amortization captions totaled $9.2 million and $1.7 million, respectively. The aggregate effect of ceasing amortization increased operating income by 12% ($10.9 million).

Investment and Other Income (Expense) primarily includes gains and (losses) on marketable securities and other investments, interest and dividend income, and investment income. Investment and other income (expense) totaled $(23.1) million in 2002 and $14.5 million in 2001.

Investment Income, net, increased $4.1 million to $11.0 million in the first three months of 2002 due to improved operating results of certain wireless interests. Investment income represents the Company’s share of income in unconsolidated entities in which the Company has a minority interest and follows the equity method of accounting.

Gain (Loss) on Marketable Securities and Other Investments totaled $(37.4) million in 2002. Management determined the decline in value of TDS’s investment in VeriSign, Inc. relative to its cost basis was other than temporary and charged a $37.4 million loss to the statement of operations .

Income Tax Expense decreased 28% ($8.5 million) in 2002 primarily due to the decrease in pretax income. The effective tax rate was 48.4% in 2002 and 43.9% in 2001. Excluding the loss on marketable securities, the effective tax rate was 44.4% in 2002.

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. The increase in minority share of income primarily reflects the increase in U.S. Cellular’s net income.

                                                 Three Months Ended
                                                     March 31,
                                               ---------------------
                                                  2002       2001       Change
                                               ---------   ---------   ---------
                                                     (Dollars in thousands)
Minority Share of (Income) Loss
  U.S. Cellular
    Minority Public Shareholders'              $ (7,797)   $ (6,018)   $ (1,779)
    Minority Shareholders' or Partners'          (2,433)     (2,279)       (154)
                                               --------    --------    --------
                                                (10,230)     (8,297)     (1,933)
  Other                                             291         328         (37)
                                               --------    --------    --------
                                               $ (9,939)   $ (7,969)   $ (1,970)
                                               ========    ========    ========

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                                                           Three Months Ended
                                                                March 31,
                                                        ------------------------
                                                          2002            2001
                                                        --------       ---------
                                                        (Dollars in thousands,
                                                       except per share amounts)

Income before Extraordinary Item
  Operations                                            $ 36,232       $ 37,846
  SFAS No. 142 Amortization Adjustment                        --         (6,624)
  Gains (Losses)                                         (22,635)            --
                                                        --------       --------
                                                        $ 13,597       $ 31,222
                                                        ========       ========


Diluted Earnings Per Share before
     Extraordinary Item
  Operations                                            $   0.61       $   0.63
  SFAS No. 142 Amortization Adjustment                        --           (.11)
  Gains (Losses)                                           (0.38)            --
                                                        --------       --------
                                                        $   0.23       $   0.52
                                                        ========       ========

customer base.

Management anticipates that the rate of growth in inbound roaming minutes of use will continue to slow down due to newer customers roaming less than existing customers, reflecting further penetration of the consumer market. In addition, as new wireless operators begin service in U.S. Cellular's markets, roaming partners could switch their business to these new operators. It is also anticipated that average inbound roaming revenue per minute of use will continue to decline in the future, reflecting the general downward trend in negotiated rates.

Operating expenses increased 5% ($18.3 million) in 2002. The increase is primarily related to costs incurred to serve and expand the customer base.

System operations expenses (costs to provide service) increased 13% ($12.3 million) and represented 23.4% of service revenues in 2002 and 22.5% in 2001. System operations expenses include customer usage expenses and maintenance, utility and cell site expenses. This increase was due to an increase in the costs associated with customers roaming on other companies' systems ($5.2 million), an increase in the cost of minutes used on the systems ($5.0 million) and an increase in the cost of maintaining the network ($2.4 million). Management expects system operations to increase over the next few years, driven by increases in the number of cell sites and increases in minutes of use on the U.S. Cellular system and on other systems when roaming. The number of cell sites increased to 3,049 in 2002 from 2,597 in 2001.

Costs to expand the customer base consist of marketing and selling expenses and the cost of equipment sold. Marketing and selling expenses increased 12% ($8.8 million) in 2002 while cost of equipment sold declined 10% ($3.4 million). These expenses, less equipment sales revenue, represent the cost to acquire a new customer. Equipment sales revenue increased 9% ($1.5 million) in 2002. The increase in marketing and selling expense in 2002 was primarily due to increased costs related to improvements made to U.S. Cellular's telesales and merchandise management processes, offset somewhat by lower costs related to a 12% decrease in the number of gross customer additions. Cost per gross customer addition increased to $365 in 2002 from $308 in 2001. This increase is attributed to a decrease in gross customer activations to 255,000 in 2002 from 290,000 in 2001 combined with increased costs.

General and administrative expenses decreased 1% ($0.8 million) and represented 23.5% of service revenues in 2002 and 25.8% in 2001. The decrease in general and administrative expenses reflects the reduction in customer retention costs of $3.5 million due to the slowing of the migration of customers from analog to digital service. The retention costs were offset somewhat by the increase in expenses required to serve the growing customer base in U.S. Cellular's markets and other expenses incurred related to the overall growth in U.S. Cellular's business.

Depreciation expense increased 19% ($10.7 million) in 2002 primarily due to the 16% increase in average fixed assets since March 31, 2001. Amortization expense decreased 58% ($9.3 million) as a result of the implementation of SFAS No. 142. U.S. Cellular determined that licenses have indefinite lives and no longer amortize the intangible asset. No impairment charge was required to be recorded upon the completion of the initial impairment review. In the first quarter of 2001, amortization of license costs and goodwill totaled $9.2 million.

Operating income increased 35% ($20.4 million) to $78.8 million in 2002. Operating margin, as a percent of service revenue, increased to 17.1% in 2002 compared to 13.8% in 2001. The increase in operating income and operating income margin resulted from increased revenues combined with lower amortization expenses and general and administrative expenses partially offset by increased costs to serve and expand the customer base.

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distance resale, and expansion of competitive local exchange activities.

Operating expenses increased 25% ($32.5 million) during 2002, reflecting primarily growth in expenses related to the newer services, ILEC acquisitions and the expansion of competitive local exchange activities.

Operating income decreased 20% ($6.4 million) to $25.7 million in 2002 reflecting operating losses incurred from the expansion of competitive local exchange operations offset by improved local telephone operations operating results.

Local Telephone Operations
Operating revenues increased 11% ($15.0 million) in 2002. Acquisitions increased revenues by $10.6 million. Average monthly revenue per equivalent access line increased 2% ($1.23) to $73.35 in 2002 from $72.12 in 2001. Revenues from reselling long distance service increased network access and long distance revenues by $3.2 million in 2002. As of March 31, 2002, TDS Telecom was providing long distance service to 143,100 customers compared to 60,300 customers in 2001.

Operating expenses increased by 13% ($12.3 million) in 2002. Cash operating expenses increased by 19% ($12.3 million) in 2002. Acquisitions increased cash operating expenses by $6.9 million in 2002. Bad debt expense increased by $3.0 million related to the write-off of pre-petition accounts receivable due to the bankruptcy of a long distance provider. The cost of providing long-distance service to an increased customer base increased expenses by $2.5 million. Depreciation and amortization increased less than 1% ($54,000) in 2002. Acquisitions increased depreciation expense by $2.0 million. In accordance with SFAS No. 142, TDS Telecom no longer amortizes telephone franchise costs (goodwill). No impairment charge was required to be recorded upon the completion of the initial impairment review. Amortization expense of goodwill amounted to $1.7 million in the first three months of 2001.

Operating income increased 7% ($2.7 million) to $40.5 million. Operating income should remain fairly stable or increase slightly with expense increases due to inflation and additional revenue and expenses from new or expanded product offerings.

Competitive Local Exchange Operations
Operating revenues increased 42% ($11.1 million) in 2002 as equivalent access lines served increased to 221,500 at March 31, 2002 from 123,700 at March 31, 2001.

Operating expenses increased 62% ($20.2 million) in 2002 due primarily to the costs incurred to grow and serve the customer base and expand competitive local exchange operations.

Operating loss increased $9.1 million to $14.8 million. TDS Telecom expects its competitive local exchange business to continue to grow. Operating losses are expected to increase somewhat throughout 2002 due to increased depreciation expenses and costs associated with market expansion.

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behalf and through joint ventures. The interests acquired through joint ventures are 100% owned by the joint ventures, and U.S. Cellular is considered to have the controlling financial interest in these joint ventures for financial reporting purposes.

Cash Flows From Financing Activities.
Cash flows from financing activities required $95.5 million in the first three months of 2002 and $10.3 million in 2001. TDS paid $51.0 million to retire Medium-term Notes in the first quarter of 2002 that were called at their principal face amount. Notes Payable balances decreased $31.0 million in 2002 and increased by $36.5 million in 2001. Dividends paid on Common and Preferred Shares, excluding dividends reinvested, totaled $8.6 million in 2002 and $8.1 million in 2001.

During the first three months of 2001, cash required for the repurchase of TDS common shares (110,000 shares for an aggregate price of $10.3 million) and the settlement of late December 2000 repurchases totaled $13.5 million. During the first three months of 2001, U.S. Cellular paid $11.0 million to settle repurchases of U.S. Cellular Common Shares made in late December 2000. No TDS or U.S. Cellular common shares were repurchased in 2002.

In 2001, U.S. Cellular retired LYONs securities with a carrying value of $15.8 million for cash totaling $10.8 million and 162,000 U.S. Cellular Common Shares. An additional $1.2 million was paid in April 2001 to settle retirements that occurred at the end of March 2001.

LIQUIDITY AND CAPITAL RESOURCES

Subject to the discussion under “Financing of Chicago 20 MHz Acquisition” below, management believes that internal cash flow, existing cash and cash equivalents, and funds available from line of credit arrangements provide sufficient financial resources to finance its near-term capital, business development and expansion expenditures. TDS and its subsidiaries have access to public and private capital markets to help meet its long-term financing needs. TDS and its subsidiaries anticipate accessing public and private capital markets to issue debt and equity securities only when and if capital requirements, financial market conditions and other factors warrant.

However, the availability of financial resources is dependent on economic events, business developments, technological changes, financial conditions or other factors, some of which may not be in TDS’s control. If at any time financing is not available on terms acceptable to TDS, TDS might be required to reduce its business development and capital expenditure plans, which could have a materially adverse effect on its business and financial condition. TDS does not believe that any circumstances that could materially adversely affect TDS’s liquidity or capital resources are currently reasonably likely to occur, but it cannot provide assurances that such circumstances will not occur or that they will not occur rapidly. Economic downturns, changes in financial markets or other factors could rapidly change the availability of TDS’s liquidity and capital resources.

At March 31, 2002, TDS and its subsidiaries are in compliance with all covenants and other requirements set forth in long-term debt indentures. TDS does not have any rating downgrade triggers that would accelerate the maturity dates of its long-term debt. However, a downgrade in TDS’s credit rating could adversely affect its ability to renew existing, or obtain access to new, credit facilities in the future.

TDS and its subsidiaries had cash and cash equivalents totaling $80.8 million at March 31, 2002. TDS had a $600 million revolving credit facility for general corporate purposes at March 31, 2002, all of which was unused. Borrowings bear interest at the London Interbank Borrowing Rate (“LIBOR”) plus a contractual spread based on the Company’s credit rating. The contractual spread

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