Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006 OR

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

For the transition period from to

Commission File Number 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

30 North LaSalle Street, Chicago, Illinois 60602

(Address of principal executive offices) (Zip Code)

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

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

Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at June 30, 2006
Common Shares, $.01 par value		51,431,735 Shares
Special Common Shares, $.01 par value		57,782,076 Shares
Series A Common Shares, $.01 par value		6,446,079 Shares

Telephone and Data Systems, Inc. and Subsidiaries

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2006

Index

Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Statements of Operations Three Months Ended March 31, 2006 and 2005	3

		Consolidated Statements of Cash Flows Three Months Ended March 31, 2006 and 2005	4

		Consolidated Balance Sheets March 31, 2006 and December 31, 2005	5

		Notes to Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

		Three Months Ended March 31, 2006 and 2005
		U.S. Cellular Operations	35
		TDS Telecom Operations	44
		Recent Accounting Pronouncements	47
		Financial Resources	47
		Liquidity and Capital Resources	48
		Application of Critical Accounting Policies and Estimates	54
		Certain Relationships and Related Transactions	59
		Safe Harbor Cautionary Statement	60

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63

	Item 4.	Controls and Procedures	65

Part II.	Other Information		68

	Item 1.	Legal Proceedings	68

	Item 1A.	Risk Factors	68

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

	Item 5.	Other Information	69

	Item 6.	Exhibits	69

Signatures

Part I. Financial Information

Item 1. Financial Statements

Telephone and Data Systems, Inc. and Subsidiaries

Consolidated Statements of Operations

Unaudited

	Three Months Ended March 31,
	2006			2005
	(Dollars in thousands, except per share amounts)

Operating Revenues	$	1,060,312		$	935,787

Operating Expenses
Cost of services and products (exclusive of depreciation, amortization and accretion expense shown below)	375,139			338,624
Selling, general and administrative expense	393,421			348,571
Depreciation, amortization and accretion expense	182,667			169,748
Total Operating Expenses	951,227			856,943

Operating Income	109,085			78,844

Investment and Other Income (Expense)
Investment income	19,805			14,754
Interest and dividend income	16,237			8,286
Interest expense	(58,532		)	(51,856		)
Gain on investments	—			500
Other expense	(502		)	(4,321		)
Total Investment and Other Income (Expense)	(22,992		)	(32,637		)

Income Before Income Taxes and Minority Interest	86,093			46,207
Income tax expense	35,968			17,395
Income Before Minority Interest	50,125			28,812
Minority share of income	(10,250		)	(5,763		)
Net Income	39,875			23,049
Preferred dividend requirement	(51		)	(50		)
Net Income Available To Common	$	39,824		$	22,999

Basic Weighted Average Shares Outstanding (000s)	115,741			114,999
Basic Earnings Per Share (Note 5)	$	0.34		$	0.20

Diluted Weighted Average Shares Outstanding (000s)	116,327			115,646
Diluted Earnings Per Share (Note 5)	$	0.34		$	0.20

Dividends Per Share	$	0.0925		$	0.0875

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

Telephone and Data Systems, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Unaudited

	Three Months Ended March 31,
	2006			2005
	(Dollars in thousands)
Cash Flows from Operating Activities
Net income	$	39,875		$	23,049
Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion	182,667			169,748
Bad debts expense	9,075			8,135
Deferred income taxes	(11,602		)	960
Investment income	(19,805		)	(14,754		)
Distributions from unconsolidated entities	5,676			1,520
Minority share of income	10,250			5,763
Gain on investments	—			(500		)
Stock based compensation expense	7,023			1,171
Noncash interest expense	5,480			5,029
Other noncash expense	1,079			2,514
Changes in assets and liabilities
Change in accounts receivable	9,065			9,620
Change in materials and supplies	7,546			7,482
Change in accounts payable	(53,405		)	(64,793		)
Change in customer deposits and deferred revenues	4,349			3,844
Change in accrued taxes	47,703			21,868
Change in accrued interest	4,567			3,971
Change in other assets and liabilities	(28,967		)	(34,468		)
	220,576			150,159

Cash Flows from Investing Activities
Additions to property, plant and equipment	(146,362		)	(134,787		)
Acquisitions, divestitures and exchanges	—			(120,924		)
Other investing activities	(1,467		)	(564		)
	(147,829		)	(256,275		)

Cash Flows from Financing Activities
Issuance of notes payable	55,000			165,000
Issuance of long-term debt	560			112,588
Repayment of notes payable	(105,000		)	(60,000		)
Repayment of long-term debt	(748		)	(110,510		)
Repayment of medium-term notes	(35,000		)	(17,200		)
TDS common share issued for benefit plans	3,080			6,684
U.S. Cellular common shares issued for benefit plans	3,858			6,836
Capital (distributions) to minority partners	(4,146		)	—
Dividends paid	(10,749		)	(10,122		)
Other financing activities	1,207			131
	(91,938		)	93,407

Net Increase (Decrease) in Cash and Cash Equivalents	(19,191		)	(12,709		)

Cash and Cash Equivalents -
Beginning of period	1,095,791			1,171,105
End of period	$	1,076,600		$	1,158,396

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

Telephone and Data Systems, Inc. and Subsidiaries

Consolidated Balance Sheets

Assets

Unaudited

	March 31, 2006		December 31, 2005
	(Dollars in thousands)
Current Assets
Cash and cash equivalents	$	1,076,600	$	1,095,791
Accounts receivable
Due from customers, less allowance of $11,805 and $15,200, respectively	332,811		336,005
Other, principally connecting companies, less allowance of $6,806 and $5,620, respectively	145,437		160,577
Materials and supplies, at average cost	96,359		103,211
Prepaid expenses	47,889		40,704
Deferred income tax asset	13,434		13,438
Other current assets	31,723		29,243
	1,744,253		1,778,969

Investments
Marketable equity securities	2,559,507		2,531,690
Licenses	1,364,836		1,365,063
Goodwill	870,110		869,792
Customer lists, net of accumulated amortization of $45,979 and $42,947, respectively	46,286		49,318
Investments in unconsolidated entities	231,196		215,424
Other investments, less valuation allowance of $55,144 in both periods	12,044		12,274
	5,083,979		5,043,561

Property, Plant and Equipment
In service and under construction	7,262,283		7,140,447
Less accumulated depreciation	3,768,618		3,614,242
	3,493,665		3,526,205

Other Assets and Deferred Charges	55,259		55,830
	$	10,377,156	$	10,404,565

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

Telephone and Data Systems, Inc. and Subsidiaries

Consolidated Balance Sheets

Liabilities and Stockholders’ Equity

Unaudited

	March 31, 2006			December 31, 2005
	(Dollars in thousands)
Current Liabilities
Current portion of long-term debt	$	203,124		$	237,948
Notes payable	85,000			135,000
Accounts payable	303,869			357,273
Customer deposits and deferred revenues	125,577			121,228
Accrued interest	33,513			28,946
Accrued taxes	85,875			47,180
Accrued compensation	45,866			67,443
Other current liabilities	71,130			61,086
	953,954			1,056,104

Deferred Liabilities and Credits
Net deferred income tax liability	1,378,914			1,383,031
Derivative liability	454,049			449,192
Asset retirement obligation	167,645			163,093
Other deferred liabilities and credits	112,328			104,984
	2,112,936			2,100,300

Long-Term Debt
Long-term debt, excluding current portion	1,633,268			1,633,519
Forward contracts	1,711,813			1,707,282
	3,345,081			3,340,801

Commitment and Contingencies

Minority Interest in Subsidiaries	561,711			552,884

Preferred Shares	3,863			3,863

Common Stockholders’ Equity
Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued 56,502,000 and 56,481,000 shares, respectively	565			565
Special Common Shares, par value $.01 per share; authorized 165,000,000 shares, issued 62,887,000 and 62,868,000 shares, respectively	629			629
Series A Common Shares, par value $.01 per share; authorized 25,000,000 shares; issued and outstanding 6,446,000 and 6,440,000 shares; respectively	64			64
Capital in excess of par value	1,830,780			1,826,420
Treasury Shares, at cost:
Common Shares, 5,071,000 and 5,105,000 shares, respectively	(207,524		)	(208,156		)
Special Common Shares 5,105,000 and 5,128,000 shares, respectively	(209,421		)	(210,600		)
Accumulated other comprehensive income	322,710			309,009
Retained earnings	1,661,808			1,632,682
	3,399,611			3,350,613
	$	10,377,156		$	10,404,565

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

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDS’s 81.2%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”), TDS’s 100%-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”) and TDS’s 80%-owned printing and distribution company, Suttle Straus, Inc. In addition, the consolidated financial statements include all entities in which TDS has a variable interest that requires TDS to absorb a majority of the entity’s expected gains or losses, or both. All material intercompany accounts and transactions have been eliminated.

The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’s Annual Report on Form 10-K for the year ended December 31, 2005 (“Form 10-K”).

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items unless otherwise disclosed) necessary to present fairly the financial position as of March 31, 2006, and the results of operations for the three months ended March 31, 2006 and 2005 and the cash flows for the three months ended March 31, 2006 and 2005. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results to be expected for the full year.

2. Summary of Significant Accounting Policies

Change in Accounting Principle – Stock-Based Compensation

TDS has established long-term incentive plans, employee stock purchase plans, and dividend reinvestment plans, which are described more fully in Note 3 – Stock-Based Compensation. Prior to January 1, 2006, TDS accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, as permitted by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”. Total stock-based employee compensation cost recognized in the Consolidated Statements of Operations under APB 25 was $1.2 million for the three months ended March 31, 2005, primarily for restricted stock unit and deferred compensation stock unit awards. No compensation cost was recognized in the Consolidated Statements of Operations under APB 25 for stock option awards for the three months ended March 31, 2005, because all outstanding options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The employee stock purchase plans and dividend reinvestment plans qualified as non-compensatory plans under APB 25; therefore, no compensation cost was recognized for these plans during the three months ended March 31, 2005.

Effective January 1, 2006, TDS adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. In addition, TDS applied the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”), issued by the Securities and Exchange Commission in March 2005 in its adoption of SFAS 123(R). Under the modified prospective transition method, compensation cost recognized during the three months ended March 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

Under SFAS 123(R), the long-term incentive plans are considered compensatory plans; therefore, recognition of compensation costs for grants made under these plans is required.

Under SFAS 123(R), the employee stock purchase plans are considered compensatory plans; therefore, recognition of compensation costs for grants made under these plans is required. However, due to restrictions on activity under these plans that were in place during the three months ended March 31, 2006, no compensation expense was recognized during this period.

Under SFAS 123(R), the dividend reinvestment plans are not considered compensatory plans, therefore recognition of compensation costs for grants made under these plans is not required.

Upon adoption of SFAS 123(R), TDS elected to continue to value its share-based payment transactions using a Black-Scholes valuation model, which was previously used by TDS for purposes of preparing the pro forma disclosures under SFAS 123. Under the provisions of SFAS 123(R), stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that is ultimately expected to vest. Accordingly, stock-based compensation cost recognized in the first quarter of 2006 has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. TDS believes that its historical experience is the best estimate of future expected life. In TDS’s pro forma information required under SFAS 123, TDS also reduced stock-based compensation cost for estimated forfeitures. The expected life assumption was determined based on TDS’s historical experience. For purposes of both SFAS 123 and SFAS 123(R), the expected volatility assumption was based on the historical volatility of TDS’s common stock. The dividend yield was included in the assumptions. The risk-free interest rate assumption was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock options.

Compensation cost for stock option awards granted after January 1, 2006 will be recognized over the respective requisite service period of the awards, which is generally the vesting period, on a straight-line basis over the requisite service period for each separately vesting portion of the awards as if the awards were, in-substance, multiple awards (graded vesting attribution method), which is the same attribution method that was used by TDS for purposes of its pro forma disclosures under SFAS 123.

Certain employees were eligible for retirement at the time that compensatory stock options were granted. Under the terms of the TDS option agreements, options granted to these individuals do not vest upon retirement. Under the terms of the U.S. Cellular option agreements, options granted to these individuals will fully vest upon their retirement if they have reached the age of 65. Similarly, under the terms of TDS’s restricted stock unit agreements, restricted stock units vest upon retirement if the employee has reached the age of 66. Under the terms of U.S. Cellular’s restricted stock unit agreements, restricted stock units vest upon retirement if the employee has reached the age of 65. Prior to the adoption of SFAS 123(R), TDS used the “nominal vesting method” to recognize the pro forma stock-based compensation cost related to options and restricted stock units awarded to retirement eligible employees. This method does not take into account the effect of early vesting due to the retirement of eligible employees. Upon adoption of SFAS 123(R), TDS adopted the “non-substantive vesting method”, which requires the recognition of the entire expense related to options granted to retirement-eligible employees. If the non-substantive vesting method had been applied in prior periods, the effect on previously disclosed pro forma stock-based compensation cost would not have been material.

On March 7, 2006, the TDS Compensation Committee approved amendments to stock option award agreements. The amendments modify current and future options to extend the exercise period until 30 days following (i) the lifting of a “suspension” if options otherwise would expire or be forfeited during the suspension period and (ii) the lifting of a blackout if options otherwise would expire or be forfeited during a blackout period. TDS temporarily suspended issuances of shares under the 2004 Long Term Incentive Plan on March 17, 2006, as required by SEC regulations, because TDS did not file its Form 10-K for the year ended December 31, 2005 in a timely manner. Under SEC regulations, TDS may not issue shares under its existing registration statement on Form S-8 related to the 2004 Long Term Incentive Plan until the date that TDS is current with respect to its Form 10-K for the year ended December 31, 2005 and other periodic SEC filings. As required under the provisions of SFAS 123 (R), TDS evaluated the impact of this plan modification to determine if an adjustment to stock based compensation was required. TDS determined that the impact of such an adjustment would not be material.

Pension Plan

TDS sponsors a qualified noncontributory defined contribution pension plan. The plan provides benefits for the employees of TDS Corporate, TDS Telecom and U.S. Cellular. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $3.5 million and $3.4 million for the three months ended March 31, 2006 and March 31, 2005, respectively.

TDS also sponsors an unfunded non-qualified deferred supplemental executive retirement plan for certain employees which supplements the benefits under the qualified plan to offset the reduction of benefits caused by the limitation on annual employer contributions under the tax laws.

Other Postretirement Benefits

TDS sponsors two contributory defined benefit postretirement plans that cover most employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS Telecom. One plan provides medical benefits and the other plan provides life insurance benefits.

Net periodic benefit costs for the defined benefit postretirement plans include the following components:

	Three Months Ended March 31,
	2006			2005
	(Dollars in thousands)
Service Cost	$	544		$	553
Interest on accumulated benefit obligation	692			659
Expected return on plan assets	(648		)	(558		)
Amortization of:
Prior service cost	(208		)	(279		)
Net loss	292			288
Net postretirement cost	$	672		$	663

TDS will contribute $5.3 million to the postretirement plan assets during the second quarter of 2006.

Recent Accounting Pronouncements

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), was issued in July 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in an income tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. TDS is currently reviewing the requirements of FIN 48 and has not yet determined the impact, if any, on its financial position or results of operations.

3. Stock-Based Compensation

As a result of adopting SFAS 123(R) on January 1, 2006, TDS’s income before income taxes and net income for the three months ended March 31, 2006, are $3.5 million and $1.7 million lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the three months ended March 31, 2006 are $0.02 and $0.02 lower, respectively, than if TDS had continued to account for share-based compensation under APB 25.

Stock-Based Compensation Expense

For comparison, the following table illustrates the pro forma effect on net income and earnings per share had TDS applied the fair value recognition provisions of SFAS 123(R) to its stock-based employee compensation plans for the three months ended March 31, 2005:

(Dollars in thousands, except per share amounts)
Net income, as reported	$	23,049
Add: Stock-based compensation expense included in reported net income, net of related tax effects and minority interest	647
Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects and minority interest	(2,962		)
Pro forma net income	$	20,734

Earnings per share:
Basic—as reported	$	0.20
Basic—pro forma	$	0.18
Diluted—as reported	$	0.20
Diluted—pro forma	$	0.18

Prior to the adoption of SFAS 123(R), TDS presented all tax benefits resulting from tax deductions associated with the exercise of stock options by employees as cash flows from operating activities in the Consolidated Statements of Cash Flows. SFAS 123(R) requires that “excess tax benefits” be classified as cash flows from financing activities in the Consolidated Statement of Cash Flows. For this purpose, the excess tax benefits are tax benefits related to the difference between the total tax deduction associated with the exercise of stock options by employees and the amount of compensation cost recognized for those options. For the three months ended March 31, 2006, excess tax benefits of $0.4 million were included within Other Financing Activities of the Cash Flows from Financing Activities pursuant to this requirement of SFAS 123(R).

The following table summarizes stock-based compensation expense recognized during the three months ended March 31, 2006:

(Amounts in thousands)
Compensation expense recognized for stock option awards	$	3,512
Compensation expense recognized for restricted stock unit awards	2,751
Compensation expense recognized for deferred compensation matching stock unit awards	760
Compensation expense recognized for awards under employee stock purchase plans	0
Total stock-based compensation, before income taxes	7,023
Income tax benefit	(2,935		)
Total stock-based compensation expense, net of income taxes	$	4,088

At March 31, 2006, unrecognized compensation cost for all stock-based compensation awards was $19.7 million. The unrecognized compensation cost for stock-based compensation awards at March 31, 2006 is expected to be recognized over a weighted average period of 0.8 years.

All stock-based compensation expense recognized during the three months ended March 31, 2006 was recorded in Selling, general and administrative expense.

TDS

The information in this section relates to stock-based compensation plans utilizing the equity instruments of TDS. Participants in these plans are generally employees of TDS Corporate and TDS Telecom, although U.S. Cellular employees are eligible to participate in the TDS Employee Stock Purchase Plan. Information related to plans utilizing the equity instruments of U.S. Cellular are shown in the U.S. Cellular section following the TDS section.

Under the TDS 2004 Long-Term Incentive Plan (and a predecessor plan), TDS may grant fixed and performance-based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees. TDS had reserved 4,006,000 Common Shares and 11,893,000 Special Common Shares at March 31, 2006, for equity awards granted and to be granted under this plan. At March 31, 2006, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and deferred compensation stock unit awards. At March 31, 2006, TDS also had reserved 174,000 Common Shares and 323,000 Special Common Shares for issuance under the Automatic Dividend Reinvestment and Stock Purchase Plan and 49,000 Series A common shares for issuance under the Series A common share Automatic Dividend Reinvestment Plan, and 185,000 Common Shares and 320,000 Special Common Shares under an employee stock purchase plan. The maximum number of TDS Common Shares, TDS Special Common Shares and TDS Series A Common Shares that may be issued to employees under all stock-based compensation plans in effect at March 31, 2006 was 4,365,000, 12,536,000 and 49,000 shares, respectively. TDS currently utilizes treasury stock to satisfy stock option exercises, issuances under its employee stock purchase plan, restricted stock unit awards and deferred compensation stock unit awards.

Stock Options—Stock options granted to key employees are exercisable over a specified period not in excess of ten years. Stock options generally vest over periods up to four years from the date of grant. Stock options outstanding at March 31, 2006 expire between 2006 and 2015. However, vested stock options typically expire 30 days after the effective date of an employee’s termination of employment for reasons other than retirement. Employees who leave at the age of retirement have 90 days (or one year if they satisfy certain requirements) within which to exercise their vested stock options. The exercise price of the option generally equals the market value of TDS common stock on the date of grant.

TDS estimates the fair value of stock options granted using the Black-Scholes valuation model. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the awards as if the awards were, in-substance, multiple awards, which is the same attribution method that was used by TDS for purposes of its pro forma disclosures under SFAS 123. TDS did not grant stock options during the three months ended March 31, 2006 and March 31, 2005.

A summary of TDS stock options (vested and nonvested) at March 31, 2006 and changes during the three months then ended is presented in the table and narrative below:

All TDS options outstanding at March 31, 2006 were granted prior to the distribution of the TDS Special Common Share Dividend in 2005, more fully described in TDS’s 2005 Annual Report on Form 10-K. As a result of the Special Common Share Dividend, an employee will receive one Common Share and one Special Common Share per tandem option exercised. Each tandem option is exercisable at its original exercise price.

				Weighted
		Weighted		Average
	Number	Average		Remaining
	of Tandem	Exercise		Contractual	Aggregate
	Options(1)	Prices		Term	Intrinsic Value
Outstanding at December 31, 2005 (2,461,000 exercisable)	2,701,000	$	73.86	6.5 years	$	30,119,000
Granted	—	—			—
Exercised	23,000	$	52.28		466,000
Forfeited	12,000	$	56.70		273,000
Expired	—	—			—
Outstanding at March 31, 2006 (2,438,000 exercisable)	2,666,000	$	74.12	6.3 years	$	29,285,000

(1) Upon exercise, each tandem option is converted into one TDS Common Share and one TDS Special Common Share.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between TDS’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. This amount will change in future periods based on the market price of TDS’s stock. TDS received $1.2 million in cash from the exercise of stock options during the three months ended March 31, 2006.

A summary of TDS’s nonvested stock options at March 31, 2006 and changes during the three months then ended is presented in the table below:

		Weighted
		Average
	Number of	Fair Values of
	Stock Options(1)	Stock Options
Nonvested at December 31, 2005	240,000	$	21.67
Granted	—	—
Vested	—	—
Forfeited	12,000	21.99
Nonvested at March 31, 2006	228,000	$	21.66

(1) Upon exercise, each restricted stock option outstanding at March 31, 2006 is converted into one TDS Common Share and one TDS Special Common Share.

Restricted Stock Units—Beginning in April 2005, TDS granted restricted stock unit awards to key employees. These awards generally vest after three years. All TDS restricted stock units outstanding at March 31, 2006 were granted prior to the distribution of the TDS Special Common Share Dividend in 2005. As a result of the Special Common Share Dividend, an employee will receive one Common Share and one Special Common Share upon the vesting of such restricted stock units. The restricted stock unit awards outstanding at March 31, 2006 will vest in December 2007. When vested, employees will receive an equal number of TDS Common Shares and TDS Special Common Shares with respect to such restricted stock units.

TDS estimates the fair value of restricted stock units based on the closing market price of TDS shares on the date of grant. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

A summary of TDS nonvested restricted stock units at March 31, 2006 and changes during the three months then ended is presented in the table below:

		Weighted
		Average
	Number	Fair Values of
	of Restricted	Restricted
	Stock Units(1)	Stock Units
Nonvested at December 31, 2005	90,286	$	77.55
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested at March 31, 2006	90,286	$	77.55

(1) Upon exercise, each restricted stock unit outstanding at March 31, 2006 is converted into one TDS Common Share and one TDS Special Common Share.

Deferred Compensation Stock Units—Certain TDS employees may elect to defer receipt of all or a portion of their annual bonuses and to receive stock unit matches on the amount deferred up to $400,000. Deferred compensation, which is immediately vested, is deemed to be invested in TDS Common Share units or, at the election of the committee that administers the plan after the TDS Special Common Share Dividend in 2005, TDS Special Common Share units. TDS match amounts depend on the amount of annual bonus that is deferred into stock units. Participants receive a 25% stock unit match for amounts deferred up to 50% of their total annual bonus and a 33% match for amounts that exceed 50% of their total annual bonus. The matched stock units vest ratably at a rate of one-third per year over three years. When fully vested and upon distribution, employees will receive the vested TDS Common Shares and/or TDS Special Common Shares, as applicable.

TDS estimates the fair value of deferred compensation matching stock units based on the closing market price of TDS shares on the date of grant. The fair value of the matched stock units is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

A summary of TDS nonvested deferred compensation stock unit plans at March 31, 2006 and changes during the three months then ended is presented in the table that follows:

		Weighted Average
	Number of	Fair Values
	Stock Units(1)	of Stock Units
Nonvested at December 31, 2005	1,025	$	72.50
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested at March 31, 2006	1,025	$	72.50

(1) Upon exercise, each deferred compensation stock unit outstanding at March 31, 2006 is converted into one TDS Common Share and one TDS Special Common Share.

Employee Stock Purchase Plan—Under the 2003 Employee Stock Purchase Plan, eligible employees of TDS and its subsidiaries may purchase a limited number of shares of TDS common stock on a quarterly basis. Prior to 2006, such common stock consisted of TDS Common Shares. Beginning in 2006, such common stock consisted of TDS Special Common Shares. TDS had reserved 185,000 Common Shares and 320,000 Special Common Shares at March 31, 2006 for issuance under this plan. The plan became effective on April 1, 2003 and will terminate on December 31, 2008. The per share cost to each participant is 85% of the market value of the Common Shares or Special Common Shares as of the issuance date. Under SFAS 123(R), the employee stock purchase plan is considered a compensatory plan; therefore recognition of compensation costs for stock issued under this plan is required. Compensation cost is measured as the difference between the cost of the shares to the plan participants and the fair market value of the shares on the date of issuance. However, due to restrictions on activity under these plans in place during the three months ended March 31, 2006, no compensation expense was recognized during this period.

Dividend Reinvestment Plans—TDS had reserved 174,000 Common Shares and 323,000 Special Common Shares at March 31, 2006, for issuance under Automatic Dividend Reinvestment and Stock Purchase Plans and 49,000 Series A Common Shares for issuance under the Series A Common Share Automatic Dividend Reinvestment Plan. These plans enable holders of TDS’s Common Shares, Special Common Shares and Preferred Shares to reinvest cash dividends in Common Shares and Special Common Shares and holders of Series A Common Shares to reinvest cash dividends in Series A Common Shares. The purchase price of the shares is 95% of the market value, based on the average of the daily high and low sales prices for TDS’s Common Shares and Special Common Shares on the American Stock Exchange for the ten trading days preceding the date on which the purchase is made. Under SFAS 123(R) and SFAS 123, these plans are considered non-compensatory plans, therefore no compensation expense is recognized for stock issued under these plans.

U.S. Cellular

The information in this section relates to stock-based compensation plans utilizing the equity instruments of U.S. Cellular. Participants in these plans are employees of U.S. Cellular. U.S. Cellular employees are also eligible to participate in the TDS Employee Stock Purchase Plan. Information related to plans utilizing the equity instruments of TDS are shown in the previous section.

Under the U.S. Cellular 2005 Long-Term Incentive Plan, U.S. Cellular may grant fixed and performance-based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees. U.S. Cellular had reserved 5,403,000 Common Shares at March 31, 2006, for equity awards granted and to be granted under this plan. At March 31, 2006, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and deferred compensation stock unit awards. At March 31, 2006, U.S. Cellular also had reserved 110,000 Common Shares for issuance to employees under an employee stock purchase plan. The maximum number of U.S. Cellular Common Shares that may be issued to employees under all stock-based compensation plans in effect at March 31, 2006 was 5,513,000 shares. U.S. Cellular currently utilizes treasury stock to satisfy stock option exercises, issuances under its employee stock purchase plan, restricted stock unit awards and deferred compensation stock unit awards. U.S. Cellular employees are also eligible to participate in the TDS Employee Stock Purchase Plan, which was described previously.

On March 7, 2006, the U.S. Cellular Compensation Committee, approved amendments to stock option award agreements. The amendments modify current and future options to extend the exercise period until 30 days following (i) the lifting of a “suspension” if options otherwise would expire or be forfeited during the suspension period and (ii) the lifting of a blackout if options otherwise would expire or be forfeited during a blackout period. U.S. Cellular temporarily suspended issuances of shares under the 2005 Long Term Incentive Plan on March 17, 2006, as required by SEC regulations, because U.S. Cellular did not file its Form 10-K for the year ended December 31, 2005 in a timely manner. Under SEC regulations, U.S. Cellular may not issue shares under its existing registration statement on Form S-8 related to the 2005 Long Term Incentive Plan until the date that U.S. Cellular is current in this and its other SEC filings. As required under the provisions of SFAS 123 (R), U.S. Cellular evaluated the impact of this plan modification to determine if an adjustment to stock based compensation was required. U.S. Cellular determined that the impact of a change would not be material.

Stock Options— Stock options granted to key employees are exercisable over a specified period not in excess of ten years. Stock options generally vest over periods up to four years from the date of grant. Stock options outstanding at March 31, 2006 expire between 2006 and 2015. However, vested stock options typically expire 30 days after the effective date of an employee’s termination of employment for reasons other than retirement. Employees who leave at the age of retirement have 90 days (or one year if they satisfy certain requirements) within which to exercise their vested stock options. The exercise price of the option generally equals the market value of U.S. Cellular Common Shares on the date of grant.

U.S. Cellular estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service period, which is generally the vesting period, for each separately vesting portion of the awards as if the awards were, in-substance, multiple awards, which is the same attribution method that was used by U.S. Cellular for purposes of its pro forma disclosures under SFAS 123. U.S. Cellular did not grant stock options during the three months ended March 31, 2006.

A summary of U.S. Cellular stock options outstanding (vested and nonvested) at March 31, 2006 and changes during the three months then ended is presented in the table that follows:

		Weighted		Weighted Average
		Average		Remaining
	Number of	Exercise		Contractual	Aggregate
	Options	Prices		Term	Intrinsic Value
Outstanding at December 31, 2005 (877,000 exercisable)	2,701,000	$	38.80	7.5 years	$	55,522,000
Granted	—	—		—	—
Exercised	107,000	$	34.51		2,259,000
Forfeited	29,000	$	39.70		564,000
Expired	1,000	$	29.80		18,000
Outstanding at March 31, 2006 (1,514,000 exercisable)	2,564,000	$	38.98	7.4 years	$	52,252,000

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between U.S. Cellular’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. This amount will change in future periods based on the market price of U.S. Cellular’s stock. U.S. Cellular received $3.7 million in cash from the exercise of stock options during the three months ended March 31, 2006.

A summary of U.S. Cellular nonvested stock options at March 31, 2006 and changes during the three months then ended is presented in the table that follows:

		Weighted Average
	Number of	Fair Values of
	Stock Options	Stock Options
Nonvested at December 31, 2005	1,824,000	$	14.19
Granted	—	—
Vested	748,000	17.23
Forfeited	26,000	14.22
Nonvested at March 31, 2006	1,050,000	14.00

Restricted Stock Units—U.S. Cellular grants restricted stock unit awards to key employees, which generally vest after three years.

U.S. Cellular estimates the fair value of restricted stock units based on the closing market price of U.S. Cellular shares on the date of grant, which is not adjusted for any dividends foregone during the vesting period because U.S. Cellular has never paid a dividend and has expressed the intention of retaining all future earnings in the business. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Awards granted under this plan prior to 2005 were classified as liability awards due to a plan provision which allowed participants to elect tax withholding in excess of minimum statutory tax rates. In 2005, this provision was removed from the plan and awards after 2005 have been classified as equity awards.

A summary of U.S. Cellular nonvested restricted stock units at March 31, 2006 and changes during the three months then ended is presented in the tables that follow:

Liability Classified Awards

			Weighted Average
			Grant-Date
	Number of		Fair Values of
	Restricted		Restricted
	Stock Units		Stock Units
Nonvested at December 31, 2005	181,000		$	29.79
Granted	—		—
Vested	(108,000	)	$	23.73
Forfeited	(1,000	)	$	38.65
Nonvested at March 31, 2006	72,000		$	38.65

Equity Classified Awards

			Weighted Average
			Grant-Date
	Number of		Fair Values of
	Restricted		Restricted
	Stock Units		Stock Units
Nonvested at December 31, 2005	201,000		$	45.63
Granted	—		—
Vested	—		—
Forfeited	(5,000	)	$	45.63
Nonvested at March 31, 2006	196,000		$	45.63

Deferred Compensation Stock Units—Certain U.S. Cellular employees may elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution on the amount deferred. All bonus compensation that is deferred by employees, which is immediately vested, is deemed to be invested in U.S. Cellular Common Share stock units. Upon vesting and distribution of such stock units, employees will receive U.S. Cellular Common Shares. The amount of U.S. Cellular’s matching contribution depends on the portion of the annual bonus that is deferred. Participants receive a 25% match for amounts deferred up to 50% of their total annual bonus and a 33% match for amounts that exceed 50% of their total annual bonus; such matching contributions also are deemed to be invested in U.S. Cellular Common Share stock units. The matching contribution stock units vest ratably at a rate of one-third per year over three years.

U.S. Cellular estimates the fair value of deferred compensation matching contribution stock units based on the closing market price of U.S. Cellular Common Shares on the date of match. The fair value of such matching contribution stock units is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period

A summary of U.S. Cellular nonvested deferred compensation stock units at March 31, 2006 and changes during the three months ended is presented in the table below:

		Weighted Average
		Fair Values
	Number of	of Stock
	Stock Units	Units
Nonvested at December 31, 2005	7,700	$	41.08
Granted	—	—
Vested	3,700	37.31
Forfeited	—	—
Nonvested at March 31, 2006	4,000	$	44.62

Employee Stock Purchase Plan—Under the 2003 Employee Stock Purchase Plan, eligible employees of U.S. Cellular and its subsidiaries may purchase a limited number of U.S. Cellular Common Shares on a quarterly basis. U.S. Cellular had reserved 110,000 Common Shares at March 31, 2006 for issuance under this plan. The plan became effective on April 1, 2003 and will terminate on December 31, 2008. U.S. Cellular employees are also eligible to participate in the TDS Employee Stock Purchase Plan, which was described previously. The per share cost to each participant in these plans is 85% of the market value of the Common Shares or Special Common Shares as of the issuance date. Under SFAS 123(R), the employee stock purchase plans are considered compensatory plans; therefore recognition of compensation costs for stock issued under these plans is required. Compensation cost is measured as the difference between the cost of the shares to plan participants and the fair market value of the shares on the date of issuance. However, due to restrictions on activity under these plans in place during the three months ended March 31, 2006, no compensation expense was recognized during this period for either plan.

Prior to the adoption of SFAS 123(R), U.S. Cellular presented all tax benefits resulting from tax deductions associated with the exercise of stock options by employees as cash flows from operating activities in the Consolidated Statements of Cash Flows. SFAS 123(R) requires that “excess tax benefits” be classified as cash flows from financing activities in the Consolidated Statement of Cash Flows. For this purpose, the excess tax benefits are tax benefits related to the difference between the total tax deduction associated with the exercise of stock options by employees and the amount of compensation cost recognized for those options. For the three months ended March 31, 2006, excess tax benefits of $0.3 million were included within Other Financing Activities of the Cash Flows from Financing Activities pursuant to this requirement of SFAS 123(R).

4. Income Taxes

The overall effective tax rate on income before income taxes and minority interest for the three months ended March 31, 2006 and 2005 was 41.8% and 37.7%, respectively. The effective tax rate for the 2006 period is higher than 2005 primarily due to the estimated foreign tax expense on the Deutsche Telekom dividend included in the annual operations effective tax rate for 2006. In 2005 the estimated foreign tax expense on the Deutsche Telekom dividend was not included in the annual operations effective tax rate until the second quarter (the first time in three years that a dividend was declared).

In June of 2006, the Internal Revenue Service commenced its audit of the 2002 – 2004 consolidated federal tax returns of TDS and subsidiaries. The audit is in its preliminary stages.

5. Earnings per Share

Basic earnings per share is computed by dividing net income available to common by the weighted average common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by weighted average common shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options.

TDS distributed one Special Common Share in the form of a stock dividend with respect to each outstanding Common Share and Series A Common Share of TDS on May 13, 2005 to shareholders of record on April 29, 2005. As a result of the Special Common Share Dividend, each option outstanding on May 13, 2005 was converted into a tandem option for one Common Share and one Special Common Share at the same exercise price per tandem option exercised.

The net income amounts used in computing earnings per share and the effects on the weighted average number of common and Series A Common Shares and earnings per share of potentially dilutive stock options are as follows:

	Three Months Ended March 31,
	2006			2005
	(Dollars and shares in thousands, except earnings per share)
Basic Earnings per Share:
Net income	$	39,875		$	23,049
Preferred dividend requirement	(51		)	(50		)
Net income available to common used in basic earnings per share	$	39,824		$	22,999

Diluted Earnings per Share:
Net income available to common used in basic earnings per share	$	39,824		$	22,999
Minority income adjustment (1)	(206		)	(132		)
Preferred dividend adjustment (2)	12			—
Net income available to common used in diluted earnings per share	$	39,630		$	22,867

Weighted average number of shares of common stock used in basic earnings per share:
Common Shares	51,471			51,074
Special Common Shares	57,823			57,500
Series A Common Shares	6,447			6,425
Weighted average number of shares of common stock used in basic earnings per share	115,741			114,999
Effects of Dilutive Securities:
Effects of stock options (3)	532			647
Conversion of preferred shares (4)	54			—
Weighted average number of shares of common stock used in diluted earnings per share	116,327			115,646

Basic Earnings per Share	$	0.34		$	0.20

Diluted Earnings per Share	$	0.34		$	0.20

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

(2) The preferred dividend adjustment reflects the dividend reduction in the event any preferred series were dilutive, and therefore converted for shares.

(3) Stock options convertible into 1,294,004 Common Shares and 1,294,004 Special Common Shares were not included in computing Diluted Earnings per Share in the three months ended March 31, 2006, because their effects were antidilutive. Stock options convertible into 680,683 Common Shares and 680,683 Special Common Shares were not included in computing Diluted Earnings per Share in the three months ended March 31, 2005 because their effects were antidilutive.

(4) Preferred shares convertible into 54,540 Common Shares and 54,540 Special Common Shares were not included in computing Diluted Earnings per Share in the three months ended March 31, 2006, because their effects were antidilutive. Preferred shares convertible into 94,792 Common Shares and 54,540 Special Common Shares were not included in computing Diluted Earnings per Share in the three months ended March 31, 2005 because their effects were antidilutive.

6. Marketable Equity Securities and Forward Contracts

TDS and its subsidiaries hold a substantial amount of marketable equity securities that are publicly traded and can have volatile movements in share prices. TDS and its subsidiaries do not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, trades or reorganizations of other assets.

Information regarding TDS’s marketable equity securities is summarized as follows:

	March 31, 2006			December 31, 2005
	(Dollars in thousands)
Marketable Equity Securities
Deutsche Telekom AG - 131,461,861 Ordinary Shares	$	2,221,706		$	2,191,469
Vodafone Group Plc – 12,945,915 American Depositary Receipts(1)	270,570			277,949
VeriSign, Inc. - 2,361,333 Common Shares	56,648			51,760
Rural Cellular Corporation - 719,396 equivalent Common Shares	10,582			10,511
Other	1			1
Aggregate fair value	2,559,507			2,531,690
Accounting cost basis	1,543,677			1,543,677
Gross unrealized holding gains	1,015,830			988,013
Equity method unrealized gains	543			543
Income tax (expense)	(398,740		)	(387,599		)
Minority share of unrealized holding gains	(7,088		)	(7,738		)
Unrealized holding gains, net of tax and minority share	610,545			593,219
Derivative instruments, net of tax and minority share	(287,835		)	(284,210		)
Accumulated other comprehensive income	$	322,710		$	309,009

(1) See Note 20 – Subsequent Events for a discussion of the Share Consolidation and Special Distribution related to the Vodafone ADRs that was effected on July 25, 2006. As a result of the Share Consolidation, the aggregate number of shares underlying ADRs was reduced from 12,945,915 to 11,327,674.

The investment in Deutsche Telekom AG (“Deutsche Telekom”) resulted from TDS’s disposition of its over 80%-owned personal communication services operating subsidiary, Aerial Communications, Inc., to VoiceStream Wireless Corporation (“VoiceStream”) in exchange for stock of VoiceStream, which was then acquired by Deutsche Telekom in exchange for Deutsche Telekom stock. The investment in Vodafone Group Plc (“Vodafone”) resulted from certain dispositions of non-strategic cellular investments to or settlements with AirTouch Communications Inc. (“AirTouch”), in exchange for stock of AirTouch, which was then acquired by Vodafone whereby TDS and its subsidiaries received American Depositary Receipts representing Vodafone stock. The investment in VeriSign, Inc. (“VeriSign”) is the result of the acquisition by VeriSign of Illuminet, Inc., a telecommunication entity in which several TDS subsidiaries held interests. The investment in Rural Cellular Corporation (“Rural Cellular”) is the result of a consolidation of several cellular partnerships in which TDS subsidiaries held interests in Rural Cellular, and the distribution of Rural Cellular stock in exchange for these interests.

TDS has entered into a number of forward contracts related to the marketable equity securities it holds. The risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities while retaining a share of gains from increases in the market prices of such securities. The downside risk is hedged at or above the accounting cost basis thereby eliminating the risk of an other-than-temporary loss being recorded on these contracted securities.

See Note 13 – Long-term Debt and Forward Contracts for additional information related to forward contracts.

See Note 20 – Subsequent Events for additional information related to the investment in Vodafone ADRs.

7. Goodwill

TDS has substantial amounts of goodwill as a result of the acquisition of wireless markets, and the acquisition of operating telephone companies. The changes in goodwill for the three months ended March 31, 2006 and 2005 are detailed in the table below. TDS Telecom’s incumbent local exchange carriers are designated as “ILEC” and its competitive local exchange carrier is designated as “CLEC”.

	U.S.			TDS Telecom
(Dollars in thousands)	Cellular			ILEC		CLEC		Other (1)		Total
Balance December 31, 2005	$	471,617		$	395,894	$	—	$	2,281	$	869,792
Acquisitions	—			—		—		—		—
Other Adjustments	318			—		—		—		318
Balance March 31, 2006	$	471,935		$	395,894	$	—	$	2,281	$	870,110

Balance December 31, 2004	$	445,212		$	395,894	$	—	$	2,281	$	843,387
Acquisitions	—			—		—		—		—
Other	(10		)	—		—		—		(10		)
Balance March 31, 2005	$	445,202		$	395,894	$	—	$	2,281	$	843,377

(1) Other consists of goodwill related to Suttle Straus.

8. Unconsolidated Entities

Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a minority interest. These investments are accounted for using either the equity or cost method.

TDS’s significant investment in unconsolidated entities include the following:

	March 31, 2006		March 31, 2005

Los Angeles SMSA Limited Partnership	5.5	%	5.5	%
Midwest Wireless Communications, L.L.C. (1)	14.2	%	14.2	%
North Carolina RSA 1 Partnership	50.0	%	50.0	%
Oklahoma City SMSA Limited Partnership	14.6	%	14.6	%

(1) In addition, U.S. Cellular owns a 49% interest in an entity, which owns approximately 2.9% of Midwest Wireless Holdings, L.L.C., the parent company of Midwest Wireless Communications, L.L.C.

Based primarily on data furnished to TDS by third parties, the following summarizes the combined results of operations of all wireless and wireline entities in which TDS’s investments are accounted for by the equity method:

	Three Months Ended March 31,
	2006		2005
	(Dollars in thousands)

Results of operations
Revenues	$	993,000	$	784,000
Operating expenses	688,000		544,000
Operating income	305,000		240,000
Other income (expense), net	8,000		7,000
Net Income	$	313,000	$	247,000

See Note 20 – Subsequent Events for additional information related to TDS’s investment in Midwest Wireless Communications, LLC.

9. Customer Lists

Customer lists, which are intangible assets resulting from the acquisition of wireless markets, are amortized based on average customer retention periods using the declining balance method. Amortization expense was $3.0 million and $2.3 million for the first quarter of 2006 and 2005, respectively. Amortization expense for the remainder of 2006 and for the years 2007-2010 is expected to be $8.8 million, $8.6 million, $6.5 million, $4.9 million and $3.3 million, respectively.

10. Property, Plant and Equipment

U.S. Cellular reviews the estimated useful lives of its property, plant and equipment, including leasehold improvements, annually and adjusts such estimated useful lives as appropriate. U.S. Cellular did not change the useful lives of its property, plant and equipment, including leasehold improvements, in 2006 or 2005.

TDS Telecom reviews the useful lives of its property, plant and equipment annually. There were no changes made to the useful lives of TDS Telecom assets in the first quarter of 2006 or 2005.

11. Revolving Credit Facilities

TDS has a $600 million revolving credit facility available for general corporate purposes. At March 31, 2006, letters of credit were $3.4 million, leaving $596.6 million available for use. Borrowings under the revolving credit facility bear interest at the London InterBank Offered Rate (“LIBOR”) plus a contractual spread based on TDS’s credit rating (the one-month LIBOR was 4.83% at March 31, 2006). At March 31, 2006, the contractual spread was 60 basis points. TDS may select borrowing periods of either seven days or one, two, three or six months. If TDS provides less than two days’ notice of intent to borrow, interest on borrowings is at the prime rate less 50 basis points (the prime rate was 7.75% at March 31, 2006). This credit facility expires in December 2009.

TDS also has $75 million of direct bank lines of credit at March 31, 2006, all of which were unused. The terms of the direct lines of credit bear negotiated interest rates up to the prime rate (the prime rate was 7.75% at March 31, 2006).

U.S. Cellular has a $700 million revolving credit facility available for general corporate purposes. At March 31, 2006, outstanding notes payable and letters of credit were $85.0 million and $0.5 million, respectively, leaving $614.5 million available for use. Borrowings under the revolving credit facility bear interest at the London InterBank Offered Rate (“LIBOR”) plus a contractual spread based on U.S. Cellular’s credit rating (the one-month LIBOR was 4.83% at March 31, 2006). At March 31, 2006, the contractual spread was 60 basis points. U.S. Cellular may select borrowing periods of either seven days or one, two, three or six months. If U.S. Cellular provides less than two days’ notice of intent to borrow, interest on borrowings is the prime rate less 50 basis points (the prime rate was 7.75% at March 31, 2006). This credit facility expires in December 2009.

TDS’s and U.S. Cellular’s interest cost on their revolving credit facilities would increase if their current credit ratings from either Standard & Poor’s or Moody’s were lowered. However, the credit facilities would not cease to be available or accelerate solely as a result of a decline in TDS’s or U.S. Cellular’s credit rating. A downgrade in TDS’s or U.S. Cellular’s credit rating could adversely affect their ability to renew existing, or obtain access to new, credit facilities in the future. At March 31, 2006, TDS’s and U.S. Cellular’s credit ratings are as follows:

Moody’s Investor Service	Baa3	– under review for possible further downgrade
Standard & Poor’s	A-	– on credit watch with negative implications
Fitch	BBB+	– on rating watch negative

The maturity dates of certain of TDS’s and U.S. Cellular’s revolving credit facilities would accelerate in the event of a change in control. The continued availability of the revolving credit facilities requires TDS and U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and represent certain matters at the time of each borrowing. On November 10, 2005 TDS and U.S. Cellular announced that they would restate certain financial statements which caused TDS and U.S. Cellular to be late in certain SEC filings. The restatements and late filings resulted in defaults under the revolving credit facilities and one line of credit facility. However, TDS and U.S. Cellular were not in violation of any covenants that require TDS and U.S. Cellular to maintain certain financial ratios and did not fail to make any scheduled payments. TDS and U.S. Cellular received waivers from the lenders associated with the revolving credit facilities, under which the lenders agreed to waive any defaults that may have occurred as a result of the restatements and late filings. The waivers require the Form 10-K for the year ended December 31, 2005 to be filed by August 31, 2006, the Form 10-Q for the quarter ended March 31, 2006 to be filed within 30 days after the filing of the Form 10-K for the year ended December 31, 2005 and the Form 10-Q for the quarter ended June 30, 2006 to be filed within 45 days after the filing of the Form 10-Q for the quarter ended March 31, 2006. The Form 10-K for the year ended December 31, 2005 was filed on July 28, 2006.

12. Asset Retirement Obligations

TDS accounts for asset retirement obligations under SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), and FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (“FIN 47”) which require entities to record the fair value of a liability for legal obligations associated with an asset retirement in the period in which the obligations are incurred. At the time the liability is incurred, TDS records a liability equal to the net present value of the estimated cost of the asset retirement obligation and increases the carrying amount of the related long-lived asset by an equal amount. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the obligations, any differences between the cost to retire an asset and the recorded liability (including accretion of discount) is recognized in the Consolidated Statements of Operations as a gain or loss.

U.S. Cellular is subject to asset retirement obligations associated primarily with its cell sites, retail sites and office locations. Asset retirement obligations generally include obligations to remediate leased land on which U.S. Cellular’s cell sites and switching offices are located. U.S. Cellular is also generally required to return leased retail store premises and office space to their pre-existing conditions.

TDS Telecom’s incumbent local exchange carriers have recorded an asset retirement obligation in accordance with the requirements of SFAS No. 143 and FIN 47, and a regulatory liability for the costs of removal that state public utility commissions have required to be recorded for regulatory accounting purposes. The amounts recorded for regulatory accounting purposes exceed, in most cases, the amount required to be recorded in accordance with SFAS No. 143 and FIN 47. These amounts combined make up the asset retirement obligation for the incumbent local exchange carriers. The asset retirement obligation calculated in accordance with the provisions of SFAS No. 143 and FIN 47 at March 31, 2006 was $37.0 million. The regulatory liability in excess of the amounts required to be recorded in accordance with SFAS No. 143 and FIN 47 at March 31, 2006 was $34.4 million.

In accordance with the requirements of SFAS No. 143 and FIN 47, TDS Telecom’s competitive local exchange carrier has recorded an asset retirement obligation of $2.7 million at March 31, 2006.

The table below summarizes the changes in asset retirement obligations during the three months ended March 31, 2006.

	U.S.		TDS Telecom					TDS
	Cellular		ILEC			CLEC		Consolidated
			(Dollars in thousands)

Beginning Balance – December 31, 2005	$	90,224	$	70,220		$	2,649	$	163,093
Additional liabilities accrued	1,529		1,429			—		2,958
Accretion expense	1,737		8			46		1,791
Costs of removal incurred in 2006	—		(197		)	—		(197		)
Ending Balance – March 31, 2006	$	93,490	$	71,460		$	2,695	$	167,645

13. Long-Term Debt and Forward Contracts

The late filing of TDS’s and U.S. Cellular’s Forms 10-K for the year ended December 31, 2005 and Forms 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006 and the failure to deliver such Forms 10-K and 10-Q to the trustees of the TDS and U.S. Cellular debt indentures on a timely basis, resulted in non-compliance under such debt indentures. However, this non-compliance did not result in an event of default or a default. TDS and U.S. Cellular believe that non-compliance was cured upon the filing of their Forms 10-K for the year ended December 31, 2005 and Forms 10-Q for the quarterly period ended March 31, 2006, but that non-compliance continues to exist with respect to their Forms 10-Q for the quarterly period ended June 30, 2006. TDS and U.S. Cellular have not failed to make nor do they expect to fail to make any scheduled payment of principal or interest under such indentures.

Except as noted above, TDS believes that it and its subsidiaries were in compliance as of March 31, 2006 with all covenants and other requirements set forth in long-term debt indentures. Such indentures do not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in TDS’s credit rating. However, a downgrade in TDS’s credit rating could adversely affect its ability to obtain long-term debt financing in the future.

TDS redeemed $35.0 million of medium-term notes in January and February of 2006 which carried interest rates of 10.00%.

TDS repaid $200.0 million plus accrued interest of unsecured 7% senior notes on August 1, 2006, using cash on-hand.

Forward Contracts

TDS maintains a portfolio of available-for-sale marketable equity securities, the majority of which are the result of sales or trades of non-strategic assets. Subsidiaries of TDS have forward contracts with counterparties in connection with its Deutsche Telekom, Vodafone and VeriSign marketable equity securities. The principal amount of the forward contracts was accounted for as a loan. The collar portions of the forward contracts are accounted for as derivative instruments.

The Deutsche Telekom forward contracts mature from July 2007 to September 2008. A majority of the contracts require quarterly interest payments at the LIBOR rate plus 50 basis points (the three-month LIBOR rate was 5.00% at March 31, 2006). The remaining contracts are structured as zero coupon obligations with a weighted average effective interest rate of 4.4% per year. No interest payments are required for the zero coupon obligations during the contract period.

The Vodafone forward contracts mature in May and October 2007. The Vodafone forward contracts require quarterly interest payments at the LIBOR rate plus 50 basis points (the three-month LIBOR rate was 5.00% at March 31, 2006). See Note 20 – Subsequent Events for additional information related to the investment in Vodafone ADRs.

The VeriSign forward contract matures in May 2007 and is structured as a zero coupon obligation with an effective interest rate of 5.00% per year. TDS is not required to make interest payments during the contract period.

The risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities (“downside limit”) while retaining a share of gains from increases in the market prices of such securities (“upside potential”). The downside limit is hedged at or above the accounting cost basis thereby eliminating the risk of an other-than-temporary loss being recorded on these contracted securities.

Under the terms of the forward contracts, subsidiaries of TDS and U.S. Cellular will continue to own the contracted shares and will receive dividends paid on such contracted shares, if any. The forward contracts, at TDS’s and U.S. Cellular’s option, may be settled in shares of the respective security or in cash, pursuant to formulas that “collar” the price of the shares. The collars effectively reduce downside risk and upside potential on the contracted shares. The collars are typically adjusted for any changes in dividends on the contracted shares. If the dividend increases, the collar’s upside potential is typically reduced. If the dividend decreases, the collar’s upside potential is typically increased. If TDS and U.S. Cellular elect to settle in shares, they will be required to deliver the number of shares of the contracted security determined pursuant to the formula. If shares are delivered in the settlement of the forward contract, TDS and U.S. Cellular would incur a current tax liability at the time of delivery based on the difference between the tax basis of the marketable equity securities delivered and the net amount realized through maturity. If TDS and U.S. Cellular elect to settle in cash, they will be required to pay an amount in cash equal to the fair market value of the number of shares determined pursuant to the formula. TDS and U.S. Cellular have provided guarantees to the counterparties which provide assurance that all principal and interest amounts are paid by its consolidated subsidiaries upon settlement of the contracts.

TDS and U.S. Cellular are required to comply with certain covenants under the forward contracts. On November 10, 2005, TDS and U.S. Cellular announced that they would restate certain financial statements which caused TDS and U.S. Cellular to be late in certain SEC filings. The restatements and late filings resulted in defaults under the forward contracts. However, TDS and U.S. Cellular were not in violation of any covenants that require TDS and U.S. Cellular to maintain certain financial ratios. TDS and U.S. Cellular did not fail to make any scheduled payments under such forward contracts. TDS and U.S. Cellular received waivers from the counterparties associated with the forward contracts, under which the counterparties agreed to waive any defaults that may have occurred as a result of the restatements and late filings. The waivers require the Form 10-K for the year ended December 31, 2005 to be filed by August 31, 2006, the Form 10-Q for the quarter ended March 31, 2006 to be filed within 30 days after the filing of the Form 10-K for the year ended December 31, 2005 and the Form 10-Q for the quarter ended June 30, 2006 to be filed within 45 days after the filing of the Form 10-Q for the quarter ended March 31, 2006. The Form 10-K for the year ended December 31, 2005 was filed on July 28, 2006.

14. Minority Interest in Subsidiaries

Under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” certain minority interests in consolidated entities with finite lives may meet the standard’s definition of a mandatorily redeemable financial instrument and thus require reclassification as liabilities and remeasurement at the estimated amount of cash that would be due and payable to settle such minority interests under the applicable entity’s organization agreement assuming an orderly liquidation of the finite-lived entity, net of estimated liquidation costs (the “settlement value”). TDS’s consolidated financial statements include such minority interests that meet the standard’s definition of mandatorily redeemable financial instruments. These mandatorily redeemable minority interests represent interests held by third parties in consolidated partnerships and limited liability companies (“LLCs”), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the minority interest holders and TDS in accordance with the respective partnership and LLC agreements. The termination dates of TDS’s mandatorily redeemable minority interests range from 2042 to 2103.

The settlement value of TDS’s mandatorily redeemable minority interests is estimated to be $144.6 million at March 31, 2006. This represents the estimated amount of cash that would be due and payable to settle minority interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on March 31, 2006, net of estimated liquidation costs. This amount is being disclosed pursuant to the requirements of FASB Staff Position (“FSP”) No. FAS 150-3; TDS has no current plans or intentions to liquidate any of the related partnerships or LLCs prior to their scheduled termination dates. The corresponding carrying value of the minority interests in finite-lived consolidated partnerships and LLCs at March 31, 2006 is $32.5 million, and is included in the Balance Sheet caption Minority interest in subsidiaries. The excess of the aggregate settlement value over the aggregate carrying value of the mandatorily redeemable minority interests of $112.1 million is primarily due to the unrecognized appreciation of the minority interest holders’ share of the underlying net assets in the consolidated partnerships and LLCs. Neither the minority interest holders’ share, nor TDS’s share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements. The estimate of settlement value was based on certain factors and assumptions. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount.

15. Common Share Repurchase Programs

In 2003, the Board of Directors of TDS authorized the repurchase of up to 3.0 million TDS common shares, but this authorization expired in February 2006 and a new authorization has not yet been put in place. No TDS Common Shares were repurchased in the first quarter of 2006 or 2005.

The Board of Directors of U.S. Cellular has authorized the repurchase of a limited amount of U.S. Cellular common shares on a quarterly basis, primarily for use in employee benefit plans. No U.S. Cellular common shares were repurchased in the first quarter of 2006 or 2005.

16. Acquisitions, Divestitures and Exchanges

TDS assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews attractive opportunities to acquire additional operating markets, telecommunications companies and wireless spectrum. In addition, TDS may seek to divest outright or include in exchanges for other wireless interests those markets and wireless interests that are not strategic to its long-term success.

U.S. Cellular is a limited partner in Carroll Wireless, L.P. (“Carroll Wireless”), an entity which participated in the auction of wireless spectrum designated by the FCC as Auction 58. Carroll Wireless was qualified to bid on spectrum which was available only to companies that fall under the FCC definition of “designated entities,” which are small businesses that have a limited amount of assets. Carroll Wireless was a successful bidder for 17 licensed areas in Auction 58, which ended on February 15, 2005. The aggregate amount paid to the FCC for the 17 licenses was $129.9 million, net of all bidding credits to which Carroll Wireless was entitled as a designated entity. These 17 licensed areas cover portions of 12 states and are in markets which are either adjacent to or overlap current U.S. Cellular licensed areas.

On January 6, 2006, the FCC granted Carroll Wireless’ applications with respect to 16 of the 17 licenses for which it had been the successful bidder and dismissed one application, relating to Walla Walla, Washington. Following the completion of Auction 58, the FCC determined that a portion of the Walla Walla license was already licensed to another party and should not have been included in Auction 58. Accordingly, in 2006, Carroll Wireless received a full refund of the $228,000 previously paid to the FCC with respect to the Walla Walla license.

Carroll Wireless is in the process of developing its long-term business and financing plans. As of March 31, 2006, U.S. Cellular made capital contributions and advances to Carroll Wireless and/or its general partner of approximately $129.9 million; $129.7 million of this amount is included in Licenses in the Consolidated Balance Sheets. U.S. Cellular consolidates Carroll Wireless and Carroll PCS, Inc., the general partner of Carroll Wireless, for financial reporting purposes, pursuant to the guidelines of FASB Interpretation No. 46R (“FIN 46R”), as U.S. Cellular anticipates benefiting from or absorbing a majority of Carroll Wireless’ expected respective gains or losses. Pending finalization of Carroll Wireless’ permanent financing plan, and upon request by Carroll Wireless, U.S. Cellular may make additional capital contributions and advances to Carroll Wireless and/or its general partner. In November 2005, U.S. Cellular approved additional funding of $1.4 million of which $0.1 million was provided to Carroll Wireless through March 31, 2006.

In the first quarter of 2005, TDS adjusted the gain on investments related to its sale to ALLTEL of certain wireless properties on November 30, 2004. The adjustment of the gain, which resulted from a working capital adjustment that was finalized in the first quarter of 2005, increased the total gain on the sale by $0.5 million to $51.4 million.

In addition, in 2005, U.S. Cellular purchased one new wireless market and certain minority interests in other wireless markets in which it already owned a controlling interest for $6.9 million in cash.

17. Accumulated Other Comprehensive Income

The cumulative balances of unrealized gains (losses) on securities and derivative instruments and related income tax effects included in Accumulated other comprehensive income are as follows.

	Three Months Ended March 31,
	2006			2005
	(Dollars in thousands)
Marketable Equity Securities
Balance, beginning of period	$	593,219		$	1,109,222
Add (deduct):
Unrealized gains (losses) on marketable equity securities	27,817			(356,776		)
Income tax (expense) benefit	(11,142		)	141,384
	16,675			(215,392		)
Minority share of unrealized losses	651			862
Net change in unrealized gains (losses) on marketable equity securities in comprehensive income	17,326			(214,530		)
Balance, end of period	$	610,545		$	894,692

Derivative Instruments
Balance, beginning of period	$	(284,210	)	$	(738,365	)
Add (deduct):
Unrealized gains (losses) on derivative instruments	(5,283		)	347,018
Income tax (expense) benefit	2,217			(137,683		)
	(3,066		)	209,335
Minority share of unrealized losses	(559		)	(375		)
Net change in unrealized gains (losses) on derivative instruments included in comprehensive income	(3,625		)	208,960
Balance, end of period	$	(287,835	)	$	(529,405	)

Accumulated Other Comprehensive Income
Balance, beginning of period	$	309,009		$	370,857
Net change in marketable equity securities	17,326			(214,530		)
Net change in derivative instruments	(3,625		)	208,960
Net change in unrealized gains (losses) included in comprehensive income	13,701			(5,570		)
Balance, end of period	$	322,710		$	365,287

18. Business Segment Information

Financial data for TDS’s business segments for the three month period ended or at March 31, 2006 and 2005 are as follows. TDS Telecom’s incumbent local exchange carriers are designated as “ILEC” in the table and its competitive local exchange carrier is designated as “CLEC”.

Three Months Ended or at March 31, 2006	U.S.		TDS Telecom							Other Reconciling
(Dollars in thousands)	Cellular		ILEC		CLEC		Other (1)			Items(2)			Total
Operating revenues	$	837,236	$	161,026	$	59,870	$	7,583		$	(5,403	)	$	1,060,312
Cost of services and products	298,171		48,832		23,617		5,272			(753		)	375,139
Selling, general and administrative expense	325,618		41,200		28,449		1,907			(3,753		)	393,421
Operating income before depreciation, amortization and accretion (3)	213,447		70,994		7,804		404			(897		)	291,752
Depreciation, amortization and accretion expense	141,726		33,576		6,654		711			—			182,667
Operating income (loss)	71,721		37,418		1,150		(307		)	(897		)	109,085
Significant noncash items:
Investment income	19,483		—		—		—			322			19,805
Marketable equity securities	219,584		—		—		—			2,339,923			2,559,507
Investment in unconsolidated entities	185,915		3,623		—		—			41,658			231,196
Total assets	5,412,286		1,668,956		151,830		27,664			3,116,420			10,377,156
Capital expenditures	$	119,795	$	17,109	$	2,673	$	1,873		$	4,912		$	146,362

Three Months Ended or at March 31, 2005	U.S.		TDS Telecom								Other Reconciling
(Dollars in thousands)	Cellular		ILEC			CLEC			Other (1)		Items(2)			Total
Operating revenues	$	711,071	$	161,843		$	59,267		$	7,808	$	(4,202	)	$	935,787
Cost of services and products	265,719		43,739			24,124			5,549		(507		)	338,624
Selling, general and administrative expense	278,330		43,258			29,262			1,416		(3,695		)	348,571
Operating income before depreciation, amortization and accretion (3)	167,022		74,846			5,881			843		—			248,592
Depreciation, amortization and accretion expense	127,493		34,264			7,303			688		—			169,748
Operating income (loss)	39,529		40,582			(1,422		)	155		—			78,844
Significant noncash items:
Investment income	14,440		175			—			—		139			14,754
Gain (loss) on investments	551		(51		)	—			—		—			500
Marketable equity securities	274,079		—			—			—		2,767,949			3,042,028
Investment in unconsolidated entities	169,634		19,896			—			—		24,290			213,820
Total assets	5,255,595		1,728,560			147,760			25,623		3,557,551			10,715,089
Capital expenditures	$	112,775	$	16,142		$	4,214		$	915	$	741		$	134,787

(1) Represents Suttle Straus.

(2) Consists of the TDS Corporate operations, intercompany and intracompany revenue and expense eliminations, TDS Corporate and TDS Telecom marketable equity securities and all other businesses not included in the U.S. Cellular or TDS Telecom segments.

(3) The amount of operating income before depreciation, amortization and accretion is a non-GAAP financial measure. The amount may also be commonly referred to by management as operating cash flow. TDS has presented operating cash flow because this financial measure, in combination with other financial measures, is an integral part of our internal reporting system utilized by management to assess and evaluate the performance of its business. Operating cash flow is also considered a significant performance measure. It is used by management as a measurement of its success in obtaining, retaining and servicing customers by reflecting its ability to generate subscriber revenue while providing a high level of customer service in a cost effective manner. The components of operating cash flow include the key revenue and expense items for which operating managers are responsible and upon which TDS evaluates its performance.

Other companies in the wireless industry may define operating cash flow in a different manner or present other varying financial measures, and, accordingly, TDS’s presentation may not be comparable to other similarly titled measures of other companies.

Operating cash flow should not be construed as an alternative to operating income (loss), as determined in accordance with GAAP, as an alternative to cash flows from operating activities, as determined in accordance with GAAP, or as a measure of liquidity. TDS believes operating cash flow is useful to investors as a means to evaluate TDS’s operating performance prior to non-cash depreciation and amortization expense, and certain other non-cash charges. Although operating cash flow may be defined differently by other companies in the wireless industry, TDS believes that operating cash flow provides some commonality of measurement in analyzing operating performance of companies in the wireless industry.

	Three Months Ended March 31,
	2006			2005
	(Dollars in thousands)
Total operating income from reportable and other segments	$	109,085		$	78,844
Total Investment and other income (expense)	(22,992		)	(32,637		)
Income before income taxes and minority interest	$	86,093		$	46,207

19. Commitments and Contingencies

Contingent obligations, including indemnities, litigation and other possible commitments are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies,” which requires that an estimated loss be recorded if it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accordingly, those contingencies that are deemed to be probable and where the amount of such settlement is reasonably estimable are accrued in the financial statements. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been or will be incurred, even if the amount is not estimable. The assessment of contingencies is a highly subjective process that requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of the accruals and related financial statement disclosure. The ultimate outcome of contingencies could materially impact the Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows.

Indemnifications

TDS enters into agreements in the normal course of business that provide for indemnification of counterparties. These agreements include certain asset sales and financings with other parties. The terms of the indemnifications vary by agreement. The events or circumstances that would require TDS to perform under these indemnities are transaction specific; however, these agreements may require TDS to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. TDS is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, TDS has not made any significant indemnification payments under such agreements.

TDS is party to an indemnity agreement with T-Mobile USA Inc., (“T-Mobile”) regarding certain contingent liabilities at Aerial Communications, Inc. (“Aerial”) for the period prior to Aerial’s merger into VoiceStream Wireless. As of March 31, 2006, TDS has recorded liabilities of $1.5 million relating to this indemnity, which represents its best estimate of its probable liability.

Legal Proceedings

TDS is involved in a number of legal proceedings before the FCC and various state and federal courts. If TDS believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of the accruals and related financial statement disclosure. The ultimate outcome of legal proceedings could differ materially from amounts accrued in the financial statements.

Regulatory Environment

Changes in the telecommunications regulatory environment, including the effects of potential changes in the rules governing universal service funding and potential changes in the amounts or methods of intercarrier compensation, could have a material adverse effect on TDS Telecom’s financial condition, results of operations and cash flows.

20. Subsequent Events

U.S. Cellular owns approximately 14% of Midwest Wireless Communications, LLC, which interest is convertible into approximately an 11% interest in Midwest Wireless Holdings, LLC, a privately-held wireless telecommunications company that controls Midwest Wireless Communications. Midwest Wireless Holdings, through subsidiaries, holds FCC licenses and operates certain wireless markets in southern Minnesota, northern and eastern Iowa and western Wisconsin. On November 18, 2005, ALLTEL announced that it had entered into a definitive agreement to acquire Midwest Wireless Holdings for $1.075 billion in cash, subject to certain conditions, including approval by the FCC, other governmental authorities and the members of Midwest Wireless Holdings. On January 31, 2006, U.S. Cellular filed a petition to deny the FCC license transfer of control applications filed by ALLTEL and Midwest Wireless Holdings seeking FCC consent to their transaction. That petition is pending. Subject to the outcome of such petition, the satisfaction of certain conditions and the closing of the foregoing agreement, U.S. Cellular will be entitled to receive approximately $102.7 million in cash in consideration with respect to its interest in Midwest Wireless Communications upon the closing of the acquisition of Midwest Wireless Holdings by ALLTEL. In addition, U.S. Cellular owns 49% of an entity, accounted for under the equity method, which owns approximately 2.9% of Midwest Wireless Holdings. If the transaction with ALLTEL occurs, this entity will receive cash in consideration for its interest in Midwest Wireless Holdings. Following that, this entity will be dissolved and U.S. Cellular will be entitled to receive approximately $11.4 million in cash. The net aggregate carrying value of U.S. Cellular’s investments in Midwest Wireless Communications and Midwest Wireless Holdings was approximately $21.7 million at March 31, 2006.

U.S. Cellular is a limited partner in Barat Wireless, L.P. (“Barat Wireless”), an entity which is participating in the auction of wireless spectrum designated by the FCC as Auction 66, which began in August 2006. Barat Wireless intends to qualify as a “designated entity” and be eligible for discounts with respect to spectrum purchased in Auction 66.

Barat Wireless is in the process of developing its long-term business and financing plans. As of August 25, 2006, U.S. Cellular has made capital contributions and advances to Barat Wireless and/or its general partner of $79.9 million to provide initial funding of Barat Wireless’ participation in Auction 66. U.S. Cellular will consolidate Barat Wireless and Barat Wireless, Inc., the general partner of Barat Wireless, for financial reporting purposes, pursuant to the guidelines of FIN 46R, as U.S. Cellular anticipates benefiting from or absorbing a majority of Barat Wireless’ expected gains or losses. Pending finalization of Barat Wireless’ permanent financing plan, and upon request by Barat Wireless, U.S. Cellular may agree to make additional capital contributions and advances to Barat Wireless and/or its general partner.

In April 2006, an interexchange carrier for which TDS Telecom provides both originating and terminating access asserted a claim for refund, net of counterclaims, of up to $10 million for past billed amounts for certain types of traffic. TDS Telecom believes its billing methods and procedures were appropriate under the terms of its state and federal tariffs and will contest this claim.

TDS Telecom has in the past obtained financing from the RTB. In connection with such financings, TDS Telecom purchased stock in the RTB. TDS Telecom has repaid all of its debt to the RTB, but continued to own the RTB stock. In August 2005, the board of directors of the RTB approved resolutions to liquidate and dissolve the RTB. In order to effect the dissolution and liquidation, shareholders were asked to remit their shares to receive cash compensation for those shares. TDS Telecom remitted its shares and received $101.7 million from the RTB in the second quarter of 2006. TDS Telecom’s book basis in the RTB stock was approximately $9.1 million.

At an Extraordinary General Meeting held on July 25, 2006, shareholders of Vodafone approved a Return of Capital (“Special Distribution”) of £0.15 per share (£1.50 per American Depositary Receipt (“ADR”)) and a Share Consolidation under which every 8 ADRs were consolidated into 7 ADRs.

The Share Consolidation was effective July 28, 2006 and the Special Distribution was paid on August 18, 2006. As a result of the Share Consolidation, U.S. Cellular’s previous 10,245,370 ADRs were consolidated into 8,964,698 ADRs and TDS Telecom’s previous 2,700,545 ADRs were consolidated into 2,362,976 ADRs. Also, U.S. Cellular received approximately $28.6 million and TDS Telecom received approximately $7.6 million from the Special Distribution and will record dividend income, before taxes, of this amount in the third quarter of 2006.

Pursuant to terms of the forward contracts, the contract collars were adjusted as a result of the Special Dividend and the Share Consolidation. After adjustment, the collars had downside limits (floor) ranging from $17.22 to $18.37 and upside potential (ceiling) ranging from $17.22 to $19.11. In the case of two forward contracts, subsidiaries of TDS made a dividend substitution payment in the amount of $3.2 million to the counterparties in lieu of further adjustments to the collars for such forward contracts.

TDS repaid $200.0 million plus accrued interest of unsecured 7% senior notes on August 1, 2006, using cash on-hand.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

Telephone and Data Systems, Inc. (“TDS”- AMEX symbol: TDS and TDS.S) is a diversified telecommunications company providing high-quality telecommunications services to approximately 6.8 million wireless telephone customers and wireline telephone equivalent access lines. TDS conducts substantially all of its wireless telephone operations through its 81.2%-owned subsidiary, United States Cellular Corporation (“U.S. Cellular”), its incumbent local exchange carrier and competitive local exchange carrier wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”) and its printing and distribution operations through its 80%-owned subsidiary, Suttle Straus, Inc.

The following discussion and analysis should be read in conjunction with TDS’s interim consolidated financial statements included herein, and with its audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2005.

OVERVIEW

The following is a summary of certain selected information from the complete management discussion that follows the overview and does not contain all of the information that may be important. You should carefully read the entire Management’s Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on this overview.

Results of Operations

U.S. Cellular—U.S. Cellular positions itself as a regional operator, focusing its efforts on providing wireless service to customers in the geographic areas where it has licenses to provide such service. U.S. Cellular differentiates itself from its competitors through a customer satisfaction strategy, reflecting broad product distribution, a customer service focus and a high-quality wireless network.

U.S. Cellular’s business development strategy is to operate controlling interests in wireless licenses in areas adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas. U.S. Cellular’s operating strategy is to strengthen the geographic areas where it can continue to build long-term operating synergies and to exit those areas where it does not have opportunities to build such synergies.

U.S. Cellular’s operating income in the three months ended March 31, 2006 increased $32.2 million, or 81%, to $71.7 million from $39.5 million in 2005. The operating income margin (as a percent of service revenues) was 9.3% in 2006 and 5.9% in 2005. Operating income and operating income margin are expected to improve slightly over the next few years, primarily due to anticipated increases in revenues generated by additional customers, data-related services and recently launched markets. Offsetting these increases are the anticipated effects of the following factors:

· costs of customer acquisition and retention;

· effects of competition;

· costs related to increased customer use of its services;

· costs of developing recently acquired and launched markets; and

· costs of additional enhancements to U.S. Cellular’s wireless networks.

See “U.S. Cellular Operations.”

TDS Telecom—TDS Telecom provides high-quality telecommunication services, including full-service local exchange service, long distance telephone service and Internet access, to rural, suburban and selected small urban area communities. TDS Telecom’s business plan is designed for a full-service telecommunications company, including competitive local exchange carrier operations, by leveraging TDS Telecom’s strength as an incumbent local exchange carrier. TDS Telecom is focused on achieving three central strategic objectives: growth, market leadership, and profitability. TDS Telecom’s strategy includes gaining additional market share and deepening penetration of vertical services within established markets.

TDS Telecom’s operating income in the three months ended March 31, 2006 decreased $0.6 million, or 2% to $38.6 million from $39.2 million in 2005. The operating income margins were 17.6% in 2006 and 17.8% in 2005. Despite the challenges faced in the industry, TDS Telecom was able to increase equivalent access lines in 2006 primarily through the increase in penetration of existing markets by its competitive local exchange operations.

See “TDS Telecom Operations.”

Cash Flows and Investments

At March 31, 2006, TDS and its subsidiaries had cash and cash equivalents totaling $1,076.6 million, available borrowing capacity of $1,211.1 million under its revolving credit facilities and an additional $75 million of bank lines of credit. Also, during the quarter ended March 31, 2006, TDS generated cash flows from operating activities of $220.6 million. Management believes that cash on hand, expected future cash flows from operating activities and sources of external financing provide substantial financial flexibility and are sufficient to permit TDS and its subsidiaries to finance their contractual obligations and anticipated capital expenditures. TDS continues to seek to maintain a strong balance sheet and an investment grade credit rating.

Barat Wireless is in the process of developing its long-term business and financing plans. As of August 25, 2006, U.S. Cellular has made capital contributions and advances of $79.9 million to Barat Wireless and/or its general partner to provide initial funding of Barat Wireless’ participation in Auction 66. U.S. Cellular will consolidate Barat Wireless and Barat Wireless, Inc., the general partner of Barat Wireless, for financial reporting purposes, pursuant to the guidelines of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), as U.S. Cellular anticipates absorbing a majority of Barat Wireless’ expected gains or losses. Pending finalization of Barat Wireless’ permanent financing plan, and upon request by Barat Wireless, U.S. Cellular may agree to make additional capital contributions and advances to Barat Wireless and/or its general partner.

See “Financial Resources” and “Liquidity and Capital Resources.”

RESULTS OF OPERATIONS

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Operating Revenues increased $124.5 million, or 13%, to $1,060.3 million during the three months ended March 31, 2006 from $935.8 million during the three months ended March 31, 2005, primarily as a result of an 8% increase in customers and equivalent access lines served. U.S. Cellular’s operating revenues increased $126.1 million, or 18%, to $837.2 million in 2006 from $711.1 million in 2005 as customers served increased by 506,000, or 10%, since March 31, 2005, to 5,633,000. TDS Telecom’s operating revenues decreased $0.4 million, or less than 1%, to $219.4 million in 2006 from $219.8 million in 2005. A decrease in revenues generated from network access was partially offset by the growth in equivalent access lines. Equivalent access lines grew 19,500 or 2%, since March 31, 2005, to 1,191,400. An equivalent access line is derived by converting a high-capacity data line to an estimated equivalent number, in terms of capacity, of switched access lines.

Operating Expenses increased $94.3 million, or 11%, to $951.2 million in 2006 from $856.9 million in 2005 primarily reflecting growth in operations. Operating expenses include a $5.9 million increase in stock-based compensation expense primarily due to the implementation of FASB Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised) (“SFAS 123(R)”), “Share-Based Payment,” as of January 1, 2006. U.S. Cellular’s operating expenses increased $94.0 million, or 14%, to $765.5 million in 2006 from $671.5 million in 2005 primarily reflecting costs associated with acquiring customers and serving and retaining its expanding customer base. TDS Telecom’s expenses increased $0.1 million, or less than 1%, to $180.8 million in 2006 from $180.7 million in 2005 primarily reflecting increased cost of goods sold for digital subscriber lines and long distance services, along with costs related to providing services to additional competitive local exchange carrier customers.

Operating Income increased $30.3 million, or 38%, to $109.1 million in 2006 from $78.8 million in 2005. The operating margin was 10.3% in 2006 and 8.4% in 2005 on a consolidated basis. U.S. Cellular’s operating income increased $32.2 million, or 81%, to $71.7 million from $39.5 million in 2005 and its operating margin, as a percentage of service revenues, increased to 9.3% in 2006 from 5.9% in 2005. TDS Telecom’s operating income decreased $0.6 million, or 2%, to $38.6 million in 2006 from $39.2 million in 2005 and its operating margin decreased to 17.6% in 2006 from 17.8% in 2005.

Investment and Other Income (Expense) primarily includes interest and dividend income, investment income, gains and losses on investments and interest expense. Investment and other income (expense) totaled $(23.0) million in 2006 and $(32.6) million in 2005.

Investment income increased $5.0 million, or 34%, to $19.8 million in 2006 from $14.8 million in 2005. Investment income represents TDS’s share of net income from markets in which it has a minority interest and that are accounted for by the equity method. TDS’s investment in the Los Angeles SMSA Limited Partnership meets certain “significance” tests, pursuant to Rule 3-09 of SEC Regulation S-X, this investment contributed $14.6 million and $12.0 million to investment income for the three months ended March 31, 2006 and 2005, respectively.

Interest and dividend income increased $7.9 million to $16.2 million in 2006 from $8.3 million in 2005 primarily due to higher average rates of interest earned on investments in 2006 than 2005.

Interest expense increased $6.6 million, or 13%, to $58.5 million in 2006 from $51.9 million in 2005. The increase in interest expense in the three months ended March 31, 2006 was primarily due to an increase in interest paid on forward contracts related to interest rate increases ($6.7 million), the new debt issuance of 6.625% senior notes in March 2005 of $116.25 million ($1.9 million) and the increase in interest rates on the revolving credit facilities ($1.6 million). The increase in interest expense was partially offset by the repayment of TDS Telecom subsidiary debt in March and June of 2005 ($3.4 million).

Gain on investments totaled a net gain of $0.5 million in 2005. The net gain reflects the working capital adjustment recorded in 2005 on the investment interests sold by U.S. Cellular and TDS Telecom to ALLTEL in November 2004. There were no gains or losses on investments recorded in 2006.

Other income (expense) totaled $(0.5) million in 2006 and $(4.3) million in 2005. Borrowing costs on the prepaid forward contracts decreased $0.6 million in 2006 compared to 2005. The VeriSign derivative resulted in a gain of $0.4 million in 2006 compared to a loss of $0.1 million in 2005. In addition, in 2005 TDS Telecom recorded a $0.6 million expense prepayment penalty on the repayment of debt as well as a $0.1 million write off of unamortized debt issuance costs.

Income Tax Expense increased $18.6 million to $36.0 million in 2006 from $17.4 million in 2005 primarily due to the increase in pre-tax income. The overall effective tax rates on income before income taxes and minority interest for the three months ended March 31, 2006 and 2005 were 41.8% and 37.7%, respectively. The effective tax rate for the 2006 period is higher than for 2005 primarily due to the estimated foreign tax expense on the Deutsche Telekom dividend included in the annual operations effective tax rate for 2006. In 2005 the estimated foreign tax expense on the Deutsche Telekom dividend was not included in the annual operations effective tax rate until the second quarter (the first time in three years that a dividend was declared). For further analysis and discussion of TDS’s effective tax rates in 2006 and 2005, see Note 4 – Income Taxes.

Minority Share of Income includes the minority public shareholders’ share of U.S. Cellular’s net income, the minority shareholders’ or partners’ share of U.S. Cellular’s subsidiaries’ net income or loss and other minority interests.

	Three Months Ended March 31,
	2006			2005
	(Dollars in thousands)
Minority Share of Income
U.S. Cellular
Minority Public Shareholders’	$	(7,050	)	$	(2,159	)
Minority Shareholders’ or Partners’	(3,100		)	(3,578		)
	(10,150		)	(5,737		)
Other	(100		)	(26		)
	$	(10,250	)	$	(5,763	)

Net Income Available to Common totaled $39.8 million, or $0.34 per diluted share, in 2006 and $23.0 million, or $0.20 per diluted share, in 2005.

U.S. CELLULAR OPERATIONS

TDS provides wireless telephone service through United States Cellular Corporation (“U.S. Cellular”), an 81.2%-owned subsidiary. U.S. Cellular owns, manages and invests in wireless markets throughout the United States. Growth in the customer base is the primary reason for the change in U.S. Cellular’s results of operations in 2006 and 2005. The number of customers increased 10% to 5,633,000 at March 31, 2006, from 5,127,000 at March 31, 2005, due to customer additions from its marketing channels and acquisition, divestitures and exchange activities.

SUMMARY OF HOLDINGS

U.S. Cellular owned, or had the right to acquire pursuant to certain agreements, either majority or minority interests in 241 wireless markets as of March 31, 2006. A summary of the number of markets U.S. Cellular owns or has rights to acquire as of March 31, 2006 follows:

		Number of Markets
Consolidated markets (1)		200
Consolidated markets acquirable pursuant to existing agreements (2)		17
Minority interests accounted for using equity method (3)		19
Minority interests accounted for using cost method (4)		5
Total markets to be owned after completion of pending transactions		241

(1) U.S. Cellular owns a controlling interest in each of these markets. These markets include controlling interests acquired in 11 licenses through Carroll Wireless, L.P. (“Carroll Wireless”), an entity in which U.S. Cellular owns a controlling interest for financial reporting purposes. Carroll Wireless was the winning bidder for 17 wireless licenses in the auction of wireless spectrum designated by the Federal Communications Commission (“FCC”) as Auction 58. On January 6, 2006, the FCC granted Carroll Wireless applications with respect to 16 of the 17 licenses for which it was the winning bidder and dismissed one application relating to Walla Walla, Washington. Following the completion of Auction 58, the FCC determined that a portion of the Walla Walla license was already licensed to another party and should not have been included in Auction 58. In March 2006, Carroll Wireless received a full refund of the amount paid to the FCC with respect to the Walla Walla license. Of the 16 licenses which were granted to Carroll Wireless, five are in markets in which U.S. Cellular currently owns spectrum. Only license acquisitions which add incremental territory to U.S. Cellular’s consolidated operating markets are included in the number of consolidated markets to be acquired to avoid duplicate reporting of overlapping markets. The other 11 licenses represent markets which are incremental to U.S. Cellular’s currently owned or acquirable markets.

U.S. Cellular’s consolidated markets also include controlling interests acquired in 15 licenses and exclude controlling interests transferred in two licenses pursuant to the exchange transaction with ALLTEL Corporation (“ALLTEL”) that was completed on December 19, 2005.

(2) U.S. Cellular owns rights to acquire controlling interests in 17 wireless licenses resulting from an exchange transaction with AT&T Wireless Services, Inc. (“AT&T Wireless”), now Cingular Wireless LLC (“Cingular”), which closed in August 2003. Pursuant to such exchange transaction, U.S. Cellular acquired rights to 21 licenses as of the closing date. U.S. Cellular has up to five years from the transaction closing date to exercise its rights to acquire the licenses. Pursuant to such exchange transaction, U.S. Cellular also has rights to acquire four additional licenses. However, those four licenses are in markets where U.S. Cellular currently owns spectrum. Therefore, the four licenses for which U.S. Cellular owns rights to acquire controlling interests are not included in the number of consolidated markets to be acquired.

(3) Represents licenses in which U.S. Cellular owns an interest that is not a controlling financial interest and which are accounted for using the equity method.

(4) Represents licenses in which U.S. Cellular owns an interest that is not a controlling financial interest and which are accounted for using the cost method.

RESULTS OF OPERATIONS

Following is a table of summarized operating data for U.S. Cellular’s consolidated operations.

	Three Months Ended or At March 31,
	2006	2005

As of March 31, (1a)
Total market population (2)	55,164,000	44,576,000
Customers (3)	5,633,000