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Article by DailyStocks_admin    (10-06-08 03:37 AM)

Filed with the SEC from Sep 18 to Sep 24:

Telephone & Data Systems (TDS)
A group of funds managed by Mario Gabelli's Gamco Investors increased its position to about 4.19 million shares (7.88%), from 3.66 million (6.88%) held in May.

BUSINESS OVERVIEW

Business

Telephone and Data Systems, Inc. ("TDS"), is a diversified telecommunications service company with wireless telephone and wireline telephone operations. At December 31, 2002, TDS served approximately 5.1 million customer units in 35 states, including 4,103,000 wireless telephones and 1,002,600 telephone equivalent access lines. U.S. Cellular provided 73.2% of TDS's consolidated revenues and 72.8% of consolidated operating income in 2002. TDS Telecom provided 26.8% of consolidated revenues and 27.2% of consolidated operating income in 2002. TDS's business strategy is to expand its existing operations through internal growth and acquisitions and to explore and develop other telecommunications businesses that management believes will utilize TDS expertise in customer focused telecommunications services.

TDS conducts substantially all of its wireless operations through United States Cellular Corporation ("U.S. Cellular"). At December 31, 2002, TDS owned 82.2% of the combined total of the outstanding Common Shares and Series A Common Shares of U.S. Cellular and controlled 96.0% of the combined voting power of both classes of common stock. U.S. Cellular is traded on the American Stock Exchange under the symbol "USM". At December 31, 2002, U.S. Cellular provided wireless telephone service to 4,103,000 customers through 149 majority-owned and managed ("consolidated") wireless systems serving approximately 18% of the geography and approximately 13% of the population of the United States. Since 1985, when U.S. Cellular began providing cellular service in Knoxville, Tennessee and Tulsa, Oklahoma, U.S. Cellular has expanded its wireless networks and customer service operations to cover eight market areas in 25 states as of December 31, 2002. U.S. Cellular owns wireless licenses covering territories in two additional states and has the rights to commence service in those license areas in the future. The wireless licenses that U.S. Cellular currently manages cover a total population of more than one million in each market area.

TDS conducts substantially all of its wireline telephone operations through its wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom"). At December 31, 2002, TDS Telecom operated 111 Incumbent Local Exchange Carrier ("ILEC") telephone companies serving 711,200 equivalent access lines in 28 states. TDS Telecom is expanding by offering additional lines of telecommunications products and services to existing customers and through the selective acquisition of local exchange telephone companies serving rural and suburban areas. TDS Telecom has acquired 11 telephone companies since the beginning of 1998. These acquisitions added 89,300 equivalent access lines during this five-year period, while internal growth added 99,400 equivalent access lines. TDS Telecom also began offering services as a Competitive Local Exchange Carrier ("CLEC") in 1998 in certain mid-sized cities which are geographically proximate to existing TDS Telecom ILEC markets. At December 31, 2002, TDS Telecom's CLECs served 291,400 equivalent access lines in five states.

TDS was incorporated in 1968 and changed its corporate domicile from Iowa to Delaware in 1998. TDS executive offices are located at 30 North LaSalle Street, Chicago, Illinois 60602. Its telephone number is 312-630-1900.

Unless the context indicates otherwise references to:

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"TDS" or the "Company" refer to Telephone and Data Systems, Inc., and its subsidiaries;

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"USM" or "U.S. Cellular" refer to United States Cellular Corporation and its subsidiaries;

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"TDS Telecom" refer to TDS Telecommunications Corporation and its subsidiaries;

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"ILEC" refer to incumbent local exchange carriers;

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"CLEC refer to competitive local exchange carriers;

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"MSA" refer to the Metropolitan Statistical Area, as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas;

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"RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas;

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"MTA" refer to Metropolitan Trading Areas, used by the FCC in dividing the United States into PCS market areas for licenses in Blocks A and B;

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"BTA" refer to Basic Trading Areas, used by the FCC in dividing the United States into PCS market areas for licenses in Blocks C through F;

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"PCS" refer to personal communications services,

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cellular, PCS, or wireless "markets" or "systems" refer to MSAs, RSAs, MTAs, BTAs, or any combination thereof; and

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"population equivalents" mean the population of a market, based on 2002 Claritas estimates, multiplied by the percentage interests that TDS owns or has the right to acquire in an entity licensed or designated to receive a license ("licensee") from the FCC to operate a cellular or PCS system in such market.

Available Information

TDS's website is http://www.teldta.com . Anyone may access, free of charge, through the Investor Relations portion of the website the TDS annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after such material is electronically filed with the Securities and Exchange Commission.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT

This Annual Report on Form 10-K, including exhibits, contains statements that are not based on historical fact, including the words "believes," "anticipates," "intends," "expects," and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to:

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Increases in the level of competition in the markets in which TDS operates could adversely affect TDS's revenues or increase its costs to compete.

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Advances or changes in telecommunications technology could render certain technologies used by TDS obsolete. Competitors may have a lower fixed investment per customer because of technology changes.

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Changes in telecommunications regulatory environment could adversely affect TDS's financial condition or results of operations or could prevent TDS businesses which depend on access to competitors' facilities from obtaining such access on reasonable terms.

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Changes in the supply or demand of the market for wireless licenses or telephone companies, increased competition, adverse developments in the TDS businesses or the industries in which TDS is involved and/or other factors could result in an impairment of the value of TDS's license costs, goodwill and/or physical assets, which may require TDS to record a writedown in the value of such assets.

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Competition, construction delays, customer churn and other challenges in executing TDS's expansion and development of its CLEC business could result in higher than planned losses, additional financing requirements and/or the writedown of the CLEC assets if TDS is unable to successfully implement its plans in this business development.

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Conversions of LYONs, early redemptions of debt or repurchases of debt, changes in estimates or other factors or developments, could cause the amounts reported under Contractual Obligations in TDS's MD&A incorporated by reference herein to be different from the amounts presented.

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Changes in circumstances relating to and/or in the assumptions underlying the accounting estimates described under Critical Accounting Policies in TDS's MD&A incorporated by reference herein could have a material effect on the Company's financial condition, changes in financial condition and results of operations.

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Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending or future litigation that is Company specific or that apply to the industry in general could have an adverse effect on TDS's financial condition, results of operations or ability to do business.

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Costs, integration problems or other factors associated with acquisitions/divestitures of properties and/or licenses could have an adverse effect on TDS's financial condition or results of operations.

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Changes in prices, the number of wireless customers, average revenue per unit, penetration rates, churn rates, roaming rates and the mix of products and services offered in wireless markets could have an adverse effect on TDS's wireless business operations.

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Changes in roaming partners, rates, and the ability to provide voice and data services on other carriers' networks could have an adverse effect on TDS's wireless business operations.

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Changes in competitive factors with national carriers could result in product and cost disadvantages could have an adverse effect on TDS's wireless business operations.

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Changes in prices, in the number of ILEC and CLEC customers, churn rates, access minutes of use trends, and mix of products and services offered in ILEC and CLEC markets could have an adverse effect on such TDS business segments.

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Continued migration of customers from wireline to wireless services could have an adverse effect on TDS's wireline businesses.

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Continued uncertainty of access to capital for telecommunications companies, further deterioration in the capital markets, other changes in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development and acquisition programs.

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Changes in TDS's credit ratings could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development and acquisition programs.

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Changes in circumstances or other events, relating to the acquisition of Chicago 20MHz, including integration costs or problems or other factors associated with such acquisition could have an adverse effect on TDS's financial condition or results of operations.

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The continuation of the economic downturn and continued bankruptcies in the telecommunications industry could result in higher bad debts and slower business activity, which could have an adverse effect on TDS's businesses.

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War, conflicts, hostilities and/or terrorist attacks could have an adverse effect on TDS's businesses.

•
Changes in TDS's accounting policies, estimates or assumptions could have an adverse effect on our financial condition or results of operations.

•
Changes in general economic and business conditions, both nationally and in the market areas in which TDS operates, could have an adverse effect on TDS's businesses.

TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.

U.S. Cellular Operations

TDS's wireless operations are conducted through U.S. Cellular and its subsidiaries. U.S. Cellular believes that it is the eighth largest wireless company in the United States, based on internally prepared calculations of the aggregate number of customers in its consolidated markets compared to the number of customers disclosed by other wireless companies in their publicly released information. 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 anticipates that grouping its operations into market areas will continue to provide it certain economies in its capital and operating costs. As the number of opportunities for outright acquisitions has decreased in recent years, and as U.S. Cellular's regions have grown, U.S. Cellular's focus has broadened to include exchanges and divestitures of managed and investment interests which are considered less essential to its operating strategy.

U.S. Cellular's ownership interests in wireless licenses include interests in licenses covering 175 cellular MSAs or RSAs and 35 PCS BTAs. Of those interests, U.S. Cellular owns controlling interests in licenses covering 143 MSAs or RSAs and all 35 PCS BTAs. U.S. Cellular's interests in licenses covering six PCS BTAs are owned exclusively through joint ventures ("JVs") in which U.S. Cellular owns a limited partner interest; U.S. Cellular is considered to have the controlling financial interest for financial reporting purposes in these PCS BTAs.

U.S. Cellular manages the operations of all but two of the cellular licenses in which it owns a controlling interest; U.S. Cellular has contracted with another wireless operator to manage the operations of the other two markets. U.S. Cellular also manages the operations of four additional cellular licenses in which it does not own a controlling interest, through an agreement with the controlling interest holder or holders. U.S. Cellular manages or has the rights to manage the operations of 29 of the 35 PCS BTAs in which it owns licenses. As of year-end 2002, six of these BTAs were operational; marketing activities had not yet begun in the other 29 BTAs. In the six PCS BTAs in which U.S. Cellular owns a limited partner interest, the general partner has the authority to select the manager of these operations. None of these six PCS BTAs were operational at year-end 2002.

Some of the territory covered by the PCS BTA licenses U.S. Cellular operates overlaps with territory covered by the cellular licenses it operates. In other cases, U.S. Cellular owns a controlling interest in one license and a limited partner interest in another license, which covers the same PCS BTA. For the purpose of tracking population counts, when U.S. Cellular acquires a licensed area that overlaps a licensed area it already owns, it does not duplicate the number of population equivalents for any overlapping licensed area. Only non-overlapping, incremental population equivalents are added to the reported amount of total population equivalents in the case of an acquisition of a licensed area that overlaps a previously owned licensed area. The incremental population equivalents that are added in such event are referred to throughout this Form 10-K as "incremental" population measurements. Amounts reported in this Form 10-K as "total market population" and "population equivalents" do not duplicate any population equivalents in the case of any overlapping licensed areas U.S. Cellular owns.

U.S. Cellular's wireless interests represent 42.0 million incremental population equivalents as of December 31, 2002. Overall, 95% of U.S. Cellular's incremental population equivalents are in consolidated markets and 5% are in markets in which U.S. Cellular holds an investment interest.

U.S. Cellular is a limited partner in a JV which was a successful bidder for 17 PCS licenses in 13 markets in the January 2001 FCC spectrum auction ("Auction 35"). The JV has acquired five of such licenses in four markets, which are included in the 35 PCS BTAs discussed above. With respect to the remaining licenses, such licenses had been reauctioned by the FCC after defaults by winning bidders in a prior auction and were made subject by the FCC to the final outcome of certain legal proceedings initiated by the prior winning bidders. During 2002, the FCC allowed all successful bidders to opt out of any pending applications to purchase licenses resulting from Auction 35. The FCC approved the dismissal of the JV's pending applications and all amounts deposited with the FCC have been returned to the JV.

Wireless systems in U.S. Cellular's 149 operational consolidated markets served 4,103,000 customers at December 31, 2002, and contained 3,914 cell sites. The average penetration rate in U.S. Cellular's operational consolidated markets was 11.22% at December 31, 2002, and the churn rate in these markets averaged 2.1% per month for the twelve months ended December 31, 2002.

Wireless Telephone Operations

The Wireless Telephone Industry. Wireless telephone technology provides high-quality, high-capacity communications services to hand-held portable and in-vehicle wireless telephones. Wireless telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Wireless telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, facsimile and data transmission; those systems which have digital radio capabilities may offer additional features such as caller ID, short messaging services and certain data transmission services.

Wireless telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers which operate on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is connected to the conventional ("landline") telephone network and potentially other MTSOs. Each conversation on a wireless phone involves a transmission over a specific set of radio frequencies from the wireless phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network or to another wireless phone to complete the call. As the wireless telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call.

The FCC currently grants two licenses to provide cellular telephone service in each cellular licensed area. Multiple licenses have been granted in each PCS licensed area, and PCS licensed areas (BTAs and MTAs) overlap with cellular licensed areas. As a result, PCS license holders can and do compete with cellular license holders for customers. Competition for customers also includes competing communications technologies, such as:

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conventional landline telephone,

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Specialized Mobile Radio ("SMR") systems,

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mobile satellite communications systems, and

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radio paging.

PCS licensees have initiated service in nearly all areas of the United States, including substantially all of U.S. Cellular's licensed areas, and U.S. Cellular expects other wireless operators to continue deployment of PCS in all of its operating regions throughout 2003. Additionally, technologies such as Enhanced Specialized Mobile Radio ("ESMR") and mobile satellite communication systems are proving to be competitive with wireless service in many of U.S. Cellular's markets.

The services available to wireless customers and the sources of revenue available to wireless system operators are similar to those provided by conventional landline telephone companies. Customers may be charged a separate fee for system access, airtime, long-distance calls and ancillary services. Wireless system operators also provide service to customers of other operators' wireless systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." Roaming is available because technical standards require that analog wireless telephones be compatible in all market areas in the United States. Additionally, because U.S. Cellular has deployed digital radio technologies in substantially all of its service areas, its customers with digital or dual-mode (both analog and digital capabilities) or tri-mode (analog plus digital capabilities at both the cellular and PCS radio frequencies) wireless telephones can roam in other companies' service areas which have a compatible digital technology in place. Likewise, U.S. Cellular can provide roaming service to other companies' customers who have compatible digital wireless telephones. In all cases, the system that provides the service to roamers will generate usage revenue, at rates that have been negotiated between the serving carrier and the customer's carrier.

There have been a number of technical developments in the wireless industry since its inception. Currently, while substantially all companies' MTSOs process information digitally, on certain cellular systems the radio transmission uses analog technology. All PCS systems utilize digital radio transmission. Several years ago, certain digital transmission techniques were approved for implementation by the wireless industry. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the wireless industry and has been deployed by many wireless operators, including U.S. Cellular's operations in a substantial portion of its markets. Another digital technology, Code Division Multiple Access ("CDMA"), is also being deployed by U.S. Cellular in its remaining markets. In 2002, U.S. Cellular began its plans to deploy CDMA 1XRTT technology, which allows for higher speed data transmission, throughout all of its markets, over a three-year period ending in 2004. As of December 31, 2002, U.S. Cellular had deployed CDMA 1XRTT technology in a substantial portion of its Midwest market area, where it had previously deployed TDMA technology, as part of its technology conversion plans.

U.S. Cellular will continue to deploy the TDMA technology currently in place for the next few years. Migration of U.S. Cellular's customers to CDMA handsets in these markets is expected to take a few years; in addition, continuing to deploy its current TDMA technology will enable U.S. Cellular to use both CDMA and TDMA to serve roaming customers in these markets.

Digital radio technology offers several advantages, including the following:

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greater privacy,

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less transmission noise,

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data transmission capabilities,

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greater system capacity, and

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potentially lower incremental costs to accommodate additional system usage.

The conversion from analog to digital radio technology is continuing on an industry-wide basis; however, this process is expected to continue for a few more years. Wireless operators in the United States have deployed TDMA, CDMA and a third digital technology, Global System for Mobile Communication ("GSM"), in the licensed areas where they have begun operations.

U.S. Cellular's Operations. From its inception in 1983 until 1993, U.S. Cellular was principally in a start-up phase. Until 1993, U.S. Cellular's activities had been concentrated significantly on the acquisition of interests in cellular licenses and on the construction and initial operation of wireless systems. The development of a wireless system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. U.S. Cellular experienced operating losses and net losses from its inception until 1993. In the years since 1993, U.S. Cellular has produced operating income and net income, except in 2002 when higher operating expenses and losses on investments resulted in a net loss for the year.

Management anticipates further growth in wireless units in service and revenues as U.S. Cellular continues to expand through internal growth and as the PCS licenses acquired in 2001 and 2002 become fully integrated into its operations. Expenses associated with this expansion may reduce the rate of growth in cash flows from operating activities and operating income during the period of additional growth. In addition, U.S. Cellular anticipates that the seasonality of revenue streams and operating expenses may cause its cash flows from operating activities and operating income to vary from quarter to quarter.

While U.S. Cellular has produced operating income and net income since 1993 (except the net loss in 2002), changes in any of several factors may reduce U.S. Cellular's growth in operating income and net income over the next few years. These factors include:

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the growth rate in the customer base;

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the usage and pricing of wireless services;

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the cost to begin or integrate operations of newly acquired licensed areas;

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the percentage of customers who disconnect service ("churn rate");

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the cost of providing wireless services, including the cost of attracting and retaining customers;

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the migration to a single digital equipment platform, which will require substantial capital expenditures;

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continued competition from other wireless licensees and other telecommunication technologies; and

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continuing technological advances which may provide additional competitive alternatives to wireless service.

U.S. Cellular is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage wireless telephone systems. Its wireless interests include eight operating market areas. See "U.S. Cellular's Wireless Interests."

U.S. Cellular has acquired its wireless interests through the wireline application process for MSAs and RSAs, including settlements and exchanges with other applicants, and through acquisitions, including acquisitions from TDS and third parties.

Wireless Systems Development

Acquisitions, Divestitures and Exchanges. U.S. Cellular assesses its wireless holdings on an ongoing basis in order to maximize the benefits derived from grouping its markets geographically. U.S. Cellular also reviews attractive opportunities for the acquisition of additional wireless spectrum. Over the past few years, U.S. Cellular has completed exchanges of minority interests or controlling interests in its less strategic markets for controlling interests in markets which better complement its operating market areas. U.S. Cellular has also completed outright sales of other less strategic markets, and has purchased controlling interests in markets which enhance its operating market areas. In 2001, U.S. Cellular began acquiring interests in PCS markets. These markets are either adjacent to U.S. Cellular's current operations, thus expanding its current operating market areas, or are in territories in which U.S. Cellular currently operates, and will add spectrum capacity to those operations. As a result of its acquisition activities, currently 95% of U.S. Cellular's interests are in markets where it is the operator or expects to manage.

U.S. Cellular may continue to make opportunistic acquisitions or exchanges in markets that further strengthen its operating market areas and in other attractive markets. U.S. Cellular also seeks to acquire minority interests in markets where it already owns the majority interest and/or operates the market. There can be no assurance that U.S. Cellular, or TDS for the benefit of U.S. Cellular, will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. U.S. Cellular plans to retain minority interests in certain wireless markets which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in markets which enhance U.S. Cellular's operations or may be sold for cash or other consideration. U.S. Cellular also continues to evaluate the disposition of certain controlling interests in wireless licenses which are not essential to its corporate development strategy.

Acquisition of Chicago 20MHz. On August 7, 2002, U.S. Cellular completed the acquisition of all the assets and certain liabilities of Chicago 20MHz, LLC ("Chicago 20MHz") from PrimeCo Wireless Communications LLC ("PrimeCo"). The purchase price was approximately $618 million, including working capital and other adjustments. Chicago 20MHz operated the PrimeCo wireless system in the Chicago Major Trading Area ("MTA"), and is the holder of certain FCC licenses, including a 20 megahertz ("MHz") PCS license in the Chicago MTA (excluding Kenosha County, Wisconsin) covering a total population of 13.2 million.

U.S. Cellular financed the Chicago 20MHz purchase using $175 million from U.S. Cellular's 9% Series A Notes due 2032 issued to PrimeCo, $105 million from an intercompany note with TDS and the remaining amount from U.S. Cellular's $500 million revolving credit facility with a series of banks. Net of cash acquired in the transaction and bonds issued to the sellers of Chicago 20MHz, U.S. Cellular used cash totaling $431.9 million for the acquisition of Chicago 20MHz.

Other Acquisitions. Additionally in 2002, U.S. Cellular, through JVs, acquired majority interests in 10 MHz licenses in three PCS markets. The interests U.S. Cellular acquired 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. U.S. Cellular also acquired the remaining minority interests in three other PCS markets in which it previously owned an interest, resulting in 100% ownership in those markets. The aggregate amount paid by U.S. Cellular to acquire the interests in these transactions, which represented 1.4 million population equivalents (684,000 incremental population equivalents), was $21.1 million.

Pending Transaction—Subsequent Event. On March 10, 2003, U.S. Cellular announced that it had entered into a definitive agreement with AT&T Wireless ("AWE") to exchange wireless properties. U.S. Cellular will receive 10 and 20 MHz PCS licenses in 13 states, representing 12.2 million incremental population equivalents contiguous to existing properties and 4.4 million population equivalents that overlap existing properties in the Midwest and Northeast. U.S. Cellular will also receive approximately $31 million in cash and minority interests in six markets it currently controls. U.S. Cellular will transfer wireless assets and approximately 141,000 customers in 10 markets, representing 1.5 million population equivalents, in Florida and Georgia to AWE. Total U.S. Cellular revenue in 2002 of $107 million and operating income, excluding shared services costs, of $25 million was attributable to these markets. The transaction is subject to regulatory approvals. The closing of the transfer of the U.S. Cellular properties and the assignment to U.S. Cellular of most of the PCS licenses is expected to occur in the third quarter of 2003. The assignment and development of certain licenses will be deferred by U.S. Cellular until later periods. The acquisition of licenses in the exchange will be accounted for as a purchase by U.S. Cellular and the transfer of the properties by U.S. Cellular will be accounted for as a sale. The buildout of the licenses could require substantial capital investment by U.S. Cellular over the next several years. U.S. Cellular is currently working on a buildout and financing plan for these markets.

CEO BACKGROUND

Gregory P. Josefowicz. Gregory P. Josefowicz served as a non-exclusive, senior level consultant to Borders Group, Inc., a leading global retailer of books, music and movies, until February 2, 2008. From 1999 until his retirement in 2006, Mr. Josefowicz served as a director and president and chief executive officer, and was named chairman of the board in 2002, of Borders Group. Prior to that time, he was chief executive officer of the Jewel-Osco division of American Stores Company, which operated food and drug stores in the greater Chicago, Illinois and Milwaukee, Wisconsin areas, from 1997 until June 1999 when American Stores merged into Albertson's Inc., a national retail food-drug chain. At that time, Mr. Josefowicz became president of Albertson's Midwest region. Mr. Josefowicz joined Jewel in 1974, and was elected senior vice president of marketing and advertising in 1993. Mr. Josefowicz is currently a member of the board of directors of PetSmart, Inc., a leading pet supply and services retailer, and Winn-Dixie Stores, Inc., one of the nation's largest food retailers.

Mr. Josefowicz was elected at the 2007 annual meeting to fill the directorship vacated by Martin L. Solomon. See below.

Christopher D. O'Leary. Christopher D. O'Leary was appointed executive vice president, chief operating officer—international, of General Mills, Inc., as of June 1, 2006. Before that, he was a senior vice president of General Mills since 1999. In addition, he was the president of the General Mills Meals division between 2001 and 2006 and was president of the Betty Crocker division between 1999 and 2001. Mr. O'Leary joined General Mills in 1997 after a 17-year career with PepsiCo, where his assignments included leadership roles for the Walkers-Smiths business in the United Kingdom and the Hostess Frito-Lay business in Canada.

Mitchell H. Saranow. Mitchell H. Saranow has been the chairman of The Saranow Group, L.L.C., a private investment firm that he founded in 1984, for more than five years. Mr. Saranow was the chief executive officer of the general partner of Lenteq, LP of Northbrook, Illinois and served as a managing director (i.e., both a director and executive officer) of Lenteq, C.V., the primary Dutch operating entity and a wholly owned subsidiary of Lenteq, LP. In 2007, Lenteq, C.V. and two related Dutch companies filed for bankruptcy under Dutch insolvency laws, and substantially all of their assets were sold pursuant to this process early in 2008. Mr. Saranow is currently on the board of directors of Lawson Products, Inc., which provides services, systems, and products to the maintenance, repair and operations market and manufactures and sells products and provides services and systems to original equipment manufacturers.

Herbert S. Wander. Herbert S. Wander has been a partner of Katten Muchin Rosenman LLP for more than five years. Katten Muchin Rosenman LLP does not provide legal services to TDS or its subsidiaries.

James Barr, III. James Barr, III had been President and Chief Executive Officer of TDS Telecommunications Corporation ("TDS Telecom"), a wholly owned subsidiary of TDS which operates local telephone companies, for more than five years prior to his retirement. Mr. Barr stepped down as President and CEO of TDS Telecom on January 1, 2007. He remained on TDS Telecom's payroll until March 23, 2007 and retired on March 24, 2007. For further information, see "Director Compensation" below.

LeRoy T. Carlson, Jr. LeRoy T. Carlson, Jr., has been TDS' President and Chief Executive Officer (an executive officer of TDS) for more than five years. Mr. LeRoy T. Carlson, Jr. is also a director and Chairman (an executive officer) of United States Cellular Corporation (American Stock Exchange listing symbol: USM), a subsidiary of TDS which operates and invests in wireless telephone companies and properties ("U.S. Cellular") and TDS Telecom. He is the son of LeRoy T. Carlson and the brother of Walter C.D. Carlson, Letitia G. Carlson, M.D. and Prudence E. Carlson.

Letitia G. Carlson, M.D. Letitia G. Carlson, M.D. has been a physician at George Washington University Medical Center for more than five years. At such medical center, she was an assistant professor between 1992 and 2001 and an assistant clinical professor between 2001 and 2003, and has been an associate clinical professor since 2003. Dr. Carlson is the daughter of LeRoy T. Carlson and the sister of LeRoy T. Carlson, Jr., Walter C.D. Carlson and Prudence E. Carlson.

Prudence E. Carlson. Prudence E. Carlson has been a private investor for more than five years. Ms. Carlson is the daughter of LeRoy T. Carlson and the sister of LeRoy T. Carlson, Jr., Walter C.D. Carlson and Letitia G. Carlson, M.D.

Walter C.D. Carlson. Walter C.D. Carlson was elected non-executive Chairman of the Board of the board of directors of TDS in February 2002. He has been a partner of Sidley Austin LLP for more than five years and is a member of its executive committee. He is a director of U.S. Cellular. Walter C.D. Carlson is the son of LeRoy T. Carlson and the brother of LeRoy T. Carlson, Jr., Letitia G. Carlson, M.D. and Prudence E. Carlson. The law firm of Sidley Austin LLP provides legal services to TDS and its subsidiaries on a regular basis. See "Certain Relationships and Related Transactions" below. Mr. Carlson does not provide legal services to TDS, U.S. Cellular or their subsidiaries.

Kenneth R. Meyers. Kenneth R. Meyers was appointed a director and Executive Vice President and Chief Financial Officer of TDS (an executive officer of TDS) and Chief Accounting Officer of U.S. Cellular (an executive officer) and of TDS Telecom on January 1, 2007. Prior to that time, he was the Executive Vice President—Finance, Chief Financial Officer and Treasurer of U.S. Cellular for more than five years. Mr. Meyers is also a director of U.S. Cellular and TDS Telecom.

Donald C. Nebergall. Donald C. Nebergall has been a consultant to companies since 1988, including TDS from 1988 through 2002. Mr. Nebergall was vice president of The Chapman Company, a registered investment advisory company located in Cedar Rapids, Iowa, from 1986 to 1988. Prior to that, he was the chairman of Brenton Bank & Trust Company, Cedar Rapids, Iowa, from 1982 to 1986, and was its president from 1972 to 1982.

George W. Off. George W. Off has been chairman of Checkpoint Systems, Inc., a New York Stock Exchange listed company, since August 2002. He was also the chief executive officer of Checkpoint Systems, Inc. between August 2002 and December 2007. Checkpoint Systems, Inc. is a multinational manufacturer and marketer of integrated system solutions for retail security, labeling and merchandising. Prior to that time, Mr. Off was chairman of the board of directors of Catalina Marketing Corporation, a New York Stock Exchange listed company, from July 1998 until he retired in July 2000. Mr. Off served as president and chief executive officer of Catalina from 1994 to 1998.


MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONS

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Operating Revenues increased 20% ($273.1 million) during the first six months of 2003 primarily as a result of a 20% increase in customer units served. U.S. Cellular's operating revenues increased 23% ($232.9 million) as customer units served increased by 796,000, or 22%, since June 30, 2002, to 4,343,000. Acquisitions contributed 9% (320,000 customer units) of U.S. Cellular's customer growth in the past twelve months. TDS Telecom operating revenues increased 10% ($40.1 million) as equivalent access lines increased by 92,500, or 10%, since June 30, 2002 to 1,042,400.

Operating Expenses rose 32% ($374.3 million) in 2003 reflecting growth in operations. U.S. Cellular's operating expenses increased 44% ($365.6 million) primarily reflecting costs associated with providing service to an expanding customer base and additional expenses related to the Chicago market acquired in August 2002. Also included in U.S. Cellular's operating expenses is a $27.0 million loss on assets of operations held for sale. TDS Telecom's expenses increased 3% ($8.7 million) reflecting growth in operations offset somewhat by a reduction in bad debt expense.

Operating Income decreased 44% ($101.2 million) to $127.4 million in 2003. Operating margin decreased to 7.7% in 2003 from 16.5% in 2002 on a consolidated basis. U.S. Cellular's operating income decreased 73% ($132.7 million) to $48.3 million in 2003 and its operating income margin, as a percentage of service revenues, decreased to 4.1% in 2003 from 18.8% in 2002. TDS Telecom's operating income increased 66% ($31.4 million) to $79.1 million in 2003 and its operating margin rose to 18.7% in 2003 from 12.5% in 2002.

Investment and Other Income (Expense) primarily includes interest and dividend income, investment income and gain (loss) on marketable securities and other investments. Investment and other income (expense) totaled $22.2 million in 2003 and $(1,687.5) million in 2002.

Interest and Dividend Income decreased $39.8 million to $10.4 million in 2003 primarily as a result of recording a $45.3 million dividend on the Deutsche Telekom investment in 2002. No dividend was recorded in 2003. Interest income increased $4.9 million in 2003 due to larger cash balances. The Company reported cash and cash equivalents of $1,289.6 million at June 30, 2003 and $44.6 million at June 30, 2002. The increase in cash from June 30, 2002 is primarily from the cash received from the forward contracts during 2002.

Investment Income increased 40% ($7.5 million) in the first six months of 2003. 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.

(Loss) on Marketable Securities and Other Investments totaled $(8.5) million in 2003 and $(1,756.5) million in 2002. The Company recorded a $5.0 million impairment loss on a cellular investment held by TDS Telecom in the second quarter of 2003. Also in 2003, a $3.5 million license cost impairment loss was recorded related to the investment in a non-operating market in Florida that will remain after the AWE exchange. In 2002 Management determined that the decline in value of marketable securities relative to its cost basis was other than temporary and charged a $1,756.5 million loss to the statement of operations.

Interest Expense increased 49% ($28.6 million) to $87.4 million in 2003. The increase in interest expense in 2003 was primarily due to amounts related to variable prepaid forward contracts ($19.8 million), the issuance of 30-year 8.75% Senior Notes ($5.7 million) by U.S. Cellular in November 2002 and the increase in short-term debt ($2.5 million).

Income Tax Expense increased $615.2 million in 2003 primarily due to the tax benefits recorded on the loss on marketable securities and other investments in 2002. Losses on marketable equity securities and other investments and the loss on assets-held-for sale totaled $35.5 million ($23.1 million, net of tax of $8.5 million and minority interest of $3.9 million) in 2003. A loss of $1,756.5 million ($1,044.4 million, net of tax of $686.2 million and minority interest of $25.9 million) was recorded on marketable securities in 2002. The effective tax (benefit) rate was 56.3% in 2003 and was (38.4)% in 2002. For an analysis of the Company's effective tax rates in 2003 and 2002, see Note 4 - Income Taxes.

As a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003, enacted in May of 2003, the Company anticipates that it will claim additional federal tax depreciation deductions in 2003. Such additional depreciation deductions may result in a federal net operating loss for the Company for 2003.

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. U.S. Cellular's minority public shareholders' share of income in 2003 was reduced by $3.9 million due to U.S. Cellular's loss on investments and loss on assets held for sale and by $25.9 million in 2002 due to loss on marketable securities.

Income (Loss) Before Cumulative Effect of Accounting Change totaled $15.2 million, or $0.26 per diluted share, in 2003 compared to $(937.8) million, or $(16.00) per diluted share, in 2002.

Cumulative Effect of Accounting Change. Effective January 1, 2002, U.S. Cellular changed its method of accounting for commissions expenses related to customer activations and began deferring expense recognition of a portion of commissions expenses in the amount of activation fees revenue deferred. The cumulative effect of this accounting change on periods prior to 2002 was recorded in 2002 and increased net income by $3.4 million, net of tax and minority interest, or $0.06 per diluted share.

Net Income (Loss) Available to Common totaled $14.9 million, or $0.26 per diluted share, in 2003, compared to $(934.6) million, or $(15.94) per diluted share, in 2002.

U.S. CELLULAR OPERATIONS

TDS provides wireless telephone service through United States Cellular Corporation (“U.S. Cellular”), an 82.2%-owned subsidiary. U.S. Cellular owns, manages and invests in cellular markets throughout the United States. Growth in the customer base and the acquisition of the Chicago market are the primary reasons for the growth in U.S. Cellular’s revenues and expenses. The number of customer units served increased by 796,000 or 22%, since June 30, 2002, to 4,343,000 due to customer additions from its marketing channels as well as the addition of customers from the Chicago market acquisition.

On August 7, 2002, U.S. Cellular completed the acquisition of the assets and certain liabilities of Chicago 20MHz, LLC, now known as United States Cellular Operating Company of Chicago, LLC (“USCOC of Chicago” or the “Chicago market”) from PrimeCo Wireless Communications LLC (“PrimeCo”). USCOC of Chicago operates a wireless system in the Chicago Major Trading Area (“MTA”). USCOC of Chicago is the holder of certain FCC licenses, including a 20 megahertz (“MHz”) PCS license in the Chicago MTA (excluding Kenosha County, Wisconsin) covering a total population of 13.2 million. The Chicago market operations are included in consolidated operations for the first half of 2003 but not for the comparable period of 2002. The Chicago market’s operations contributed to the increases in the Company’s operating revenues and expenses during 2003 compared to 2002.

Operating revenues increased 23% ($232.9 million) in 2003 primarily related to the 22% increase in customer units. Average monthly service revenue per customer increased 1% ($0.42) to $46.24 in 2003 from $45.82 in 2002.

Retail service revenues (charges to U.S. Cellular’s customers for local system usage and usage of systems other than their local systems ) increased 24% ($188.4 million) in 2003 due primarily to the growth in customers. Average monthly retail service revenue per customer increased 3% ($1.03) to $37.89 in 2003 from $36.86 in 2002. Management anticipates that overall growth in U.S. Cellular’s customer base will continue at a slower pace in the future, primarily as a result of an increase in the number of competitors in its markets and continued penetration of the consumer market. As U.S. Cellular expands its operations in the Chicago market and into other PCS markets in the remainder of 2003 and in 2004, it anticipates adding customers and revenues in those markets.

Monthly local retail minutes of use per customer averaged 401 in 2003 and 259 in 2002. The increase in monthly local retail minutes of use was driven by U.S. Cellular’s focus on designing incentive programs and rate plans to stimulate overall usage, as well as the acquisition of the Chicago market, whose customers used more minutes per month than the Company average. The impact on retail service revenue of the increase in minutes of use in 2003 was partially offset by a decrease in average revenue per minute of use. Management anticipates that the Company’s average revenue per minute of use will continue to decline in the future, reflecting increased competition and penetration of the consumer market.

Inbound roaming revenues (charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming) decreased 4% ($5.3 million) in 2003. The decrease in revenue related to inbound roaming on U.S. Cellular’s systems primarily resulted from a decrease in revenue per roaming minute of use offset by the increase in roaming minutes used. The increase in inbound roaming minutes of use was primarily driven by the overall growth in the number of customers throughout the wireless industry. Average inbound roaming revenue per minute of use is expected to continue to decline in the future, reflecting the general downward trend in negotiated rates.

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 may switch their business from U.S. Cellular to these new operators or to their own systems.

Long-distance and other revenue increased 41% ($29.2 million) in 2003, primarily related to a $19.2 million increase in amounts billed to the Company’s customers to offset costs related to certain regulatory mandates, such as universal service funding, wireless number portability and E-911 infrastructure, which are being passed through to customers. Additionally, the amounts the Company charges to its customers to offset universal service funding costs increased significantly due to changes in FCC regulations beginning April 1, 2003, contributing to the $19.2 million increase. The increase in long-distance and other revenue was also driven by an increase in the volume of long-distance calls billed by U.S. Cellular from inbound roamers using U.S. Cellular’s systems to make long-distance calls. This effect was partially offset by price reductions primarily related to long-distance charges on roaming minutes of use as well as U.S. Cellular’s increasing use of pricing plans for its customers which include long-distance calling at no additional charge.

Equipment sales revenues increased 51% ($20.5 million) in 2003. The increase in equipment sales revenues reflects a change in U.S. Cellular’s method of distributing handsets to its agent channel. Beginning in the second quarter of 2002, U.S. Cellular began selling handsets to its agents at a price approximately equal to its cost before applying any rebates. Previously, the agents purchased handsets from third parties. Selling handsets to agents enables U.S. Cellular to provide better control over handset quality, set roaming preferences and pass along quantity discounts. Management anticipates that U.S. Cellular will continue to sell handsets to agents in the future, and that it will continue to provide rebates to agents who provide handsets to new and current customers.

In these transactions, equipment sales revenue is recognized upon delivery of the related products to the agents, net of any anticipated agent rebates. In most cases, the agents receive a rebate from U.S. Cellular at the time these agents provide handsets to sign up a new customer or retain a current customer.

Handset sales to agents, net of all rebates, increased equipment sales revenues by approximately $27.5 million during 2003. Equipment sales to customers through U.S. Cellular’s non-agent channels decreased $7.0 million, or 20%, from 2002. Gross customer activations, the primary driver of equipment sales revenues, increased 41% in 2003. The increase in gross customer activations in 2003 was driven by an increase in store traffic in U.S. Cellular’s markets and the acquisition of the Chicago market, which added to U.S. Cellular’s distribution network. The decrease in equipment sales revenues from U.S. Cellular’s non-agent channels is primarily attributable to lower revenue per handset in 2003, reflecting declining handset prices on most models and the reduction in sales prices to end users as a result of increased competition.

Operating expenses increased 44% ($365.6 million) in 2003. The increase is primarily related to costs incurred to serve and expand the growing customer base.

System operations expenses increased 26% ($58.9 million). System operations expenses include charges from other telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to local interconnection to the landline network, charges for maintenance of the network, long-distance charges and outbound roaming expenses. The increase was due to an increase in the cost of maintaining the network ($25.8 million), an increase in the cost of minutes used on the systems ($25.6 million) and an increase in the costs associated with customers roaming on other companies’ systems ($7.6 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 4,106 in 2003 from 3,145 in 2002.

In 2003, system operations expenses increased due to the acquisition of the Chicago market whose expenses are included in the increases noted above. The increase in expenses in the Chicago market was partially offset by a reduction in expenses in other markets, primarily in the Midwest, when customers in those markets used the Chicago system. In 2002, U.S. Cellular paid roaming charges to third parties when its customers roamed in the Chicago market.

As the Chicago area has historically been U.S. Cellular’s customers’ most popular roaming destination, management anticipates that the continued integration of the Chicago market into its operations will result in a further increase in minutes of use by U.S. Cellular’s customers on its systems and a corresponding decrease in minutes of use by its customers on other systems, resulting in a lower overall increase in minutes of use by U.S. Cellular’s customers on other systems. Such a shift in minutes of use should reduce U.S. Cellular’s per-minute cost of usage in the future, to the extent that U.S. Cellular’s customers use U.S. Cellular’s systems rather than other carriers’ networks. Additionally, U.S. Cellular’s acquisition and subsequent buildout of licensed areas received in the AWE transaction may shift more minutes of use to U.S. Cellular’s systems, as many of these licensed areas are major roaming destinations for U.S. Cellular’s current customers.

Marketing and selling expenses increased 31% ($49.3 million) in 2003. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent commissions and related expenses; corporate marketing, merchandise management and telesales department salaries and expenses; advertising; and public relations expenses. The increase in 2003 was primarily due to the 41% increase in gross customer activations in 2003, which drove a $14.9 million increase in commissions and agent-related payments, and a $21.2 million increase in advertising costs, primarily related to the continued marketing of the U.S. Cellular brand in the Chicago market.

Cost of equipment sold increased 82% ($55.2 million) in 2003. The increase in 2003 is primarily due to the $52.9 million increase in handset costs related to the sale of handsets to agents beginning in the second quarter of 2002. Cost of equipment sold from non-agent channels increased by $2.2 million, or 4%, in 2003. The increase in cost of equipment sold from non-agent channels primarily reflects a 41% increase in gross customer activations, almost fully offset by the effects of economies realized from U.S. Cellular’s merchandise management system.

Marketing cost per gross customer activation (“CPGA”), which includes marketing and selling expenses and cost of equipment sold, less equipment sales revenues (excluding agent rebates related to customer retention), decreased 2% to $367 in 2003 from $374 in 2002. Agent rebates related to the retention of current customers increased $13.2 million in 2003. Due to the impact of such agent rebates, CPGA is not calculable using financial information derived directly from the statement of operations. Future CPGA calculations will also be impacted by the effects of agent rebates related to customer retention.

General and administrative expenses increased 50% ($111.6 million) in 2003. These expenses include the costs of operating U.S. Cellular’s customer care centers, the costs of serving and retaining customers and the majority of U.S. Cellular’s corporate expenses. The increase in general and administrative expenses is primarily due to increases in billing-related expenses ($25.8 million), customer retention expenses ($13.0 million), bad debt expenses ($12.0 million), expenses related to payments into the federal universal service fund based on an increase in rates due to changes in FCC regulations ($10.4 million) and various customer service-related expenses as a result of the 22% increase in the customer base. The increase in billing-related expenses is primarily related to maintenance of the Chicago market’s billing system and the ongoing conversion of such billing system to the system used in U.S. Cellular’s other operations. The above factors were all impacted by the acquisition of the Chicago market.

U.S. Cellular anticipates that customer retention expenses will increase in the future as it changes to a single digital technology platform and certain customers will require new handsets. A substantial portion of these customer retention expenses are anticipated to be agent rebates, which are recorded as a reduction of equipment sales revenues.

Depreciation expense increased 36% ($48.0 million) in 2003 primarily due to the 33% increase in average fixed assets since June 30, 2002. The increase in fixed asset balances in 2003 resulted from the addition of new cell sites, the acquisition of the Chicago market, the migration of the network to CDMA, the addition of digital ratio channels, the upgrade to provide digital service and the investment in billing and office systems. Amortization expense increased 109% ($15.6 million) in 2003 primarily driven by the $11.1 million of amortization related to the customer list intangible assets and other deferred charges acquired in the USCOC of Chicago transaction during 2002. These customer list assets are amortized based on the average customer retention periods of each customer list.

Loss on assets held for sale totaled $27.0 million in 2003. This loss represents the difference between the fair value of the assets the Company expects to receive in the AWE transaction, as determined by an independent valuation, and the recorded value of the assets it expects to transfer to AWE. Subsequent to recording the loss, the recorded value of the assets U.S. Cellular expects to transfer to AWE is equal to the fair value of the assets U.S. Cellular expects to receive from AWE. This loss may require an adjustment during the third quarter of 2003 to reflect the final amounts of the fair value of assets received and the recorded value of the assets transferred.

Operating income (loss) decreased $132.7 million to $48.3 million in 2003. The decline in operating income reflects increased expenses from the acquisition, launch and transition costs related to the Chicago market; increased number of cell sites and the number of minutes used on U.S. Cellular’s network; increased depreciation expense driven by the increase in average fixed assets; increased equipment subsidies; increased bad debt, customer retention and universal service funding expenses; and the loss on assets held for sale. U.S. Cellular expects most of the above factors, except for those related to the launch and transition of the Chicago market, to continue to have an effect on operating income for the next several quarters. Any changes in the above factors, as well as the effects of other drivers of U.S. Cellular’s operating results, may cause operating income to fluctuate over the next several quarters.

Related to U.S. Cellular’s acquisition and subsequent transition of the Chicago market’s operations, U.S. Cellular plans to incur additional expenses during the remainder of 2003 as it competes in the Chicago market. Additionally, U.S. Cellular plans to build out its network into other as yet unserved portions of its PCS licensed areas, and will begin marketing operations in those areas during 2003 and 2004. As a result, U.S. Cellular’s operating income and operating margins may be below historical levels for the full year of 2003 compared to the full year of 2002.

Management expects service revenues to continue to grow during the remainder of 2003. However, management anticipates that average monthly revenue per customer may decrease as retail service revenue per minute of use and inbound roaming revenue per minute of use decline. Management believes U.S. Cellular operating results reflect seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses which tend to be higher in the fourth quarter due to increased marketing activities and customer growth. This seasonality may cause operating income to vary from quarter to quarter. Management anticipates that the impact of such seasonality will decrease in the future, particularly as it relates to operating expense, as the proportion of full year customer activations derived from fourth quarter holiday sales is expected to decline.

Competitors licensed to provide wireless services have initiated service in substantially all of U.S. Cellular’s markets over the past several years. U.S. Cellular expects other wireless operators to continue deployment of their networks throughout all of its service areas during the remainder of 2003 and in 2004. U.S. Cellular’s management continues to monitor other wireless communications providers’ strategies to determine how this additional competition is affecting U.S. Cellular’s results. The effects of additional wireless competition and the downturn in the nation’s economy have significantly slowed customer growth in certain of U.S. Cellular’s markets. Management anticipates that overall customer growth may be slower in the future, primarily as a result of the increase in competition in U.S. Cellular’s markets and the maturation of the wireless industry.

The FCC has mandated that all wireless carriers must be capable of facilitating wireless number portability beginning in November 2003. At that time, any wireless customer in the largest 100 Metropolitan Statistical Areas in the United States may switch carriers and keep their current wireless telephone number. U.S. Cellular believes it will have the infrastructure in place to accommodate wireless number portability as of the November 2003 deadline. The implementation of wireless number portability may impact U.S. Cellular’s churn rate in the future; however, U.S. Cellular is unable to predict the impact that the implementation of wireless number portability will have on its overall business.

TDS TELECOM OPERATIONS

TDS operates its wireline telephone operations through TDS Telecommunications Corporation (“TDS Telecom”), a wholly owned subsidiary. Total equivalent access lines served by TDS Telecom increased by 92,500 or 10%, since June 30, 2002 to 1,042,400.

TDS Telecom’s incumbent local exchange carriers (“ILEC”) subsidiaries served 718,800 equivalent access lines at June 30, 2003, a 2% (12,800 equivalent access lines) increase from the 706,000 equivalent access lines at June 30, 2002. Acquisitions in 2002 added 7,800 equivalent access lines while internal growth added 5,000 equivalent access lines.

TDS Telecom’s competitive local exchange carrier (“CLEC”) subsidiaries served 323,600 equivalent access lines at June 30, 2003, a 33% (79,700 equivalent access lines) increase from 243,900 equivalent access lines served at June 30, 2002.

Operating revenues increased 10% ($40.1 million) in 2003. CLEC operations, reflecting customer growth, contributed $25.4 million to the increase in operating revenues in 2003. Telephone companies acquired in 2002 contributed operating revenues of $8.7 million in 2003. In addition, the operations of relatively new services such as long distance resale, Internet service and digital subscriber line (“DSL”) service increased operating revenues $3.6 million in 2003.

Operating expenses increased 3% ($8.7 million) during 2003, reflecting primarily growth in access lines and growth in expenses related to the newer services and offset by a reduction in bad debt expense in 2003 as compared to 2002 due to the bankruptcies of certain long distance carriers in 2002.

Operating income increased 66% ($31.4 million) to $79.1 million in 2003 reflecting improved operating results from CLEC operations, the reduction of bad debt expense and the operating results of acquired ILEC companies.

Local Telephone Operations

Operating revenues increased 5% ($14.8 million) in 2003. Average monthly revenue per equivalent access line increased 1% ($0.60) to $74.51 in 2003 from $73.91 in 2002. Acquisitions increased operating revenues by $8.7 million in 2003. Revenues from Internet, DSL and other non-regulated lines of business increased miscellaneous revenues by $2.1 million in 2003. As of June 30, 2003, TDS Telecom ILEC operations were providing Internet service to 116,700 customers compared to 118,000 customers in 2002 and were providing DSL service to 16,200 customers compared to 6,500 customers in 2002. Dial-up Internet accounts declined as customers shifted to broadband services. Revenues from reselling long distance service increased network access and long distance revenues by $1.5 million in 2003. As of June 30, 2003, TDS Telecom ILEC operations were providing long distance service to 211,900 customers compared to 176,300 customers in 2002.

Operating expenses increased by 3% ($5.9 million) in 2003. Operating expenses before depreciation and amortization increased by 3% ($4.6 million) in 2003. Acquisitions increased operating expenses before depreciation and amortization by $5.6 million in 2003. The cost of providing long distance, Internet and DSL service to an increased customer base increased expenses by $3.5 million. Cost of goods sold related to DSL, business systems and providing long distance service increased $2.5 million. Bad debt expense recorded in 2002 included $8.8 million related to the write-off of pre-petition accounts receivable due to the bankruptcy of WorldCom and Global Crossing. In 2003, the ILEC’s recovered $900,000 of bad debt write-offs related to the WorldCom bankruptcy filing. Depreciation and amortization increased 2% ($1.2 million) in 2003.

Operating income increased 11% ($9.0 million) to $88.7 million primarily due to the reduction in bad debt expense and the partial recovery of amounts due from WorldCom and Global Crossing and the contribution of the acquired companies. Local telephone operating expenses are expected to increase due to inflation while additional revenues and expenses are expected from new or expanded product offerings.

CONF CALL

Mark A. Steinkrauss - Vice President - Corporate Relations

Thank you, Sara. Good morning, everyone. With me today are Ken Meyers, Executive VP and CFO of TDS; Steve Campbell, Executive VP Finance, CFO and Treasurer at U.S. Cellular; Bill Megan, Executive VP Finance and CFO at TDS Telecom. And also joining me are Jack Rooney, CEO and Jay Ellison, Executive VP and COO at U.S. Cellular.

A replay of this teleconference will be available today at 01:00 PM Chicago Time and run through midnight Friday, August, 8th the replay number is 800-723-6498, conference ID 9648709. For international callers the number is 785-830-7989, same passcode. This call is being simultaneously webcast on the Investor Relations sections of both TDS and U.S. Cellular's websites. The webcast will be available for the next two weeks after which it will be available on the conference call archives. Please recall that archives calls are not updated.

Some information during the call and subsequent Q&A period contains statements about expected future events and financial results that are forward-looking and subject to risk and uncertainties. Please review the Safe Harbor paragraph and the releases in the more extended versions on our website as well as in our filings with the SEC. Shortly after we released our earnings results earlier this morning and before this call TDS and U.S. Cellular filed 8-Ks, the 8-Ks include the press releases we issued this morning and some additional information.

Both companies plan to file their SEC Form 10-Q later today. Both press releases have been posted to the TDS Internet home page and U.S. Cellular has posted their release to their website as well. You will also find posted on the website additional information and reconciliation of non-GAAP financial measures that maybe used management when discussing the operating data during today's teleconference, as well as the company's guidance for 2008, two of the reconciliations of the net income and diluted earnings per share.

All of the information is included on a separate page entitled Guidance and Reconciliation to make it easier to find. The information can also be accessed on the Conference Call page of the Investor Relations sections of both our websites. Please note that the comparisons made by the speaker today in their prepared comments are second quarter year-to-year compares unless otherwise noted. We have added a consolidated statement of cash flow to the press release to allow to you to access some key information more quickly and we'll continue to do this going forward.

We will be presenting at a couple of investment conferences in the next month or two on September 4th, we're going to be appearing at the 14th Annual Kopman [ph] Brothers Investor Conference in New York City. And Ted Carlson and I will be meeting with investors in Europe from September 22nd through October 2nd. And on October 3rd, we have a meeting with investors in Boston. If you'd like to meet with us at any of these events please let me know and we will try to accommodate you if at all possible.

With that I'll turn the call over the Ken Meyers.

Kenneth R. Meyers - Executive Vice President and Chief Financial Officer

Thank you, Mark. Good morning, thanks for joining us today. I've just a few comments to make before turning the call over to Steve and Bill who will cover the operating results. And then we'll take questions at the end of the prepared comments. Operating revenues for TDS were up 7% to nearly $1.3 billion with most of the increase coming out of U.S. Cellular. Operating income declined slightly principally due to U.S. Cellular's investment in its new branding and advertising campaign and increasing handset subsidies.

Quickly, let me cover some of the year-over-year, non-operating comparisons on the income statement. One, under the TDS current stock repurchase authorization the company has bought back 4.1 million common shares or about $211 million to-date of about $38.7 million remaining under that authorization. We've been buying the stock as aggressively as the Exchange regulations allow. U.S. Cellular continues to purchase shares under it's the limits [ph] program purchasing 150,000 shares in the second quarter.

In the second quarter the company settled the last of the Deutsche Telekom variable prepaid foreign contracts, resold remaining DT shares. This removes a lot of complexity from the balance sheet. So we have no longer of any prepaid forward contracts or derivative liabilities. Of note the Rural Cellular Shares are still listed as marketable securities on the balance sheet since the acquisition by Verizon had not closed as of the end of the quarter.

Also going forward interest expense will be reduced so we will no longer make quarterly interest payments on the prepaid forward contracts, the interest... the income line felling sharply year-over-year. In the second quarter of 2007 the Deutsche Telekom we've been was $118 million and that was the only $11 million in second quarter of this year, reflecting the change in the company's holding as it is unwound of various prepaid forward contracts.

For the quarter the effective tax rate was 33.4% which was reduced due to state tax benefits related to the settlement of the DT prepaid forward contracts. For the year, we still expect the effective rate for both companies too be approximately 40% to 41%. The end of the quarter with a great balance sheet $1.1 billion in cash all of which is still invested in treasuries and virtually unused credit facilities we have a lot of financial flexibility.

Finally, you'll note that we've updated the guidance of U.S. Cellular as disclosed in today's press releases. While affirming the guidance of TDS Telecom, the change to U.S. Cellular's net add in operating include targets, reflect our current best estimate in a rapidly changing marketplace, while handset pricing has increasingly been one of the key areas of competition in the marketplace. The dynamics keep changing especially around smartphones. Everyone has reported that smartphone usage at ARPU than regular phones. Thereby justifying the bigger discount to get these phones to users hands quickly. I believe that was the thinking had AT&T's pricing on the iPhone and now Verizon's recent book.

These moves carry both a risk and a secondary effect, the risk is that the new smartphone customers of tomorrow don't generate the same higher incremental revenue. Thereby failing to justify this higher level of investment, this is something we continue to watch. The secondary effect is of this new pricing on smartphones create a pricing ceiling for all phones and in fact there is a value hierarchy with smartphones [indiscernible] so not only does this affect smartphone pricing it probably affects and lowers the pricing and all terms.

How these two recent changes play out over the next couple quarters could significantly affect our result and could cause such results to vary from even our current guidance. We will continue to monitor and react to these competitive actions.

With that let me turn the call over Steve Campbell with U.S. Cellular.

Steven T. Campbell - Executive Vice President, Finance, Chief Financial Officer and Treasurer-U.S. Cellular

Thanks, Ken and good morning everyone. I am going to begin with a few general comments about the business and then I will highlight some of the key results for the quarter. Overall, we found the second quarter to be challenging as we face difficult economic conditions, strong industry competition and weather related flooding in some of our key markets.

Despite these challenges U.S. Cellular again delivered solid results for the second quarter of 2008. First, we continue to grow our subscriber base. We added 34,000 net retail customers and we ended the quarter with 6.2 million total customers up 3% from the prior year. We're also reporting year-over-year growth in both service revenues at 9% and ARPU at 6%. Both of these trends reflect outstanding growth in our data revenues. This is the 11th consecutive quarter in which we're reporting year-over-year growth in ARPU.

At the same time, we're experiencing increased costs in a number of areas of our business. As a result we're reporting operating cash flow that is essentially flat year-over-year. In this tough competitive and uncertain economic environment we believe that it's important to continue to invest in our business and customers for the long term. One of the significant steps that we're taking further differentiate our customer satisfaction based business model is our new, Believe in Something Better, branding campaigning that was launched in June. With this campaign we're showing that we recognize that wireless plays an important part in our customers' lives that goes well beyond just completing calls. Along with the campaign we're investing in training and other programs so that our associates can deliver the ideal customer experience.

The initial response for the campaign from our customers has been positive, as they recognize our efforts to bring humanity to an industry that has often been devoid of it.

To capitalize on the growth and demand for data products and services; we continue to expand our smartphone and related offerings.

We recently introduced the Black Berry 8330 Curve, Motorola Q9C and HTC 6800 devices. In addition we launched several product enhancements including an updated picture messaging online album and new Black Berry plans designed to penetrate deeper into the consumer segment of the marketplace. To help ensure that our data customers receive a high quality service experience we're expanding EVDO coverage in select service areas.

By the end of 2008, our EVDO coverage will reach 30% of our covered population we plan to continue the targeted expansion in 2009. We also continue to strengthen our overall network with new cell sites and towers in selected areas. There's a foundation for future growth, we participated through our interest in King Street Wireless in the recent FCC auction of 700 megahertz spectrum. King Street Wireless was the provisional winner bidder for 152 licenses covering 42 million props in areas that primarily overlapped or approximate of contiguous two areas covered by licenses that we currently own.

These additional licenses will increase the dept of our footprint to meet future capacity and new technology requirements. We didn't launch any new markets during the second quarter, don't have any plans of along those lines at present. For the next few quarters we intend to focus on adding customers and growing revenues and profitability within our existing markets and of course we're maintaining our relentless focus on customer satisfaction including the commitment to ensuring that our customers have access to a high quality network.

On July, 1st the FCC published this order adopting an interim cap under Federal Universal Service Fund high cost program. As a result of the cap which will be of a definite duration wireless, eligible tower [ph] communications carriers such as U.S. Cellular likely will receive less support in a given state than they otherwise would have been eligible to receive because overall support will not increase as a carrier adds customers whereas additional carriers are granted ETC status in the state. The FCC also is considering other changes in the Universal Service Fund under the heading of long-term reform which could reduce the amount of support that wireless carriers such U.S. Cellular would be eligible to receive.

During the second quarter we received ETC funding of $31 million, a level of ETC funding that we'll receive in the future is somewhat uncertain but we don't expect much of a change over the next couple of quarters.

Now I'll cover some of the details of our second quarter results. As I mentioned earlier retail net adds for the quarter were 34,000, in the postpaid segment which is our primary area of focus it represents approximately 95% of our total retail customer base, we added 33,000 in that new customers.

Retail postpaid churn remains low at 1.4% about the same level as in the prior year quarter. Service revenues of $987 million increased 9% year-over-year driven primarily by customer growth and demand for our data products and services. ARPU of $53.27 was up 6% year-over-year.

We continue to see substantial growth in data revenues, which were up 45% to $124 million, data now represents about 13% of our total service revenues up from 9% a year ago and with plenty of rooms still to grow.

Operating income for the quarter was $118 million compared, to $123 million in the prior year and operating cash flow was $269 million essentially flat relative to last year's $272 million. As I mentioned earlier higher costs in a number of areas put pressure on margin. The net loss on equipment for the quarter was $99 million up 20% factors include a higher net subsidy per unit reflecting handsets with expanded capabilities including smartphones and aggressive promotions across the industry.

Like others we've experienced solid growth in service revenues and data revenues in particular and the equipment subsidy is a cost of these additional revenues. We expect that the expanded capabilities for the handsets that we're currently selling will continue to drive growth in data revenues in the future.

System operations expenses for the quarter were $197 million up 11.5%, the increase reflected an increase in number of cell sites and service, higher total custom minutes of use and higher expenses incurred when our customers use other carrier's networks when roaming.

Selling, general, and administrative expenses were $422 million up 12.7%, advertising expenses increased almost $11 million or 20% primarily due to media purchases and TV production expenses and the launch of our new Believe in Something Better branding campaign.

Investments and other income totaled $4.1 million down from $18.2 million. In 2007 the company recorded a pre-tax gain of $132 million on settlement of variable prepaid forward contracts related to Vodafone ADRs and sale of the remaining Vodafone ADRs and also a pre-tax loss of $18 million on fair value adjustments the variable prepaid forward contacts prior to settlement.

Net income for the quarter was approximately $73 million or $0.83 per diluted share. As I mentioned earlier the company generated operating cash flow of $269 million during the quarter. We also borrowed $50 million net under our revolving credit facility. We used some of this cash to fund capital expenditures of $138 million including expenditures related to the EVDO deployment. And we contributed $203 million to King Street Wireless which in turn used these funds to pay the FCC, for its remaining obligation incurred in the 700 megahertz spectrum launch.

In addition, we purchased 150,000 of our common shares at a cost of about $8 million. At June 30th, our balance sheet remains very sound. The cash balance was $51 million net of outstanding borrowings under the revolving credit facility. We have additional borrowing capacity of about $650 million under that facility.

Our updated guidance, for expected full year 2008 results is contained in today's press release. We're confirming our guidance for service revenues but given our year-to-date results on the uncertain economic, and competitive outlooks we're lowering our guidance for retail net adds in operating income.

Also we're reducing our estimate for capital expenditures. In his comments Ken provided some important context with his guidance. I won't repeat those comments but I will say that the revised guidance reflects a balanced approach to dealing with the challenges in the current environment. We are taking the actions that we can to sensibly control cost and to reduce capital expenditures in order to produce strong free cash flow while continuing to invest in our business and customers for the long term.

Our goal is to continue to drive for growth in customers, revenues, operating income, and cash flows but while not compromising our customer satisfaction strategy and relative competitive position in the market.

Now I will turn the call over to Bill Megan for a discussion of TDS Telecom's results. Bill?

Bill Megan - Executive Vice President Finance and Chief Financial Officer

Thank you, Steve, good morning everyone. The headline for the quarter at TDS Telecom is that not withstanding a weak economy, ESL subscribers increased by 29% and our access line rates held steady. Also the company continues to actively manage and change its cost structure to offset revenue decline thereby holding cash flow steady. For the quarter combined ILEC and CLEC revenues declined by 4% with the segments declining at approximately the same the rate.

The principle drivers on the ILEC side were physical access line losses which were 5% year-on-year excluding acquisitions and lower access revenue. It's intrastate minutes of use declined s21%. Revenues were also affected by a election to exit certain revenue pools in mid 2007. As we have mentioned in the past the decision to withdraw from the pools for our DSL service was an economic one in exiting the pool revenues were reduced by $2.1 million but the corresponding expense contributing to the pools was reduced by twice that amount.

Clearly, a positive element of the quarter was the increase in ILEC data revenues which grew 24%. We had good success with our promotional campaign selling DSL adding about 8,000 net subscribers sequentially and 36,000 year-on-year. Our gross adds remains strong at 17,000. These numbers exclude the effect of acquisitions. Residential DSL ARPU increased 8% to just shy of $35. We also had success in selling our triple play adding nearly 6,600 net subscribers in the quarter and we now have nearly 49,000 in total.

We have a very strong partner in dish network for the video component and are experience has been the triple play customers have significantly lower churn. Over the past year we have introduced a series of promotions in key markets including pre-service for alimony period, a gift card to be used as the customer wishes, a guarantee of lower price for more extended period and so forth. These present different value propositions and if kept the program fresh and customers have responded favorably.

Also, contributing to the increase in data revenues was the expansion of high capacity Ethernet services for commercial customers. As we mentioned on our last call we have rolled out a service that uses specialized equipment to bond together copper facilities to expand bandwidth. And the bandwidth is symmetric often an important feature for commercial customers.

In our CLEC segment, the revenue decline was driven by our decision to improve profitability by focusing our marketing and sales efforts in smaller medium businesses and limiting our investment in acquiring residential customers.

Another positive element in the quarter was expense control, we reduced cash expenses for our combined operations by $11.9 million and thus we're able to improve cash flow by 4% over last year. Importantly, we have been able to combine support functions and make our other process improvements permitting us to lower average headcount by 5% while still maintaining high levels of customer satisfaction.

We continue to invest in out network; capital expenditures were 28 million for the quarter on a consolidated basis and we will continue to evolve our network and put the necessary infrastructure in place to offer broadband feeds that are very competitive. 89% of our ILEC clients who've quit [ph] for DSL service with 84% of our customers taking speeds of 1.5 megabytes or greater and 46% at speeds from 3 to 6 megabytes.

In key markets we are launching 10 megabyte service over copper facilities in 15 to 25 megabyte service where we have fiber facilities. At the end of May, TDS telecom acquired Mosinee Telephone Company which serves about 4,900 access lines in Central Wisconsin. This acquisition is a good strategic fit for us. Contiguous with our current operations has a good residential and commercial customer mix and network capable of higher data speeds and present a good opportunity per synergies in our operation. And finally, our guidance for the year is unchanged.

And now I'll turn the call back over to Mark Steinkrauss.

Mark A. Steinkrauss - Vice President - Corporate Relations

Thank you, Bill. Sara before we go to the Q&A period I'd like to give you some updated replay numbers we had a change. So if you would cross out the old ones I gave you at the beginning and note the following. The replay number 888-203-1112 that's domestic. For international 719-457-0820 and the conference ID number is 6948709. Thank you. And Sara, now I'll turn the call back to you for questions and answers.

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