<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------

American Paging, Inc. (AMEX symbol "APP" or the "Company") served 777,400
customers at December 31, 1996 through its digital radio transmission systems,
covering a geographic area with a total population of approximately 76 million.
The Company currently provides local, regional and nationwide advanced wireless
messaging communications services in 21 states and the District of Columbia
through 51 sales and service centers. The Company offers local and regional
paging coverage throughout Florida, the Midwest (including all or parts of
Minnesota, Wisconsin, Missouri, Illinois, Indiana and Kentucky), the
Mid-Atlantic (including all or parts of Maryland, Pennsylvania, Virginia and
Washington, D.C.) and in portions of Oklahoma, Texas, Arizona and Utah. The
Company also provides paging service coverage in portions of Iowa, Ohio and
Southern California through transmitter-sharing agreements with non-affiliated
service providers. Nationwide one-way and two-way paging services are offered
through the Company's alliances with non-affiliated service providers.

Overview and Restructuring
American Paging's results of operations for 1996 reflect nearly flat service
revenue growth and a slight decrease in the number of units in service. In
addition, declining average monthly service revenue per unit ("ARPU"), primarily
due to competitive pressures, coupled with rapid increases in operating costs
have resulted in sharply higher operating and net losses. Restructuring efforts,
started in the third quarter of 1995 and continuing throughout 1996, caused
disruptions throughout the Company which, in turn, have slowed revenue growth
and led to significant increases in operating costs.

During the third quarter of 1995, the Company launched a comprehensive
restructuring initiative related to its sales and customer service
organizations. The restructuring effort was aimed at improving three main areas
of the Company's operations: increasing sales productivity and service revenue
growth, reducing administrative support expenses and improving customer service.
The increase in sales productivity was to be achieved through improved direct
sales efforts and an increase in the number of direct sales representatives.
Reductions in administrative expenses and improvements in customer service were
to come from consolidation of the Company's 17 geographically-dispersed customer
service and administrative functions into the Company's newly established
centralized Customer Telecare Center ("CTC") located in Oklahoma City.

The disruption caused by the restructuring activities was more severe on the
Company's results of operations than initially anticipated. Among the problems
the Company faced during the restructuring initiative were an increased level of
turnover in sales employees, a loss of qualified administrative support for the
field, a complete change in the customer support and retention processes, as
well as various system integration difficulties encountered during the
conversion to the CTC.

The process of transferring back office operations from the field offices to the
CTC also resulted in dysfunctions throughout the organization. For example, in
the management of inventory, all field offices were directed to ship their
broken or damaged inventory to the CTC to be repaired through a centralized
repair system. However, the volume of pagers received created a severe backlog
resulting in a shortage of user devices in the field. In addition, it was
discovered that many of the pagers received at the CTC were obsolete based on
the Company's needs.

In order to address these disruptions, several changes were made to the senior
management team. During the third quarter of 1996, the Company appointed a new
President and Chief Executive Officer, hired a new Vice President- Sales,
Marketing and Field Operations, and consolidated its engineering and business
development operations under one vice president. Early in 1997, the Company also
hired a new Vice President-Finance and Chief Financial Officer. The new senior
management team has begun implementing a plan for 1997 centered on building a
high-quality, focused sales and marketing organization driven by a new
goal-aligned compensation plan, creating new distribution channel and pricing
strategies, consolidating current transmission systems to reduce the cost of
service and continually improving customer care practices.

The following table presents the breakdown of restructuring charges for the
years ended December 31, 1996 and 1995 and the impact on net loss before income
taxes:

                                                For the Year Ended December 31,
                                                       1996           1995
                                                   ------------------------
                                                    (Dollars in thousands)
Net loss before income taxes                      $(45,185)      $(15,385)
                                                   ------------------------
General and administrative
 restructuring charges:
   Employee severance costs
     and duplicate staffing                           2,511            752
   Consulting and legal costs                         1,535            430
   Lease buy out costs                                   --            951
                                                   ------------------------
                                                      4,046          2,133
Depreciation restructuring charges:
   Obsolete inventory                                 2,760             --
   Customer management
     and billing system                               2,214             --
   Leasehold improvements and other                     310            779
                                                   ------------------------
                                                      5,284            779
 Total restructuring related charges                  9,330          2,912
                                                   ------------------------
Net loss before income taxes
 excluding restructuring charges                  $(35,855)      $(12,473)
                                                   ========================

During 1996, the Company recorded $4.0 million of general and administrative
expenses related to the restructuring effort, primarily for duplicate staffing,
employee severance costs, and consulting and legal fees. The problems related to
inventory management at the CTC noted above resulted in a write-down of obsolete
inventory in the third quarter of 1996 of $2.8 million. The Company also
recorded additional depreciation charges of $2.5 million primarily for the
write-off of the customer management and billing system. During the
consolidation of customer information databases at the CTC, it became apparent
that the Company's customer management and billing system did not provide the


16

<PAGE>

flexibility necessary to support future customer growth and retention. The
Company is currently assessing potential customer management and billing
systems.

Restructuring activities during the second half of 1995 resulted in the Company
recording pre-tax charges of $2.9 million during 1995. The Company recorded $2.1
million related to employee severance payments, lease buy out costs and
consulting fees. In addition, approximately $800,000 in additional depreciation
expense was recorded for the reduction in the useful lives of fixed assets which
were no longer required after the restructuring.

Over the past two years, the Company has experienced operating losses as a
result of increased costs associated with the operation of its upgraded radio
paging systems, sales and marketing expenses related to programs which failed to
produce planned increases in service revenue, higher general and administrative
expense (including restructuring charges), and increased depreciation expense
related to obsolete inventory and restructuring-related retirements. Higher
operating costs as well as increased interest expense have contributed to
increased net losses. Higher interest expense is associated with the Company's
increased borrowings to purchase its narrowband Personal Communications Services
("PCS") licenses, capital expenditures, and acquisitions. The Company's
operating loss in 1996 was $36.6 million compared to $9.0 million and $169,000
in 1995 and 1994, respectively. The Company's net loss in 1996 was $45.5 million
compared to $15.7 million and $1.3 million in 1995 and 1994, respectively.

Results of Operations
SERVICE REVENUE increased 0.9% ($800,000) in 1996 and 20.0% ($15.5 million) in
1995. The minimal growth in 1996 was due to an increase in the average number of
units in service partially offset by a decrease in the Company's ARPU. Even
though ending units in service for 1996 were below 1995, average units in
service for 1996 increased due to steady increases in units in service through
the first half of 1996 with gradual declines occurring in the second half of the
year. The increase in 1995 was primarily driven by the growth in customers
served, including customers obtained through acquisitions. The Company's
customer units in service decreased 0.9% (7,100 units) in 1996 and increased
20.2% (131,700 units including approximately 28,400 acquired units) in 1995. The
Company's unit growth was slowed in the second half of 1995 and negative for
1996 as a result of workforce disruptions related to restructuring efforts.

In addition to the decrease in units in service during 1996, the Company's
service revenue was also slowed by competitive pricing declines and a shift in
the distribution channel mix, both of which have had an adverse impact on the
Company's ARPU. In 1996 ARPU was $9.88 compared to $10.57 and $11.92 in 1995 and
1994, respectively. The 1996 decline of 6.5% was the result of competitive
pricing pressures which accounted for a 5.1% change and a shift in distribution
channel mix which accounted for a 1.4% change.

The Company obtains its customers through the direct distribution channel as
well as through the indirect reseller and agent distribution channels. Service
revenue received through the Company's direct distribution channel is obtained
from customers who either purchase the pager or lease the pager from the
Company. Service revenue received from customer-owned and maintained ("COAM")
pagers is lower than for leased pagers because the COAM customer does not pay
monthly lease fees. Reseller units produce lower service revenue and operating
cash flow on a per unit basis than units added through the direct and retail
distribution channels. As part of the restructuring effort, the Company
increased the number of direct sales representatives with the goal of increasing
growth in units in service, revenue and  ARPU. However, disruptions within the
direct sales force from restructuring activities and the resultant increased
sales employee turnover led to a decrease in the percentage of customer units
served through the direct channel at December 31, 1996 to 62.0% from 62.3% and
65.8% at December 31, 1995 and 1994, respectively.

The Company's revenue is derived primarily from fixed periodic (usually monthly)
fees charged to customers for radio paging services and rental of pagers. As
long as a subscriber remains on service, future operating results benefit from
the recurring payments of the fixed periodic fees without incurring additional
selling expenses or additional fixed costs by the Company. The Company's selling
activities are directed toward adding new customers and marketing new or
additional services to existing customers. Each month, a percentage of the
Company's customer base discontinues service for a variety of reasons, including
failure to pay, transitory need, economic downturns, switching to a competing
service provider, unmet expectations, relocation to a non-service area or
securing alternative services. Due to disruptions within the customer service
functions that were consolidated as part of the restructuring, the Company's
average monthly disconnect or "churn" rate for the year increased to 3.1% during
1996 from 2.5% and 2.6% for 1995 and 1994, respectively. However, the many
process improvements implemented at the CTC during the fourth quarter of 1996
led to significant reductions in customer churn from a high of 4.6% for the
month of August to 2.7% for the month of December.

SERVICE OPERATING EXPENSES increased 28.3% ($28.9 million) in 1996 and 31.3%
($24.3 million) in 1995 principally due to increased costs to serve the customer
base, restructuring charges, higher selling costs, and increased depreciation
and amortization expense. The increase in service operating expenses includes
restructuring charges totaling $9.3 million and $2.9 million recorded in 1996
and 1995, respectively. As a result of these increased costs, the Company's
average


                                                                              17
<PAGE>

monthly cash operating expense per unit (cost of services plus general and
administrative expense) increased to $7.36 in 1996 from $6.98 and $7.27 in 1995
and 1994, respectively.

Cost of service increased 25.1% ($6.0 million) in 1996 and 24.4% ($4.7 
million) in 1995. During 1996, the Company's third-party reseller expense 
increased mainly due to an increase in nationwide units in service, along 
with additional demand for alphanumeric dispatch services and telephone 
expense increased due to a need for greater trunking capacity at the CTC. The 
increase in 1995 was due to increased costs of providing service to the 
customer base as well as increasing system capacity and geographic coverage. 
The Company's transmitters in service increased to 1,048 at year-end 1996 
from 1,018 at year-end 1995 and from 943 at year-end 1994. During 1996 and 
1995, transmitters were added primarily for the continued expansion and 
upgrade of existing systems coupled with the deconstruction of smaller, 
outdated systems. The Company's new systems and upgraded transmitters are 
capable of digital broadcast using the high-speed FLEX-TM- signaling 
protocol, significantly increasing system capacity over the Company's 
conventional signaling protocol. Beginning in 1997, the Company intends to 
reduce its cost of providing service by reducing the number of frequencies it 
maintains and deconstructing older networks it operates.

Sales and marketing expense increased 70.7% ($11.3 million) in 1996 and 20.7% 
($2.7 million) in 1995. The increase in 1996 was due to a significant 
increase in the number of employees in the sales and marketing function as 
well as increased recruiting and relocation costs associated with high 
employee turnover. The number of sales employees as a percentage of total 
employees increased to 62% at year-end 1996 compared to 45% at year-end 1995. 
With the numerous changes and dislocations surrounding the restructuring 
effort, employee turnover for 1996 increased significantly, primarily within 
the sales staff. As part of the restructuring plan, the Company committed 
additional resources to sales and sales support with the intent to increase 
unit sales, service revenue and productivity. The Company experienced slight 
net unit decline in 1996 and slower revenue growth in the second half of 1995 
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. Selling cost per gross unit added, excluding acquisitions, 
increased to $94 in 1996 compared to $50 in 1995 and $41 in 1994.

General and administrative expense increased 6.6% ($2.5 million) in 1996 and
33.5% ($9.4 million) in 1995. During 1996, the Company recorded restructuring
expenses of approximately $4.0 million related to duplicate staffing, employee
severance costs and consulting and legal fees. During the third quarter of 1996,
the Company also recorded additional expense of $1.3 million for information
systems consulting services in support of the conversion to the CTC.  Bad debt
expense increased $900,000 in 1996 as a result of temporarily suspending credit
and collection activities while these activities were consolidated from the
field offices to the CTC. However, partially offsetting these charges were
reductions in general and administrative expense primarily due to administrative
staff reductions also related to restructuring initiatives. During 1995 the
Company recorded restructuring charges of $2.1 million related to subleasing
office space, employee severance and outplacement fees, and consulting services.

Operating cash flow was $(2.8) million, or (3.0)% of service revenue in 1996
compared to $15.7 million, or 16.9% of service revenue in 1995 and $17.0
million, or 21.9% of service revenue in 1994. Excluding the $4.0 million of
restructuring charges recorded during 1996, operating cash flow would have been
$1.2 million, or 1.3% of service revenue. Excluding the $2.1 million of
restructuring charges recorded during 1995, operating cash flow would have been
$17.8 million, or 19.2% of service revenue.

Depreciation and amortization expense increased 36.8% ($9.1 million) in 1996 and
43.7% ($7.5 million) in 1995. The increase in 1996 was primarily due to
increased depreciation totaling $5.3 million for obsolete inventory, write-off
of the customer management and billing system, and a reduction in the useful
lives of assets retired as a result of the Company's restructuring. The
remaining increase in depreciation and amortization expense in 1996 reflects the
Company's increased investment in system infrastructure and pager devices.
Increased depreciation and amortization expense in 1995 was due to the reduction
in the useful lives of pagers and transmitters, and charges of $800,000 to
write-off certain assets retired as a result of the Company's restructuring.
Excluding the investment in narrowband PCS licenses (which is not yet being
amortized), gross fixed assets grew 7.0% to $145.2 million at year-end 1996 from
$135.7 million at year-end 1995, primarily due to increases in pagers,
transmitters and terminals.

EQUIPMENT SALES INCOME increased $450,000 in 1996 and decreased $13,000 in 1995.
The Company generally plans to break even or make a small profit on equipment
sales. For marketing purposes, it may, at times in selected locations, discount
paging equipment below cost due to competitive pressures or sales promotions.

OPERATING LOSS was $36.6 million in 1996 compared to $9.0 million in 1995 and
$169,000 in 1994. Operating margin on service revenue decreased to (39.0)% from
(9.7)% in 1995, and was nearly break-even in 1994. As noted previously, the
decrease in operating results reflects slower service revenue growth coupled
with higher costs to serve the customer base, increased sales and marketing
costs, and additional restructuring charges.

The Company's new senior management team is working toward improving unit and
service revenue growth during 1997 through a more focused and goal-aligned sales
and


18

<PAGE>

marketing organization. This plan also includes improving customer churn and
service revenue through additional training and increased tenure of CTC customer
service representatives. Another major goal in 1997 is to significantly reduce
the cost of serving the customer base. The Company currently utilizes 19
frequencies which are supported by 43 network systems across the country. The
Company intends to reduce the cost of service by migrating its customer base to
no more than three frequencies in any one market which will be supported by a
total of six network systems nationwide. Along with dismantling older, less
efficient systems, there are plans to relocate some existing transmitters to
more heavily populated areas in order to expand coverage, improve quality and
gain new customers. The Company intends for these efforts to marginally improve
service operating loss and net loss in 1997.

INVESTMENT AND OTHER INCOME/(EXPENSE) was $(900,000) in 1996 and $(855,000) in
1995, reflecting primarily investment losses of $1.2 million for each of the
years ended December 31, 1996 and 1995, associated with the Company's joint
venture with Nexus Telecommunication Systems, Ltd. ("Nexus"), accounted for
using the equity method. The joint venture, American Messaging Services, LLC,
was formed to develop multiple applications and distribution channels worldwide
for a patented communications network that provides two-way paging, location and
telemetry services.

INTEREST EXPENSE-AFFILIATES increased $2.1 million to $7.6 million in 1996 
compared to 1995 primarily as the result of increased long-term indebtedness 
due to the purchase of narrowband PCS licenses, acquisitions and construction 
expenditures. At year-end 1996, the Company had $140 million outstanding 
under its Revolving Credit Agreement with its parent, Telephone and Data 
Systems, Inc. (AMEX symbol "TDS"). The Company pays interest to TDS at a rate 
of 1 1/2% over the prime rate (for a rate of 9.75% at December 31, 1996) on 
its outstanding debt. Beginning October 1, 1995 and continuing through 
September 30, 1996, the Company capitalized interest costs related to 
borrowing for the acquisition and development of its narrowband PCS licenses. 
The Company stopped capitalizing interest as of October 1, 1996 due to a 
suspension in the Company's development of its narrowband PCS licenses. 
Please see the Capital Resources and Liquidity section for more information 
related to the Company's plans with respect to the buildout of its narrowband 
PCS licenses. Capitalized interest totaled $4.2 million for 1996 and $1.4 
million for 1995. Interest expense-affiliates was increased $4.4 million to 
$5.5 million in 1995 compared to 1994 primarily as the result of increased 
long-term indebtedness due to the purchase of narrowband PCS licenses, 
acquisitions and construction expenditures.

INCOME TAX EXPENSE was $340,000 in 1996 and $325,000 in 1995, primarily for
state income taxes in states where the Company's subsidiaries are generating
taxable income after utilization of state net operating losses. The Company s
effective income tax rate was (0.8)% in 1996 and (2.1)% in 1995. American Paging
is included in a consolidated federal income tax return with other members of
the TDS consolidated group. The Company and TDS are parties to a Tax Allocation
Agreement pursuant to which American Paging is able to carry forward its losses
and credits and use them to offset any current or future income tax liabilities
to TDS. The amount of the federal operating loss carry forward available to
offset future taxable income aggregated $58.3 million at December 31, 1996, and
expires between 2010 and 2012. The amount of the state net operating loss carry
forward available to offset future taxable income aggregated $61.5 million at
December 31, 1996, and expires between 1997 and 2012.

NET LOSS increased to $45.5 million in 1996 primarily due to significant
increases in operating expenses as well as increased interest expense due to
additional borrowings under the Revolving Credit Agreement with TDS. Net loss
increased to $15.7 million in 1995 from $1.3 million in 1994, also reflecting a
significant increase in operating loss and increased interest expense and costs
associated with the Company's investment in the Nexus joint venture. LOSS PER
COMMON SHARE was $2.27 in 1996 and $0.78 in 1995, reflecting the change in net
loss.

Inflation
Management believes that inflation affects the Company's business to no greater
extent than it does the general economy.

Capital Resources and Liquidity
Construction and development of the Company's radio paging infrastructure and
Customer Telecare Center, the purchase of narrowband PCS licenses, costs
associated with restructuring the Company's operations, and growth in the number
of customers served, both internally and through acquisitions, have caused
financing requirements to exceed internally generated cash flow during the last
three years. Accordingly, the Company has obtained substantial external funds in
the form of borrowings under a Revolving Credit Agreement with TDS and
anticipates that it will require additional funds over the next few years. The
additional funds will be used to finance continuing operations as needed, as
well as for expanding and upgrading its infrastructure to provide increased
coverage and improved quality service to customers.

CASH FLOWS FROM OPERATING ACTIVITIES required cash of $10.8 million in 1996 and
provided cash of $13.8 million and $20.7 million for the years ended December
31, 1995 and 1994, respectively. Cash flows required by operating activities in
1996 compared to 1995 reflect a $24.6 million decrease, primarily due to $29.8
million additional net loss coupled with a decrease in items requiring cash such
as accrued interest, accounts payable and unearned revenue of $4.1 million.
These decreases were partially offset by $9.3 million for depreciation and
amortization and other items not requiring cash. Cash flows provided by
operating activities in 1995 compared to 1994 reflect a $6.9 million



                                                                              19
<PAGE>

increase, primarily due to $14.4 million additional net loss coupled with a 
decrease in items requiring cash such as accounts payable, employee benefit 
obligations and unearned revenue of $6.9 million. These decreases were 
partially offset by $14.4 million for items not requiring cash, such as 
depreciation and amortization and balance sheet accruals for interest, taxes 
and restructuring.

CASH FLOWS FROM FINANCING ACTIVITIES provided $45.6 million, $67.8 million 
and $28.3 million for the years ended December 31, 1996, 1995 and 1994, 
respectively. The Company increased its borrowings under the Revolving Credit 
Agreement with TDS by $45.4 million, $66.4 million and $28.1 million during 
the years ended December 31, 1996, 1995 and 1994, respectively. In 1994, the 
Company repaid $44.4 million of notes payable-affiliates from the net 
proceeds of its February 1994 initial public offering.

CASH FLOWS FROM INVESTING ACTIVITIES required cash totaling $38.5 million, $79.6
million and $48.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The majority of the cash outflow in each of these years related to
additions to property, plant and equipment of $32.5 million, $26.5 million and
$29.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Net cash outflow of $4.3 million for the year ended December 31,
1996 primarily related to interest capitalized on borrowings for the purchase of
five regional narrowband PCS licenses. Net cash outflow of $45.4 million and
$11.2 million for the years ended December 31, 1995 and 1994, respectively,
related to the Company's acquisition and development of its narrowband PCS
licenses. Acquisitions required cash totaling $5.5 million and $9.5 million
during 1995 and 1994, respectively. Cash required for other investments related
primarily to the Company's joint venture with Nexus. Capital expenditures for
radio paging property and equipment and the purchase of pagers for lease are
anticipated to total approximately $35 million in 1997.

In April 1995, the Company completed its acquisition of five regional 
narrowband PCS licenses, providing coverage equivalent to that of a 
nationwide license, from the Federal Communications Commission ("FCC"). The 
Company does not expect to spend a significant amount during 1997 on the 
development of its narrowband PCS licenses. The Company is suspending 
development of its narrowband PCS licenses until such time as the supporting 
infrastructure and related subscriber device equipment is commercially 
available. In addition, significant funds will be required when the Company 
resumes development of its narrowband PCS infrastructure and markets the 
services that these licenses will allow the Company to provide. There can be 
no assurance that the Company will be successful in developing these 
licenses due to such factors as the inability to obtain sufficient financing 
at a reasonable cost, the availability of supporting infrastructure and 
related subscriber device equipment, competition, regulatory developments or 
other factors.

At December 31, 1996, the Company had $560,000 in cash. The Company had unused
borrowing capacity at December 31, 1996 of $10 million under its Revolving
Credit Agreement with TDS.

Pursuant to the Revolving Credit Agreement, amended effective January 1, 1997,
the Company may borrow up to an aggregate of $180 million from TDS. At December
31, 1996, long-term debt under this agreement of $140 million was used for the
acquisition and development of five regional narrowband PCS licenses ($61.0
million), investment in infrastructure, systems and pagers ($49.2 million),
acquisitions ($15.7 million) and continuing operations ($14.1 million). The
Revolving Credit Agreement allows the Company to borrow funds at an interest
rate equal to 1 1/2% above the prime rate, which is payable quarterly. No
principal is payable until January 1, 1999, subject to acceleration under
certain circumstances, at which time the entire principal balance then
outstanding is scheduled to become due and payable. The Company determined that
it was in violation of a covenant under the Revolving Credit Agreement with TDS
relating to maintaining a certain ratio of equity to liabilities. The Company
obtained a waiver of the covenant from TDS through January 1, 1999. In absence
of such waiver, the entire amount outstanding under the Revolving Credit
Agreement would have become immediately due and payable at the discretion of
TDS.

In connection with the Company's efforts to increase its customer base and
market share, invest in new communications technologies and fulfill its
obligations under the Revolving Credit Agreement with TDS, the Company may
require additional funding, the nature, amount and source of which cannot now be
determined, but which may include increases under or changes in the structure of
the Revolving Credit Agreement with TDS or public or private offerings of debt
or equity securities. 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 and development programs, which could have a material adverse
impact on the Company's financial condition and results of operations.



Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Language

This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report 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. American Paging 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
the Company's markets; new wireless messaging technology advances; possible
future litigation; availability of future financing; start-up of narrowband PCS
operations; and unanticipated changes in growth in paging customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets. Readers should evaluate any statements in light of these important
factors.


20

<PAGE>
 
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                            Year Ended December 31,

                                                       1996           1995           1994
                                                   -----------------------------------------
                                               (Dollars in thousands, except per share amounts)
<S>                                                <C>           <C>            <C>
Service Revenue                                    $ 93,841      $  93,034      $  77,520
                                                   -----------------------------------------
Service Operating Expenses
 Cost of services                                    30,092         24,062         19,347
 Sales and marketing                                 27,295         15,988         13,249
 General and administrative                          39,766         37,308         27,947
 Depreciation and amortization                       33,777         24,692         17,178
                                                   -----------------------------------------
                                                    130,930        102,050         77,721
                                                   -----------------------------------------
Service Operating Loss                              (37,089)        (9,016)          (201)
                                                   -----------------------------------------

Equipment Sales
 Revenue                                             10,346         14,116         14,545
 Cost of equipment sold                               9,883         14,097         14,513
                                                   -----------------------------------------
Equipment Sales Income                                  463             19             32
                                                   -----------------------------------------

Operating Loss                                      (36,626)        (8,997)          (169)
                                                   -----------------------------------------

Investment and Other Income/(Expense)
 Investment loss in joint venture                    (1,201)        (1,151)        (1,055)
 Interest income                                        259            175            121
 Other, net                                              33            121            153
                                                   -----------------------------------------
                                                       (909)          (855)          (781)
                                                   -----------------------------------------
Loss Before Interest and Income Taxes               (37,535)        (9,852)          (950)
Interest expense - affiliates                         7,650          5,533          1,165
                                                   -----------------------------------------
Loss Before Income Taxes                            (45,185)       (15,385)        (2,115)
Income tax expense/(benefit)                            342            325           (783)
                                                   -----------------------------------------
Net Loss                                           $(45,527)    $  (15,710)      $ (1,332)
                                                   =========================================
Weighted Average Common and
 Series A Common shares (000s) (SEE NOTE 1)          20,048         20,017         19,621
Net Loss per Common and Series A Common share      $  (2.27)      $  (0.78)      $  (0.07)
                                                   =========================================


THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.



</TABLE>

 

                                                                              21

<PAGE>

CONSOLIDATED BALANCE SHEETS


Assets

                                                          December 31,
                                                       1996           1995
                                                  ---------------------------
                                                     (Dollars in thousands)
Current Assets
 Cash and cash equivalents                        $     557      $   4,280
 Temporary investments                                  150             --
 Accounts receivable:
   Customers, net of reserves of
     $1,883 and $1,283, respectively                 12,639         11,883
   Affiliates--income taxes                              --            258
   Other                                                234             15
 Inventory                                            8,548          3,408
 Net deferred tax asset                               2,482          2,028
 Prepaid expenses and other                           1,231          1,508
                                                  ---------------------------
                                                     25,841         23,380
                                                  ---------------------------

Investments
 Investment in joint venture                            193             97
 Marketable securities                                  286             --
                                                  ---------------------------
                                                        479             97
                                                  ---------------------------

Property, Plant and Equipment
 In service                                         113,000        102,385
 Less accumulated depreciation                       61,528         42,933
                                                  ---------------------------
                                                     51,472         59,452
                                                  ---------------------------

Intangible Assets
 PCS licenses                                        59,601         55,538
 Other intangibles, net of accumulated
    amortization of $17,543 and $13,733, 
    respectively                                     15,981         20,682
 
                                                  ---------------------------
                                                     75,582         76,220
                                                  ---------------------------

Total Assets                                      $ 153,374      $ 159,149
                                                  ===========================

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.



22

<PAGE>

Liabilities and Common Shareholders' Equity

                                                         December 31,

                                                       1996           1995
                                                  ---------------------------
                                                     (Dollars in thousands)
Current Liabilities
 Due to affiliates
   Accounts payable                                $  1,486       $  1,540
   Accrued interest                                   1,169          2,391
 Accounts payable                                     3,401          9,192
 Unearned revenue and deposits                       10,527         10,829
 Accrued taxes                                          357            353
 Accrued compensation                                 1,266          1,033
 Other current liabilities                            2,841          1,991
                                                  ---------------------------
                                                     21,047         27,329
                                                  ---------------------------


Revolving Credit Agreement - TDS                    139,960         94,523
                                                  ---------------------------


Net Deferred Tax Liability                            2,169          1,721
                                                  ---------------------------

Common Shareholders' Equity
 Common shares, par value $1 per share;
    authorized 50,000,000 shares; issued
    and outstanding 7,559,633 shares in
    1996 and 7,536,931 shares in 1995                 7,560          7,537
 Series A Common shares, par value $1 per share;
    authorized 50,000,000 shares; issued and
    outstanding 12,500,000 shares                    12,500         12,500
 Additional paid-in capital                          72,589         72,463
 Retained deficit                                  (102,451)       (56,924)
                                                  ---------------------------
                                                     (9,802)        35,576
                                                  ---------------------------


Total Liabilities and Common Shareholders' Equity  $153,374       $159,149
                                                  ===========================

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.


                                                                              23
<PAGE>
 
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                            Year Ended December 31,

                                                                      1996           1995           1994
                                                                   -----------------------------------------
                                                                            (Dollars in thousands)
<S>                                                                <C>            <C>            <C>
Cash Flows from Operating Activities
 Net loss                                                         $(45,527)      $(15,710)      $ (1,332)
 Add (deduct) adjustments to reconcile net loss to
   net cash (required) provided by operating activities:
 Depreciation and amortization                                      33,777         24,692         17,178
 Deferred income taxes, net                                             (6)           263           (129)
 Investment loss                                                     1,201          1,151          1,055
 Other noncash expense                                               4,473          4,030          2,912
 Change in accounts receivable                                        (975)          (998)        (1,118)
 Change in accounts payable                                         (2,269)           167          4,811
 Change in unearned revenue                                           (302)           788            946
 Change in accrued taxes                                               262           (281)        (2,518)
 Change in accrued interest                                         (1,222)         1,887           (319)
 Change in employee benefit obligations                                 --         (2,096)            --
 Change in other assets and liabilities                               (186)          (104)          (800)
                                                                   -----------------------------------------
                                                                   (10,774)        13,789         20,686
                                                                   -----------------------------------------
Cash Flows from Financing Activities
 Change in Revolving Credit Agreement - TDS                         45,437         67,548        28,113
 Change in notes payable - affiliates                                   --             --        (44,436)
 Common shares issued                                                  149            268         44,581
                                                                   -----------------------------------------
                                                                    45,586         67,816         28,258
                                                                   -----------------------------------------

Cash Flows from Investing Activities
 Additions to property, plant and equipment                        (32,517)       (26,527)       (28,966)
 Acquisitions, excluding cash acquired                                  --         (5,539)        (9,548)
 Investment in PCS licenses                                         (4,285)       (45,412)       (11,203)
 Other investments                                                  (1,297)        (2,131)        (1,751)
 Change in temporary investments and marketable securities            (436)            --          2,858
                                                                   -----------------------------------------
                                                                   (38,535)       (79,609)       (48,610)
                                                                   -----------------------------------------

Net (Decrease) Increase in Cash
 and Cash Equivalents                                               (3,723)         1,996            334

Cash and Cash Equivalents
 Beginning of period                                                 4,280          2,284          1,950
                                                                   -----------------------------------------
 End of period                                                    $    557       $  4,280       $  2,284
                                                                   =========================================

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.


</TABLE>




24

<PAGE>


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
                                                                           Year Ended December 31,
                                                                      1996           1995           1994
                                                                 -----------------------------------------
                                                                           (Dollars in thousands)
<S>                                                              <C>            <C>            <C>
Common shares
 Balance at beginning of period                                  $   7,537      $   7,500      $      --
 Add
   Employee stock ownership plans                                       23             37             --
   Recapitalization                                                     --             --          1,500
   Initial public offering                                              --             --          3,500
   Conversion of Series A Common shares                                 --             --          2,500
                                                                 -----------------------------------------
 Balance at end of period                                        $   7,560      $   7,537      $   7,500
                                                                 =========================================


Series A Common shares
 Balance at beginning of period                                  $  12,500      $  12,500      $      --
 Add (deduct)
   Recapitalization                                                     --             --         15,000
   Conversion into Common shares                                        --             --         (2,500)
                                                                 -----------------------------------------
 Balance at end of period                                        $  12,500      $  12,500      $  12,500
                                                                 =========================================


Additional Paid-in Capital
 Balance at beginning of period                                  $  72,463      $  72,232      $  47,651
 Add (deduct)
   Employee stock ownership plans                                      126            231             --
   Recapitalization                                                     --             --        (16,500)
   Initial public offering                                              --             --         42,070
   Common stock expense                                                 --             --           (989)
                                                                 -----------------------------------------
 Balance at end of period                                        $  72,589      $  72,463      $  72,232
                                                                 =========================================


Retained Deficit
 Balance at beginning of period                                  $ (56,924)     $ (41,214)     $ (39,882)
 Add Net loss                                                      (45,527)       (15,710)        (1,332)
                                                                 -----------------------------------------
 Balance at end of period                                        $(102,451)     $ (56,924)     $ (41,214)
                                                                 =========================================


THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                                                                                         25

</TABLE>

<PAGE>
                                                                              25
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American Paging, Inc. (the "Company") is an 82.3%-owned subsidiary of Telephone
and Data Systems, Inc. ("TDS").  

The Company provides local, regional and nationwide advanced wireless 
messaging communications services in 21 states and the District of Columbia. 
The Company offers local and regional paging coverage throughout the Midwest, 
the Mid-Atlantic, and in the states of Florida, Oklahoma, Texas, Arizona and 
Utah. Nationwide paging is offered through the Company's alliances with 
non-affiliated service providers. As of December 31, 1996, the Company had 
777,400 pagers in service through 51 sales and service offices.

PRINCIPLES OF CONSOLIDATION

The accounting policies of the Company conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of
American Paging, Inc. and its subsidiaries. All material intercompany accounts
and transactions have been eliminated.

USE OF ESTIMATES

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

SERVICE REVENUE AND EQUIPMENT SALES

Service revenue includes all regular monthly charges to customers for subscriber
device rental and dispatch services. Rental and dispatch revenues are recognized
in the month in which service is provided. Equipment sales revenue includes all
charges for pagers sold to customers.

UNEARNED REVENUE AND DEPOSITS

Unearned revenue and deposits primarily represent monthly charges to customers
for subscriber device rental and dispatch services billed in advance. Such
revenue is recognized in the following months when service is provided and
deposits are applied against the customer's final bill.

NET LOSS PER SHARE

Net loss per Common and Series A Common share is computed by dividing Net loss
by the weighted average number of Common and Series A Common shares outstanding
during the periods, adjusted to give retroactive effect to the recapitalization
in conjunction with the Company's 1994 initial public offering.

Assuming that the Company's initial public offering had taken place and all
proceeds therefrom had been used to retire Notes payable-affiliates as of
January 1, 1994, pro forma Net loss would have decreased by $286,000 (net of
income taxes) due to the elimination of Interest expense-affiliates and pro
forma Net loss per Common and Series A Common share would have been $0.05 for
the year ended December 31, 1994.

CASH AND CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES

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 and less than 
12 months are classified as temporary investments and 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.

INVENTORY

Inventory consists of subscriber devices on hand. Subscriber device cost is
determined by the average cost method.

INVESTMENT IN JOINT VENTURE

The equity method of accounting is used to record the Company's 50% interest in
American Messaging Services, LLC ("AMS"), which is the Company's joint venture
with Nexus Telecommunication Systems, Ltd. of Israel ("Nexus"). AMS, a
development stage entity, was formed to develop multiple applications and
distribution channels worldwide for a patented communications network that
provides two-way paging, location and telemetry services. The Company's share of
the net losses of the joint venture is stated as Investment loss in joint
venture in the Consolidated Statement of Operations.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at original cost. Depreciation is
provided based on the straight-line method over the estimated useful lives of
the assets, which range from two to five years. Based on a study of useful
lives, the Company shortened the estimated useful lives of its subscriber
devices from five to four years and transmitters from seven to five years,
beginning in July 1994. This change in accounting estimate increased
depreciation expense approximately $3.5 million, or $0.18 per share, for 1995
and $1.5 million, or $0.08 per share, for 1994.

Property, plant and equipment is composed of the following:

                                                December 31,
                                             1996           1995
                                         ---------------------------
                                           (Dollars in thousands)
 Subscriber devices                     $  39,714      $  47,577
 Terminals and transmitters                44,251         41,842
 Computer equipment                        16,595          4,467
 Furniture and fixtures                    10,314          6,696
 Other                                      2,126          1,803
                                         ---------------------------
   Subtotal                               113,000        102,385
Less accumulated depreciation              61,528         42,933
                                         ---------------------------
   Total                                $  51,472      $  59,452
                                         ===========================

See Note 5 - Commitments for a discussion of property leased by the Company.



26
<PAGE>

INTANGIBLE ASSETS

The Company has capitalized certain start-up costs in connection with the
development and acquisition of paging systems. Costs of developing new paging
systems are deferred pending the outcome of license applications which grant
authority to provide paging services in a particular area. Upon acceptance of
the application the Company amortizes these deferred start-up costs over a
period of ten years commencing with the date of commercial operation. If the
application is not granted, all costs incurred are charged to expense in the
current period. In the case of trades for or acquisitions of operating paging
systems, certain costs are included in other intangible assets. Covenants not to
compete are amortized over the term of the agreements. Goodwill is amortized
over a period of 25 years. Customer lists are amortized over a period of five
years.

Other intangible assets are composed of the following:

                                               December 31,
                                             1996           1995
                                        ---------------------------
                                           (Dollars in thousands)
 Customer lists                         $  15,411      $  15,411
 Deferred start-up costs                    7,048          7,939
 Goodwill                                   6,599          6,599
 Covenants not to compete                   2,409          2,409
 Other                                      2,057          2,057
                                        ---------------------------
   Subtotal                                33,524         34,415
 Less accumulated amortization             17,543         13,733
                                        ---------------------------
   Total                                $  15,981      $  20,682
                                        ===========================

In November 1994, the Company was the successful bidder for five regional
narrowband Personal Communications Services ("PCS") licenses, providing coverage
equivalent to that of a nationwide license, at auction by the Federal
Communications Commission ("FCC"). The FCC granted the licenses in May 1995. The
Company's cost of the licenses aggregated $53.6 million.

Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 34,
American Paging capitalized interest on the borrowings for the purchase of these
licenses while it undertook development activities. Interest capitalized for the
year ended December 31, 1995 was $1.4 million. Interest capitalized for the nine
months ended September 30, 1996 was $4.2 million. Effective October 1, 1996, the
Company stopped capitalizing interest as the Company suspended the development
of its narrowband PCS licenses pending commercial availability of the supporting
infrastructure and related subscriber device equipment.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in January 1996. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by any entity be reviewed for impairment whenever events indicate
that the carrying amount of an asset may not be recoverable. The effect of
adopting the standard on results of operations and financial position was
immaterial.

OTHER CURRENT LIABILITIES

Other current liabilities consists of accrued restructuring expenses of $1.3
million and $1.0 million at December 31, 1996 and 1995, respectively. The
remaining other current liabilities consist of accrued expenses as of December
31, 1996 and 1995.

RESTRUCTURING

American Paging began restructuring its sales and operating areas during the
third quarter of 1995 which continued throughout 1996. During 1995, the Company
recorded restructuring-related expense totaling $2.9 million, primarily for
employee severance payments, lease costs and consulting fees of $2.1 million
included in general and administrative expense. In addition, approximately
$800,000 in depreciation expense was recorded during 1995 for the reduction in
the useful lives of fixed assets which were no longer required upon completion
of the restructuring.

During 1996, the Company recorded restructuring-related expense totaling $9.3
million, primarily for additional depreciation related to obsolete inventory of
$2.8 million and the write-off of the customer management and billing system of
$2.2 million. Also recorded were accruals for other restructuring costs included
in general and administrative expense of $4.0 million.

SUPPLEMENTAL CASH FLOW DISCLOSURES

The Company acquired three paging companies in 1995 and one in 1994. In
conjunction with these acquisitions, the following assets were acquired and
liabilities assumed:

                                          Year Ended December 31,
                                             1995           1994
                                        ---------------------------
                                           (Dollars in thousands)
 Goodwill                               $   2,193      $   3,850
 Customer lists                             2,022          4,400
 Licenses                                     775            500
 Covenants not to compete                     500            500
 Property, plant and equipment                216            350
 Accounts receivable                          181             --
 Inventory                                    103            150
 Advance billings and
   customer deposits                         (123)           (40)
 Unearned revenue                            (330)          (150)
 Other assets and liabilities,
   excluding cash acquired                      2            (12)
                                        ---------------------------
 Decrease in cash due
   to acquisitions                      $   5,539      $   9,548
                                        ===========================

The following table summarizes interest and income taxes paid.

                                  Year Ended December 31,
                              1996           1995           1994
                           --------------------------------------
                                  (Dollars in thousands)
 Interest paid
   to affiliates           $13,039         $3,645         $1,483

 Income taxes paid         $    96         $  205         $1,333
                           --------------------------------------




                                                                              27


<PAGE>

The Company used federal income taxes refundable of $1.1 million to reduce its
debt to TDS during 1995.

Other noncash expenses included in the statements of cash flows consist
primarily of lost pager expense of $2.9 million, $2.4 million and $2.1 million
for the years ended December 31, 1996, 1995 and 1994, respectively,
restructuring expense of $1.5 million and $1.7 million for the years ended
December 31, 1996 and 1995, respectively, and deferred compensation for stock
appreciation rights of $306,000 for the year ended December 31, 1994.

Other investments consist primarily of the Company's investment in the AMS joint
venture of $1.2 million, $1.1 million and $1.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively.


2. INCOME TAXES

The Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group.

TDS and American Paging entered into a Tax Allocation Agreement (the
"Agreement") effective January 1, 1994. The Agreement provides that American
Paging and its subsidiaries be included in a consolidated federal income tax
return and in state income or franchise tax returns in certain situations with
the TDS affiliated group. American Paging and its subsidiaries calculate their
losses and credits as if they comprised a separate affiliated group. Under the
Agreement, American Paging is able to carry forward its losses and credits and
use them to offset any future income tax liabilities to TDS. The amount of
federal net operating loss carry forward available to offset future taxable
income aggregated $58.3 million at December 31, 1996 and expires between 2010
and 2012. The amount of state net operating loss carry forward available to
offset future taxable income aggregated $61.5 million at December 31, 1996 and
expires between 1997 and 2012.

Income tax expense/(benefit) is summarized as follows:

                                        Year Ended December 31,
                                   1996           1995      1994
                                  --------------------------------
                                        (Dollars in thousands)
 Federal income taxes:
   Current                        $  --         $  (39)  $  (666)
   Deferred                          --             60        35
 State income taxes:
   Current                          348            101        12
   Deferred                          (6)           203      (164)
                                  --------------------------------
 Income tax expense/(benefit)     $ 342         $  325   $  (783)
                                  ================================


The components of the Company's noncurrent deferred tax assets and liabilities
are summarized as follows:

                                           December 31,
                                       1996           1995
                                    ---------------------------
                                     (Dollars in thousands)
 Deferred tax asset:
   Net operating loss
     carryforwards                 $ 24,797      $  10,290
   Deferred charges                   3,295            391
   AMT credit carryforward              313            313
   Other                                417             63
                                   --------------------------
                                     28,822         11,057
   Less: valuation allowance        (26,683)        (9,373)
                                   --------------------------
     Total deferred tax asset         2,139          1,684
                                   --------------------------
 Deferred tax liability:
   Property, plant and equipment       (831)         2,817
   Licenses                           5,139            588
                                   --------------------------
     Total deferred tax liability     4,308          3,405
                                   --------------------------
       Net deferred tax liability  $  2,169      $   1,721
                                   ==========================

A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance primarily for the federal and state net
operating loss carryforwards that may expire before they are utilized. The
valuation allowance increased by $17.3 million and $5.6 million in 1996 and
1995, respectively. The Company had current deferred tax assets totaling $2.5
million at December 31, 1996, representing primarily the effects of unearned
revenue. At December 31, 1996, the Company had $313,000 of federal alternative
minimum tax ("AMT") credit carryforwards available to offset regular income tax
payable in future years.

The statutory federal income tax rate is reconciled to the Company's effective
income tax rate from net loss before the cumulative effect of a change in
accounting principle below:

                                           Year Ended December 31,
                                     1996           1995           1994
                                 -------------------------------------------
 Statutory federal
   income tax rate                   35.0%          35.0%          35.0%
 State income taxes,
   net of federal benefit            (0.8)          (2.0)           4.7
 Federal deferred
   tax asset adjustment             (36.6)         (36.0)          (5.4)
 Other, net                           1.6            0.9            2.7
                                 -------------------------------------------
 Effective tax rate                  (0.8)%         (2.1)%         37.0%
                                 ===========================================

3. REVOLVING CREDIT AGREEMENT

The Company has unsecured notes payable to TDS and Telecommunications
Technologies Fund, Inc., a wholly owned subsidiary of TDS, pursuant to a
Revolving Credit Agreement.

The Company entered into the Revolving Credit Agreement with TDS effective
January 1, 1994, at which date all of the outstanding obligations of the Company
to TDS were incorporated thereunder. Pursuant to the Revolving Credit


28

<PAGE>

Agreement, as amended effective January 1, 1997, the Company may borrow up to 
an aggregate of $180 million from TDS, at an interest rate equal to 1 1/2% 
above the prime rate announced from time to time by the LaSalle National Bank 
of Chicago (for a rate of 9.75% at December 31, 1996) on the unpaid principal 
amount. Interest is payable on demand on any overdue principal or overdue 
installment of interest at a rate equal to 3 1/2% above such prime rate. 
Interest on the balance due under the Revolving Credit Agreement is payable 
quarterly and no principal is payable until the earlier of January 1, 1999, 
or six months after such time as TDS's ownership of the Company falls below 
70%, subject to acceleration under certain circumstances, at which time the 
entire principal balance due under the Revolving Credit Agreement then 
outstanding is scheduled to become due and payable.

During 1996, the Company determined that it was in violation of a covenant 
under the Revolving Credit Agreement with TDS relating to maintaining a 
certain ratio of equity to liabilities. The Company obtained a waiver of the 
covenant from TDS through January 1, 1999. In absence of such waiver, the 
entire amount outstanding under the Revolving Credit Agreement would have 
become immediately due and payable at the discretion of TDS.

4. RELATED PARTY TRANSACTIONS

The Company is billed for all services it receives from TDS and its affiliates,
consisting primarily of information processing and general management services.
Such billings are based on expenses specifically identified to the Company and
on allocations of common expenses. Such allocations are based on the
relationship of the Company's assets, employees, investment in plant and
expenses to the total assets, employees, investment in plant and expenses of
TDS. Management believes the method used to allocate common expenses is
reasonable.

TDS and certain of its affiliates provided the Company with centralized 
management, accounting, engineering, billing and data processing services 
aggregating $5.9 million, $5.8 million and $4.6 million in 1996, 1995 and 
1994, respectively. In addition, the Company purchased materials and 
equipment at cost through TDS's associated service companies aggregating 
$244,000, $296,000 and $400,000 in 1996, 1995 and 1994, respectively.

The Company has a Cash Management Agreement with TDS under which the Company may
from time to time deposit its excess cash with TDS for investment under TDS's
Cash Management program. Deposits made under the agreement are generally
available to the Company on demand and bear interest each month equal to the
daily weighted average rate earned on all securities held on behalf of the
participants in the program. For financial reporting purposes, the Company
reports its proportionate amount of cash, temporary investments and marketable
securities invested in the program.

5. COMMITMENTS

The Company expects to spend approximately $35 million during 1997 for
enhancements to existing systems, construction of new systems and purchases of
subscriber devices for lease. The Company has not budgeted any amounts for the
buildout of its narrowband PCS license for 1997.

The Company and its subsidiaries lease office and transmitter sites at various
locations in the United States under operating leases. Future minimum rental
payments required under operating leases that have noncancellable lease terms in
excess of one year, as of December 31, 1996, are as follows:

                                            Minimum Future
                                            Rental Payments
                                            ---------------
                                         (Dollars in thousands)
         1997                                 $  2,631
         1998                                    2,403
         1999                                    1,836
         2000                                    1,150
         2001                                      749
      Thereafter                                 1,700

Rent expense totaled $6.7 million, $5.7 million and $4.6 million in 1996, 1995
and 1994, respectively.

6. COMMON STOCK

EMPLOYEE BENEFIT PLANS
The following table summarizes Common shares issued for the year ended December
31, 1996 for the employee benefit plans described below:

                                           Year Ended December 31,
                                             1996           1995
                                          -------------------------
Common shares:
 Tax deferred savings plan                 18,970         31,453
 Employee stock purchase plan               3,732          5,478
 Employee stock option plan                    --             --
                                          -------------------------
                                           22,702         36,931
                                          =========================

No shares were issued under these plans for the year ended December 31, 1994.

EMPLOYEE STOCK APPRECIATION RIGHTS PLAN
In 1988, American Paging began a Stock Appreciation Rights ("SAR") program 
for its senior management pursuant to the Long-Term Incentive Plan (the 
"Plan"). The Plan utilized phantom stock of the Company and lasted until 
December 31, 1994. Each SAR allowed the grantee to receive an amount, in TDS 
Common shares or cash, equivalent to the difference between the estimated 
market value of the SAR on the grant and exercise dates. The Company recorded 
compensation expense over the seven year vesting period with total 
compensation under the Plan of $2.1 million being paid in cash in 1995.

TAX-DEFERRED SAVINGS PLAN
The Company has reserved 150,000 Common shares for issuance under the TDS
Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. Participating

                                                                              29

<PAGE>

employees have the option of investing their contributions in American Paging 
Common shares, TDS Common shares, United States Cellular Corporation (an 
80.6%-owned subsidiary of TDS) Common shares, Aerial Communications, Inc. (an 
82.8%-owned subsidiary of TDS) Common shares or five non-affiliated funds. 
During 1996 and 1995, the Company issued 18,970 and 31,453 Common shares 
under this plan, respectively.

EMPLOYEE STOCK PURCHASE PLAN
The Company reserved 110,000 Common shares for sale to employees of American
Paging and its subsidiaries in connection with the 1994 Employee Stock Purchase
Plan ("1994 ESPP"). During 1996 and 1995, the Company issued 3,732 and 5,478
Common shares, respectively, to employees under the 1994 ESPP. The termination
date of this plan was December 31, 1996. During 1996, the 1997 Employee Stock
Purchase Plan ("1997 ESPP") was approved which became effective January 1, 1997.
The Company reserved 100,000 Common shares for sale to employees of American
Paging and its subsidiaries under the 1997 ESPP.

EMPLOYEE STOCK OPTION PLAN
The Company has reserved 700,000 Common shares for sale to officers and 
employees through stock options in connection with the 1994 Long-Term 
Incentive Plan (the "1994 Plan"), as amended and restated as of April 1, 
1996. As of December 31, 1996, no shares had been issued under the 1994 Plan. 
The options are exercisable over a specified period not in excess of ten 
years. The options expire from 2000 to 2006, or the date of the employee's 
termination of employment, if earlier.

The Company accounts for stock options and employee stock purchase plans 
under Accounting Principles Board Opinion No. 25. No compensation costs have 
been recognized for these plans. Had compensation cost for all plans been 
determined consistent with SFAS No. 123 "Accounting for Stock-Based 
Compensation," the Company's Net loss and Net loss per share would have been 
the following pro forma amounts:

                                           Year Ended December 31,
                                             1996           1995
                                         ---------------------------
                                           (Dollars in thousands
                                          except per share amounts)
Net loss                As reported     $ (45,527)     $ (15,710)
                        Pro forma         (45,639)       (15,746)

Loss per Common share   As reported     $   (2.27)     $   (0.78)
                        Pro forma           (2.28)         (0.79)
                                         ---------------------------

Because the method of accounting prescribed by SFAS No. 123 has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.

A summary of the status of the Company's stock option plan as of December 31,
1996 and 1995, and changes during the years then ended is presented in the
following table:

                                                   Weighted        Weighted
                                     Number of      Average         Average
                                      Shares     Option Prices    Fair Values
                                     ----------------------------------------
STOCK OPTIONS:
Outstanding-January 1, 1995          282,500        $14.00
  (no shares exercisable)
 Granted                              85,500        $ 7.58          $4.02
 Cancelled                           (88,500)       $14.00
Outstanding-December 31, 1995        279,500        $12.04
  (42,000 shares exercisable)
 Granted                              33,000        $ 6.73          $3.43
 Cancelled                           (93,875)       $11.43
Outstanding-December 31, 1996        218,625        $11.49
  (88,400 shares exercisable)

The fair value of each option grant is estimated on the date of grant using 
the Black-Scholes option pricing model with the following weighted average 
assumptions used for grants in 1996 and 1995, respectively: risk-free 
interest rates of 5.6% and 7.6%; expected dividend yield of 0.0% for both 
years; expected lives of 7.4 years and 5.5 years; and expected volatility of 
38.6% and 38.6%.

In accordance with provisions of the 1994 ESPP, shares issued in 1996 and 1995
under the 1994 ESPP were issued at 100% of the fair market value as this was
below the offering price as of the grant date on October 1, 1994. As a result,
there is no compensation cost to be recognized under SFAS No. 123 for these
shares.

INITIAL PUBLIC OFFERING
In 1994, the Company sold 3.5 million Common shares in an underwritten public
offering at an initial public offering price of $14.00 per share. The Company
realized $45.6 million in connection with the sale, after the payment of the
underwriters' discount. The proceeds of the sale were used to repay indebtedness
to TDS. Prior to the public offering, TDS exchanged all of the outstanding
common stock of the Company for 1.5 million Common shares and 15.0 million
Series A Common shares.

SERIES A COMMON SHARES
The holders of Common shares are entitled to one vote per share. The holders of
Series A Common shares are entitled to fifteen votes per share. Series A Common
shares are convertible on a share-for-share basis into Common shares. During
1994, TDS converted 2.5 million Series A Common shares into Common shares. As of
December 31, 1996, all of the Company's Series A Common shares were held by TDS.

7. ACQUISITIONS

Assuming that the acquisitions accounted for as purchases during 1995 had taken
place on January 1, 1995, unaudited pro forma results of operations would have
been as follows:

                                      Year Ended December 31,
                                        1996          1995
                                    ---------------------------
                                      (Dollars in thousands
                                     except per share amounts)
 Service revenue                   $  93,841      $  95,570
 Net loss                            (45,527)       (16,432)
 Loss per Common share             $   (2.27)     $   (0.82)
                                    ---------------------------


30
<PAGE>

 
<TABLE>
<CAPTION>

SELECTED CONSOLIDATED FINANCIAL DATA

                                                                             Year Ended or at December 31,
                                                                 1996        1995        1994        1993        1992
                                                           --------------------------------------------------------------
                                                            (Dollars in thousands, except per share and per unit amounts)
<S>                                                        <C>          <C>         <C>         <C>         <C>
OPERATING DATA
 Service revenue                                           $   93,841  $   93,034  $   77,520  $   64,384  $   48,582
 Equipment sales revenue                                       10,346      14,116      14,545      10,979       6,134
 Operating loss                                               (36,626)     (8,997)       (169)       (721)     (5,447)
 Net loss before cumulative effect of a
   change in accounting principle                             (45,527)    (15,710)     (1,332)     (3,058)     (4,725)
 Cumulative effect of a change in accounting principle             --          --          --        (178)         --
 Net loss                                                  $  (45,527) $  (15,710) $   (1,332) $   (3,236) $   (4,725)
 Weighted average Common and
   Series A Common shares (000s) (1)                           20,048      20,017      19,621      16,500      16,500
 Loss per Common and Series A Common share:
   Before cumulative effect of a
     change in accounting principle                        $    (2.27)  $   (0.78)  $   (0.07)  $   (0.19)  $   (0.29)
   Cumulative effect of a change
     in accounting principle                                       --          --          --       (0.01)         --
   Net loss                                                $    (2.27)  $   (0.78)  $   (0.07)  $   (0.20)  $   (0.29)
 Effective tax rate                                              (0.8)%       (2.1)%      37.0%       31.8%       30.7%

OTHER DATA
 Operating cash flow (Earnings before interest, taxes,
   depreciation and amortization) (2)                      $   (2,849) $   15,695  $   17,009  $   12,671  $    4,965
 Operating cash flow margin (2)                                  (3.0)%       16.9%       21.9%       19.7%       10.2%

BALANCE SHEET DATA
 Working capital (3)                                       $    4,794  $   (3,949) $   42,008) $   41,811) $  (29,032)
 Property, plant and equipment, net                            51,472      59,452      53,661      43,083      34,632
 Intangible assets, net                                        75,582      76,220      71,258       9,862       7,007
 Total assets                                                 153,374     159,149     147,056      75,225      58,519
 Revolving Credit Agreement - TDS                             139,960      94,523      28,113          --          --
 Common shareholders' equity                               $   (9,802) $   35,576  $   51,018  $    7,769  $   11,004

OTHER COMPANY STATISTICS
 Customer units in service                                    774,400     784,500     652,800     460,900     322,200
 Average monthly service revenue per unit ("ARPU")         $     9.88  $    10.57  $    11.92  $    13.65  $    14.93
 Average monthly operating cost per unit                   $     7.36  $     6.98  $     7.27  $     8.61  $    10.06
 Subscriber devices in service per employee                       893       1,007         853         685         539
 Average monthly service revenue per employee              $    8,980  $   12,457  $   10,171  $    9,388  $    7,801
 Transmitters in service                                        1,048       1,018         943         685         532
 Capital expenditures                                      $   28,940  $   35,107  $   27,403  $   24,813  $   15,501
 Average monthly disconnect rate ("churn")                         3.1%        2.5%        2.6%        2.9%        2.9%
 Current ratio                                                    1.2         0.9         0.3         0.3         0.4
 Return on equity                                              (227.1)%     (78.5)%      (6.8)%     (19.6)%     (28.6)%
-------------------------------------------------------------------------------------------------------------------------


</TABLE>


(1) WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES OUTSTANDING GIVE
RETROACTIVE EFFECT TO THE RECAPITALIZATION IN CONJUNCTION WITH THE COMPANY'S
1994 INITIAL PUBLIC OFFERING, AS IF THIS TRANSACTION HAD OCCURRED AT JANUARY 1,
1992.

(2) ALTHOUGH OPERATING CASH FLOW AND OPERATING CASH FLOW MARGIN ARE COMMONLY
USED AS MEASURES OF PERFORMANCE IN THE PAGING INDUSTRY AND BY FINANCIAL ANALYSTS
AND OTHERS WHO FOLLOW THE INDUSTRY, THEY SHOULD NOT BE CONSIDERED IN ISOLATION
OR USED AS PERFORMANCE AND LIQUIDITY MEASURES PURSUANT TO GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.

(3) WORKING CAPITAL INCLUDES DUE TO FCC - PCS LICENSES OF $42.9 MILLION AT
DECEMBER 31, 1994. WORKING CAPITAL INCLUDES NOTES PAYABLE - AFFILIATES OF $44.4
MILLION AND $31.7 MILLION AT DECEMBER 31, 1993 AND 1992, RESPECTIVELY.

                                                                              31

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AMERICAN PAGING, INC.:

We have audited the accompanying consolidated balance sheets of American Paging,
Inc. (a Delaware corporation) and its subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in common
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Paging, Inc. and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.


Arthur Andersen LLP

Chicago, Illinois
January 29, 1997





 
<TABLE>
<CAPTION>


CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)

                                                                                Quarter Ended
                                                             March 31      June 30     Sept. 30      Dec. 31
                                                           ----------------------------------------------------
                                                              (Dollars in thousands, except per share amounts)
<S>                                                          <C>          <C>          <C>          <C>
1996
 Service revenue                                            $  23,708    $  23,493    $  23,766    $  22,784
 Restructuring charges                                            778        1,465        7,087           --
 Operating loss                                                (4,086)      (6,567)     (16,694)      (9,279)
 Net loss                                                   $  (5,344)   $  (8,340)   $ (18,636)   $ (13,207)
 Weighted average Common and Series A Common shares (000s)     20,041       20,047       20,050       20,053
 Loss per Common and Series A Common share                  $   (0.27)   $   (0.42)   $   (0.93)   $   (0.66)

1995
 Service revenue                                            $  22,237    $  22,866    $  24,109    $  23,822
 Restructuring charges                                             --           --        2,196          716
 Operating loss                                                (2,029)      (2,010)      (2,339)      (2,619)
 Net loss                                                   $  (2,748)   $  (4,027)   $  (4,871)   $  (4,064)
 Weighted average Common and Series A Common shares (000s)     20,000       20,019       20,023       20,030
 Loss per Common and Series A Common share                  $   (0.14)   $   (0.20)   $   (0.24)   $   (0.20)


</TABLE>
 

32
<PAGE>

SHAREHOLDER INFORMATION

AMERICAN PAGING STOCK AND DIVIDEND INFORMATION

The Company's Common shares are listed on the American Stock Exchange under the
symbol "APP" and in the newspapers as "AmPaging." As of February 28, 1997, the
Company's Common shares were held by 98 record owners. All of the Series A
Common shares were held by TDS. No public trading market exists for the Series A
Common shares, but the Series A Common shares are convertible on a
share-for-share basis into Common shares.

The high and low sales prices of the Common shares as reported by the American
Stock Exchange were as follows:

                                                Common Shares
Calendar Period                              High            Low
                                         ---------------------------
1996
First Quarter                           $   7.375       $   6.250
Second Quarter                             10.000           6.500
Third Quarter                               7.563           5.500
Fourth Quarter                              6.125           4.625

1995
First Quarter                           $   8.750       $   7.125
Second Quarter                              8.250           6.125
Third Quarter                               8.375           6.625
Fourth Quarter                              8.250           6.375

The Company has never paid any cash dividends and currently intends to retain
any future earnings for use in the Company's business. In addition, the
Revolving Credit Agreement with TDS prohibits the payment of dividends on the
Company's Common shares and Series A Common shares, except to the extent of
one-half of the cumulative consolidated net income, if any, of the Company for
the period after December 31, 1993.

INVESTOR RELATIONS

Our Annual Report, Form 10-K, Quarterly Reports, Prospectuses, and News Releases
are available to our investors, security analysts and other members of the
investment community. These reports are provided, without charge, upon request
to our Corporate Office. Our Corporate Office can also help with questions
regarding lost, stolen or destroyed certificates, consolidation of accounts,
transferring of shares and name or address changes. All inquiries should be
directed to:

Michelle M. Haupt
Investor Relations
AMERICAN PAGING, INC.
1300 Godward Street Northeast Suite 3100
Minneapolis, Minnesota 55413
612/623-3100
612/623-4413 (fax)

e-mail: michelle.haupt@teldta.com
        joan.kerkvliet@teldta.com

ANNUAL MEETING

The Annual Meeting of shareholders of American Paging, Inc. will be held on May
5, 1997, at 11:00 a.m., local time, in Minneapolis, Minnesota.