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


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

X   For the quarterly period ended              September 30, 1996
                                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, 1996
          -------------------------               ------------------------------
        Common Shares, $1 par value                     54,219,146 Shares
  Series A Common Shares, $1 par value                   6,907,109 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           2-15

        Consolidated Statements of Income -
          Three Months and Nine Months Ended
          September 30, 1996 and 1995                              16

        Consolidated Statements of Cash Flows -
          Nine Months Ended September 30, 1996 and 1995            17

        Consolidated Balance Sheets -
          September 30, 1996 and December 31, 1995               18-19

        Notes to Consolidated Financial Statements               20-22


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


RESULTS OF OPERATIONS

Nine Months Ended 9/30/96 Compared to Nine Months Ended 9/30/95

CONSOLIDATED

Telephone and Data Systems,  Inc.  ("TDS" or the "Company")  reported net income
available  to common of $115.3  million,  or $1.89 per share,  in the first nine
months of 1996, compared to $86.9 million, or $1.49 per share, in the first nine
months of 1995.  Consolidated  operating  results  for the first nine months of
1996 compared to 1995 primarily reflect:

   * strong growth in cellular customer units resulting in substantial increases
     in cellular revenue, operating cash flow and operating income;

   * steady  growth in telephone  access lines and  revenues,  higher  operating
     costs due to development of new service offerings and a centralized network
     management  center  resulting in small increases in operating cash flow and
     operating  income;  

   * declining  growth in  pagers  served  in the nine  months of 1996,  reduced
     paging   revenue  and  higher   operating   costs,   including   additional
     restructuring  charges,  resulting in a decrease in paging  operating  cash
     flow and an increase in operating loss;

   * significant  gains and cash proceeds from sales and trades of non-strategic
     cellular interests and other investments; and

   * significant     increases    in    Personal     Communications     Services
     ("PCS")development  costs as American  Portable  Telecom,  Inc. proceeds to
     develop and construct its PCS networks.

Excluding gains on the sales of cellular  interests and other  investments,  PCS
development  costs and paging  restructuring  charges,  along  with the  related
income taxes and minority  interest,  net income  available to common would have
been  $72.1  million,  or $1.18 per  share,  in the first  nine  months of 1996,
compared to $52.8 million, or $.91 per share, in the first nine months of 1995.

                                               Nine Months Ended September 30,
                                               -------------------------------
                                                    1996                1995
                                                    ----                ---- 
                                (Dollars in thousands, except per share amounts)

Net Income Available to Common As Reported         $ 115,281          86,916
   Add:   PCS Development Costs                       10,797           4,641
          Paging Restructuring Costs                   4,238           1,013
   Less:  Effects of Gains                           (58,238)        (39,777)
                                                   ---------       ---------
   As Adjusted                                     $  72,078       $  52,793
                                                   =========       =========

Earnings Per Share As Reported                     $   1.89        $    1.49
   Add:   PCS Development Costs                         .18              .08
          Paging Restructuring Costs                    .07              .02
   Less:  Effects of Gains                             (.96)            (.68)
                                                   --------        ---------
   As Adjusted                                     $   1.18        $     .91
                                                   ========        =========

                                       2

<PAGE>


Operating  Revenues  increased 26% ($179.7 million) during the first nine months
of  1996   primarily  as  a  result  of  increases  in  customer  units  served.
Consolidated  cellular  telephone,  telephone  and radio paging  customer  units
increased 22% (18%  attributable  to cellular  telephone)  since September 30, 
1995.

Cellular  telephone  revenues  increased  44% ($154.8  million) in 1996 on a 52%
increase  in  customer  units and  strong  inbound  roaming  revenues.  Cellular
customers  increased to 940,000 at September  30, 1996 from 618,000 at September
30, 1995. Local retail revenue  increased 53% ($109.3 million) in the first nine
months of 1996 due primarily to the 52% customer  growth.  Average monthly local
retail revenue per customer  declined to $42.84 in the first nine months of 1996
from $45.05 in 1995,  while  average  local  minutes of use per retail  customer
increased  to 106 in 1996 from 93 in 1995.  U.S.  Cellular's  use of  incentive
programs in 1996 that  encourage  lower-priced  weekend and off-peak  usage,  in
order to stimulate overall usage,  resulted in an increase in average minutes of
use and a lower  average  revenue  per minute of use.  Inbound  roaming  revenue
(charges to customers of other systems who use U.S.  Cellular's cellular systems
when roaming) increased 28% ($30.9 million) in the first nine months of 1996 due
to  increased  minutes of use.  Average  monthly  inbound  roaming  revenue  per
customer  declined to $18.88 in 1996 compared to $23.62 in 1995. The decrease is
the result of roaming  revenue  growing at a slower  rate than U.S.  Cellular's
customer  base (28%  versus 52%) and  negotiated  reductions  in roaming  rates.
Long-distance  and other revenue increased 46% ($12.9 million) in the first nine
months of 1996  primarily due to the  increased  volume of  long-distance  calls
billed by U.S.  Cellular.  Average monthly  long-distance  and other revenue per
customer  was $5.53 in the first  nine  months of 1996 and $6.09 in 1995.  Total
average monthly service revenue per customer was $67.25 in the first nine months
of 1996 and $74.75 in 1995.  Equipment  sales  revenue  increased 16% ($1.8 mill
ion) in 1996  reflecting the increase in the number of cellular  telephone units
sold partially offset by a decrease in revenue per unit sold.

Telephone  revenues  increased  10% ($26.0  million)  in 1996 as a result of the
effects  of  acquisitions  ($12.1  million),  recovery  of  increased  costs  of
providing  long-distance services ($5.4 million),  increased network usage ($3.4
million),  internal  access  line growth of 6% since  September  30, 1995 ($ 4.0
million)  and  increased  sales of custom  calling and advanced  features  ($2.0
million).  The number of  telephone  access  lines  increased  14% to 479,700 at
September 30, 1996 from 422,000 at September 30, 1995.  Average  monthly revenue
per access  line  decreased  to $66.36  for the first  nine  months of 1996 from
$67.31 in 1995.

Radio paging  revenues  decreased  1% ($1.2  million) in 1996.  Service  revenue
increased  3% ($1.8  million) on a 1% increase in paging  units in service.  The
number of pagers in service  increased  to 788,300 in 1996 from 776,900 in 1995.
Average  revenue  per unit  decreased  7% to $9.92 in 1996 from  $10.70 in 1995
reflecting a shift in distribution channel mix and competitive pricing declines.
Equipment  sales revenue  decreased  $2.9 million  reflecting the slow growth in
pager sales.

Operating  Expenses  rose 27% ($161.9  million) in the first nine months of 1996
due primarily to added expenses to serve the growing customer base.

Cellular  telephone  expenses increased 37% ($116.8 million) during 1996. System
operations  expenses  increased  52%  ($27.3  million)  in 1996 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 87% ($22.3 million) as minutes of use increased,  primarily  related to the
52% increase in customer units and increased roaming usage. Also contributing to
the increase was $9.3 million of additional  costs related to fraudulent  use of
U.S.  Cellular's  customers'  telephone  numbers.  U.S.  Cellular  continues  to
implement  procedures  in its markets to combat this fraud,  which is  primarily
related to roaming usage. Maintenance, utility and cell site expenses

                                       3

<PAGE>

increased 19% ($5.1 million) reflecting  primarily the increase in the number of
cell sites to 1,270 in 1996 from 1,041 in 1995.  Marketing and selling  expenses
incurred to add new customers  increased 39% ($42.3 million),  including a $11.2
million  increase in cost of equipment  sold.  Cost per gross customer  addition
declined  to $368 in 1996  from  $373  in  1995 as  gross  customer  activations
increased to 373,000 in 1996 from 259,000 in 1995.  General and  administrative
expenses  increased  34% ($32.2  million)  due to the growing  customer  base in
existing   markets  and  an  expansion  of  local  office  and  corporate  staff
necessitated  by the  U.S.  Cellular's  growth.  Depreciation  and  amortization
increased  23% ($14.9  million)  primarily due to the increase in average fixed
assets since September 30, 1995.

Telephone  expenses increased 13% ($25.4 million) during 1996 due to the effects
of acquisitions  ($10.4 million),  growth in internal  operations ($4.8 million)
and increased depreciation and amortization ($3.7 million). The development of a
centralized  network  management  center to  provide  more  effective  network
monitoring and maintenance and the development of new service  offerings  caused
expenses to increase  $5.6  million.  These  expenditures  are expected to begin
producing cost  efficiencies  and new revenues in the next several  quarters and
beyond. Operating margin declined to 25.5% in 1996 from 27.8% in 1995.

Paging expenses  increased 23% ($19.8 million) in 1996.  During  September 1995,
American Paging  announced a plan to restructure key operating areas to increase
sales,  improve  customer mix, lower  administrative  costs and improve customer
service.  Through this restructuring,  American Paging has committed additional
resources  to sales and sales  support  with the intent to increase  unit sales,
service  revenue and  productivity.  Although  anticipated,  American Paging has
experienced  slower unit and revenue  growth and  increased  operating  expenses
through  the third  quarter  as a result of  continued  work force  disruptions
caused by the refocusing of the sales force on direct sales and reengineering of
the customer service  organization.  An additional $7.0 million of restructuring
charges were  identified in the third quarter of 1996 once the customer  service
functions were transferred to the new centralized  customer  service center.  In
total, $9.3 million of restructuring charges were incurred during the first nine
months of 1996. Cost of services  increased 25% ($4.4 million)  primarily due to
increasing costs of serving the customer base,  maintenance and repair of pagers
and  increased re seller costs.  Selling,  general and  administrative  expenses
increased 24% ($9.7 million),  including $4.0 million of  restructuring  charges
related to duplicate staffing, employee severance and legal and consulting fees.
Programming  services  performed during the conversion to a new customer service
center  amounted to $1.3  million.  Cost of equipment  sold  decreased 30% ($3.4
million)  as a  result  of the  slow  growth  in unit  sales.  Depreciation  and
amortization  increased 51% ($9.1 million) as a result of the write-offs of $2.8
million of obsolete  inventory,  $2.2 million for obsolete software and $300,000
for assets retired as a result of the restructuring and the increased investment
in fixed assets.

                                       4

<PAGE>


Operating  Income increased 17% ($17.8 million) in the first nine months of 1996
due to improved  cellular  operating  results offset  somewhat by the decline in
paging operating results.

                                       Nine Months Ended September 30,
                                  ------------------------------------------
                                           1996           1995        Change
                                           ----           ----        ------   
                                         (Dollars in thousands)
Operating Income
        Cellular telephone        $       74,937       $ 36,883     $ 38,054
        Telephone                         73,711         73,036          675
        Radio paging                     (27,347)        (6,378)     (20,969)
                                  --------------       --------     --------
                                  $      121,301       $103,541     $ 17,760
                                  ==============       ========     ========

     Operating Margins
        Cellular telephone*               15.1%          10.7%
        Telephone                         25.5%          27.8%
        Radio paging*                    (38.5%)         (9.2%)
        Consolidated                      13.8%          14.8%
         * Computed on Service Revenues

Management  anticipates  continued  growth in  consolidated  customer  units and
revenues  as  the  business  units  continue  their  expansion  and  development
programs.  The rate of revenue  growth is expected  to be  somewhat  slower than
historical  trends as cellular and paging revenue per unit continue to decline.
Expenses should increase,  driven by customer growth,  although at a slower rate
than revenues,  yielding continued growth in operating income and operating cash
flow.  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. This seasonality may
cause operating income to vary from quarter-to-quarter.

Additionally,  competitors  licensed  to provide  PCS  services  have  initiated
service  in  certain  of the U.S.  Cellular's  markets  in recent  months.  U.S.
Cellular  anticipates  that PCS operators will initiate service in several other
of its markets later in 1996 and 1997. U.S. Cellular's management is monitoring
these and other PCS providers'  strategies,  but cannot at this time  anticipate
what effect,  if any, this additional  competition will have on U.S.  Cellular's
future strategies and results.

Investment  and Other Income totaled $136.6 million in 1996 and $93.5 million in
1995.

Gain on Sale of Cellular Interests and Other Investments  totaled $136.0 million
in the  first  nine  months of 1996  compared  to $79.7  million  in 1995 as the
Company has sold or traded  certain  non-strategic  cellular  interests and sold
other investments.

PCS  Development  Costs  totaled $24.3 million in 1996 and $2.8 million in 1995.
American  Portable  Telecom,   Inc.  ("American  Portable")  has  been  devoting
substantially  all of its efforts to recruiting an experienced  management team,
developing  and executing a business  plan,  raising  capital and designing and
constructing  its PCS  networks.  As of  September  30,  1996,  a  total  of 118
microwave  paths have been cleared,  with an additional 52 paths having  pending
agreements  with  incumbents.  Management  anticipates  that by  year-end  1996,
sufficient  paths  will have been  cleared  to allow  service  launch in all six
markets.  Over 500 cell sites have been secured as zoning and installation  work
continues.  The National Operations Center is substantially  complete.  Friendly
user  (customer)  trials are planned to begin late in the fourth quarter of 1996
and conclude in the first quarter of 1997, with roll-out of commercial  service
after  successful  customer  trials.  The Company  expects to incur  significant
expenditures for the development of PCS activities during 1996 and 1997.


                                       5


<PAGE>

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  31% ($9.1  million ) in the first nine months of 1996 as
income from the cellular markets increased. Cellular investment income is net of
amortization of license costs relating to these minority interests.

Minority Share of Income, the minority  shareholders' share of U.S.  Cellular's,
American Paging's, and American Portable's net income or loss and other minority
shareholders' and partners' share of subsidiaries' net income or loss, increased
20% ($4.0  million)  in the first  nine  months  of 1996 due primarily  to the
increase in U.S.  Cellular's net income offset  somewhat by increased  losses at
American Paging and American Portable.  Minority shareholders' share of gains on
the sales of cellular interests was $12.9 million and $14.9 million in the first
nine months of 1996 and 1995, respectively.

Interest Expense  decreased 23% ($8.8 million) in the first nine months of 1996.
TDS capitalized  $21.2 million of interest expense  associated with expenditures
for broadband and narrowband PCS licenses and capitalized  construction costs in
1996 and $6.5 million in 1995. Long-term interest expense increased $6.7 million
in 1996 as a  result  of the  completion  of U.S.  Cellular's  convertible  debt
offering in June of 1995.

Income Tax Expense increased 61% ($42.1 million) in 1996 compared with 1995. The
increase reflects  additional income taxes of about $32.1 million due to the 44%
increase  in pretax  income and  additional  income tax  expense of about  $10.0
million  due to tax gains in excess of book gains  associated  with the sale of
certain cellular  interests.  The effective income tax rate was 49% in the first
nine months of 1996 and 44% in 1995. The increase in the effective rate reflects
the  additional  income  taxes  related to the gain on sale of certain  cellular
interests.

Net Income  Available to Common increased $28.4 million to $115.3 million in the
first nine  months of 1996 from $86.9  million in the first nine months of 1995.
Earnings  Per Common Share were $1.89 in the first nine months of 1996 and $1.49
in the first nine months of 1995.

TDS anticipates that the development of American  Portable and its entrance into
the PCS  business  is  expected to reduce the rate of growth in TDS's net income
from levels which would otherwise be achieved during the next few years.

                                       6

<PAGE>


Three Months Ended 9/30/96 Compared to Three Months Ended 9/30/95

CONSOLIDATED

Net income  available to common for the third  quarter of 1996 and 1995 included
significant gains from the sales of non-strategic cellular interests and certain
other  investments,  increased PCS  development  costs and paging  restructuring
charges.  Excluding these gains, PCS development costs and paging restructuring
charges,  along with the related income taxes and minority interest,  net income
available to common  would have been $26.9  million,  or $.44 per share,  in the
third  quarter of 1996,  compared to $25.5  million,  or $.44 per share,  in the
third quarter of 1995.
                                               Three Months Ended September 30,
                                               --------------------------------
                                                    1996             1995
                                                 -----------      -----------
                                (Dollars in thousands, except per share amounts)

     Net Income Available to Common As Reported  $    22,200      $    42,338
      Add:  PCS Development Costs                      3,467            3,250
            Paging Restructuring Costs                 3,223            1,013
      Less:  Effects of Gains                         (1,982)         (21,081)
                                                 -----------      -----------
          As Adjusted                            $    26,908      $    25,520
                                                 ===========      ===========

     Earnings Per Share As Reported              $       .36      $       .72
      Add:   PCS Development Costs                       .06              .06
             Paging Restructuring Costs                  .05              .02
      Less:  Effects of Gains                           (.03)            (.36)
                                                 -----------      -----------
          As Adjusted                            $       .44      $       .44
                                                 ===========      ===========

Operating  Revenues  increased 23% ($59.4  million)  during the third quarter of
1996 for reasons generally the same as the first nine months. Cellular telephone
revenues  increased 35% ($49.0 million) in 1996. Local retail revenue  increased
45% ($36.1 million) in the third quarter of 1996, while inbound roaming revenue
increased 18% ($8.1  million).  Average monthly service revenue per customer was
$67.88 in the third  quarter  of 1996 and  $76.93  in 1995.  Telephone  revenues
increased  13%  ($11.4  million)  in the  third  quarter  of 1996.  Acquisitions
increased  telephone revenues by 7% ($6.5 million) in the third quarter of 1996.
Average  revenue per access line remained  stable at $67.46 in the third quarter
of 1996  compared to $67.44 in 1995.  Radio paging  revenues  decreased 4% ($1.0
million) in 1996.  Average  revenue per unit  decreased 6% to $9.96 in 1996 from
$10.63 in 1995.

Operating Expenses rose 27% ($58.7 million) during the third quarter of 1996 for
reasons  generally the same as the first nine months except for American  Paging
which had an  additional  $7.0  million of  restructuring  expenses in the third
quarter of 1996.  Cellular  telephone  expenses  increased 28% ($33.9 million).
System operations  expense increased 24% ($5.4 million),  including $4.0 million
of costs  related to  fraudulent  use of U.S.  Cellular's  customers'  telephone
numbers.  Marketing  and selling  expenses,  including  cost of equipment  sold,
increased 40% ($15.8  million).  Cost per gross customer addition  increased to
$386 in the third quarter of 1996 from $366 in 1995.  General and administrative
expenses  increased 25% ($8.8 million).  Telephone expenses increased 18% ($11.5
million).  Acquisitions  increased  telephone  expenses  by $6.0  million  while
depreciation  expense  increased $2.3 million. The development of a centralized
network  management  center to provide more  effective  network  monitoring  and
maintenance  and the  development of new service  offerings  caused  expenses to
increase $2.2 million.  Paging operating expenses increased 45% ($13.4 million).
Selling,  general and admi  nistrative  expenses  increased 54% ($7.4  million),
including $2.0 million of additional  restructuring  expenses.  Depreciation and
amortization  increased  86% ($5.7  million)  primarily  due to the $2.8 million
write-off of obsolete inventory and $2.2 million write-off of obsolete software.

                                       7


<PAGE>

Operating Income increased 2% ($703,000) in the third quarter of 1996.  Improved
cellular  operating results were  substantially  offset by the decline in paging
results.

                                       Three Months Ended September 30,
                                       -----------------------------------------
                                           1996          1995       Change
                                       -----------------------------------------
                                                     (Dollars in thousands)
CONSOLIDATED OPERATING INCOME
     Cellular Telephone Operations    $    33,094    $   17,967    $ 15,127
     Telephone Operations                  24,863        24,932         (69)
     Radio Paging Operations              (16,694)       (2,339)    (14,355)
                                      -----------    ----------    --------
                                      $    41,263    $   40,560    $    703
                                      ===========    ==========    ========

Operating Margins:
     Cellular Telephone*                     18.1%         13.4%
     Telephone                               24.4%         27.6%
     Radio Paging*                          (70.2%)        (9.7%)
     Consolidated                            13.1%         15.8%

 * Computed on Service Revenues

Investment  and Other Income  totaled $12.5 million in 1996 and $47.6 million in
1995.

Gain on Sale of Cellular Interests and Other Investments totaled $7.8 million in
the third  quarter of 1996  compared to $43.4 million in 1995 as the Company has
sold  or  traded  certain  non-strategic   cellular  interests  and  sold  other
investments.

PCS  Development  Costs  totaled  $10.8 million in 1996 and $1.9 million in 1995
reflecting activities taking place to develop and construct PCS networks.

Cellular Investment Income increased 44% ($4.9 million),  reflecting improvement
in U.S. Cellular's equity-method markets managed by others.

Minority  Share of Income  decreased 55% ($4.4  million) in the third quarter of
1996 due primarily to the increase in American  Portable's and American Paging's
net losses,  offset  somewhat by the  increase  in U.S.  Cellular's  net income.
Minority  shareholders'  share of gains on the sales of cellular interests were
$435,000 and $8.2 million in the third quarter of 1996 and 1995, respectively.

Interest Expense  decreased 23% ($2.8 million) in the third quarter of 1996. TDS
capitalized  $7.1 million of interest expense  associated with  expenditures for
broadband and narrowband PCS licenses and capitalized construction costs in 1996
and $6.5 million in 1995. The remaining  decrease is primarily  attributable to
the reduction in average notes payable outstanding between 1996 and 1995.

Income Tax Expense  decreased  35% ($11.7  million) in 1996  compared  with 1995
primarily  due to the  $35.6  million  decrease  in gain on  sales  of  cellular
interests and other  investments.  The effective  income tax rate was 49% in the
third  quarter of 1996 and 44% in 1995.  The  increase  in the  effective  rate
reflects additional income taxes related to certain sales of cellular interests.

Net Income  Available to Common  decreased to $22.2 million in the third quarter
of 1996 from $42.3 million in 1995 reflecting the decrease of $19.1 million gain
on the  sales of  cellular  interests  and  other  investments  (net-of-tax  and
minority  interest).  Earnings  Per  Common  Share were $.36 in 1996 and $.72 in
1995.

                                       8


<PAGE>

BUSINESS SEGMENT  HIGHLIGHTS  
Telephone and Data Systems,  Inc. is a  diversified  telecommunications  company
with established cellular telephone, local telephone and radio paging operations
and  developing  personal  communications  services  operations.  Following  are
operating  highlights  for each major  business  unit for the nine months ended
September  30,  1996 and the  operating  results  for the nine  months and three
months ended September 30, 1996 and 1995.

CELLULAR TELEPHONE OPERATIONS
TDS  provides   cellular   telephone  service  through  United  States  Cellular
Corporation  [AMEX:  USM], an  80.6%-owned  subsidiary.  Consolidated  operating
results for the first nine months of 1996 compared to 1995 reflect:

     *  strong  growth in customer  units to 940,000  units in 130 markets  from
        618,000 units in 138 markets;  

     *  a 44% increase in revenue related to the increase in customer units;

     *  and a 52%  increase  in  operating  cash  flow  and a 103%  increase  in
        operating income.

TELEPHONE OPERATIONS
TDS manages  its local  landline  telephone  service  through  its wholly  owned
subsidiary TDS Telecommunications  Corporation ("TDS Telecom"). At September 30,
1996, TDS Telecom  operated 105 telephone  companies which served 479,700 access
lines in 28 states.  Consolidated operating results for the first nine months of
1996 compared to 1995 reflect:

     *  steady  growth in  telephone  access  lines,  6% internal  growth and 8%
        growth due to acquisitions;

     *  a 10%  increase  in revenue  with  revenue  per access  line  decreasing
        slightly; and

     *  a 13%  increase  in  operating  costs  including  $5.6  million  for the
        development of a centralized  network  management center and new service
        offerings.

PAGING OPERATIONS
TDS manages its radio paging business through American Paging, Inc. [AMEX: APP],
an 82.3%-owned  subsidiary.  APP provides wireless  messaging  communications to
788,300  subscribers  in 21 states and the  District of  Columbia.  Consolidated
operating results for the first nine months of 1996 compared to 1995 reflect:

     *  a 1% growth in pagers served, but a 1% decline in paging revenue; and

     *  a  23%  increase  in  operating   costs   including  $9.3  million  from
        restructuring costs, resulting in an increased operating loss.

PCS OPERATIONS
TDS manages its broadband  personal  communications  services  business  through
American  Portable  Telecom,  Inc.  [NASDAQ:  APTI], an 82.8%-owned  subsidiary.
American  Portable's  licenses  cover the Major  Trading  Areas of  Minneapolis,
Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus and
account for approximately 27.3 million population equivalents.  Results from the
first nine months of 1996 compared to 1995 reflect significant  increases in PCS
development costs as American Portable proceeds to develop and construct its PCS
network.


                                       9

<PAGE>

CELLULAR TELEPHONE OPERATIONS



                                  Nine Months Ended September 30,
                      ----------------------------------------------------------
                                                       Change        Change
                                                       Due To       Excluding
                      1996       1995       Change    Acquisitions  Acquisitions
                      ----       ----       ------    ------------ -------------
                                   (Dollars in thousands)
Operating Revenues
 Local retail       $ 316,900  $ 207,568  $ 109,332   $  13,909    $  95,423
 Inbound roaming      139,689    108,837     30,852      (1,297)      32,149
 Long-distance         39,309     24,832     14,477       1,148       13,329
 Other                  1,592      3,217     (1,625)     (1,558)         (67)
                    ---------- ---------- ----------  -----------  -------------
  Service Revenues    497,490    344,454    153,036      12,202      140,834
 Equipment sales       12,790     10,985      1,805         534        1,271
                    ---------- ---------- ----------  -----------  -------------
                      510,280    355,439    154,841      12,736      142,105
                    ---------- ---------- ----------  -----------  -------------
Operating Expenses
 System operations     79,728     52,413     27,315       1,774       25,541
 Marketing and       
  selling             100,307     69,204     31,103       5,497       25,606
 Cost of equipment    
  sold                 49,631     38,393     11,238       2,840        8,398
 General and         
  administrative      126,461     94,271     32,190       3,131       29,059
 Depreciation and
  amortization         79,216     64,275     14,941         199       14,742
                   ----------- ---------- ----------  -----------  -------------
                      435,343    318,556    116,787      13,441      103,346
                   ----------- ---------- ----------  -----------  -------------
Operating Income   $   74,937   $ 36,883  $  38,054   $    (705)   $  38,759
                   =========== ========== ==========  ===========  =============

Consolidated Markets:
 Market penetration       4.38%      2.78%
 Churn rate per month     1.9%       2.0%

                                  Three Months Ended September 30,
                      ----------------------------------------------------------
                                                       Change        Change
                                                       Due To       Excluding
                      1996       1995       Change    Acquisitions  Acquisitions
                      ----       ----       ------    ------------  ------------
                                   (Dollars in thousands)
Operating Revenues
 Local retail       $ 115,671  $  79,577  $  36,094   $    (873)     $ 36,967
 Inbound roaming       52,256     44,181      8,075      (2,194)       10,269
 Long-distance         14,720     10,274      4,446        (177)        4,623
 Other                    622        522        100        (485)          585
                    ---------- ---------- -----------  ------------  -----------
  Service Revenues    183,269    134,554     48,715      (3,729)       52,444
Equipment sales         4,325      4,013        312         (84)          396
                    ---------- ---------- -----------  ------------  -----------
                      187,594    138,567     49,027      (3,813)       52,840
                    ---------- ---------- -----------  ------------  -----------
Operating Expenses
 System operations     27,339     21,972      5,367      (1,449)        6,816
 Marketing and        
  selling              37,486     25,571     11,915         (55)       11,970
 Cost of equipment     
  sold                 18,241     14,356      3,885        (235)        4,120
 General and           
  administrative       43,969     35,131      8,838      (1,049)        9,887
 Depreciation and
  amortization         27,465     23,570      3,895        (905)        4,800
                    ---------- ---------- -----------  ------------  -----------
                      154,500    120,600     33,900      (3,693)       37,593
                    ---------- ---------- -----------  ------------  -----------
Operating Income    $  33,094  $  17,967  $  15,127    $   (120)     $ 15,247
                    ========== ========== ===========  ============  ===========

Consolidated Markets:
 Market penetration       4.38%      2.78%
 Churn rate per month     2.0%       2.1%

  
                                     10

<PAGE>


   TELEPHONE OPERATIONS



                                    Nine Months Ended September 30,
                       ---------------------------------------------------------
                                                        Change        Change
                                                        Due to       Excluding
                       1996      1995       Change    Acquisitions  Acquisitions
                       ----      ----       ------    ------------  ------------
                                   (Dollars in thousands)
Operating Revenues
 Local service      $  81,037  $  70,461  $  10,576    $   4,108    $   6,468
 Network access and
  long-distance       172,170    160,816     11,354        6,228        5,126
 Miscellaneous         35,630     31,532      4,098        1,795        2,303
                     --------- ---------- ----------  ------------  ------------
                      288,837    262,809     26,028       12,131       13,897
                     --------- ---------- ----------  ------------  ------------
Operating Expenses
 Network operations    61,958     50,669     11,289        2,867        8,422
 Depreciation and
  Amortization         63,941     57,589      6,352        2,600        3,752
 Customer operations   42,437     35,948      6,489        1,824        4,665
 Corporate and other   46,790     45,567      1,223        3,096       (1,873)
                     --------- ---------- ----------  ------------  ------------
                      215,126    189,773     25,353       10,387       14,966
                     --------- ---------- ----------  ------------  ------------
Operating Income     $ 73,711  $  73,036  $     675   $    1,744    $  (1,069)
                     ========= ========== ==========  ============  ============


Growth in access lines from prior year-end:

 Acquisitions          33,100    12,900
 Internal growth       20,700    16,600


                                  Three Months Ended September 30,
                       ---------------------------------------------------------
                                                         Change      Change
                                                         Due to     Excluding
                       1996      1995       Change    Acquisitions  Acquisitions
                       ----      ----       ------    ------------  ------------
                                    (Dollars in thousands)
Operating Revenues
 Local service      $  28,492  $  24,070  $   4,422    $   2,081    $   2,341
 Network access and
  long-distance        60,129     55,515      4,614        3,308        1,306
 Miscellaneous         13,170     10,813      2,357        1,104        1,253
                    ---------- ---------- -----------  -----------  ------------
                      101,791     90,398     11,393        6,493        4,900
                    ---------- ---------- -----------  -----------  ------------
Operating Expenses
 Network operations    22,861     17,831      5,030        1,777        3,253
 Depreciation and
  Amortization         23,036     19,494      3,542        1,319        2,223
 Customer operations   15,532     11,927      3,605        1,105        2,500
 Corporate and other   15,499     16,214       (715)       1,843       (2,558)
                    ---------- ---------- -----------  -----------  ------------
                       76,928     65,466     11,462        6,044        5,418
                    ---------- ---------- -----------  -----------  ------------
Operating Income    $  24,863  $  24,932  $     (69)   $     449    $    (518)
                    ========== ========== ===========  ===========  ============

Growth in access lines from prior quarter-end:
 
 Acquisitions          800           0
 Internal growth     7,900       6,000


                                       11

<PAGE>

RADIO PAGING OPERATIONS



                                             Nine Months Ended September 30,
                                          --------------------------------------
                                              1996         1995        Change
                                              ----         ----        ------
                                 (Dollars in thousands, except per unit amounts)
Revenues
    Service revenues                      $  70,967    $  69,212    $   1,755
    Equipment sales                           8,178       11,114       (2,936)
                                           ---------    ---------    ---------
     Total Revenue                           79,145       80,326       (1,181)
                                           ---------    ---------    ---------
Costs and expenses
    Cost of services                         21,835       17,477        4,358
    Selling, general and administrative      49,910       40,177        9,733
    Cost of equipment sold                    7,760       11,137       (3,377)
    Depreciation and amortization            26,987       17,913        9,074
                                           ---------    ---------    ---------
                                            106,492       86,704       19,788
                                           ---------    ---------    ---------
Operating (Loss)                          $ (27,347)   $  (6,378)   $ (20,969)
                                           =========    =========    =========

Churn rate per month                              3.1%        2.5%
Marketing cost per gross customer unit addition $  86     $    45


                                             Three Months Ended September 30,
                                         ---------------------------------------
                                              1996        1995       Change
                                              ----        ----       ------
                                 (Dollars in thousands, except per unit amounts)
Revenues
     Service revenues                      $ 23,766    $ 24,109    $   (343)
     Equipment sales                          2,773       3,434        (661)
                                            --------    --------    --------
      Total Revenues                         26,539      27,543      (1,004)
                                            --------    --------    --------
Costs and expenses
     Cost of services                         7,716       6,052       1,664
     Selling, general and administrative     20,999      13,643       7,356
     Cost of equipment sold                   2,194       3,558      (1,364)
     Depreciation and amortization           12,324       6,629       5,695
                                            --------   ---------    --------
                                             43,233      29,882      13,351
                                            --------   ---------    --------
Operating (Loss)                           $(16,694)   $ (2,339)   $(14,355)
                                            ========   =========    ========

Churn rate per month                              3.9%        2.6%
Marketing cost per gross customer unit addition $ 103      $   45


                                       12

<PAGE>


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 in recent years.  Accordingly,
TDS has obtained substantial funds from external sources in the past to finance
construction of cellular  telephone systems and to fund  acquisitions.  Although
the steady internal cash flow from TDS Telecom and increasing internal cash flow
from U.S. Cellular have reduced the need for external financing, the development
and  construction  activities  of American  Portable  will  require  substantial
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.  Operating cash flow
(operating income plus  depreciation and  amortization)  increased 20% to $291.4
million  in the first  nine  months of 1996 from  $243.3  million in 1995.  The
increase  represents  primarily  the 52% ($53.0  million)  increase  in cellular
telephone  operating  cash flow.  Cash flows  from  other  operating  activities
(investment  and other income,  interest and income tax expense,  and changes in
working capital and other assets and liabilities) required $105.4 million in the
first nine months of 1996 and $84.3 million in 1995.

                                               Nine Months Ended September 30,
                                          --------------------------------------
                                              1996         1995        Change
                                              ----         ----        ------
                                                    (Dollars in thousands)
Operating cash flow
        Cellular telephone                 $ 154,153    $ 101,158    $  52,995
        Telephone                            137,652      130,625        7,027
        Radio paging                            (360)      11,535      (11,895)
                                           ---------    ---------    ---------
                                             291,445      243,318       48,127
     Other operating activities             (105,418)     (84,255)     (21,163)
                                           ---------    ---------    ---------
                                           $ 186,027    $ 159,063    $  26,964
                                           =========    =========    =========

Cash Flows from Financing  Activities.  TDS has used  short-term debt to finance
its cellular  telephone,  radio paging and PCS operations,  for acquisitions and
for general corporate purposes. TDS takes advantage of attractive  opportunities
to retire  short-term  debt with the proceeds  from  long-term  debt and equity
sales. Cash flows from financing  activities  totaled $69.8 million in the first
nine  months of 1996  compared  to $342.7  million  in 1995.  American  Portable
Telecom sold 12,250,000 common shares for net proceeds, after underwriters fees,
totaling  $195.3 million in an initial public offer ing in the second quarter of
1996, providing most of the Company's external financing requirements during the
first nine months of 1996. TDS reduced its  short-term  debt by $89.4 million in
the first nine months of 1996.  Increases in long-term  debt,  primarily  $221.5
million  received  from the sale of  convertible  debt at U.S.  Cellular,  $58.7
million from vendor financing and $39.5 million from the sale of TDS medium-term
notes, and increases in short-term debt provided most of the Company's  external
financing requirements during the first nine months of 1995.

Cash Flows From Investing  Activities.  TDS makes  substantial  investments each
year  to  acquire,   construct,   operate  and  maintain  modern,   high-quality
communications  networks and  facilities.  Cash flows from investing  activities
required  $198.2  million in the first nine  months of 1996  compared to $476.4
million in 1995.  Additions  to property,  plant and  equipment  totaled  $347.7
million in 1996 and $264.9  million in 1995.  Also in 1995,  $319.0  million was
expended  for  broadband  and  narrowband  PCS license  purchases.  The sales of
non-strategic  cellular interests and other investments provided $ 212.5 million
in 1996 and $128.3 million in 1995.

Property,  Plant and Equipment.  The primary purpose of TDS's  construction  and
expansion

                                       13

<PAGE>


program is to provide for normal 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  totaled $347.7 million in the first nine months of 1996 consisting of
$172.9  million for cellular  plant and  equipment,  $91.1 million for telephone
plant and  equipment,  $26.3  million for radio paging  property and  equipment,
$51.3  million for  broadband  PCS  property and equipment and $6.1 million for
other assets.

Acquisitions.  TDS seeks to acquire  cellular  telephone,  telephone  and paging
interests which add value to the  organization.  During the first nine months of
1996, the Company  purchased  controlling  interests in one cellular  market and
five  telephone  companies and minority  interests in several cellular markets.
The aggregate  consideration for these acquisitions was $147.6 million primarily
consisting  of 2.6  million TDS Common  Shares and $33.9  million  cash.  TDS is
currently  reviewing  opportunities for the acquisition of additional  cellular,
telephone and paging companies.

LIQUIDITY

Management  believes  TDS has  sufficient  internal  and  external  resources to
finance the anticipated  requirements of its business development,  construction
and acquisition programs.

TDS is generating substantial internal funds to finance business development and
construction programs. Operating cash flow for the twelve months ended September
30, 1996 increased to $371.6 million from $310.8 million in 1995.

                            Twelve Months Ended September 30,
                           ----------------------------------
                             1996      1995       Change
                             ----      ----       ------
                               (Dollars in thousands)
Operating Cash Flow
     Cellular telephone    $185,208   $121,265   $ 63,943
     Telephone              182,621    173,667      8,954
     Radio paging             3,800     15,904    (12,104)
                           --------   --------   --------
                           $371,629   $310,836   $ 60,793
                           ========   ========   ========

TDS and its  subsidiaries  have cash and  temporary  investments  totaling  $142
million and longer-term cash  investments  totaling $37 million at September 30,
1996.  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 and its  subsidiaries  had $646 million of committed bank lines of
credit for  general  corporate  purposes  at  September  30,  1996 of which $552
million was unused.  These line of credit agreements  provide for borrowings at
negotiated  rates up to the prime rate.  TDS has $238  million  remaining on its
universal shelf  registration  statement which may be used from  time-to-time to
issue debt  securities  and/or  Common  Shares for cash.  TDS and USM have shelf
registration statements covering the issuance of equity for acquistions.  In
addition,   the  Company  has  issued   Common  Shares  for acquistions pursuant
to  registration   statements  filed  specifically  for particular acquistions.

The  Company's  property,  plant and  equipment  additions  are  anticipated  to
aggregate  approximately  $412 million for 1996 (excluding PCS  construction and
development  expenditures  as  explained  more fully below)  consisting  of $240
million for cellular  capital  additions,  $125 million for  telephone  capita l
additions,  $32 million for the radio paging  property and equipment,  including
capitalized interest and $15 million for other fixed asset expenditures.

                                       14


<PAGE>

U.S.  Cellular  plans  to  finance  its  construction  program  using  primarily
internally   generated   cash   supplemented   by  proceeds  from  the  sale  of
non-strategic  assets.  TDS Telecom  plans to finance its  construction  program
using internally generated cash supplemented by long-term financing from federal
government programs. American Paging plans to finance its property and equipment
expenditures  primarily through borrowings under TDS's short-term lines of
credit.

PCS  Development.   American  Portable  is  proceeding  with  planned  microwave
relocation  and  cell  site  acquisition  activities  in each  of its six  major
markets.  Management  anticipates  that by year-end 1996,  sufficient paths will
have been cleared to allow  service  launch in all six markets.  Service will be
launched  with more than 500 cell sites in place,  which will provide  wide-area
metropolitan coverage. Friendly user (customer) trials are planned to begin late
in the fourth  quarter of 1996 and conclude in the first  quarter of 1997,  with
roll-out of commercial service after successful customer trials.

American Portable anticipates construction,  development and introduction of PCS
networks  and  services   will  require   substantial   capital  and   operating
expenditures  over  the  next  several  years.  While  construction   (including
microwave  relocation),  and other  start-up  activities may be impacted by many
factors,  American Portable  estimates that the aggregate funds required through
December 31, 1998 will total  approximately  $865 million ($345 million in 1996,
$415  million  in 1997 and $105  million  in  1998).  This  amount  includes  an
estimated  $620 million of capital  expenditures  for  construction  of the PCS
networks  ($300  million in 1996,  $275 million in 1997 and $45 million in 1998)
and $245 million of estimated working capital requirements.

TDS expects American  Portable's 1996 capital  expenditures and expenditures for
start-up and  development  activities to be financed using a variety of sources,
including but not limited to,  borrowings  under TDS's  short-term bank lines of
credit,  vendor  financing and equity  investors in American Portable. In March
1996, American Portable selected Nokia Telecommunications, Inc. ("Nokia") as its
sole supplier of digital radio  channel and switching  infrastructure  equipment
during the initial build out of its PCS networks. Nokia has agreed to provide up
to $200 million in financing for equipment  purchases through a Credit Agreement
dated June 19,1996 ("Credit  Agreement").  In April of 1996,  American  Portable
sold 12,250,000 of its Common Shares,  approximately  17.2% of total outstanding
shares,  at a price of $17 per  share in an  initial  public  offering.  The net
proceeds from the offering, after underwriting  discounts and commissions,  was
$195 million.  On November 4, 1996 American  Portable  issued $226.2  million in
aggregate  principal amount at maturity Series A Zero Coupon Notes ("Notes") due
in 2006.  The issue  price of the Notes  was  44.2% of the  principal  amount at
maturity or $100 million and there is no periodic payment of interest.  The per
annum yield to maturity on the Notes is 8.34%.

TDS anticipates  the development of American  Portable and its entrance into the
PCS  business  will  reduce the rate of growth in TDS's net income  from  levels
which would otherwise be achieved during the next few years.

Management  believes TDS's internal cash flows and funds available from cash and
cash  investments  provide  substantial  financial  flexibility.  TDS  also  has
substantial lines of credit and longer-term  financing  commitments to help meet
its short- and long-term  financing needs.  Moreover,  TDS and its sub sidiaries
have access to public and private  capital  markets and anticipate  issuing debt
and  equity  securities  when  capital  requirements  (including  acquisitions),
financial market conditions and other factors warrant.  However, the Company has
no  agreements,  commitments  or  understandings  with  respect  to  any  such
transactions.

                                       15


<PAGE>

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

                               Three Months Ended          Nine Months Ended
                                 September 30                September 30,
                               -------------------         ------------------
                                1996         1995         1996         1995
                                ----         ----         ----         ----
                                (Dollars in thousands, except per share amounts)
OPERATING REVENUES
 Cellular telephone        $    187,594  $   138,567    $ 510,280    $ 355,439
 Telephone                      101,791       90,398      288,837      262,809
 Radio paging                    26,539       27,543       79,145       80,326
                           ------------  -----------    ---------    ---------
                                315,924      256,508      878,262      698,574
                           ------------  -----------    ---------    ---------
OPERATING EXPENSES
 Cellular telephone             154,500      120,600      435,343      318,556
 Telephone                       76,928       65,466      215,126      189,773
 Radio paging                    43,233       29,882      106,492       86,704
                           ------------  -----------    ---------    ---------
                                274,661      215,948      756,961      595,033
                           ------------  -----------    ---------    ---------
OPERATING INCOME                 41,263       40,560      121,301      103,541
                           ------------  -----------    ---------    ---------
INVESTMENT AND OTHER INCOME
 Interest and dividend           
  income                          3,925        3,998       10,048        9,803
 Cellular investment income,
  net of license cost            
   amortization                  15,992       11,117       38,221       29,083
 PCS development costs          (10,805)      (1,856)     (24,312)      (2,758)
 Gain on sale of cellular 
  interests and other            
   investments                    7,797       43,375      136,049       79,749
 Other income (expense), net       (786)      (1,044)         979       (2,005)
 Minority share of income        (3,595)      (7,965)     (24,397)     (20,420)
                            -----------  -----------   ----------    ---------
                                 12,528       47,625      136,588       93,452
                            -----------  -----------   ----------    ---------
INCOME BEFORE INTEREST
 AND INCOME TAXES                53,791       88,185      257,889      196,993
Interest expense                  9,346       12,121       30,343       39,191
                            -----------  -----------   ----------    ---------
INCOME BEFORE INCOME TAXES       44,445       76,064      227,546      157,802
Income tax expense               21,776       33,468      111,496       69,433
                            -----------  -----------   ----------    ---------
NET INCOME                       22,669       42,596      116,050       88,369
Preferred Dividend Requirement     (469)        (258)        (769)      (1,453)
                            -----------  -----------   ----------    ---------
NET INCOME AVAILABLE TO
 COMMON                     $    22,200  $    42,338   $  115,281    $  86,916
                            ===========  ===========   ==========    =========
WEIGHTED AVERAGE COMMON
 SHARES (000s)                   61,321       59,038       60,856       58,191
EARNINGS PER COMMON SHARE   $       .36  $       .72   $     1.89    $    1.49
                            ===========  ===========   ==========    =========
DIVIDENDS PER COMMON AND
 SERIES A COMMON SHARE      $       .10  $      .095   $      .30    $    .285
                            ===========  ===========   ==========    =========

The accompanying notes to financial statements are an integral part of these 
 statements.
                                       16



<PAGE>

             TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 Unaudited
                                                            Nine Months Ended
                                                                September 30,
                                                            -----------------
                                                            1996         1995
                                                            ----         ----
                                                          (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
      Net income                                         $ 116,050    $  88,369
      Add (Deduct) adjustments to reconcile net income
        to net cash provided by operating activities
          Depreciation and amortization                    180,201      148,441
          Deferred taxes                                    45,122       15,930
          Investment income                                (40,747)     (30,937)
          Minority share of income                          24,397       20,420
          Gain on sale of cellular interests              (136,049)     (79,749)
          Noncash interest expense                          11,952        7,685
          Other noncash expense                              5,168        6,503
          Change in accounts receivable                    (27,724)     (32,439)
          Change in accounts payable                        (7,369)      (7,990)
          Change in accrued taxes                           11,984       24,516
          Change in accrued interest                        (5,457)      (3,366)
          Change in other assets and liabilities             8,499        1,680
                                                          --------    ---------
                                                           186,027      159,063
                                                          --------    ---------
      CASH FLOWS FROM FINANCING ACTIVITIES
      Long-term debt borrowings                              8,904      333,174
      Repayments of long-term debt                         (23,161)     (24,246)
      Change in notes payable                              (89,434)      44,629
      Proceeds from the issuance of common stock             2,723        6,346
      Minority partner capital distributions                (4,302)         373
      Redemption of preferred stock                           (526)        (534)
      Dividends paid                                       (19,638)     (17,942)
      Proceeds from the issuance of subsidiaries' stock    195,232          915
                                                          --------     --------
                                                            69,798      342,715
                                                          --------     --------
     CASH FLOWS FROM INVESTING ACTIVITIES
      Additions to property, plant and equipment          (347,709)    (264,905)
      Investments in and advances to cellular
        minority partnerships                              (14,931)     (11,467)
      Distributions from partnerships                       14,959        7,616
      Investments in PCS licenses                          (21,009)    (318,963)
      Proceeds from investment sales                       212,549      128,312
      Change in other investments                           (2,020)      (2,486)
      Acquisitions, net of cash acquired                   (33,892)     (48,859)
      Change in temporary investments and
        marketable securities                               (6,140)      34,333
                                                          --------     --------
                                                          (198,193)    (476,419)
                                                          --------     --------
     NET INCREASE IN CASH AND
       CASH EQUIVALENTS                                     57,632       25,359
     CASH AND CASH EQUIVALENTS -
      Beginning of period                                   55,116       24,733
                                                         ---------    ---------
      End of period                                      $ 112,748    $  50,092
                                                         =========    =========
 The accompanying notes to financial statements are an integral part of these 
                                  statements.

                                       17

<PAGE>


                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS

                                            (Unaudited)
                                         September 30, 1996    December 31, 1995
                                         ------------------    -----------------
                                                  (Dollars in thousands)
                                                     
CURRENT ASSETS
 Cash and cash equivalents                    $  112,748         $   55,116
 Temporary investments                            29,525             25,735
 Accounts receivable from                         
  customers and others                           180,903            145,344
 Materials and supplies, at average cost,
  and other current assets                        38,850             35,015
                                              -----------        -----------
                                                 362,026            261,210
                                              -----------        -----------
INVESTMENTS
 Cellular limited partnership interests          194,596            158,559
 Cellular license acquisition costs,           
  net of amortization                          1,080,639          1,075,820
 PCS license acquisition costs                   377,143            356,561
 Franchise costs and other costs in excess of
  the underlying book value of                   
   subsidiaries, net                             177,825            168,608
 Other investments                               110,137             87,726
                                              -----------        -----------
                                               1,940,340          1,847,274
                                              -----------        -----------
PROPERTY, PLANT AND EQUIPMENT
 Cellular telephone, net                         614,781            530,027
 Telephone, net                                  735,085            657,015
 PCS, net                                        121,840             11,978
 Radio paging, net                                56,843             59,452
 Other, net                                       32,023             34,938
                                              -----------        -----------
                                               1,560,572          1,293,410
                                              -----------        -----------
OTHER ASSETS AND DEFERRED CHARGES                 70,480             67,188
                                              -----------        -----------
  TOTAL ASSETS                                $3,933,418         $3,469,082
                                              ===========        ===========


                                       18


<PAGE>

               TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                            (Unaudited)
                                         September 30, 1996    December 31, 1995
                                         ------------------    -----------------
                                                  (Dollars in thousands)
CURRENT LIABILITIES
 Current portion of long-term debt
  and preferred shares                        $   37,854         $   49,233
 Notes payable                                    98,236            184,320
 Accounts payable                                122,420            122,886
 Advance billings and customer deposits           32,614             27,706
 Accrued interest                                  6,167             11,573
 Accrued taxes                                    22,005              2,525
 Other current liabilities                        51,196             29,481
                                              -----------        -----------
                                                 370,492            427,724
                                              -----------        -----------


DEFERRED LIABILITIES AND CREDITS                 186,979            138,295
                                              -----------        -----------

LONG-TERM DEBT, excluding current portion        890,545            858,857
                                              -----------        -----------

REDEEMABLE PREFERRED SHARES, excluding
 current portion                                     359              1,587
                                              -----------        -----------

MINORITY INTEREST in subsidiaries                431,619            328,544
                                              -----------        -----------

NONREDEEMABLE PREFERRED SHARES                    29,038             29,710
                                              -----------        -----------

COMMON STOCKHOLDERS' EQUITY
 Common Shares, par value $1 per share            54,190             51,137
 Series A Common Shares, par value $1 per share    6,898              6,893
 Common Shares issuable (30,975 and 31,431
  shares, respectively)                            1,461              1,496
 Capital in excess of par value                1,658,100          1,417,513
 Retained earnings                               303,737            207,326
                                              -----------        -----------
                                               2,024,386          1,684,365
                                              -----------        -----------

                                              $3,933,418         $3,469,082
                                              ===========        ===========

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

                                       19

<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 accorda
     nce 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, 1996 and December
     31, 1995,  and the results of operations and cash flows for the nine months
     ended September 30, 1996 and 1995.  The results of operations for the nine
     months ended September 30, 1996 and 1995, 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, 1996 consist of dilutive  Common Share options and dilutive
     convertible Preferred Shares.

4.   Assuming that  acquisitions  accounted  for as purchases  during the period
     January 1, 1995, to September 30, 1996, had taken place on January 1, 1995,
     unaudited pro forma results of operations from continuing  operations would
     have been as follows:

                                                    Nine Months Ended
                                                      September 30,
                                               --------------------------
                                                1996               1995
                                                ----               ----
                                              (Dollars in thousands, except
                                                     per share amounts)

     Operating revenues                       $855,533           $733,987
     Net income                                118,052             81,035
     Earnings per share                       $   1.90           $   1.30

                                       20

<PAGE>

5.   Supplemental Cash Flow Information

     Cash and cash equivalents includes cash and those short-term, highly liquid
     investments  with  original  maturities  of three  months  or  less.  Those
     investments with original maturities of greater than three months to twelve
     months are classified as temporary investments.

     TDS acquired certain cellular licenses,  operating  companies and telephone
     companies in 1996 and 1995. In  conjunction  with these  acquisitions,  the
     following assets were acquired and liabilities  assumed,  and Common Shares
     and Preferred Shares issued.

                                                     Nine Months Ended
                                                       September 30,
                                          --------------------------------------
                                                    1996               1995
                                                    ----               ----
                                              (Dollars in thousands, except
                                                    per share amounts)

  Property, plant and equipment           $        55,692    $         54,223
  Cellular licenses                                94,454             119,364
  Increase (decrease) in equity method
    investment in cellular interests                8,356                 (19)
  Franchise costs                                  12,847              23,473
  Long-term debt                                  (22,979)             (8,933)
  Deferred credits                                 (7,363)               (214)
  Other assets and liabilities,
    excluding cash and cash equivalents             9,613              (2,618)
  Minority interest                                (3,036)             (1,912)
  Common Shares issued and issuable              (113,658)           (121,864)
  U.S. Cellular Stock issued and issuable             (34)            (12,641)
                                          ---------------   -------------------
  Decrease in cash due to acquisitions    $        33,892     $        48,859
                                          ===============   ===================

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

                                                    Nine Months Ended
                                                      September 30,
                                          --------------------------------------
                                                    1996              1995
                                                    ----              ---- 
                                              (Dollars in thousands, except
                                                  per share amounts)

  Interest Paid                           $        56,733     $        41,612
  Income Taxes Paid                                65,466              27,629
  Common Shares issued by TDS for
    conversion of TDS Preferred Stock     $         4,545     $        13,653

                                       21

<PAGE>


6.   Contingencies
     The Company's material  contingencies as of September 30, 1996, include the
     collectibility  of  a  $5.5  million  note  receivable  under  a  long-term
     financing  agreement  with a cellular  company and a $10.0 million  standby
     letter of credit in support of a bank loan to an entity  minority-owned  by
     the Company. For further discussion of these contingencies, see Note 14 of
     Notes to Consolidated Financial Statements included in the Company's Report
     on Form 10-K for the year ended December 31, 1995.

7.   Business Segment Information
     The following tables  summarize  business  segment  identifiable  assets at
     September  30,  1996,   and  1995,   and  business   segment   construction
     expenditures for the nine months and three months ended September 30, 1996,
     and 1995.

Identifiable Assets                                     September 30,
                                     -------------------------------------------
                                                1996                   1995
                                                ----                   ----
                                                     (Dollars in thousands)

Cellular Telephone                   $        2,067,259    $        1,833,984
Telephone                                     1,164,783             1,022,439
PCS                                             431,103               299,013
Radio Paging                                    158,804               152,841
Other                                           111,353                92,349  
                                     --------------------  --------------------
                                     $        3,933,302    $        3,400,626
                                     ====================  ====================

Additions To Property, Plant and Equipment

                                  Three Months Ended         Nine Months Ended
                                     September 30,              September 30,
                                -----------------------   ----------------------
                                     1996       1995        1996        1995
                                     ----       ----        ----        ----
                                             (Dollars in thousands)

     Cellular Telephone         $    67,147 $    60,706   $172,916   $160,679
     Telephone                       36,389      27,065     91,131     74,746
     PCS                             28,882         185     51,337        185
     Radio Paging                     4,302       3,290     26,330     20,231
     Other                           (5,695)      2,849      5,995      9,064
                                -----------  ----------   --------   --------
                               $    131,025 $    94,095   $347,709   $264,905
                                ===========  ==========   ========   ========
8.   Subsequent Event

     On November 4, 1996,  American  Portable issued $226.2 million in aggregate
     principal  amount at maturity  Series A Zero Coupon Notes  ("Notes") due in
     2006.  The issue  price of the Notes was 44.2% of the  principal  amount at
     maturity or $100 million,  and there is no periodic payment of interest.  
     The per annum  yield to  maturity  on the  Notes is  8.34%  (computed  on a
     semi-annual bond equivalent basis) calculated from November 4, 1996.

                                       22

<PAGE>


                           PART II. OTHER INFORMATION

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

   (a) Exhibits
        Exhibit 10.1 - Deferred  Compensation  Agreement for H. Donald Nelson
           dated July 15, 1996.  

        Exhibit  11 -  Computation  of  earnings  per  common  share.
        Exhibit 12 -  Statement  regarding  computation  of ratios.  
        Exhibit 27 - Financial  Data Schedule

   (b) Reports on Form 8-K filed during the quarter ended September 30, 1996:

       TDS filed a Current Report on Form 8-K dated July 1, 1996, which included
       a copy of the new $500 million  revolving  credit  agreement,  with First
       National Bank of Boston, as Agent.

No other reports on Form 8-K were filed during the quarter  ended  September 30,
1996.

  
                                     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, 1996              /s/ MURRAY L. SWANSON
      -------------------            --------------------------------
                                     Murray L. Swanson,
                                     Executive Vice President-Finance
                                     (Chief Financial Officer)



Date  November 13, 1996               /s/ GREGORY J. WILKINSON
      -------------------             ---------------------------------
                                      Gregory J. Wilkinson,
                                      Vice President and Controller
                                      (Principal Accounting Officer)


                                       24
<PAGE>