 53% ($20.2 million) to $58.4
million in the first nine  months of 1997 as income  from the  cellular  markets
increased.  Cellular  investment  income is net of amortization of license costs
relating to these  minority  interests.  Future  cellular  investment  income is
expected  to  decrease  as a result of the  recent  completion  of the  exchange
transaction with BellSouth Corporation.  See "Financial Resources and Liquidity"
for further discussion of this transaction.


                                        6

<PAGE>




Minority  Share of Income  includes  the  minority  shareholders'  share of U.S.
Cellular's,  Aerial's  and  American  Paging's  net  income  or  loss,  minority
partners'  share  of  U.S.  Cellular's  operating  markets  and  other  minority
shareholders'  and  partners'  share of  subsidiaries'  net income or loss.  The
decrease in 1997 is  primarily  related to the  increase  in  Aerial's  net loss
allocated to its minority  shareholders and the decrease in U.S.  Cellular's net
income (due to the reduction in gains)  allocated to its minority  shareholders.
Minority  shareholders  of  American  Paging  are not  allocated  losses in 1997
because American Paging's shareholders' equity is negative.

                                             Nine Months Ended September 30,
                                      ------------------------------------------
                                          1997           1996          Change
                                      ----------    -----------     ------------
                                               (Dollars in thousands)
Minority Share of (Income) Loss
  United States Cellular
     Minority Shareholders' Share     $  (16,478)   $   (22,914)    $     6,436
     Minority Partners' Share            (10,271)        (8,615)         (1,656)
                                      ----------    -----------     -----------
                                         (26,749)       (31,529)          4,780
  Aerial                                  26,840          2,500          24,340
  American Paging                             --          5,722          (5,722)
  Telephone Subsidiaries and Other        (1,526)        (1,090)           (436)
                                      ----------    -----------     -----------
                                      $   (1,435)   $   (24,397)    $    22,962
                                      ==========    ===========     ===========

Interest Expense increased 100% ($30.2 million) in the first nine months of 1997
primarily  due to the  increase  in  short-term  debt  outstanding  used to fund
Aerial's start-up costs and the recently approved TDS stock repurchase  program,
decreased capitalized interest and the increase in long-term debt outstanding at
Aerial and U.S. Cellular.

Income Tax Expense  decreased  76% ($84.2  million) in 1997  compared  with 1996
primarily due to the decrease in pretax  income.  The effective  income tax rate
was 52% in the first nine months of 1997 and 49% in 1996.

Net Income  Available to Common  decreased $91.2 million to $24.0 million in the
first nine months of 1997 from $115.3  million in the first nine months of 1996.
Net  income  available  to common  included  significant  gains from the sale of
cellular  interests and other  investments  in 1996 as well as  significant  PCS
development costs in 1997 and 1996 as explained previously.

Earnings  Per Common  Share were $.40 in the first nine months of 1997 and $1.89
in the first nine months of 1996.

Management  believes there exists a seasonality at U.S. Cellular in both service
revenues,  which tend to increase more slowly in the first and fourth  quarters,
and  operating  expenses,  which tend to be higher in the fourth  quarter due to
increased  marketing  activities and customer growth,  which may cause operating
income to vary from  quarter-to-quarter.  Additionally,  competitors licensed to
provide  PCS  services  have  initiated  service in  certain of U.S.  Cellular's
markets over the past fifteen  months.  U.S.  Cellular  expects PCS operators to
complete initial deployment of PCS across all of its markets by the end of 1998.
U.S. Cellular's management is monitoring these and other wireless communications
providers' strategies to determine what effect this additional  competition will
have on U.S.  Cellular's  future  strategies  and results.  While the effects of
additional  wireless  competition have slowed customer growth in certain of U.S.
Cellular's  markets,  the  overall  effect  on  operations  to date has not been
material.

TDS anticipates that start-up and development of high-quality networks and the 
marketing of

                                        7

<PAGE>



systems in Aerial's  markets  will reduce the rate of growth in TDS's  operating
and net income from levels which would otherwise be achieved during the next few
years.  TDS also expects that American  Paging will continue to incur  operating
losses in the fourth quarter of 1997 and in 1998.

Three Months Ended 9/30/97 Compared to Three Months Ended 9/30/96

Net income  available  to common was $8.5  million,  or $.14 per share,  in 1997
compared  to $22.2  million,  or $.36 per share in 1996.  Net  income  from U.S.
Cellular and TDS Telecom  increased 68% to $48.2  million,  or $.80 per share in
1997 from $28.6 million, or $.47 per share, in 1996, primarily reflecting growth
in the cellular business. The loss from Aerial's PCS start-up activities totaled
$39.5 million, or $.66 per share, in 1997 and $3.1 million, or $.06 per share in
1996.  American  Paging's loss reduced net income and earnings per share by $8.6
million, or $.14 per share, in 1997 and $6.3 million, or $.10 per share in 1996.
Net income and earnings per share  included  gains of $8.4 million,  or $.14 per
share, in 1997 and $2.9 million, or $.05 per share, in 1996.

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.

                                               Three Months Ended September 30,
                                               ---------------------------------
                                                     1997             1996
                                                -------------     --------------
                                                      (Dollars in thousands,
                                                     except per share amounts)
Net Income Available to Common
   U.S. Cellular and TDS Telecom                $      48,195     $      28,618
   Aerial                                             (39,516)           (3,075)
   American Paging                                     (8,573)           (6,272)
   Gains                                                8,443             2,929
                                                -------------     -------------
                                                $       8,549     $      22,200
                                                =============     =============
Earnings Per Share
   U.S. Cellular and TDS Telecom                $         .80     $         .47
   Aerial                                                (.66)             (.06)
   American Paging                                       (.14)             (.10)
   Gains                                                  .14               .05
                                                -------------     -------------
                                                $         .14     $         .36
                                                =============     =============

Operating  Revenues  increased 27% ($83.6  million)  during the third quarter of
1997 for reasons  generally  the same as the first nine  months.  U.S.  Cellular
revenues  increased 29% ($51.7 million) in 1997. Local retail revenue  increased
36% ($39.0 million) in the third quarter of 1997,  while inbound roaming revenue
increased 17% ($8.7  million).  Average monthly service revenue per customer was
$57.56 in the third  quarter of 1997 and $65.15 in 1996.  TDS  Telecom  revenues
increased 17% ($16.9  million) in the third quarter of 1997 due to the growth in
telephone  operations  ($9.5  million)  and  growth  in other  operations  ($7.4
million).  Average  monthly  revenue per access line  increased to $69.69 in the
third quarter of 1997 from $67.13 in 1996. Aerial revenues totaled $18.6 million
in the third quarter of 1997 consisting of service revenues of $11.7 million and
revenue from units sold to customers of $6.9 million.  American  Paging revenues
decreased 14% ($3.6 million) in 1997. Average monthly revenue per unit decreased
10% to $8.97 in 1997 from $9.96 in 1996.

Operating Expenses rose 48% ($128.4 million) during the third quarter of 1997 
for reasons generally the same as the first nine months.  U.S. Cellular expenses
increased 27% ($39.9 million). System operations expense increased 47% 
($12.9 million).  Marketing and selling expenses,

                                        8

<PAGE>



including cost of equipment sold, increased 26% ($12.8 million).  Cost per gross
customer  addition  decreased to $328 in the third  quarter of 1997 from $341 in
1996.  TDS  Telecom  expenses  increased  21% ($16.3  million)  due to growth in
telephone  operations  ($8.0  million)  and  growth  in other  operations  ($8.3
million)  for  reasons  generally  the same as the first nine  months.  Aerial's
operating  expenses totaled $83.2 million as the markets were in service for the
full quarter.  American Paging operating  expenses decreased 25% ($11.0 million)
due primarily to the $7.0 million restructuring charge recorded in 1996.

Operating  Income  decreased  109% ($44.8  million) in the third quarter of 1997
reflecting the $64.5 million  operating  loss from the PCS start-up  activities.
U.S.  Cellular  operating  income increased $11.8 million  reflecting  continued
growth in customers and revenues.

                                             Three Months Ended September 30,
                                          --------------------------------------
                                              1997          1996      Change
                                          ----------    ----------   -----------
                                                   Dollars in thousands)
Operating Income
    U.S. Cellular                         $   44,912    $   33,094   $  11,818
    TDS Telecom                               25,402        24,863         539
    Aerial                                   (64,537)           --     (64,537)
    American Paging                           (9,305)      (16,694)      7,389
                                          ----------    ----------   ---------
                                          $   (3,528)   $   41,263   $ (44,791)
                                          ==========    ==========   =========
Operating Margins:
    U.S. Cellular                              19.4%         18.4%
    TDS Telecom                                21.4%         24.4%
    Aerial                                       N/M           N/M
    American Paging                              N/M           N/M
    Consolidated                                 (.9%)        13.4%

 N/M = Not Meaningful

Investment  and Other Income  totaled $42.8 million in 1997 and $12.5 million in
1996.  Gain on Sale of Cellular  Interests and Other  Investments  totaled $13.8
million in the third  quarter of 1997  compared  to $7.8  million in 1996 as the
Company has sold or traded  certain  non-strategic  cellular  interests and sold
other   investments.   PCS  Development  Costs,  costs  incurred  prior  to  the
commencement  of operations  in the PCS markets,  totaled $10.8 million in 1996.
Cellular  Investment  Income  increased  44% ($7.0  million)  to $23.0  million,
reflecting  improvement  in  U.S.  Cellular's  equity-method markets managed  by
others.

Minority  Share of Income  decreased 177% ($6.4 million) in the third quarter of
1997 due  primarily  to the  increase  in  Aerial's  net loss  allocated  to its
minority shareholders.

                                              Three Months Ended September 30,
                                          --------------------------------------
                                              1997         1996         Change
                                          ----------    ----------   ----------
                                                   (Dollars in thousands)
Minority Share of (Income) Loss
    United States Cellular
        Minority Shareholders' Share      $   (6,915)   $    (5,069)  $  (1,846)
        Minority Partners' Share              (3,023)        (3,194)        171
                                          ----------    -----------   ---------
                                              (9,938)        (8,263)     (1,675)
    Aerial                                    13,352          1,691      11,661
    American Paging                               --          3,299      (3,299)
    Telephone Subsidiaries and Other            (657)          (322)       (335)
                                          ----------    -----------   ---------
                                          $    2,757    $    (3,595)  $   6,352
                                          ==========    ===========   ==========

                                        9

<PAGE>



Interest  Expense  increased $17.5 million to $26.9 million in the third quarter
of 1997 for reasons generally the same as the first nine months.

Income Tax Expense  decreased $18.4 million to $3.4 million in the third quarter
of 1997 compared with 1996 as pretax income decreased.  The effective income tax
rate was 27% in the third quarter of 1997 and 49% in 1996.

Net Income  Available to Common decreased 61% ($13.7 million) to $8.5 million in
the third quarter of 1997 from $22.2 million in 1996.  Earnings Per Common Share
were $.14 in 1997 and $.36 in 1996.

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, in recent years,
TDS has  obtained  substantial  funds  from  external  sources  to  acquire  PCS
licenses,  to build-out  PCS markets,  to fund  acquisitions  and to  repurchase
common shares.  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
significant additional funds from external sources.

Cash Flows From Operating  Activities.  TDS is generating  substantial  internal
funds from the rapid growth in customer units and revenues in the U.S.  Cellular
and TDS Telecom business units. U.S.  Cellular's  operating cash flow (operating
income plus depreciation and amortization)  increased 33% ($51.0 million) in the
first  nine  months  of 1997  compared  to the same  period  in 1997  while  TDS
Telecom's  operating cash flow increased 10% ($13.3  million).  These increases,
however, were offset by Aerial's $96.3 million negative cash flow as a result of
its start-up  activities.  As a result,  operating  cash flow  decreased  11% to
$258.6  million in the first nine months of 1997 from $291.4 million in the same
period of 1996. 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 $108.9 million in the first nine months
of 1997 and $105.4 million in 1996.

                                         Nine Months Ended September 30,
                               -------------------------------------------------
                                      1997           1996             Change
                               -------------    -------------     --------------
                                              (Dollars in thousands)
Operating cash flow
     U.S. Cellular             $     205,152    $     154,153     $      50,999
     TDS Telecom                     150,949          137,652            13,297
     Aerial                          (96,313)              --           (96,313)
     American Paging                  (1,187)            (360)             (827)
                               -------------    -------------     --------------
                                     258,601          291,445           (32,844)
Other operating activities          (108,872)        (105,418)           (3,454)
                               -------------    -------------     --------------
                               $     149,729    $     186,027     $     (36,298)
                               =============    =============     ==============

Cash Flows from Financing  Activities.  TDS has used  short-term debt to finance
its PCS and radio paging operations,  for acquisitions and for general corporate
purposes. TDS has taken advantage of attractive  opportunities from time-to-time
to retire short-term debt with the proceeds from long-term debt and equity sales
and sales of non-strategic  assets. Cash flows from financing activities totaled
$339.2  million in the first nine months of 1997  compared  to $69.8  million in
1996.  Increases in short-term  debt and U.S.  Cellular's sale of notes provided
most of the  financing  during 1997.  In 1996,  most of the  financing  was from
Aerial's net proceeds of $195.3 million from an initial public  offering  offset
somewhat by decreases in short-term debt.

Increases in short-term  debt of $292.7  million during the first nine months of
1997  were  used  primarily  to  fund  expenditures  for  PCS  construction  and
development activities, stock repurchases

                                       10

<PAGE>



and American Paging operating and capital requirements.  U.S. Cellular received 
$247 million on the sale of 7.25% notes in August 1997.  The proceeds were used 
to repay notes payable and long-term debt.

Through September 30, 1997, TDS purchased  1,798,100 TDS Common Shares for $69.9
million.  In December 1996, the Company authorized the repurchase of up to three
million  TDS Common  Shares  over a period of three  years.  TDS also  purchased
350,000 U.S. Cellular Common Shares for $9.8 million in 1997.

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 $499.3 million in
the first nine months of 1997 compared to $198.2 million in 1996,  primarily for
additions to property,  plant and equipment of $579.1 million in 1997 and $347.7
million  in 1996.  The  sales of  non-strategic  cellular  interests  and  other
investments  provided  $53.9  million  in 1997 and  $212.5  million  in 1996 and
distributions  from  cellular  partnerships  provided  $42.7 million in 1997 and
$15.0 million in 1996.

Property,  Plant and Equipment.  The primary purpose of TDS's  construction  and
expansion  program is to provide for  significant  customer  growth,  to upgrade
service,  to expand  into new  communication  areas,  and to take  advantage  of
service-enhancing  and cost-reducing  technological  developments.  Additions to
property,  plant and  equipment  increased  to $579.1  million in the first nine
months of 1997 from $347.7 million in 1996 primarily related to the increases in
Aerial's and U.S.  Cellular's  construction  expenditures  of $152.0 million and
$75.0 million,  respectively.  U.S. Cellular had capital  expenditures of $248.0
million primarily for cell sites, equipment and systems development. TDS Telecom
incurred $96.7 million for central office and outside plant and equipment  while
Aerial incurred $203.4 million  primarily for cell sites,  digital switching and
microwave relocation in its markets.

Acquisitions.   TDS  continually   reviews  attractive   opportunities  for  the
acquisition of additional  cellular and telephone  companies  which add value to
the organization.  As the number of opportunities  for outright  acquisitions of
cellular interests has decreased and as U.S.  Cellular's  clusters have grown to
realize greater  economies of scale,  U.S.  Cellular's  focus has shifted toward
exchanges and sales of non-strategic interests.

In October 1997, U.S. Cellular completed the exchange with BellSouth Corporation
it had  announced  earlier in 1997.  Pursuant  to the  exchange,  U.S.  Cellular
received   majority   interests   in  12  markets   adjacent  to  its  Iowa  and
Wisconsin/Illinois  clusters.  In exchange,  U.S. Cellular divested its majority
interests  in 10 markets and  minority  interests in nine markets and paid a net
amount of $87 million in cash.  Certain aspects of this transaction are taxable;
the amount of these taxes will be determined by year-end and will be paid in the
first quarter of 1998. No book gain or loss will be recorded on the transaction.
U.S.  Cellular  has an  agreement  to sell a majority  interest in one market in
which it owned both licenses upon the  completion of the exchange  agreement.  A
waiver  from the Federal  Communications  Commission  has been  received by U.S.
Cellular to own both licenses until this divestiture is completed.




                                       11

<PAGE>



LIQUIDITY

TDS  anticipates  that the  aggregate  resources  required for 1997 will include
approximately $815 million for capital spending,  consisting of $300 million for
cellular capital additions,  $130 million for telephone capital additions,  $365
million  for PCS  capital  additions,  $20  million  for  radio  paging  capital
additions,  and $255  million for working  capital and  operating  expenses  for
Aerial.  The Company  anticipates  financing these  expenditures with internally
generated funds, short-term, intermediate-term and long-term financing.

U.S. Cellular plans to finance its cellular construction program using primarily
internally  generated  cash  supplemented  by short-term  and  intermediate-term
financing.  U.S.  Cellular's  operating cash flow totaled $247.2 million for the
twelve months ended  September  30, 1997,  up 33% ($62.0  million) from 1996. In
August 1997, U.S.  Cellular issued $250 million  principal amount of 7.25% notes
under a $400  million  shelf  registration  statement,  priced to yield 7.33% to
maturity.  The  proceeds of the  offering  were used to repay notes  payable and
long-term  debt.  U.S.  Cellular  had $500  million  of bank lines of credit for
general corporate purposes at September 30, 1997, all of which was available.

TDS Telecom plans to finance its construction program using internally generated
cash  supplemented  by long-term  financing  from federal  government  programs.
Operating cash flow totaled $205.6 million for the twelve months ended September
30, 1997, up 13% ($23.0  million) from 1996. At September 30, 1997,  TDS Telecom
telephone  subsidiaries had $111.5 million in unadvanced loan funds from federal
government programs.

Aerial  plans to finance  its  construction  expenditures  and  working  capital
requirements  with  short-term  and   intermediate-term   financing  and  vendor
financing.  Aerial is currently  contemplating a private  placement  offering in
connection  with a  refinancing  arrangement  relating  to its  existing  vendor
financing.   The   proceeds   from  the   offering  are  to  be  paid  to  Nokia
Telecommunications,  Inc. in  satisfaction  of all  outstanding  obligations and
future  obligations  of Aerial.  Aerial  continues to seek an investment  from a
minority equity investor.

TDS and its  subsidiaries  have cash and temporary  investments  totaling  $74.9
million and longer-term cash investments totaling $36.2 million at September 30,
1997.  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 $644  million of bank lines of credit  for  general  corporate
purposes at September  30, 1997.  Unused  amounts of such lines  totaled  $194.5
million.  These line of credit  agreements  provide for borrowings at negotiated
rates up to the prime rate.

TDS filed a shelf Registration Statement on Form S-3 on October 21, 1997 for the
sale  of up  to  $400  million  of  Trust  Originated  Preferred  Securities(sm)
("TOPrS(sm)")1.   TDS  expects  to  issue  approximately  $150  million  of  the
securities under the shelf registration during the fourth quarter.  The proceeds
from the fourth  quarter  issuance  of the TOPrS is expected to be used to repay
short-term indebtedness.

The  Company  anticipates  requiring  additional  funding  to  finance  Aerial's
expected  capital  expenditures  and working  capital  requirements,  to finance
acquisitions and for general corporate  purposes.  The timing and amount of such
funding  requirements  will  depend on the timing of Aerial's  construction  and
operational  requirements,  the  timing  of  acquisitions,  and  other  relevant
factors.  There can be no assurance that  sufficient  funds will be available to
the Company on terms or at

--------
          1 (sm) "Trust Originated Preferred Securities" and "TOPrS" are service
marks of Merrill Lynch & Co., Inc.

                                       12

<PAGE>



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.











    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 TDS's  markets.  Readers
should evaluate any statements in light of these important factors.


                                                        13

<PAGE>




                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                    Unaudited

                                    Three Months Ended       Nine Months Ended
                                       September 30            September 30,
                                    --------------------  ---------------------
                                       1997       1996        1997       1996
                                     --------   --------    --------   ---------
                                (Dollars in thousands, except per share amounts)
OPERATING REVENUES
    Cellular telephone              $ 231,959  $ 180,219  $  634,122  $ 493,331
    Telephone                         118,660    101,790     338,700    288,836
    PCS                                18,648         --      25,791         --
    Radio paging                       22,930     26,539      71,758     79,145
                                    ---------  ---------  ----------  ---------
                                      392,197    308,548   1,070,371    861,312
                                    ---------  ---------  ----------  ---------
OPERATING EXPENSES
    Cellular telephone                187,047    147,125     523,611    418,394
    Telephone                          93,258     76,927     261,992    215,125
    PCS                                83,185         --     141,961         --
    Radio paging                       32,235     43,233      96,603    106,492
                                    ---------  ---------  ----------  ---------
                                      395,725    267,285   1,024,167    740,011
                                    ---------  ---------  ----------  ---------
OPERATING INCOME                       (3,528)    41,263      46,204    121,301
                                    ---------  ---------  ----------  ---------
INVESTMENT AND OTHER
 INCOME (EXPENSE)
  Interest and dividend income          3,026      3,925       9,922     10,048
  Cellular investment income, 
    net of license cost 
    amortization                       22,969     15,992      58,372     38,221
  PCS development costs                    --    (10,805)    (21,614)   (24,312)
  Gain on sale of cellular 
    interests and other 
    investments                        13,767      7,797      24,365    136,049
  Other (expense), net                    305       (786)     (2,461)       979
  Minority share of income              2,757     (3,595)     (1,435)   (24,397)
                                    ---------  ---------  ----------  ---------
                                       42,824     12,528      67,149    136,588
                                    ---------  ---------  ----------  ---------
INCOME BEFORE INTEREST
    AND INCOME TAXES                   39,296     53,791     113,353    257,889
Interest expense                       26,885      9,346      60,579     30,343
                                    ---------  ---------  ----------  ---------
INCOME BEFORE INCOME TAXES             12,411     44,445      52,774    227,546
Income tax expense                      3,392     21,776      27,317    111,496
                                    ---------  ---------  ----------  ---------
NET INCOME                              9,019     22,669      25,457    116,050
Preferred Dividend Requirement           (470)      (469)     (1,422)      (769)
                                    ---------  ---------  ----------  ---------
NET INCOME AVAILABLE TO
    COMMON                          $   8,549  $  22,200  $   24,035  $ 115,281
                                    =========  =========  ==========  =========
WEIGHTED AVERAGE COMMON
    SHARES (000s)                      59,640     61,321      60,395     60,856
EARNINGS PER COMMON SHARE           $     .14  $     .36  $      .40  $    1.89
                                    =========  =========  ==========  =========

DIVIDENDS PER COMMON AND
    SERIES A COMMON SHARE           $    .105  $     .10  $     .315  $     .30
                                    =========  =========  ==========  =========

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

                                       14

<PAGE>




                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    Unaudited
                                                            Nine Months Ended
                                                              September 30,
                                                       -------------------------
                                                           1997         1996
                                                       -----------   -----------
                                                        (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                           $    25,457   $  116,050
    Add (Deduct) adjustments to reconcile net 
     income to net cash provided by operating 
     activities
       Depreciation and amortization                       212,397      170,143
       Deferred taxes                                        2,593       45,122
       Investment income                                   (62,754)     (40,747)
       Minority share of income                              1,435       24,397
       Gain on sale of cellular interests and other 
          investments                                      (24,365)    (136,049)
       Noncash interest expense                             17,676       11,952
       Other noncash expense                                16,618       15,226
       Change in accounts receivable                       (46,389)     (27,724)
       Change in materials and supplies                    (29,300)       2,513
       Change in accounts payable                           16,617       (7,369)
       Change in accrued taxes                              22,088       11,984
       Change in other assets and liabilities               (2,344)         529
                                                       -----------   -----------
                                                           149,729      186,027
                                                       -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES
 Long-term debt borrowings                                 260,236        8,904
 Repayments of long-term debt                             (115,853)     (23,161)
 Change in notes payable                                   292,727      (89,434)
 Dividends paid                                            (20,363)     (19,639)
 Repurchase of Common Shares                               (69,942)          --
 Purchase of subsidiary common stock                        (9,801)          --
 Proceeds from the issuance of subsidiaries' stock              --      194,262
 Other financing activities                                  2,149       (1,134)
                                                       -----------   -----------
                                                           339,153       69,798
                                                       -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
 Additions to property, plant and equipment               (579,138)    (347,709)
 Investments in and advances to cellular
  minority partnerships                                       (499)     (14,931)
 Distributions from partnerships                            42,695       14,959
 Investments in PCS licenses                                (5,034)     (21,009)
 Proceeds from investment sales                             53,865      212,549
 Change in other investments                                 1,475       (2,020)
 Acquisitions, net of cash acquired                        (39,169)     (33,892)
 Change in temporary investments and marketable 
     securities                                             26,510       (6,140)
                                                       -----------   -----------
                                                          (499,295)    (198,193)
                                                       -----------   -----------
NET (DECREASE) INCREASE IN CASH AND
  CASH EQUIVALENTS                                         (10,413)      57,632
CASH AND CASH EQUIVALENTS -
 Beginning of period                                        57,633       55,116
                                                       -----------   -----------
 End of period                                         $    47,220   $  112,748
                                                       ===========   ===========

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

                                       15

<PAGE>



                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

                                                       (Unaudited)
                                                      September 30, December 31,
                                                           1997          1996
                                                      -----------   ------------

                                                         (Dollars in thousands)

CURRENT ASSETS
    Cash and cash equivalents                          $    47,220   $   57,633
    Temporary investments                                   27,635       61,664
    Accounts receivable from customers and others          227,776      181,212
    Materials and supplies, at average cost,
        and other current assets                            80,238       45,561
                                                       -----------   -----------
                                                           382,869      346,070
                                                       -----------   -----------
INVESTMENTS
    Cellular license acquisition costs, net of 
     amortization                                        1,085,458    1,088,409
    Cellular minority interests                            220,776      206,390
    PCS license acquisition costs                          378,624      382,724
    Franchise costs and other costs in excess of
        the underlying book value of subsidiaries, 
          net                                              178,928      181,845
    Other investments                                       89,006       84,536
                                                       -----------   -----------
                                                         1,952,792    1,943,904
                                                       -----------   -----------
PROPERTY, PLANT AND EQUIPMENT
    Cellular telephone, net                                792,279      650,754
    Telephone, net                                         787,975      769,361
    PCS, net                                               548,191      322,723
    Radio paging, net                                       47,038       51,472
    Other, net                                              44,604       34,579
                                                       -----------   -----------
                                                         2,220,087    1,828,889
                                                       -----------   -----------
OTHER ASSETS AND DEFERRED CHARGES                          105,323       82,106
                                                       -----------   -----------
    TOTAL ASSETS                                       $ 4,661,071   $4,200,969
                                                       ===========   ===========
                                   


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

                                       16

<PAGE>



                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY




                                                 (Unaudited)
                                                September 30,   December 31,
                                                     1997            1996
                                                ------------    ------------

                                                  (Dollars in thousands)
CURRENT LIABILITIES
    Current portion of long-term debt
        and preferred shares                    $    14,793     $    38,197
    Notes payable                                   451,329         160,537
    Accounts payable                                210,962         205,427
    Advance billings and customer deposits           33,171          32,434
    Accrued interest                                  8,488          11,777
    Accrued taxes                                    27,081           3,194
    Other current liabilities                        45,135          57,701
                                                -----------     -----------
                                                    790,959         509,267
                                                -----------     -----------

DEFERRED LIABILITIES AND CREDITS                    220,547         214,906
                                                -----------     -----------


LONG-TERM DEBT, excluding current portion         1,228,175         982,232
                                                -----------     -----------

REDEEMABLE PREFERRED SHARES, excluding
    current portion                                     279             280
                                                -----------     -----------

MINORITY INTEREST in subsidiaries                   424,615         432,343
                                                -----------     -----------

NONREDEEMABLE PREFERRED SHARES                       28,217          29,000
                                                -----------     -----------

COMMON STOCKHOLDERS' EQUITY
    Common Shares, par value $1 per share            54,401          54,237
    Series A Common Shares, par value $1 per 
          share                                       6,927           6,917
    Common Shares issuable (10,480 and 30,977
      shares, respectively)                             499           1,461
    Capital in excess of par value                1,661,892       1,661,093
    Treasury Shares, at cost (1,793,358 shares)     (69,767)             --
    Retained earnings                               314,327         309,233
                                                -----------     -----------
                                                  1,968,279       2,032,941
                                                -----------     -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $ 4,661,071     $ 4,200,969
                                                ===========     ===========


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

                                       17

<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  September  30,  1997 and
      December 31, 1996,  and the results of  operations  and cash flows for the
      nine months ended September  30, 1997 and 1996.  The results of operations
      for the nine months ended September 30, 1997 and 1996, are not necessarily
      indicative of the results to be expected for the full year.

2.    Certain  amounts  reported  in prior  periods  have been  reclassified  to
      conform to the current period presentation.

3.    Earnings per Common Share were  computed by dividing Net Income  Available
      to Common by the weighted  average number of common and common  equivalent
      shares outstanding during the period. Dilutive common stock equivalents at
      September 30, 1997 consist of dilutive Common Share options.

      The Financial Accounting Standards Board issued Statement of Financial 
      Accounting Standards ("SFAS") No. 128, "Earnings per Share" in March 1997 
      which will become effective in December 1997.  Earnings per share would
      not change if SFAS No. 128 had been in effect as of January 1, 1996.

4.    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.


                                       18

<PAGE>





      TDS acquired certain cellular licenses,  operating companies and telephone
      companies in 1997 and 1996. In conjunction  with these  acquisitions,  the
      following  assets were acquired and liabilities  assumed and Common Shares
      issued.


                                                      Nine Months Ended
                                                         September 30,
                                                  ------------------------------
                                                      1997            1996
                                                  -----------     -------------
                                                      (Dollars in thousands)

      Property, plant and equipment               $         --    $     55,692
      Cellular licenses                                 37,258          94,454
      Increase in equity method investment
         in cellular interests                              --           8,356
      Franchise costs                                       --          12,847
      Long-term debt                                        --         (22,979)
      Deferred credits                                      --          (7,363)
      Other assets and liabilities,
         excluding cash and cash equivalents                --           9,613
      Minority interest                                  1,911          (3,036)
      Common Shares issued and issuable                     --        (113,658)
      USM Stock issued and issuable                         --             (34)
                                                  ------------    ------------
      Decrease in cash due to acquisitions        $     39,169    $     33,892
                                                  ============    ============


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

                                                        Nine Months Ended
                                                           September 30,
                                                  -----------------------------
                                                      1997             1996
                                                  -----------     ------------
                                                      (Dollars in thousands)

      Interest Paid                               $    56,526     $     44,674
      Income Taxes Paid                                 9,286           65,466
      Common Shares issued by TDS for
         conversion of TDS Preferred Stock        $       762     $      4,545

5.    Debt Securities

      U.S.  Cellular  filed a shelf  Registration  Statement on Form S-3 in July
      1997 for the sale of up to $400 million of unsecured debt.  U.S.  Cellular
      issued $250 million of 7.25% Notes due August 15, 2007 (the "Notes") under
      the shelf registration  statement in August 1997. The net proceeds for the
      sale of the Notes of approximately  $247.0 million was used to repay notes
      payable and long-term debt.

6.    Subsequent Events

      TDS filed a shelf  Registration  Statement on Form S-3 on October 21, 1997
      for  the  sale  of  up to  $400  million  of  Trust  Originated  Preferred
      Securities(sm)  ("TOPrS(sm)").  TDS  expects to issue  approximately  $150
      million of the securities under the shelf  registration  during the fourth
      quarter. The proceeds from the sale of the TOPrS is expected to be used to
      repay short-term indebtedness.

      In October 1997, U.S. Cellular completed the exchange with BellSouth 
      Corporation it had announced

                                       19

<PAGE>




      earlier in 1997. Pursuant to the exchange, U.S. Cellular received majority
      interests  in 12  markets  adjacent  to its  Iowa  and  Wisconsin/Illinois
      clusters. In exchange, U.S. Cellular divested its majority interests in 10
      markets and  minority  interests  in nine markets and paid a net amount of
      $87 million in cash.  Certain aspects of the transaction are taxable;  the
      amount of these taxes will be  determined  by year-end and will be paid in
      the first  quarter of 1998.  No book gain or loss will be  recorded on the
      transaction.

7.    Business Segment Information

      The following tables summarize business segment  information for the three
      months and nine months ended or at September 30, 1997, and 1996.

CELLULAR OPERATIONS

                               Three Months Ended or at  Nine Months Ended or at
                                     September 30,            September 30,
                               ------------------------ ------------------------
                                  1997       1996         1997         1996
                               ----------  ----------  -----------  -----------
                                            (Dollars in thousands)
Operating Revenues
  Local service                $  147,279  $  108,296  $   407,591   $  299,951
  Inbound roaming                  60,992      52,256      163,576      139,689
  Long-distance and other          23,688      19,667       62,955       53,691
                               ----------  ----------  -----------   ----------
                                  231,959     180,219      634,122      493,331
                               ----------  ----------  -----------   ----------
Operating Expenses
  System operations                40,268      27,339      109,545       79,728
  Marketing and selling            42,729      31,384      119,728       86,455
  Cost of equipment sold           19,716      18,241       55,473       49,631
  General and administrative       51,285      42,696      144,224      123,364
  Depreciation and 
    amortization                   33,049      27,465       94,641       79,216
                               ----------  ----------  -----------   ----------
                                  187,047     147,125      523,611      418,394
                               ----------  ----------  -----------   ---------- 
Operating Income               $   44,912  $   33,094  $   110,511   $   74,937
                               ==========  ==========  ===========   ==========
Additions to property, plant
    and equipment              $   86,899  $   71,985  $   247,957   $  172,916
Identifiable assets            $2,340,079  $2,067,259  $ 2,340,079   $2,067,259


                                       20

<PAGE>





TELEPHONE OPERATIONS
                             Three Months Ended or at   Nine Months Ended or at
                                     September 30,          September 30,
                               ----------------------  ------------------------
                                   1997        1996        1997        1996
                               ----------  ----------  -----------  -----------
                                            (Dollars in thousands)
Telephone Operations
  Operating Revenues
    Local Service              $   31,031  $   28,603  $    91,383   $   81,148
    Network access and 
      long distance                61,512      54,479      174,821      155,272
    Miscellaneous                  12,732      12,650       37,091       34,902
                               ----------  ----------  -----------   ----------
                                  105,275      95,732      303,295      271,322
                               ----------  ----------  -----------   ----------
  Operating Expenses
    Network operations             20,741      19,359       56,541       51,671
    Depreciation and 
       amortization                23,939      22,463       71,043       61,907
    Customer operations            16,893      14,515       48,080       39,960
    Corporate and other            17,597      14,833       49,330       44,733
                               ----------  ----------  -----------   ----------
                                   79,170      71,170      224,994      198,271
                               ----------  ----------  -----------   ----------
  Telephone Operating Income       26,105      24,562       78,301       73,051
                               ----------  ----------  -----------   ----------

Other Operations
  Revenues                         14,174       6,403       36,654       18,351
  Expenses                         14,877       6,102       38,247       17,691
                               ----------  ----------  -----------   ----------
  Other Operating Income             (703)        301       (1,593)         660
                               ----------  ----------  -----------   ----------
Intercompany Eliminations
  Revenues                           (789)       (345)      (1,249)        (837)
  Expenses                           (789)       (345)      (1,249)        (837)
                               ----------  ----------  -----------   ----------
Operating Income               $   25,402  $   24,863  $    76,708   $   73,711
                               ==========  ==========  ===========   ==========

Additions to property, plant
    and equipment              $   41,879  $   36,389  $    96,717   $   91,131
Identifiable assets            $1,192,035  $1,164,783  $ 1,192,035   $1,164,783

PCS OPERATIONS
                             Three Months Ended or at   Nine Months Ended or at
                                      September 30,          September 30,
                               ----------------------  ------------------------
                                   1997        1996        1997         1996
                               ----------  ----------  -----------   ----------
                                              (Dollars in thousands)

Operating Revenues             $   18,648  $       --  $    25,791   $       --
                               ----------  ----------  -----------   ----------

Operating Expenses
  Systems operations                9,815          --       13,857           --
  Marketing and selling            12,113          --       27,003           --
  Cost of equipment sold           25,798          --       40,770           --
  General and administrative       16,478          --       33,717           --
  Customer service                  5,007          --        6,757           --
  Depreciation                     12,121          --       17,282           --
  Amortization                      1,853          --        2,575           --
                               ----------  ----------  -----------   ----------
                                   83,185          --      141,961           --
                               ----------  ----------  -----------   ----------
Operating (Loss)               $  (64,537) $       --  $  (116,170)  $       --
                               ==========  ==========  ===========  ===========


Additions to property, plant
    and equipment              $   45,671  $   28,882   $  203,374   $   51,337
Identifiable assets            $  899,580  $  431,103   $  899,580   $  431,103


                                       21

<PAGE>






RADIO PAGING OPERATIONS
                              Three Months Ended or at  Nine Months Ended or at
                                     September 30,            September 30,
                               ----------------------   -----------------------
                                   1997       1996         1997         1996
                               ----------  ----------   ----------   ----------
                                            (Dollars in thousands)

Operating Revenues             $   22,930  $   26,539   $   71,758   $   79,145
                               ----------  ----------   ----------   ----------
Costs and expenses
  Cost of services                  7,442       6,573       20,482       19,418
  Selling, general and 
     administrative                14,170      22,142       45,703       52,327
  Cost of equipment sold            2,110       2,194        6,760        7,760
  Depreciation and 
     amortization                   8,513      12,324       23,658       26,987
                               ----------  ----------   ----------   ----------
                                   32,235      43,233       96,603      106,492
                               ----------  ----------   ----------   ----------
Operating (Loss)               $   (9,305) $  (16,694)  $  (24,845)  $  (27,347)
                               ==========  ==========   ==========   ==========
Additions to property, plant
    and equipment              $    2,123  $    4,302   $   13,594   $   26,330
Identifiable assets            $  142,569  $  158,804   $  142,569   $  158,804

OTHER OPERATIONS
                              Three Months Ended or at  Nine Months Ended or at
                                    September 30,            September 30,
                               ----------------------   -----------------------
                                   1997       1996         1997         1996
                               ----------  ----------   ----------   ----------
                                            (Dollars in thousands)
Additions to property, plant
    and equipment              $    9,335  $   (5,694)  $   17,496   $    5,995
Identifiable Assets            $   86,809  $  111,353   $   86,809   $  111,353


                                       22

<PAGE>




                           PART II. OTHER INFORMATION

Item 5.  Other Information

         In December  1996,  TDS  authorized the repurchase of up to 3.0 million
         TDS Common Shares over a period of three years.  Through  September 30,
         1997, TDS has repurchased  1,798,100 TDS Common Shares for an aggregate
         purchase  price  of $69.9  million.  TDS also  purchased  350,000  U.S.
         Cellular  Common  Shares for $9.8 million in the first quarter of 1997.
         The share repurchases were financed  primarily by borrowings under TDS'
         short-term lines of credit.

         On  October  21,  1997,  TDS  announced  that  it  had  filed  a  shelf
         registration  statement  with the  Securities  and Exchange  Commission
         covering $400 million of Trust Originated Preferred Securities(sm). The
         news release issued to announce this is attached as Exhibit 99.1.

         On November 3, 1997,  U.S.  Cellular  announced  the  completion  of an
         exchange transaction with BellSouth Corporation, pursuant to agreements
         entered into in February 1997. The news release issued to announce this
         is attached as Exhibit 99.2.


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

         (a) Exhibit 3.1 - Articles of Incorporation, as amended

         (b) Exhibit 11 - Computation of earnings per common share

         (c) Exhibit 12 - Statement regarding computation of ratios

         (d) Exhibit 27 - Financial Data Schedule

         (e) Exhibit 99.1 - TDS news release dated October 21, 1997

         (f) Exhibit 99.2 - U.S. Cellular news release dated November 3, 1997

         (g) Reports on Form 8-K filed during the quarter  ended  September  30,
             1997

             No  reports on Form 8-K were filed  during the  quarter  ended
             September 30, 1997.









                                       23

<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      November 13, 1997                     /s/ MURRAY L. SWANSON
     ----------------------------               --------------------------
                                                Murray L. Swanson,
                                                Executive Vice President-Finance
                                                (Chief Financial Officer)



Date      November 13, 1997                     /s/ GREGORY J. WILKINSON
     ----------------------------               ---------------------------
                                                Gregory J. Wilkinson,
                                                Vice President and Controller
                                                Principal Accounting Officer)

                                       24

<PAGE>