<PAGE>


--------------------------------------------------------------------------------
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K

(MARK ONE)

/x/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     FOR THE TRANSITION PERIOD FROM ____________ TO ____________
                            ------------------------

                         COMMISSION FILE NUMBER 1-10726

                          WINSTAR COMMUNICATIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                       <C>
                        DELAWARE                                                 13-3585278
    (STATE OR OTHER JURISDICTION OF INCORPORATION OR                (I.R.S. EMPLOYER IDENTIFICATION NO.)
                     ORGANIZATION)
</TABLE>

                                685 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (212) 792-9800
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                  COMMON STOCK
                  Rights to Purchase Series B Preferred Stock
                            ------------------------

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes /x/  No / /

     Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  /x/

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such, as of a specified
date within the past 60 days: As of March 6, 2000, the aggregate market value of
such stock was approximately $4,448.1 million.

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of March 6, 2000,
the number of shares of common stock outstanding was 85,646,757.
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     The information required in Part III by Items 10, 11, 12 and 13 is
incorporated by reference to the registrant's proxy statement in connection with
the annual meeting of stockholders scheduled to be held on June 28, 2000, which
will be filed by the registrant within 120 days after the close of its fiscal
year.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL(1)

     We provide businesses with broadband services. We offer our services across
our own end-to-end broadband network in 60 major markets in the United States,
including each of the top 30 U.S. markets. We also offer services in 10 overseas
markets, including Amsterdam, Brussels, Buenos Aires and Tokyo. Revenues from
our communications and information services for the year ended December 31, 1999
were $445.6 million compared to $244.4 million for the same period in 1998.

     We believe that our rapidly expanding network will enable us to offer
broadband services to a majority of the companies comprising the business
communications market in the United States. This market is projected to grow
from approximately $178.0 billion in 1999 to approximately $360.0 billion by
2009. Our domestic network combines local and long-haul capacity with voice and
data switching facilities and is capable of carrying a substantial portion of
our customers' communications traffic from point of origin to point of
termination. This network consists of:

     o the nation's largest amount of fixed wireless spectrum, covering more
       than 80% of the U.S. business market, which we use to extend our
       broadband network across the "last mile" to our customers' buildings;

     o intracity fiber in 50 of the top 60 domestic markets, covering more than
       6,000 delivered or committed route miles, which we are incorporating into
       our network to interconnect our hub site buildings and switching and data
       center facilities;

     o a nationwide fiber backbone, comprised of four fiber strands covering
       more than 16,000 route miles, and which connects our top 60 markets;

     o access rights to connect more than 8,000 buildings, which we believe
       provides us with access to more buildings than any other facilities-based
       competitive communications provider; and

     o 34 installed Lucent local and long distance voice switches and 135
       installed data switches.

     In order to reduce network deployment costs and increase network
flexibility, we are integrating point-to-multipoint technology into our
nationwide network. We recently accomplished the initial rollout of point-to-
multipoint technology in Oakland, Phoenix, Salt Lake City, San Jose, Seattle and
Washington, D.C.

OUR SERVICES

     Our broadband network allows us to offer an integrated suite of
communications and information services, including:

     o local and long distance voice services;

     o always-on and dial-up Internet access;

     o ATM, frame relay and IP data transport services;

     o web hosting and web design and development services;

     o online business content, including office.com, a service from Winstar(2),
       our online business center;

     o online application hosting services, including Microsoft Office 2000
       OnlineSM; and

     o network and applications solutions for vertical business communities; and

     o LAN and WAN systems integration.

------------------
1 As used in this report, the terms "we," "us," "our," "our company" and
  "Winstar" refer to Winstar Communications, Inc. and, if appropriate in the
  context, its subsidiaries.
2 office.com(R), a service from WinstarSM and Wireless FiberSM are service marks
  and WinstarSM, office.com(R), Winstar for BusinessSM and Winstar Business
  InfoCenterTM are trademarks of Winstar Communications, Inc.

                                       2
<PAGE>

THE WINSTAR NETWORK

     We are constructing a broadband communications network that will be capable
of carrying bandwidth-intensive traffic from point of origination to point of
termination for a substantial majority of the companies comprising the business
communications market in the United States and selected overseas markets.

  Connecting the last mile

     Local communications service historically has been carried by incumbent
local providers over their legacy networks. The portion of these legacy networks
that ultimately connects to customer buildings, called the "last mile," is
typically copper wire. Without enhancements, copper wire is poorly suited to
support high-bandwidth services. The rapid growth of bandwidth-intensive
communications services, such as Internet access, data transport, audio and
video streaming and e-commerce applications, has created an increasingly acute
shortage of transmission capacity across the last mile.

     We believe that there are more than 750,000 commercial buildings in the
United States. Only a small percentage of these buildings have broadband
connections, most of which are made using fiber-optic cable. Further,
construction of last-mile fiber connections has slowed substantially in recent
years due to the high cost and long delays associated with extending fiber to
most buildings. Since labor constitutes the largest cost component in the
construction of last-mile fiber, we believe that it will become increasingly
less cost effective to connect the majority of commercial buildings with
last-mile fiber.

     We believe our fixed wireless infrastructure provides an optimal solution
for delivering broadband capacity across the last mile. In contrast to fiber,
the majority of the cost associated with establishing our fixed wireless
connections is related to technology and equipment, the cost of which has tended
to decrease over time as the technology develops and becomes more widely used.
As such, we are able to connect customer buildings at a cost which is
substantially less than that incurred in a fiber-build strategy. This
significant cost advantage enables us to economically deliver broadband
capacity, services and applications to a larger addressable market than would
otherwise be possible with fiber or other facilities-based broadband
alternatives. We believe that we will be able to bring broadband last-mile
connections to a majority of commercial buildings in each of our target markets
on a cost-effective basis. Where economically warranted or otherwise
complementary to our overall system architecture, we may use fiber to establish
the last-mile broadband connection to a building.

     Our typical customer is serviced by placing a 10 to 12 inch digital
microwave antenna on the roof of the customer's building. The customer's voice,
data and video communications traffic travels from the customer's premises over
the building's internal wiring to this rooftop antenna. The traffic is then
routed via wireless transmission to another antenna located on a nearby hub site
building which has a direct line of site to the antenna on the customer's
building. Hub sites serve as aggregation points for the reception and
distribution of our customers' traffic. Hub sites are located to maximize the
number of potential buildings from which such sites can receive and distribute
this communications traffic. These hub sites are typically located on our
intracity fiber rings, allowing traffic received there to continue on at
broadband speeds to our switching centers where it is routed to its final
destination.

     We use capacity in the 38 GHz spectrum and the 31 and 28 GHz, or LMDS
spectrum, as well as other portions of the radio spectrum for our wireless
connections. Our spectrum holdings cover more than 80% of the business market in
the United States. We can provide customers with up to an OC-3 (more than 2,000
voice grade equivalents) of transmission capacity over a single wireless link,
which is more than 2,700 times faster than the fastest dial-up service currently
in general use. The capacity of these wireless links has risen dramatically in
recent years and we expect that it will continue to expand as wireless
technology advances.

     We deploy point-to-point and point-to-multipoint connections in our local
network infrastructure. Point-to-point connections use a single dedicated link
between two antennas having line of site to each other, one located on the
customer's building and one at our hub site. Point-to-multipoint technology
allows for simultaneous transmissions between a single hub site antenna and
multiple customer building antennas to which it has line of sight.

     A point-to-multipoint connection allows for the cost of the hub site
antenna to be allocated over numerous customer building sites, rather than just
one, and reduces the capital expenditures necessary to bring broadband

                                       3
<PAGE>

service to a particular customer building. In addition, the use of
point-to-multipoint technology gives us the unique ability to allocate and share
network capacity on an as-needed basis and supply customers with
bandwidth-on-demand to address their dynamic capacity needs.

  Our end-to-end network architecture

     Our local network infrastructure consists of wireless transmission links
between customer buildings and our hub sites, and more than 6,000 delivered or
committed route miles of local fiber rings connecting hub sites and our voice
and data switching facilities. Committed route miles are delivered to us on an
ongoing basis as they are constructed by MFN. We expect that all 6,000 route
miles will be delivered by the end of 2001. Our local networks are
interconnected by a four-fiber strand, 16,000 route-mile long-haul fiber
backbone, forming a national broadband network. If we need more long-haul
capacity, we also have the option to purchase two additional fiber strands over
the same routes. Our network operates as a high-capacity alternative to the
existing public switched telephone networks, which are owned and controlled by
the incumbent local and long distance service providers. Our network supports
ATM, frame relay and IP data services, as well as traditional switched voice
services.

  Switching and data centers

     We have installed 34 Lucent local and long distance voice switches. We have
also purchased and are in the process of installing three more of these
switches. Our switches generally serve the markets in which they reside and, in
some cases, a secondary market from which traffic is routed back to the switch.
In addition, we have 135 data switches located throughout the United States.
Wherever possible, our voice and data equipment is or will be collocated.

     Currently, our network configuration contains both regional and local data
centers around the world. We have five regional data centers in operation,
located in Washington, D.C., Boston, Minneapolis, Seattle and Brussels.
Collectively, these data centers house more than 100,000 facilitized square feet
of capacity. We have also announced plans for the construction of five
additional regional centers in New York City, San Francisco, London, Amsterdam
and Singapore. We supplement these regional data centers with local hosting
centers now or soon to be located in every central office domestically and in
our data points of presence internationally. We believe local centers are
valuable to our customers, particularly those with collocated equipment, as it
moves both the physical storage and content associated with it closer to the end
user.

     As a Tier 1 backbone ISP, we have entered into numerous arrangements with
other Internet backbone providers for the efficient exchange of Internet traffic
between our networks. These arrangements are known as peering relationships.
They can provide access to the Internet through one of the public network access
points, such as MAE-east and MAE-west, or on a private basis. Private peering is
the direct exchange of traffic between carriers, thereby avoiding public access
points which tend to be congested potentially resulting in packet loss and
transmission delay. We access the Internet at all of the public peering points
and maintain private peering relationships with industry leaders, such as GTE,
Cable & Wireless, Sprint, America Online, UUNet (through our relationship with
AboveNet), AT&T and more than 110 other providers. These relationships typically
allow for the free exchange of traffic between providers. Recently, companies
that have previously offered free peering are establishing new, more restrictive
criteria to continue these relationships. We will have to meet these more
restrictive criteria to maintain our peering arrangements. Through our private
and public peering relationships, we can efficiently hand off our Internet
traffic to other networks while still ensuring the global access required of a
premier Internet provider. We believe that the combination of our data centers,
broadband capacity and peering relationships allows us to serve our customers
with the highest quality web hosting, application hosting and Internet access
services.

THE WINSTAR BUSINESS STRATEGY

     We expect that continued advances in technology will make available to
businesses an increasingly comprehensive range of communications services and
applications designed to help them operate more effectively. These services and
applications will drive the continued increase in demand for broadband

                                       4
<PAGE>

communications capacity. Our objective is to become a leading single-source
provider of communications capacity, applications and related services for
businesses. Our strategy is to:

     BUILD A ROBUST, EXPANSIVE NETWORK.  We are building a widely available
network capable of delivering broadband services and applications to a
significant percentage of the business community. Our network infrastructure is
flexible and allows for the integration of other existing and future wireline
and wireless technologies. In order to accomplish this, we will continue to:

     o exploit the low-cost characteristics of our fixed wireless facilities to
       deliver last-mile, broadband connections to a wider market.  The
       relatively low cost and comparatively short time required to connect our
       network to a building, as compared to fiber, allows us to offer broadband
       services to a far wider addressable market than is possible for
       fiber-based or other broadband service providers. Because this cost is
       relatively low, it can often be recaptured by revenues derived from a
       single customer in the building. As a result, the profitability of
       incremental customers increases dramatically.

     o expand the data-centric nature of our infrastructure to address the
       growing demand for data services, including Internet-based
       services.  Customer demand for data services is growing faster than the
       demand for any other type of communications services. We have assembled
       an integrated set of network technology assets, including our wireless
       capacity, intracity fiber rings, intercity fiber and our Tier 1 Internet
       and data backbone and switching facilities, which enable us to offer
       integrated Internet and data services to our customers.

     o leverage the rapid build out characteristics of our fixed wireless
       facilities to match incremental capital deployment with customer
       demand.  Once we have integrated the necessary hub sites into our local
       network, we are able to create a fixed wireless last-mile connection to a
       customer building much more quickly than would be possible with a fiber
       connection. The relatively small amount of time needed to connect an
       accessed customer building to our network allows us to add additional
       buildings to the network only as customer demand warrants. This allows us
       to reduce our upfront "last-mile" costs and to deploy capital into
       existing local networks incrementally.

     o rapidly build out our network to capitalize on a first-to-market
       advantage.  We intend to invest significant capital resources to expand
       our network in order to reach an increasing portion of our addressable
       market. In addition to our U.S. markets, we intend to deploy service in
       50 markets in Europe, Asia and Latin America by the end of 2004. We
       believe that intensive investment and rapid rollout of our network will
       enable us to create and exploit a first-to-market advantage by bringing a
       comprehensive portfolio of high-bandwidth voice, data and video services
       to buildings not currently served with other facilities-based broadband
       alternatives.

     o acquire fiber to maximize control of our network and reduce our cost of
       revenue.  We have acquired and will continue to acquire fiber capacity in
       order to own and control our network on an end-to-end basis. Owning an
       end-to-end network reduces third party costs and the delays inherent in
       using the networks of others. It also allows us to operate our network
       with consistent traffic management protocols that would not be possible
       with a network that is, in part, controlled by other carriers. Where
       economically justified, we will use fiber as a last-mile connection.

     o integrate point-to-multipoint technology to reduce our network deployment
       costs, provide greater network reach and provide customers with
       bandwidth-on-demand.  We expect to reap significant benefits from the
       continuing selective integration of point-to-multipoint technology in our
       network, including reduced network deployment costs and the ability to
       serve more customer buildings from each of our hub sites. We believe our
       customers will also realize significant benefits from point-to-multipoint
       technology, including the option of bandwidth-on-demand, which will allow
       users to purchase transmission capacity on an economical "pay-per-use"
       basis.

                                       5
<PAGE>

     DRIVE CUSTOMER TRAFFIC ONTO OUR NETWORK.  In order to drive traffic onto
our network, we will continue to:

     o focus our selling efforts on buildings connected to our
       network.  Generally, we only market our services to prospective customers
       in our on-net buildings. By marketing primarily to customers in these
       on-net buildings, we are able to:

          o increase gross margins, as the expense and time associated with
            connecting and providing service for an additional customer in a
            provisioned on-net building is minimal;

          o improve the overall customer experience, as the time to provision
            on-net customers is shorter and we have the ability to control all
            of the network elements associated with their connection;

          o realize efficiencies through the use of in-building marketing
            campaigns, targeting the majority of our marketing dollars directly
            on prospective customers;

          o minimize the number of customers served through resold and leased
            lines, thereby increasing profit margins and control over the entire
            customer experience; and

          o allow our sales staff to quickly begin marketing our entire suite of
            services, resulting in higher potential revenue per customer.

     o bundle packages of services tailored to our customers' needs.  We believe
       that many businesses are seeking simplified, integrated communications
       solutions and guidance with respect to the use of these services in their
       businesses. We seek to differentiate ourselves by providing customers
       with comprehensive service offerings tailored to their specific business
       requirements.

     o develop and market bandwidth-intensive applications.  We believe that
       there is increasing demand among business customers for the type of rich
       business-to-business content that can be delivered only through broadband
       connections. Further, we believe that providers that package broadband
       access with this content will have a strategic advantage. In order to
       capitalize on this, we create business content and applications for
       delivery through our broadband network.

     o leverage our local web hosting and broadband network competencies in
       order to exploit growth in the emerging ASP market.  We believe that we
       have an advantage in the ASP market because the combination of our
       strategic alliances, web-hosting competencies and broadband network
       allows us to provide customers with the optimal storage and delivery
       mechanism for their ASP requirements. Using our broadband network to
       carry traffic between the customer and our hosting centers, software can
       be accessed with the same speed and reliability as if it were housed on
       the customer's desktop. We are currently the only domestic local
       communications company participating in Microsoft's Office 2000 Online
       pilot program.

     PROVIDE THE HIGHEST LEVEL OF CUSTOMER CARE.  We believe that customer
loyalty can be developed by providing customers with the highest degree of care
and attention. In order to foster customer loyalty we:

     o provide customers with live 24-hour access to our customer care
       professionals;

     o have developed customer-centric support systems that provides our sales
       and service personnel with access from a single platform to in-depth
       information regarding our customers' ordering and service requirements;

     o link a portion of employee compensation to the achievement of desired
       levels of customer satisfaction;

     o provide for early escalation of significant customer issues to a group of
       customer care professionals who are specially trained to resolve such
       issues; and

     o assign a field service manager to each customer to provide follow-up
       support to our sales efforts.

                                       6
<PAGE>

     ENTER INTO STRATEGIC RELATIONSHIPS.  In order to accelerate the expansion
of our network and enhance the breadth of the business-oriented services we
offer, we have entered into strategic alliances with select industry leaders. We
have established:

     o alliances for our network expansion with:

          o Lucent, which is providing us with equipment, related services and
            up to $2.0 billion of financing for the continued buildout of our
            network;

          o Williams Communications and MFN, from which we have purchased our
            intercity fiber strands and intracity fiber rings;

     o alliances for development and delivery of content and applications with:

          o Microsoft, which is providing us with software to offer our
            customers on an ASP basis and with which we are working to develop
            and market broadband business, e-commerce and multimedia
            applications and services;

          o Lucent, with which we are a resale partner for its Web-based,
            television-quality video conferencing applications;

          o CBS, which owns 33 1/3% of office.com, and which, in exchange for
            its equity position, is providing office.com with approximately
            $47.5 million worth of promotions and advertising over the next six
            years through its media properties; and

          o Wam!Net, with which we are working to develop broadband
            business-to-business services for vertical industries.

OUR WIRELESS LICENSES

      We hold licenses for our wireless broadband spectrum in each of the
markets in the United States in which we currently operate or in which we intend
to operate by the end of 2000. These licenses provide us with an average of more
than 795 MHz of capacity in these markets. We also have an average of 230 MHz of
capacity in 118 additional markets in the United States. In December 1999, we
were granted 38 GHz licenses for incremental spectrum covering nine markets,
including Baltimore, New York City, Philadelphia, and Washington, D.C.

     The following chart indicates, in order of market size (based on population
in the metropolitan statistical area, or MSA, covering such market), the amount
of combined 38 GHz and LMDS spectrum we hold in each of the U.S. markets where
we provide service or intend to provide service by the end of 2000. We also hold
spectrum licenses in other bands, including 2 GHz, 10 GHz and 18 GHz, which are
not reflected below:
<TABLE>
<CAPTION>
                                               TOTAL
                                              CAPACITY
METROPOLITAN AREA                              (MHZ)
-------------------------------------------   ----------
<S>                                           <C>
Los Angeles................................        600
New York City..............................      1,950
Chicago....................................        700
Boston.....................................        600
Philadelphia...............................        700
Washington, D.C............................        700
Detroit....................................        600
Houston....................................        900
Atlanta....................................        900
Riverside/San Bernardino...................        500
Dallas.....................................        800
Minneapolis................................        700
San Diego..................................        400

<CAPTION>
                                               TOTAL
                                              CAPACITY
METROPOLITAN AREA                              (MHZ)
-------------------------------------------     ------
<S>                                           <C>
Long Island, NY............................        700
Phoenix....................................        700
Orange County, CA..........................        600
St. Louis..................................        900
Baltimore..................................        800
Pittsburgh.................................        600
Seattle....................................        800
Oakland....................................      1,650
Cleveland..................................        500
Tampa-St. Petersburg.......................      1,000
Miami......................................      1,000
Denver.....................................        700
Newark.....................................        800
</TABLE>

                                       7
<PAGE>
<TABLE>
<CAPTION>
                                               TOTAL
                                              CAPACITY
METROPOLITAN AREA                              (MHZ)
-------------------------------------------     ------
<S>                                           <C>
Portland, OR...............................        300
Kansas City................................        600
San Francisco/Silicon Valley...............      1,650
Norfolk....................................      1,650
Cincinnati.................................        900
Fort Worth.................................      1,000
Sacramento.................................        250
San Jose...................................      1,250
Stamford...................................        400
San Antonio................................        450
Indianapolis...............................        500
Orlando....................................      1,450
Columbus...................................        200
Milwaukee..................................        600
Ft. Lauderdale.............................      1,000
Charlotte..................................        300
New Orleans................................      1,450
<CAPTION>
                                               TOTAL
                                              CAPACITY
METROPOLITAN AREA                              (MHZ)
-------------------------------------------     ------
<S>                                           <C>
Bergen-Passaic, NJ.........................        600
Salt Lake City.............................      1,250
Las Vegas..................................        500
Buffalo....................................        800
Greensboro.................................      1,350
Nashville..................................        400
Memphis....................................        600
Austin.....................................        400
Jacksonville...............................        400
West Palm Beach, FL........................        300
Louisville.................................        500
Fresno.....................................      1,250
White Plains, NY...........................      1,250
St. Paul...................................        700
Oakbrook, IL...............................        700
Jersey City................................        800
Modesto....................................      1,150
</TABLE>

BUILDING ACCESS RIGHTS

     In order to connect a customer building to our network, we must first
obtain access rights from the building owner or manager to allow us to install
our antennas and access the phone box and the internal building wiring. During
the fourth quarter of 1999, we obtained access rights to place our antennas on
more than 1,500 buildings. This increased the total number of end-user buildings
to which we had such rights to over 8,000 as of December 31, 1999, as compared
to 4,200 such rights as of December 31, 1998. We have a dedicated team of more
than 200 employees who exclusively focus on acquiring building access rights. We
acquire access rights on a building-by-building basis and through agreements
with owners of portfolios of buildings. To date, we have signed agreements with
a number of building portfolio owners, such as Equity Office Properties,
Highwood Properties, Pacific Gulf, Spieker and Tishman-Speyer.

SERVICE OFFERINGS

     In order to serve our customers' developing needs, we offer a broad,
integrated package of communications products.

  Voice services

     Our broadband network and high-speed digital switches allow us to customize
network configurations and solutions to meet the individual telecommunications
needs of our customers. These voice services include:

     o Local, regional toll and long distance services;

     o Virtual private network, Centrex and dedicated lines; and

     o Enhanced features, including call waiting, call forwarding, and voice
       mail, as well as operator and directory assistance services.

  Internet and data transport services

     In addition to providing ATM, frame relay, IP and data transport services,
we offer customers high-speed, always-on or dial-up Internet access. A
substantial majority of our Internet and data traffic travels on our Tier 1
backbone, which connects over 60 U.S. cities and more than 135 data switches
nationwide. As a Tier 1 backbone ISP, we have entered into numerous arrangements
with other Internet backbone providers for the efficient exchange of Internet
traffic between our networks. These arrangements are known as peering
relationships. They

                                       8
<PAGE>

can be maintained on a public basis, providing access to the Internet through
one of the public network access points, such as MAE-east and MAE-west, or on a
private basis. Private peering is the direct exchange of traffic between
carriers, thereby avoiding public access points which tend to be congested and
may result in packet loss and transmission delays. We access the Internet at all
of the public peering points and maintain private peering relationships with
industry leaders, such as GTE, Cable & Wireless, Sprint, America Online, UUNet
(through our relationship with AboveNet), and AT&T and more than 110 other
providers. These relationships typically allow for the free exchange of traffic
between providers. Recently, companies that have previously offered free peering
are establishing new, more restrictive criteria to continue these relationships.
We will have to meet these more restrictive criteria to maintain our peering
arrangements. Through our private and public peering relationships, we can
efficiently hand off our Internet traffic to other networks while still ensuring
the global access required of a premier Internet provider. We believe that the
combination of our data centers, broadband capacity and peering relationships
allows us to serve our customers with the highest quality web hosting,
application hosting and Internet access available. Further, these relationships
help to sharply reduce the costs associated with the exchange of traffic between
peered networks. We also provide service to more than 200 ISP customers who, in
total, serve more than one million end users. In addition to our ISP customers,
we provide Internet service to businesses, government and educational
institutions, cable television operators and value-added resellers.

  Web hosting

     We provide our customers with a full range of web hosting services,
including shared, dedicated, collocated and fully managed web hosting. These
services are provided using our wholly-owned regional and local data centers,
which are located on our Internet backbone. We believe local centers are
valuable to our customers, particularly those with collocated equipment, as they
move both the physical storage and content associated with it closer to the end
user. Thus, customers can store their web sites at our data centers and users
can access these web sites at high-speeds through the connection to our backbone
and our extensive public and private peering relationships.

  On-line business content and applications

     We believe that there is increasing demand among business customers for the
type of rich business-to-business content that can be delivered only through
broadband connections. Further, we believe that providers that package broadband
access with this content will have a strategic advantage. In order to capitalize
on this, we create business content and applications for delivery through our
broadband network. We have entered into and continue to seek strategic
relationships with industry leaders, in an effort to benefit from their
expertise and lower the risk associated with the development of this content.

     These efforts recently resulted in the launch of office.com, our online
business center. office.com is a destination site that enables users to
interact, communicate and transact business with customers, colleagues,
suppliers and competitors. It is designed to provide small and medium businesses
with resources to improve the productivity of their enterprises. Through
comprehensive focus group research, we have identified particular tools and
content used by enterprises in more than 150 industry categories. Users also
have access to extensive business information and content, as well as e-commerce
and communications tools and services. office.com derives its revenues from a
combination of banner advertising sales, e-commerce and pay-per-view
subscription payments for industry specific information. In December 1999,
Cahners In-Stat Group rated office.com the #1 online business center.

     CBS owns 33 1/3% of office.com. In exchange for its equity position, CBS is
providing office.com with approximately $47.5 million of promotions and
advertising over a term of six years across the full range of CBS' media
properties, as well as those of its subsidiaries, including Infinity
Broadcasting Corporation. We also use the sales force of CBS PLUS, the CBS
cross-media sales group, in connection with the promotion and marketing of the
site.

                                       9
<PAGE>

  ASP services

     An ASP is a service provider that hosts software applications on servers
located in its data centers and deploys these applications across a network to a
customer base. The customer accesses applications as needed on a subscription
basis. In the ASP market, the customer no longer needs to purchase, own, install
or maintain some or all of its applications. Forrester Research estimates that
the ASP market, which has only recently begun to develop, will reach
$21.0 billion by 2001 and that the early adopters of ASP services are likely to
be small and medium businesses.

     In our effort to provide small and medium businesses with a fully
integrated communications offering, we have begun to offer ASP services. Our ASP
services provide business customers with outsourced access to applications on a
subscription basis. These applications are hosted at our data centers and are
delivered to our customers using our broadband network.

     By accessing the applications they need for their businesses, such as
software, through our broadband networks, customers will be able to:

     o have a choice among applications;

     o access the software at speeds equivalent to those experienced when
       accessing applications stored on their desktop PC or in-house network;

     o lower their costs for maintaining, supporting and upgrading their
       applications; and

     o satisfy their voice, data, video and applications needs from a single
       vendor.

     In order to provide our customers with a comprehensive set of ASP services
online, we have entered into strategic alliances with select industry leaders.
For example, we recently entered into a multifaceted relationship with Microsoft
in order to develop a market presence in the ASP market. We are currently the
only domestic local telecommunications provider selected by Microsoft for the
hosting and delivery of all Microsoft applications, including Microsoft Office
2000 Online. We have also agreed with Microsoft to:

     o co-develop new bandwidth-intensive services, such as on-demand IP video
       conferencing, based on Microsoft software;

     o collaborate on Microsoft's BizTalk e-commerce and media streaming
       initiatives; and

     o market new and existing general business, e-commerce and multimedia
       applications services which will help small and medium businesses adopt
       an Internet-centered business style.

  Vertical solutions

     The limitations of the existing public infrastructure often prevent
businesses from effectively collaborating and sharing work flow with their
industry partners. These limitations include:

     o narrowband connections to the Internet or unsecure public networks;

     o the lack of a standardized format for the exchange of data and
       information; and

     o the lack of accountability for data transfers and network failures.

     We have begun to offer solutions for specific industries, such as the
entertainment, publishing and education industries, where participants require
the transport of data-intensive work product to their industry partners. These
situations arise in cases where:

     o there is geographic dispersion of industry players;

     o the work requires a high level of interaction between multiple entities
       and involves high volumes of data and information exchange; and

     o timing sensitivities require the near-immediate transfer of this
       information.

     We work with strategic partners to integrate software, standardized
information exchange protocols and broadband access, network security and
accountability to create a virtual community in which industry partners

                                       10
<PAGE>

can collaborate online. In connection with these efforts, we recently entered
into an agreement with Wam!Net, a global digital data management services
company that helps customers leverage the Internet to convert their analog
workflow to digital workflow. We are working with Wam!Net to develop and market
new products and services for vertical industries that have a need for
high-speed broadband communications and Wam!Net's business-to-business
e-services.

  Professional services

     We provide LAN and WAN systems integration and other similar services as
part of our strategy to provide a full suite of complementary data services. We
can provide expert support in areas such as network infrastructure design,
implementation, network and desktop operating systems, web-site design and
management, document management systems, groupware applications, Internet and
Intranet solutions, flexible support of LAN, WAN and public networks and
sourcing and procurement of equipment. Additionally, we have developed numerous
strategic relationships with prominent technology providers, such as Microsoft,
Cisco, Compaq, Novell, PC DOCS, Lotus and Bay Networks.

  Information and media services

     We market and distribute information and entertainment content and services
both in traditional media, such as television, video, cable and radio, and
through new media channels, such as the Internet. We believe that the ability to
package information, entertainment and other content and services as enhanced
communications services will become an increasingly important factor in the
business customer's choice of communications provider. We have established our
operations primarily by offering traditional media products and services which
address the demand for niche and special-interest content. Our information and
media services group is organized into two primary operating units. The first
focuses on interactive advertising sales and the development and usage of online
business information services. The second concentrates on television and home
video production, distribution and licensing and radio program production,
syndication and sales of radio advertising inventory.

NETWORK AND CUSTOMER SUPPORT

     We use customer-centric business and operations support systems which allow
us to track orders, provisioning, billing, servicing and other information for
each customer from a central database.

     Our local broadband networks are monitored 24 hours a day, seven days a
week through our network operations centers, or NOCs, located in Herndon,
Virginia and Seattle, Washington. These NOCs provide us with points of contact
for network monitoring, troubleshooting and dispatching repair personnel in each
market. They have a wide range of network surveillance functions for each local
broadband network, including the ability to remotely receive data regarding the
diagnostics, status and performance of our networks. Continuous monitoring of
system components by personnel at the center allows us to avoid problems and
quickly react to problems when they occur. We believe that we provide network
service reliability equal to or exceeding that provided by our competitors. We
also maintain a separate NOC in Tysons Corner, Virginia, which performs
specialized monitoring functions and serves as a back-up to our primary NOCs.

     We maintain a national customer satisfaction center in Dublin, Ohio. The
facility serves our customers 24 hours a day, seven days a week. The customer
satisfaction center enhances our customer care efforts by centralizing these
operations. We also maintain a separate customer assistance center in
Indianapolis, Indiana to serve our dial-up Internet access customers.

MARKETING AND SALES

  MARKETING

     Our marketing effort is primarily focused in three areas: in-building
marketing campaigns; focused seminars; and targeted mass media advertising.

                                       11
<PAGE>

  In-building marketing campaigns

     Our in-building marketing campaigns focus the majority of our marketing
dollars directly on prospective customers located in on-net buildings, where
sales are the most profitable. This effort is accomplished primarily through our
Project Millennium program, which incorporates the following:

     o staged promotions which feature a different service during each phase;

     o fixed amounts of featured services that are positioned as "free" and
       which are provided to customers when they enter into long-term contracts
       for purchases of bundled services; and

     o the marketing of our services primarily in on-net buildings.

     We believe that this program delivers significant value to the customer and
to us. While the customer views the bundled service package as an attractive
value, we also derive several benefits, including:

     o the development of a long-term relationship with the customer, providing
       us with recurring revenues and opportunities to sell additional services
       over time;

     o the ability to focus on other prospective customers located in the on-net
       buildings, which represents the highest margin business; and

     o the ability to phase in new product offerings in staged promotions,
       thereby allowing our sales, provisioning and customer support teams to
       become educated on each new service offering.

     We have seen dramatic results from the first two phases of Project
Millennium, including increases in building penetration rates, on-net sales and
on-net traffic, as well as a majority of customers opting for contracts which
provide multiple services and long-term commitments.

  Focused seminars

     We offer educational seminars to senior personnel and telecommunications
decision makers working in our on-net buildings. These seminars are focused on
educating potential customers on the value of new and developing communications
services, such as high-speed always-on Internet access and a meaningful web
presence. We believe that potential customers will be more inclined to purchase
our services once they understand and realize the potential value of these
services.

  Mass media advertising

     We target our mass media advertising on demographic groups containing
communications service decision makers to help create awareness of our brand
names, such as "Winstar" and "office.com."

  SALES

     We sell our communications services primarily through two direct sales
forces, one focused on small and medium businesses and the other on large
accounts. We also use an independent agent channel to supplement our direct
sales forces. In light of the complex needs of communications customers and the
variety of service offerings in the marketplace, we have adopted a consultative
selling model in which our sales and service representatives seek to serve their
customers' communications requirements by working closely with customers to
develop optimal solutions.

  Small and medium businesses

     Our sales organization that is dedicated to small and medium businesses
includes more than 300 sales and service professionals. Our sales people are
trained to sell our services by focusing on the particular needs of the small
and medium business customers. Demand for our services by small and medium
businesses is generally driven by:

     o price;

     o a desire to receive better service than historically provided by the
       incumbent local exchange carriers;

                                       12
<PAGE>

     o a need for assistance in selecting the appropriate suite of
       communications services for their particular needs; and

     o the efficiencies of a one-stop shop for the broad array of services we
       offer.

  Large accounts

     This sales force includes more than 200 sales and service professionals. We
sell to large accounts through a number of channels, including:

     o sales of bundled products and services through our enhanced service
       provider channel. These products and services include sales of key
       network elements such as last-mile connectivity, long-haul fiber
       capacity, Internet connectivity and equipment, to developing
       communications carriers, such as Cignal Communications, VoCall
       Communications and Wam!Net. These sales transactions are particularly
       attractive where the customer can become a strategic partner and generate
       additional sales opportunities for us;

     o direct sales to large, multi-location customers, primarily through our
       direct sales force;

     o focused sales efforts for vertical solutions, with services and
       applications tailored to the special needs of a particular industry;

     o leverage of our key strategic relationships such as those with Lucent,
       Williams and Microsoft, including the resale of their products and
       services through our sales channels, access to their sales and marketing
       channels, and sales of services directly to those parties; and

     o sales to government organizations.

     Demand for our services by large account customers is generally driven by:

     o a desire for substantial bandwidth and the most advanced technologies;

     o speed and flexibility of deployment of services;

     o price;

     o bundled products and services and technical expertise in choosing and
       using products and services; and

     o a need to diversify their communications providers to insure against
       outages in mission-critical areas.

COMPETITION

     The communications market is intensely competitive and currently is
dominated by the incumbents and the large, established long distance companies.
We have not obtained significant market share in any of the areas where we offer
our services. The FCC recently granted Bell Atlantic the authority to offer long
distance services in New York, enhancing this provider's competitive position in
that state. We expect that other incumbent providers will receive similar
authority over time in the states where they operate.

     There is at least one competitor in addition to the incumbent provider in
each metropolitan area covered by our fixed wireless licenses. These competitors
include MCI WorldCom, AT&T, Sprint and Time Warner. We also face competition
from other providers which offer, or are licensed to offer, fixed wireless
services, such as NEXTLINK, Teligent, Advanced Radio Telecom, NextWave and other
LMDS and 38 GHz licensees. In some instances, these service providers hold 38
GHz and/or LMDS licenses or licenses for other frequencies in geographic areas
which encompass or overlap our market areas or operate on an unlicensed basis.
The FCC has announced its intention to auction additional 38 GHz spectrum
beginning in April 2000 as well as other spectrum thereafter. If these auctions
occur, purchasers of the new licenses could become additional competitors.

     We also may face competition from cable companies, electric utilities,
incumbent local service providers operating outside their current local service
areas, established long distance carriers, other competitive communications
providers, satellite providers and entities using new technologies. The great
majority of these entities currently provide communications services primarily
over fiber and copper-based networks which, relative to our fixed wireless
services, enjoy substantially greater market acceptance for the carriage of
communications traffic. Our information and content services compete for users
with numerous established

                                       13
<PAGE>

companies, such as America Online and Yahoo!, and other less established
providers. Moreover, the consolidation of communications companies and the
formation of strategic alliances within the communications industry, which are
expected to accelerate, could give rise to significant new or stronger
competitors.

     We believe that the principal competitive factors affecting our market
share are:

     o variety of offered services;

     o pricing;

     o quality and reliability of service;

     o customer service;

     o direct customer contact; and

     o brand awareness.

WINSTAR INTERNATIONAL

  Market opportunity

     The rapidly growing demand for high-speed communications capabilities is a
global phenomenon. Even more so than in the United States, very few of the
commercial office buildings in major cities abroad are directly connected to
fiber or other broadband alternatives. At the same time, many countries are
beginning to open up their communications markets to competition and to make
available spectrum rights which are suited to broadband communications services.
Therefore, we believe there is a significant first-to-market opportunity for us
to obtain spectrum rights and sell our broadband communications services in
selected markets abroad. We expect to use our experience in building and
operating fixed wireless broadband networks to successfully compete in these
overseas markets. For these reasons, we plan to acquire spectrum, build fixed
wireless local networks and sell communications services in 50 overseas markets
located primarily in Europe, Asia and Latin America by the end of 2004. We are
currently selling such services in 10 foreign markets.

  Strategy

     We select and prioritize our potential foreign markets based on numerous
factors, including:

     o availability of appropriate spectrum, building access and backbone fiber
       rights;

     o demand for communications and data services; and

     o perceived pro-competitive regulatory environment.

     We conduct extensive research to assess market opportunity, including:

     o legal and regulatory analyses;

     o preparation of business and network buildout plans in consultation with
       Lucent, including operational, capital and financing projections; and

     o identification of potential strategic partners to provide local market
       expertise.

     After markets are identified for potential entry, we opportunistically
pursue individual markets based upon the availability of appropriate spectrum
rights. As of December 31, 1999, we had spent approximately $6.0 million to
acquire spectrum rights or preferences in our first 24 foreign markets, and we
will continue to acquire spectrum when available on acceptable terms. Spectrum
rights for a market may be acquired in a number of ways, including:

     o grants of rights or preferences by the local government;

     o public spectrum auctions;

     o purchases from third parties; or

     o acquisitions of, or partnerships with, entities that hold spectrum
       rights.

                                       14
<PAGE>

     Once we have acquired the necessary spectrum in a target market, we use
limited capital in an effort to match our buildout with market demand and manage
risks associated with international expansion. Initially, we deploy data
switches only, resulting in less capital expenditure per market relative to U.S.
markets, where we generally introduce voice and data services concurrently.
Further, we intend to leverage our strategic supply and financing relationship
with Lucent as well as the capabilities and resources of any local joint venture
partners to quickly and cost-effectively build out a fixed wireless local
broadband network. We also intend to interconnect these markets to each other
and to our U.S. markets using fiber, thereby creating an end-to-end owned
broadband network.

     We intend to sell on-net data services, transport services, Internet access
and, in some markets, non-switched voice services. By selling to customers in
on-net buildings, we increase our gross margin potential and limit the amount of
our upfront costs. In addition, the current prices and profit margins on sales
of data services in our target international markets are substantially higher
than those in the United States. Although we anticipate that prices will
decrease as competition further develops in these markets, the current pricing
structure is advantageous to new market entrants since it substantially offsets
the expense of initially entering a market. We believe that, on a city-by-city
basis, our target international markets could become profitable more quickly
than our U.S. markets.

  Results

     Of the 24 foreign markets in which we have obtained spectrum rights or
preferences, we have begun to offer our data services in 10. The following table
lists all of the foreign markets in which we have spectrum (with the markets in
which we are currently operating indicated by an asterisk):

<TABLE>
<CAPTION>
                 EUROPE                         ASIA(3)           LATIN AMERICA
----------------------------------------  -------------------  -------------------
<S>                  <C>                  <C>                  <C>
Amsterdam*           Manchester           Tokyo*               Buenos Aires*
Rotterdam*           Berlin               Osaka*
The Hague*           Cologne              Nagoya*
Utrecht*             Dusseldorf           Okinawa*
Brussels*            Essen                Sapporo
Leeds                Frankfurt            Kyoto
Birmingham           Hamburg
London               Antwerp
                     Ghent
</TABLE>

------------------

(3) These markets are served by KDD Winstar, a joint venture formed by us, KDD
    Corporation and Sumitomo Corporation, in which we own a 35% interest.

GOVERNMENT REGULATION

     Our communications services are regulated extensively by federal, state,
local and foreign governments. The Federal Communications Commission regulates
our interstate and international communications services and our wireless
licenses in the United States. In addition, Congress has begun to impose
regulations on certain aspects of Internet-related businesses. State governments
regulate our intrastate communications services, generally through their public
utility commission ("PUC") or public service commission. Municipalities often
indirectly regulate aspects of our communications business by imposing zoning
requirements, permit or right-of-way procedures or franchise fees. Foreign
governments regulate our services and our use of spectrum in their countries. We
believe we operate our business in compliance with laws and that we possess the
governmental approvals necessary to conduct our business.

                                       15
<PAGE>

  REGULATION OF OUR COMMUNICATIONS SERVICES

     Federal government regulation.  As a provider of interstate and
international telecommunications services, our business is regulated extensively
under the Communications Act of 1934 (the "Communications Act"), as amended by
the Telecommunications Act of 1996 (the "Telecommunications Act"), and the FCC's
rules and regulations thereunder. Some of the key areas of federal regulation of
our business are:

     o interconnection of our network with the networks of other carriers;

     o the use of individual or unbundled network elements of other carriers;

     o reciprocal compensation;

     o access charges and universal service requirements;

     o prohibition on improper marketing activities such as slamming and
       cramming;

     o telephone numbering; and

     o tariffing.

     Interconnection and unbundled network elements.  The Telecommunications Act
requires ILECs to allow competitors such as us to interconnect with their
networks in a nondiscriminatory manner at any technically feasible point on
their networks on cost based prices which are more favorable than have been
available in the past. In August 1996, the FCC adopted its "Interconnection
Order," which defines the Telecommunications Act's requirements relating to
interconnection and access to unbundled network elements.

     The Interconnection Order has been extensively litigated in the federal
courts. In January 1999, the Supreme Court upheld many of the FCC's local
competition rules as set out in the Interconnection Order. The Court:

     o upheld the FCC's pricing authority with regard to interconnection, resale
       of ILEC services and competitors' use of unbundled network elements;

     o upheld the FCC's "pick and choose" rules;

     o upheld the FCC's jurisdiction to require local phone companies to
       implement intraLATA presubscription, the process by which local telephone
       customers preselect a carrier for short-haul long distance calls; and

     o remanded for further consideration the FCC's rule that defines those
       network elements which must be unbundled by the ILECs and made available
       to competitors. The FCC recently ruled that ILECs must unbundle six of
       the seven network elements required by the original Interconnection
       Order, as well as additional elements not previously required.

     Notwithstanding the Interconnection Order, we typically need to negotiate
each interconnection arrangement with the relevant ILEC. We are parties to
interconnection agreements with ILECs in each of our voice markets. As is
currently common with competitive carriers, a substantial number of our
interconnection agreements with ILECs have expired or expire in the near future
and must be re-negotiated. Each of these agreements provides for a holdover
which continues the agreement on its current terms pending renegotiation. If the
negotiation process does not result in interconnection terms that are acceptable
to us, we can petition to arbitrate disputed issues or choose to "opt in" to
another carrier's agreement, thereby having our interconnection relationship
governed under the same terms as those agreed to by the ILEC and another
carrier. With regard to unbundled ILEC network elements, we expect that a
majority of our future customers will be serviced over our network, with only
limited reliance on ILEC facilities. In cases where the use of ILEC facilities
may be necessary, recent FCC orders limiting the restrictions and costs that
ILECs may impose on collocation and mandating the availability of certain
transmission line combinations for specific types of dedicated circuits are
expected to reduce the costs of providing such services over time.

     Reciprocal Compensation.  Reciprocal compensation is the arrangement under
which local telecommunications carriers compensate each other for terminating
local calls made by their customers. The Telecommunications Act requires ILECs
and CLECs to complete calls originated by competing carriers under reciprocal
arrangements at prices based on a reasonable approximation of cost as through
the mutual exchange of traffic without explicit payments. An issue has arisen
regarding the treatment of local dial-up calls to ISPs with regard to reciprocal
compensation. Because the average length of these dial-up calls is much longer
than that of

                                       16
<PAGE>

voice calls, the amount of traffic terminated by the ISP's carrier, which is
often a CLEC, can greatly exceed that of the Internet users' carrier, which is
typically the ILEC. This can represent significant revenues to the terminating
CLEC. The ILECs have argued that such calls should be deemed interstate rather
than local and therefore not subject to reciprocal compensation. This issue
impacts the federal and state regulatory scheme and interconnection agreements.

     A substantial majority of state PUCs which have ruled on this matter have
determined that dial-up ISP traffic is subject to reciprocal compensation. The
FCC recently ruled that dial-up calls to ISPs are interstate in nature, and
therefore subject to FCC jurisdiction, but that its decision was not intended to
impact previous state PUC decisions on reciprocal compensation. This order has
been appealed to the FCC and several ILECs have requested that state regulators
reverse their prior rulings in this area. It is unclear how these proceedings
will conclude. In light of the limited revenues we receive from reciprocal
compensation for ISP traffic, we do not expect the resolution of this issue to
have a material impact on us.

     Access charges and universal service.  The FCC has recently issued orders
reforming LEC access charges and universal service requirements. Generally,
access charges are the mandatory payments that long distance carriers must pay
to local carriers to originate and terminate long distance calls. A petition has
been filed with the FCC requesting that long distance carriers be able to elect
not to purchase switched access services offered under tariff by CLECs. This
could also cause increased FCC scrutiny and regulation of CLEC interstate access
rates. The FCC has initiated a proceeding to review this issue. Under the FCC's
universal service order, communications service providers must pay a percentage
of their endorsed revenues to a universal service fund. Carriers typically pass
this cost on to their customers. There are a number of uncertainties that could
impact our obligations to contribute to the fund including the classification of
our services as telecommunications services or exempt information services, the
size of the fund, current court challenges, reconsideration of the universal
service program by the FCC or future legislation, if any.

     Improper marketing activities.  Providers of communications services are
coming under intensified regulatory scrutiny for marketing activities that
result in alleged unauthorized switching of customers from one service provider
to another. The FCC and a number of state authorities have begun adopting more
stringent regulations to curtail the intentional or erroneous switching of
customers, which include, among other things, the imposition of fines, penalties
and possible operating restrictions on entities which engage or have engaged in
unauthorized switching activities. In addition, the FCC has adopted regulations
imposing procedures for verifying the switching of customers and additional
remedies on behalf of carriers for unauthorized switching of their customers.

     Telephone numbering.  The FCC oversees the administration and assigning of
local telephone numbers, an important asset to voice carriers. The FCC has
extensive regulations governing telephone numbering, area code designation and
dialing procedures, among other things. It is considering adopting new rules
concerning a wide array of numbering-related issues which would impose
additional reporting and other obligations on the usage and availability of
telephone numbers. In 1996, the FCC permitted businesses and residential
customers to keep their numbers when changing local phone companies (referred to
as number portability). The availability of number portability is important to
competitive carriers like us since customers, especially businesses, may be less
likely to switch to a competitive carrier if they cannot retain their existing
telephone numbers. The FCC has been working with industry groups and companies,
including Winstar, to address potential problems stemming from the depletion in
certain markets of the pool of telephone numbers which communications companies
can make available to their customers. If a sufficient amount of telephone
numbers are not available to us in the market, our operations in that market may
be adversely affected or we may be unable to enter that market until sufficient
numbers become available.

     Tariffing.  As a common carrier, we are subject to federal and state
regulations on the pricing of certain of our services and their general
availability to the public. We need to make regular filings, known as tariffs,
with the state PUCs and the FCC to provide notice to our customers of the rates,
terms and conditions of our service offerings. In general, these regulations
require us to offer our services in a non-discriminatory manner at just and
reasonable prices. The FCC has adopted an order eliminating the obligation for
interexchange carriers to file tariffs with it for domestic interstate services
which order has been stayed by federal court action pending review. If the order
is permitted to go into effect, carriers will no longer be able to rely on
tariff filings to provide notice

                                       17
<PAGE>

of the terms of the Company's services. In such event the Company intends to
rely primarily on its sales force and direct marketing to provide service
offering information to its customers for interexchange carrier services.

     State government regulation.  Some of our services are classified as
intrastate and are subject to state regulation, generally administered by the
state's PUC. The nature of these regulations varies from state to state and in
some cases may be more extensive than FCC regulations. In most instances, we are
required to obtain certification from a state PUC before providing voice
services in that state. We are certified to provide intrastate non-switched
service in 42 states and the District of Columbia. We are certified to offer
switched local (i.e., CLEC) services in 38 states and the District of Columbia
and intrastate long distance service in more than 44 states.

     Local government regulation.  Local governments have authority to regulate
aspects of our communications business by, among other things, imposing zoning
regulations that may be implicated in the siting of our radio antennas and
franchise fees for the use of certain public property or rights of way. The
scope of local authority under the Communications Act has been the subject of a
number of disputes between carriers and local authorities and we anticipate the
administrative proceedings and litigation relating to these disputes will
continue.

     Foreign government regulation.  In order to provide services in overseas
markets, we need to obtain the required approvals and licenses. These typically
include licenses to operate as an internal and external facilities-based
communications carrier and, in our case, the right to use appropriate radio
spectrum. In addition, we will need to enter into interconnection agreements
with other local carriers (especially the local incumbent providers). Many
foreign jurisdictions do not have clearly defined policies or programs with
regard to making spectrum rights available or mandating cost-effective
interconnection arrangements. It may be more difficult or take more time for us
to accomplish our objectives in these markets.

  REGULATION OF OUR SPECTRUM

     The grant, renewal and administration of spectrum licenses is regulated in
the United States by the FCC. Some significant areas of regulation include:

     Renewal of 38 GHz and LMDS licenses.  Our 38 GHz wireless licenses expire
in February 2001 and our LMDS licenses expire in August 2008. In other radio
services, the FCC has historically renewed licenses as a matter of course;
however, no licenses in the 38 GHz and LMDS bands have yet been up for renewal.
The FCC's stated policy for renewal of licenses in these bands is that licensees
will have a renewal expectancy if they demonstrate substantial service during
the initial license periods. We believe that our significant and continuing
investment in the development of our national telecommunications business and
infrastructure along with our ongoing operations will be sufficient to
demonstrate substantial service for our licenses and that such licenses will be
renewed by the FCC. However, the FCC's application of substantial service
criteria cannot be predicted and we cannot assure you that all of our licenses
will be renewed by the FCC. A failure by the FCC to renew our licenses in major
markets could have a material adverse effect on the Company.

     Processing of pending 38 GHz license applications.  The FCC is currently
processing all pending 38 GHz license applications. Those with defects or which
were encumbered by mutually exclusive competing applications are being
dismissed. Pending petitions at the FCC seeking to protect certain dismissed
applications have yet to be addressed. The FCC has indicated that it will
process the clear channel portions of pending multichannel applications,
including ours. Mutually exclusive channels from those applications will be
dismissed.

     Proposed auction of 38 GHz spectrum.  The FCC has also announced its
intention to conduct an auction of unlicensed 38 GHz channels in 172 Economic
Areas (EAs) and three EA-like areas. The auction is currently scheduled to
commence on April 12, 2000. Incumbent licensees like us will retain our license
channels within existing areas, subject to renewal.

     Proposals from satellite operators.  We operate primarily in the 38.6 to
40.0 GHz spectrum band. Several major U.S. satellite companies have made
repeated proposals to the FCC to allow commercial satellite systems to operate
within that allocation in the United States. In addition, in September 1999, the
National Telecommunications and Information Administration ("NTIA") notified the
FCC that the Department of Defense ("DOD") may wish to use the 39.5 to 40.0 GHz
portion of the band for a future satellite system.

                                       18
<PAGE>

However, the FCC has designated the 38 GHz band for exclusive primary
non-government use to terrestrial fixed services and has declined to propose
rules which would accommodate the satellite companies' desire to develop future
systems utilizing this spectrum on a shared basis. Proceedings on this matter
are still pending at the FCC. If satellite transmissions were allowed in the 38
GHz band, as proposed by such the satellite companies or the DOD, their
transmissions could adversely affect our operations by creating interference or
causing the FCC to limit our transmissions in some way.

     Pursuant to an international agreement to which the United States is a
signatory, the 38 GHz band is allocated on a co-primary basis to terrestrial
fixed wireless and fixed satellite services. We are party to various
international proceedings related to the use of 38 GHz and other spectrum inside
and outside of the United States, including the World Radio Conference
(WRC-2000), scheduled to be held in Istanbul, Turkey this spring. At WRC-2000,
members of the International Telecommunications Union (ITU) will consider a
resolution relating to the use of the 37.5 to 40.0 GHz bands by satellite and
fixed wireless services. Once again, some satellite interests and member nations
have proposed spectrum sharing, power and interference standards and other
measures which, if adopted as proposed, could adversely affect our wireless
operations.

  REGULATION OF RF EMISSIONS AND RF ENVIRONMENTS

     The FCC regulates the health and safety effects of radio frequency (RF)
emissions by us and other wireless communications providers. Any FCC licensee
whose emissions in an area exceed 5% of the total permissible emissions limit
are responsible for ensuring that the site meets applicable health and safety
requirements and must notify the FCC and obtain a waiver to operate. The
wireless equipment we use is designed to operate at RF emission levels well
below the FCC's standard. However, if we operate in an area where other higher
RF emitters are operating, we could be required to cooperate with, and
contribute financially to, efforts intended to bring the site within applicable
health and safety limits. Certain foreign jurisdictions also regulate RF
emissions to various degrees. The Occupational Health and Safety Act (OSHA)
requires certain RF monitoring and other measures in RF workplace environments.
We believe our RF workplace policies comply with OSHA requirements.

  REGULATION OF INTERNET SERVICE PROVIDERS

     To date the FCC has treated ISPs as "enhanced service providers" exempt
from federal and state regulations governing common carriers, including the
obligation to pay access charges and contributions to the universal service
fund. Nevertheless, regulations governing disclosure of confidential
communications, copyright, excise tax and other requirements may apply to our
Internet access services and future regulations may be imposed by state, federal
or foreign governments. Also, Congress has passed a number of laws that concern
the Internet, principally directed toward Internet users. Generally, these laws
provide liability limitations for Internet service providers and hosting
companies that do not knowingly engage in unlawful activity. We have guidelines
in place to comply with this legislation and do not anticipate that compliance
will have an adverse impact on us. Congress is actively considering a variety of
Internet regulation bills, some of which, if signed into law, could impose
obligations on us to police the Internet activities of our customers.

EMPLOYEES

     At December 31, 1999, we had approximately 3,900 employees. We are not a
party to any collective bargaining agreements and have never experienced a
strike or work stoppage. We consider our relations with our employees to be
satisfactory.

                                  RISK FACTORS

     We face significant risks in the operation of our business. The risks
described below are intended to highlight risks that are specific to us but are
not the only risks that we face. Additional risks and uncertainties, including
those generally affecting the economy, the industry in which we operate, the
public securities markets and risks that we currently deem immaterial may
ultimately impair our business.

     This report includes forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of numerous factors, including
those described below and elsewhere in this Item I, under Item 7, "Management's
Discussion

                                       19
<PAGE>

and Analysis of Financial Condition and Results of Operations" and in other
portions of this report. See "Forward-Looking Statements" under Item 7 of this
report.

                        RISKS RELATING TO OUR OPERATIONS

IF WE DO NOT GROW AT THE RATE WE ANTICIPATE OR ARE UNABLE TO SUCCESSFULLY MANAGE
OUR EXISTING OPERATIONS AS WE GROW, OUR OPERATIONS COULD BE DISRUPTED AND OUR
FINANCIAL CONDITION COULD BE IMPAIRED.

     If we are unable to grow to the extent or as rapidly as we anticipate, or
if we are not successful in managing our growth, our financial performance may
not meet our expectations. Our rapid growth strategy includes numerous elements
which may be difficult or costly to execute, and we may not be successful in
implementing these elements. If we are not able to grow our operations at a
rapid rate, the demand for our services may not increase as planned. Even if we
are able to grow our operations, demand for our services may not increase, in
which event we will not generate sufficient revenues to offset the increased
expenditures associated with our growth, thereby having an adverse effect on our
business operations and financial condition.

OUR FAILURE TO OBTAIN THE ACCESS RIGHTS NECESSARY TO BUILD OUR NETWORK AND
SERVICE OUR CUSTOMERS WOULD ADVERSELY AFFECT OUR ABILITY TO EXPAND OUR BUSINESS.

     We may not be able to obtain, from building owners or managers, access
rights to enough buildings to successfully build our network and provide on-net
services to customers as planned. In order to build our network and access our
customers, we need access to each building where our antennas will be placed.
Our failure to obtain access rights at the pace necessary to meet our business
plan could have an adverse affect on our business and financial condition. In
addition, we may need to obtain zoning or other governmental approvals in order
to place our antennas on a particular building or in a particular area. We
cannot assure you that we will be able to obtain these approvals in a timely
manner, or at all.

FIXED WIRELESS COMMUNICATIONS SERVICES ARE RELATIVELY NEW AND ARE NOT WIDELY
USED, AND OUR FIXED WIRELESS SERVICES MAY NOT ACHIEVE WIDE MARKET ACCEPTANCE.

     Our services are relatively new and we compete with a wide variety of
alternative communications solutions. Although we use various technologies to
deliver our broadband services, our use of fixed wireless services to provide
last-mile connectivity differentiates us from the vast majority of our
competitors. Our fixed wireless services may not achieve wide market acceptance
relative to the alternative technologies used by our competitors to provide
last-mile broadband communications services. These include:

     o digital subscriber line, or DSL, technology which allows for high-speed
       transmissions over traditional copper lines;

     o cable television lines, many of which are being converted for use as a
       two-way communications medium;

     o fiber-optic lines; and

     o satellite-based and other wireless systems.

     The failure of our fixed wireless services to gain wide market acceptance
relative to these or other technologies may render us unable to meet our
operational and financial objectives and may have an adverse effect on our
business operations and financial condition.

OUR FAILURE TO HIRE OR RETAIN QUALIFIED PERSONNEL COULD HURT OUR BUSINESS.

     Our business and growth require experienced marketing, technical and
finance personnel, and our future success and performance is dependent, in part,
upon our ability to identify, hire, train and retain such employees. In
addition, there is significant competition for employees with the skills
required to work in our principal businesses. Therefore, we may not be able to
attract sufficient employees in the future to sustain and grow our business, and
may not be successful in motivating and retaining the employees we are able to
attract. Further, employees trained by us may leave and compete with us.

                                       20
<PAGE>

OUR BUSINESS AND INDUSTRY ARE SUBJECT TO EXTENSIVE REGULATIONS THAT COULD CHANGE
AT ANY TIME, IMPOSE SUBSTANTIAL COMPLIANCE COSTS, AND RESTRICT OUR ABILITY TO
COMPETE.

     The communications industry (including spectrum allocation and usage) is
highly regulated domestically at the federal, state and local levels. It is also
regulated abroad by foreign governments and their agencies. Regulations that
govern our business could change at any time, which could adversely affect the
way in which we do business and our ability to continue to conduct our business
in the manner we have planned. We could incur substantial costs in complying
with these regulations, and our failure to comply with applicable rules and
regulations could result in our having to pay civil penalties or assume costly
indemnification obligations or being prohibited from providing certain services
or operating in certain locations. Changes in regulations could also increase
competition, which may have an adverse effect on our business and results of
operations.

THE MARKETS IN WHICH WE OPERATE ARE VERY COMPETITIVE AND INCREASED COMPETITION
COULD ADVERSELY AFFECT US.

     We face intense competition with regional, national and global companies in
each of the markets in which we operate and may not be able to effectively
compete in these markets. Many of our competitors are well-established and have
larger and better developed networks and systems, longer-standing relationships
with customers and suppliers, greater name recognition and have, or have access
to, significantly greater financial, technical and marketing resources. Many of
these companies have the ability to subsidize competing services with revenues
from a variety of other services. Moreover, the growing consolidation of
companies and formation of strategic alliances within the communications and
media industries (including the recently announced MCI WorldCom/Sprint and
America Online/Time Warner mergers) could give rise to more powerful
competitors. As competition increases in the markets in which we operate, a
significant increase in general pricing pressures could occur which would
require us to increase our sales volume and to sell higher margin services in
order to remain competitive. We cannot assure you that we will be able to
continue to effectively compete in our markets or increase our sales volume in
response to increased competition.

THE FAILURE OF THIRD PARTIES WITH WHOM WE DO BUSINESS TO MEET OUR REQUIREMENTS
COULD ADVERSELY AFFECT OUR BUSINESS.

     Our business operations rely on services provided by other communications
companies and the failure of one or more of these companies to meet our needs
could have an adverse impact on our business and financial results. Some of
these companies are also our competitors and, accordingly, in the future, they
may be unwilling to provide us with the services we require. These companies may
also decide to dedicate their resources and networks to other communications
companies or to facilitate their own growth and, as a result, elect to scale
back or terminate the services they provide to us. The failure of any of these
third parties to perform could delay our buildout, limit the types of services
we can provide to our customers and adversely impact our relationship with our
customers. Any of these occurrences could have an adverse affect on our business
and financial condition.

OUR INTERNATIONAL OPERATIONS SUBJECT US TO CERTAIN RISKS WE DO NOT FACE
DOMESTICALLY.

     We may not be successful in overcoming the risks related to operating in
international markets. In each foreign market in which we operate, we will face
risks similar to those that we face in connection with our operations in the
United States as well as additional risks particular to that foreign market. The
following are some of the risks inherent in doing business in foreign markets:

     o unanticipated changes in regulatory requirements, tariffs, customs,
       duties and other trade barriers;

     o limitations on our flexibility in structuring our foreign investments
       imposed by regulatory authorities or the agreements governing our
       outstanding indebtedness;

     o longer payment cycles and problems in collecting accounts receivable;

     o political and economic risks;

     o translation and transaction exposure from fluctuations in exchange rates
       of other currencies; and

     o potentially adverse tax and cash flow consequences resulting from
       operating in multiple countries with different laws and regulations.

                                       21
<PAGE>

NETWORK FAILURE OR DELAYS AND ERRORS IN TRANSMISSIONS EXPOSE US TO POTENTIAL
LIABILITY.

     Our network will use a collection of communications equipment, software,
operating protocols and proprietary applications for the high speed
transportation of large quantities of data among multiple locations. Given the
complexity of our network, it may be possible that data may be lost or
distorted. Delays in data delivery may cause significant losses to a customer
using our network. Our network may also contain undetected design faults and
software bugs that, despite our testing and usage, may be discovered only at a
later date. The failure of any equipment or facility on the network could result
in the interruption of customer service until we effect necessary repairs or
install replacement equipment. Network failures, delays and errors could also
result from natural disasters, power losses, security breaches and computer
viruses. These failures, faults or errors could cause delays, service
interruptions, expose us to customer liability or require expensive
modifications that could have a material adverse effect on our business.

                   RISKS RELATING TO OUR FINANCIAL CONDITION

WE HAVE A HISTORY OF LOSSES THAT WE EXPECT TO CONTINUE FOR THE FORESEEABLE
FUTURE AND WE MAY NEVER BECOME PROFITABLE.

     We have incurred significant and growing net losses since our inception and
we expect to continue to incur substantial losses over the next several years to
fund the growth of our business. Our losses may not decrease over time. Our
ability to stem our losses and achieve and maintain profitability is dependent
on many factors, including:

     o our ability to execute our business plan over time;

     o the general state of the communications markets;

     o competition in our markets;

     o the success of competing technologies; and

     o the general state of the financial markets.

     As a result, we cannot assure you that we will become profitable.

OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR OPERATIONS AND
COMPETITIVE POSITION.

     We have a substantial amount of indebtedness and other payment obligations
that could affect our business in numerous ways. Such indebtedness and
obligations could, among other things:

     o limit our ability to obtain additional financing;

     o limit our flexibility in planning for, or reacting to, changes in our
       business and the industry;

     o place us at a competitive disadvantage relative to our competitors with
       less debt;

     o render us more vulnerable to general adverse economic and industry
       conditions; and

     o require us to dedicate a substantial portion of our cash flow to service
       our debt.

     We may not be able to generate enough cash flow from operations and may not
be able to obtain enough capital to service our indebtedness. In addition, we
may need to refinance some or all of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance our indebtedness on
commercially reasonable terms, or at all.

WE AND OUR SUBSIDIARIES HAVE THE ABILITY TO INCUR SUBSTANTIALLY MORE DEBT, WHICH
WOULD FURTHER EXACERBATE THE RISKS DESCRIBED ABOVE.

     We intend to incur substantial amounts of additional indebtedness to
further fund our business. For example, at December 31, 1999 we had
approximately $1,164.2 million in available commitments under the Lucent
Facility. We may also engage in other equipment financings. As we and our
subsidiaries incur additional debt, the related risks discussed above would
increase.

                                       22
<PAGE>

OUR FAILURE TO RAISE CAPITAL IN THE FUTURE MAY RENDER US UNABLE TO ACHIEVE OUR
CURRENTLY CONTEMPLATED BUSINESS STRATEGY AND UNABLE TO FUND OUR OPERATIONS.

     We will require substantial capital to fund the expansion of our business
and to fund our continuing operating losses. If we are unable to generate
sufficient cash from our operations or otherwise raise capital as needed, we
will be unable to pursue our current business strategy and may not be able to
fund our operations.

THE INDENTURES GOVERNING OUR INDEBTEDNESS CONTAIN RESTRICTIVE COVENANTS.

     The indentures governing our indebtedness contain covenants with respect to
us and most of our subsidiaries that restrict, among other things:

     o the incurrence of additional indebtedness;

     o the creation of liens;

     o the engagement in sale-leaseback transactions;

     o the payment of dividends on and redemptions of, capital stock and the
       redemption of certain types of indebtedness;

     o the redemption of capital stock;

     o other restricted payments including, without limitation, investments;

     o the sale of assets;

     o transactions with affiliates;

     o consolidations, mergers and transfers of all or substantially all of our
       assets;

     o the creation of restrictions on distributions from subsidiaries; and

     o the sale of stock of subsidiaries.

     Some of our indebtedness requires us to satisfy financial condition and
operational tests. Many of these tests will become more stringent over time. Our
ability to meet these tests can be affected by events beyond our control and we
cannot assure you that we will meet these tests.

ITEM 2. PROPERTIES

     Our corporate headquarters currently are located in approximately
228,000 square feet of space at 685 Third Avenue in New York City. In November
1998, we signed a 15-year lease for such space, with an obligation to lease
approximately 28,000 additional square feet starting in September 2000. We also
currently lease approximately 100,000 additional square feet in New York City,
but expect to consolidate some of this office space over the next several
months. Many of our communications operations are located in approximately
300,000 square feet of space in buildings in northern Virginia. In December
1998, we signed a ten-year lease for approximately 200,000 square feet of such
space in Herndon, Virginia. In August 1999, we also entered into three leases
for over 700,000 square feet of additional space in Virginia. Our payment
obligations under these leases are expected to commence in March 2000, October
2000 and by the end of 2001 as the construction of the properties is completed.
We also lease numerous other facilities throughout the United States and in
certain markets abroad, including sales offices, switch and hub locations, data
centers, building roof rights, collocation facilities and our 60,000 square foot
customer-care facility located in Dublin, Ohio.

ITEM 3. LEGAL PROCEEDINGS

     We are subject to various claims and proceedings that occur in the ordinary
course of business. Based on information currently available to us, we believe
that none of these current claims or proceedings, either individually or in the
aggregate, will have a material effect on our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

     None.

                                       23
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock has been quoted on the Nasdaq National Market
since June 1994 under the symbol "WCII."

     The following table sets forth, for the fiscal periods indicated, the high
and low sale prices of the Common Stock as reported on the Nasdaq National
Market, as adjusted to reflect the three-for-two stock split, effected as a 50%
stock dividend, described in note (b) to Selected Financial Data. The quotes
represent "inter-dealer" prices without adjustment for mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
PERIOD ENDING                                                                                        HIGH      LOW
--------------------------------------------------------------------------------------------------   ----      ---
<S>                                                                                                  <C>       <C>
March 31, 1998....................................................................................    29 7/8    16 5/12
June 30, 1998.....................................................................................    31 7/12   24 5/12
September 30, 1998................................................................................    27 5/6    11 1/6
December 31, 1998.................................................................................    26         8 2/3
March 31, 1999....................................................................................    29 5/8    19 5/6
June 30, 1999.....................................................................................    39 1/3    24 2/3
September 30, 1999................................................................................    41 5/8    26 1/9
December 31, 1999.................................................................................    51 1/6    24 2/3
January 1, 2000 through March 6, 2000.............................................................    55 5/6    44 1/4
</TABLE>

     The last sale price of the Common Stock on March 6, 2000 was $53 per share.
As of March 6, 2000, the Company had 85,646,757 shares of Common Stock
outstanding, held by approximately 610 shareholders of record. We believe that
there are more than 26,000 beneficial holders of our Common Stock.

     The following securities were issued by the Company in unregistered
transactions in the fourth quarter of 1999.

<TABLE>
<CAPTION>
                                                                             TERMS OF
                                                             EXEMPTION     CONVERSION OR
    SECURITIES SOLD         PURCHASERS     CONSIDERATION     CLAIMED         EXERCISE        USE OF PROCEEDS
------------------------   ------------   ----------------   ---------    ---------------   ------------------
<S>                        <C>            <C>                <C>          <C>               <C>
309,290 shares of Common   Various        Shares issued as        4(2)    Not Applicable    The Company did
Stock (various dates       individuals    consideration in                                  not receive cash
from 10/1/99-12/31/99)                    various                                           proceeds for these
                                          acquisitions and                                  shares.
                                          for consulting
                                          services
</TABLE>

                                       24
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

     The financial data presented below has been derived from our audited
Consolidated Financial Statements. The data has been presented to reflect the
operations of Winstar Global Products, Inc., our former merchandising
subsidiary, and Winstar Gateway Network, our former residential long distance
subsidiary, as discontinued operations.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,                 TEN MONTHS ENDED
                                             ------------------------------------------------    DECEMBER 31,
                                               1999         1998         1997         1996           1995
                                             ---------    ---------    ---------    ---------    ----------------
                                                        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
  Communications:
     Core:
       Services...........................   $ 234,799    $ 123,692    $  22,653    $     604       $       --
       Enhanced network products..........     121,274       17,774           --           --               --
                                             ---------    ---------    ---------    ---------       ----------
          Total Core......................     356,073      141,466       22,653          604               --
       Other communications services......      27,688       49,643        7,143        3,883              130
                                             ---------    ---------    ---------    ---------       ----------
Total communications services revenues....     383,761      191,109       29,796        4,487              130
Information services revenues.............      61,876       53,338       41,354       14,650            2,648
                                             ---------    ---------    ---------    ---------       ----------
  Total operating revenues................     445,637      244,447       71,150       19,137            2,778
                                             ---------    ---------    ---------    ---------       ----------
Operating income (loss):
  Communications services.................    (313,763)    (233,797)    (147,897)     (40,731)          (4,456)
  Information services....................      (2,768)      (7,387)      (3,329)      (1,409)             217
  General corporate.......................    (135,997)     (57,225)     (27,312)     (11,373)          (3,861)
                                             ---------    ---------    ---------    ---------       ----------
     Total operating loss.................    (452,528)    (298,409)    (178,538)     (53,513)          (8,100)
Interest expense..........................    (211,744)    (156,599)     (77,257)     (36,748)          (7,186)
Interest income...........................      21,995       29,758       17,577       10,515            2,890
Other income (expenses), net (a)..........       4,000        5,500        4,719           --             (866)
                                             ---------    ---------    ---------    ---------       ----------
Loss from continuing operations...........    (638,277)    (419,750)    (233,499)     (79,746)         (13,262)
Loss from discontinued operations.........          --      (24,974)     (15,985)      (3,977)          (2,595)
                                             ---------    ---------    ---------    ---------       ----------
Net loss..................................    (638,277)    (444,724)    (249,484)     (83,723)         (15,857)
Preferred stock dividends.................     (61,490)     (42,968)      (5,879)          --               --
                                             ---------    ---------    ---------    ---------       ----------
Net loss applicable to common
  stockholders............................   $(699,767)   $(487,692)   $(255,363)   $ (83,723)      $  (15,857)
                                             ---------    ---------    ---------    ---------       ----------
                                             ---------    ---------    ---------    ---------       ----------
Basic and diluted loss per share (b):
  Loss per share from continuing
     operations...........................   $   (9.15)   $   (7.98)   $   (4.80)   $   (1.91)      $    (0.39)
  Loss per share from discontinued
     operations...........................          --        (0.43)       (0.32)       (0.09)           (0.08)
                                             ---------    ---------    ---------    ---------       ----------
Loss per share............................   $   (9.15)   $   (8.41)   $   (5.12)   $   (2.00)      $    (0.47)
                                             ---------    ---------    ---------    ---------       ----------
                                             ---------    ---------    ---------    ---------       ----------
Weighted average common shares
  outstanding (b).........................      76,478       58,022       49,874       41,867           34,155
</TABLE>

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                          -----------------------------------------------------------------------
                                             1999           1998           1997           1996           1995
                                          -----------    -----------    -----------    -----------    -----------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                       <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
  investments..........................   $   245,971    $   313,030    $   419,462    $   122,638    $   211,583
Property and equipment, net............     1,793,982        639,673        284,835         59,983         13,053
Total assets...........................     3,065,293      1,663,182        973,834        273,012        268,964
Current portion of long-term debt and
  capital lease obligations............       140,259         65,508          7,127         21,121          1,839
Long-term debt and capital lease
  obligations, less current portion....     2,324,382      1,445,989        789,861        275,513        239,957
Convertible redeemable preferred
  stock................................       200,000        200,000             --             --             --
Exchangeable redeemable preferred
  stock................................       231,212        201,478        175,553             --             --
Common and preferred stock and
  additional paid-in capital (b).......     1,023,113        404,568        256,126         75,726        104,823
Stockholders' equity (deficit).........      (414,102)      (449,492)      (118,392)       (49,671)        21,752
</TABLE>

------------------

(a) The years ended December 31, 1999, 1998 and 1997 include deferred income tax
    benefits of $4.0 million, $5.5 million and $2.5 million, respectively.

(b) In February 2000, we declared a three-for-two stock split, effected in the
    form of a 50% stock dividend. The new shares were distributed on March 2,
    2000, to shareholders of record as of the close of business on February 16,
    2000. The selected financial data for all periods presented have been
    restated to reflect this stock split.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

     We provide businesses with broadband services. We offer our services across
our own end-to-end broadband network in 60 major markets in the United States,
including each of the top 30 U.S. markets. We believe that our rapidly expanding
network will enable us to offer broadband services to a majority of the
companies comprising the business communications market in the United States.
This market is projected to grow from $178.0 billion in 1999 to approximately
$360.0 billion by 2009. We also offer services in 10 overseas markets, including
Amsterdam, Brussels, Buenos Aires and Tokyo.

REVENUES

     We classify broadband communications revenues into two categories: core
services and other communications services.

     Core revenues primarily include revenues derived from: local and long
distance voice services; Internet connectivity, capacity and equipment sales;
data transmission services; web hosting, web design and development; and
professional and enhanced services including network design and implementation,
equipment selection, procurement and installation.

     Other communications services revenues are those derived from a portion of
an acquired long distance customer base located in markets which we do not have
current plans to serve with our fixed wireless services.

     We also develop and distribute information content and provide related
services through traditional media, such as television, video, cable and radio,
and over the Internet. We classify these products and services as information
services, even though they are increasingly related to our core services.

                                       26
<PAGE>

     The following discussion excludes the results of discontinued operations,
and reflects the impact of the three-for-two stock split effective March 2,
2000.

REVENUE DRIVERS

     The principal factors that drive our revenues are set forth below:

  Core Services

     Revenues from local and long distance voice services are driven primarily
by the number of customer lines installed and in service. Customers are
generally billed a flat monthly fee and/or a per-minute usage charge. Data
services are generally billed at a flat monthly rate for capacity ordered.
E-commerce and advertising revenues are billed when the ad runs or the
transaction occurs. Professional services such as network design, network
integration, installation and maintenance are billed on a project or a time and
materials basis. Revenues from our enhanced service provider channel include
sales of network capacity under long-term indefeasible rights of use to our
long-haul or local networks, as well as the sale of private network services.
This revenue channel also includes sales of network design, collocation services
and equipment used to provide our core communication services, which are billed
when the service is performed or the equipment is shipped. Sales of network
capacity and sales of equipment from our enhanced service provider channel are
generally classified as enhanced network products revenue. Core communication
revenue growth depends upon our addition of new customers in existing markets,
our sale of bundled services, our expansion into new markets and our
introduction of new services. We expect our core revenues to increase as we
expand our network and as we add more services to it.

  Other Communications Services

     Other communications services consist principally of long distance services
provided to an acquired customer base in markets where we do not currently
market or expect to market our communications services in the near term. We
expect these revenues to decline over time through normal loss, or churn, of
this customer base.

  Information Services

     Information services revenues are generated principally by: (1) sales of
traditional media content and related services to customers such as cable
networks and radio stations; (2) sales to new media distribution channels, such
as online services; (3) advertising sales; and (4) the bundling of content with
our communications services. These revenues also are driven by the amount and
quality of our available program rights during each quarter and experience some
seasonality of sales, which affect quarter-to-quarter comparability.

COST OF REVENUE

     Costs are classified with the revenue stream to which they are related. The
principal factors that influence our costs are described below:

  Core Services

     Costs associated with our core communications services include significant
up-front capital expenditures for development of the infrastructure required to
provide facilities-based local exchange, long distance and data services. These
include expenditures relating to the purchase and installation of switching and
hosting equipment, radios, customer premises equipment and related site
acquisition and installation costs, and intracity backbone facilities. In
addition, we incur start-up costs that are not capitalized, including some costs
of engineering, sales office and service personnel and the cost to lease or
otherwise use the network facilities of other providers. Often when we commence
operations in a city, our cost of revenue percentage is greater as fixed costs
are spread over less traffic. Margins can subsequently improve as: (1) traffic
increases and our fixed network costs are spread over a larger customer base;
and (2) we increase the total percentage of traffic carried on our networks,
which we refer to as on-net traffic, because on-net traffic results in higher
operating margins than traffic carried on the facilities of other companies.

                                       27
<PAGE>

  Other Communications Services

     Costs associated with other communications services are primarily incurred
through the resale of other carriers' long distance facilities. If this traffic
is migrated to our own long distance network when available, such costs will
decrease.

  Information Services

     Our information services businesses have production, distribution and
administrative costs. Production costs for video products include those related
to producing original products and licensing third-party products for
distribution. These costs are capitalized as incurred and expensed as
productions are completed and distributed. Overhead costs related to the
production of video products are also capitalized, allocated to productions in
progress and subsequently expensed as such products are completed and
distributed. The distribution and advertising divisions incur royalty costs
payable to third-party producers and selling costs, both of which vary directly
with sales of acquired product, as well as administrative costs and
personnel-related costs, which are primarily fixed in nature and are expensed as
incurred. Other media production costs are expensed as incurred.

RESULTS OF OPERATIONS

     Revenues from our operating business lines are as follows (in millions):

<TABLE>
<CAPTION>
                                                                                                YEAR ENDED
                                                                                               DECEMBER 31,
                                                                                         -------------------------
                                                                                          1999      1998     1997
                                                                                         ------    ------    -----
<S>                                                                                      <C>       <C>       <C>
Communications revenue:
  Core services.......................................................................   $234.8    $123.7    $22.7
  Enhanced network products...........................................................    121.3      17.8       --
                                                                                         ------    ------    -----
     Total core revenues..............................................................    356.1     141.5     22.7
  Other communications services.......................................................     27.7      49.6      7.1
                                                                                         ------    ------    -----
Total communications revenues.........................................................    383.8     191.1     29.8
Information services revenues.........................................................     61.8      53.3     41.4
                                                                                         ------    ------    -----
  Total operating revenues............................................................   $445.6    $244.4    $71.2
                                                                                         ------    ------    -----
                                                                                         ------    ------    -----
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

REVENUE

     Total revenues increased by $201.2 million, or 82.3%, to $445.6 million for
the year ended December 31, 1999, from $244.4 million for the year ended
December 31, 1998. This increase was attributable to the growth in our core
operations.

  Core Revenues

     Revenues from core services and enhanced network products increased by
$214.6, or 151.7%, to $356.1 million for the year ended December 31, 1999, from
$141.5 million for the year ended December 31, 1998. The revenue growth was
primarily attributable to continued customer growth driven by growth in existing
markets, the increase of domestic markets from 30 to 45, and the expansion of
our broadband data application services and enhanced service provider offerings,
which include our provision of end-to-end products and services to our
customers. These include Internet connectivity, data transport, network assets
and network integration services. The total number of our customers increased to
approximately 23,300 businesses at December 31, 1999.

     In 1998, we primarily sold voice services to small and medium businesses.
We continue to experience significant success selling these services to this
customer base, as evidenced by increasing revenue from this group of customers,
the increase in the total number of our customers and in the percentage of our
customers who

                                       28
<PAGE>

purchase more than one service. Moreover, the average revenue we derive from
each customer has continued to increase and we have been successful penetrating
buildings on our network.

     We have also been successful selling data and voice-related products and
services to both small and medium businesses and to larger accounts. We
attribute this success to the continued growth of our network through the
installation of additional local bandwidth, data and voice switching
infrastructure and the addition of our local-and long-haul fiber. We have begun
to realize increased revenue especially from the sale of these data-related
products and services, including end-to-end broadband connectivity, equipment
and network deployment solutions to our larger customers.

     We are also continuing to see an increasing demand for data related
enhanced communications solutions, and since the end of 1998 have sold such
services to many large account customers, including communications industry
customers such as AboveNet Communications, Cignal Global Communications, Lucent
Technologies, Mindspring Enterprises, VoCall Communications, Wam!Net Inc. and
Williams Communications.

  Other Communications Services Revenues

     As anticipated, revenues from other communications services decreased by
$22.0 million, or 44.2%, to $27.7 million for the year ended December 31, 1999,
as compared to $49.6 million for the year ended December 31, 1998. The decrease
resulted primarily from churn of our acquired long-distance customer base, which
is not in markets that we serve.

  Information Services Revenues

     Revenues from information services increased by $8.5 million, or 16.0%, to
$61.8 million for the year ended December 31, 1999, from $53.3 million for the
year ended December 31, 1998. This increase was due primarily to growth in
interactive service revenue and improved radio advertising sales resulting from
expanded programming offerings.

     Traditional media revenues increased by $3.0 million, or 6.1%, to $51.9
million for the year ended December 31, 1999, from $48.9 million for the year
ended December 31, 1998. Interactive service revenues were $11.3 million for the
year ended December 31, 1999 as compared to $4.4 million for the year ended
December 31, 1998.

COST OF SERVICES AND PRODUCTS

     Cost of services and products increased by $111.5 million, or 54.5%, to
$316.3 million for the year ended December 31, 1999, from $204.7 million for the
year ended December 31, 1998. As a percentage of revenues, cost of services and
products for the year ended December 31, 1999 was 71.0%, compared with 83.8% for
the year ended December 31, 1998. The decrease in the cost of revenue percentage
is the result of increased volumes and larger percentages of traffic being
provisioned on our local and long haul networks. Cost of revenue for enhanced
network products was $78.3 million, or 64.6% of corresponding revenue for the
year ended December 31, 1999, compared with $13.3 million, or 74.8% of
corresponding revenue for the year ended December 31, 1998. The decrease in the
cost of revenue percentage is the result of an increase in higher margin sales
of network capacity in 1999. Cost of information services revenue was $41.5
million, or 67.0%, of corresponding revenue for the year ended December 31,
1999, compared with $35.8 million, or 67.2% of corresponding revenue for the
year ended December 31, 1998.

                                       29
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expense increased by $163.5 million, or
62.1%, to $426.7 million for the year ended December 31, 1999, from
$263.2 million for the year ended December 31, 1998. As a percentage of
revenues, selling, general and administrative expenses declined from 107.7% for
the year ended December 31, 1998 to 95.7% for the year ended December 31, 1999.
We continued to hire sales, marketing, network and related support personnel in
connection with the expansion of our core markets. We had approximately 3,900
employees at December 31, 1999, as compared with 2,800 employees at December 31,
1998.

DEPRECIATION AND AMORTIZATION EXPENSE

     Depreciation and amortization expense increased by $80.3 million, or
107.1%, to $155.2 million for the year ended December 31, 1999, from $75.0
million for the year ended December 31, 1998, principally resulting from our
acquisition and deployment of broadband communications equipment in connection
with our network buildout and amortization relating to goodwill, purchased
customer lists and spectrum licenses.

OPERATING LOSS

     For the reasons noted above, the operating loss for the year ended
December 31, 1999 was $452.5 million, compared with an operating loss of $298.4
million for the year ended December 31, 1998.

INTEREST EXPENSE

     Interest expense increased by $55.1 million, or 35.2%, for the year ended
December 31, 1999, to $211.7 million, from $156.6 million for the year ended
December 31, 1998. This increase was principally attributable to the issuance of
$450.0 million of debt in the first quarter of 1998, aggregate borrowings of
$835.8 million under the Lucent Facility and capital lease obligations of
$337.7 million under our agreements with Williams, offset, in part, by the
conversion of $122.1 million of our 14% Convertible Senior Subordinated Discount
Notes into approximately 8.9 million shares of common stock in June 1999. Of the
$211.7 million of interest expense incurred for the year ended December 31,
1999, $140.5 million represented amortization of deferred financing costs and
other non-cash interest charges.

INTEREST INCOME

     Interest income decreased by $7.8 million, or 26.1%, to $22.0 million for
the year ended December 31, 1999, from $29.8 million for the year ended
December 31, 1998. The decrease resulted from lower average balances in cash,
cash equivalents and short-term investments.

LOSS FROM CONTINUING OPERATIONS BEFORE PREFERRED STOCK DIVIDENDS

     For the reasons noted above, we reported a loss from continuing operations
before preferred stock dividends of $638.3 million for the year ended
December 31, 1999, compared to a loss from continuing operations before
preferred stock dividends of $419.8 million for the year ended December 31,
1998.

PREFERRED STOCK DIVIDENDS

     For the year ended December 31, 1999, we incurred dividend obligations of
$61.5 million relative to our Series A Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series F Preferred Stock, none of which were
paid in cash. For the year ended December 31, 1998, such obligations amounted to
$43.0 million. The increase is primarily due to the issuance of 4,000,000 shares
of Series D Preferred Stock in March 1998 and the issuance of 300,000 shares of
Series F Preferred Stock in June 1999.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

REVENUES

     Revenues increased by $173.3 million, or 243.6%, to $244.4 million for the
year ended December 31, 1998, from $71.2 million for the year ended December 31,
1997. This increase was primarily attributable to the growth in revenues
generated by our core operations.

                                       30
<PAGE>

  Core Revenues

     Revenues from core operations increased by $118.8 million, or 524.5%, to
$141.5 million for the year ended December 31, 1998, from $22.7 million for the
year ended December 31, 1997. The revenue growth was primarily attributable to
our existing customer base, continued national sales and installation of local,
long distance and Internet services to small and medium size business customers,
the geographic and other expansion of sales, network and business operations,
along with the rapidly expanding broadband and large accounts business units and
certain acquisitions.

  Other Communications Services Revenues

     Revenues from other communications services, which consists primarily of
certain long distance voice services (other than sales attributable to national
accounts) increased by $42.5 million, or 595.0%, to $49.6 million for the year
ended December 31, 1998, from $7.1 million for the year ended December 31, 1997.
This increase resulted primarily from sales attributable to former long distance
operations which were acquired from a third party. We expect a gradual attrition
of this long distance revenue over subsequent periods.

  Information Services Revenue

     Revenues from information services increased by $12.0 million, or 29.0%, to
$53.3 million for the year ended December 31, 1998, from $41.4 million, for the
year ended December 31, 1997, due primarily to strong Internet and other
advertising revenues.

COST OF SERVICES AND PRODUCTS

     Cost of services and products increased by $130.8 million, or 177.1%, to
$204.7 million for the year ended December 31, 1998, from $73.9 million for the
year ended December 31, 1997. As a percentage of revenues, cost of services and
products was 83.8% for the year ended December 31, 1998 compared to 103.9% for
the year ended December 31, 1997. This decrease in the cost of revenue
percentage is the result of increased sales volumes, larger percentages of
traffic being provisioned over our network, substantial supplier cost
adjustments and/or credits for volume or performance and control over internal
costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expense increased by $112.5 million, or
74.6%, to $263.2 million for the year ended December 31, 1998, from
$150.7 million for the year ended December 31, 1997. As a percentage of
revenues, selling, general and administrative expenses declined from 211.8% for
the year ended December 31, 1997 to 107.7% for the year ended December 31, 1998.
We continued to hire sales, marketing and related support personnel in
connection with the expansion of our target markets. We had approximately 2,800
employees at December 31, 1998 and approximately 1,479 at December 31, 1997.

DEPRECIATION AND AMORTIZATION EXPENSE

     Depreciation and amortization expense increased by $49.9 million, or
198.6%, to $75.0 million for the year ended December 31, 1998, from $25.1
million for the year ended December 31, 1997, principally resulting from our
acquisition and deployment of broadband communications equipment in connection
with our network buildout and amortization relating to goodwill, purchased
customer lists and spectrum licenses.

OPERATING LOSS

     For the reasons noted above, the operating loss was $298.4 million for the
year ended December 31, 1998, compared with an operating loss of $178.5 million
for the year ended December 31, 1997.

INTEREST EXPENSE

     Interest expense increased by $79.3 million, or 102.7%, to $156.6 million
for the year ended December 31, 1998, from $77.3 million for the year ended
December 31, 1997. The increase was principally attributable to the issuance of
$450.0 million of debt in 1997 and another $450.0 million of debt in the first
quarter of 1998. Of the $156.6 million of interest expense incurred for the year
ended December 31, 1998, $45.1 million was payable in cash.

                                       31
<PAGE>

INTEREST INCOME

     Interest income increased by $12.2 million, or 69.3%, to $29.8 million for
the year ended December 31, 1998, from $17.6 million for the year ended
December 31, 1997. The increase resulted from the additional interest income
earned on the proceeds from our various stock and debt placements.

PREFERRED STOCK DIVIDENDS

     In 1997, we incurred dividends of $5.9 million on our placements of Series
A Preferred Stock and Series C Preferred Stock, of which $5.3 million were paid
in kind.

     For the year ended December 31, 1998, we recognized dividends of $43.0
million on our placements of Series A Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock, of which $6.0 million were paid in kind.

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

     For the reasons noted above, we reported a net loss applicable to common
stockholders of $487.7 million for the year ended December 31, 1998, compared to
a net loss applicable to common stockholders of $255.4 million for the year
ended December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1999, we had $246.0 million of cash, cash equivalents and
short-term investments. During 1999, net cash provided by financing activities
was $864.4 million. These financing activities included:

     o our sale in February 1999 of 6.3 million shares of our common stock at
       $27.83 per share for net proceeds of approximately $167.5 million;

     o our sale in June 1999 of 300,000 shares of our Series F Preferred Stock
       for net proceeds of $290.8 million;

     o our borrowing during the year ended December 31, 1999 of approximately
       $758.3 million under the Lucent Facility;

     o our consummation in June 1999 of a $35.0 million accounts receivable
       securitization financing. As of December 31, 1999, we had $9.0 million of
       indebtedness outstanding under this financing.

     During 1999, we also received $173.4 million from Williams Communications
in connection with the delivery of 114 hub sites and maintenance services under
an agreement signed in December 1998. Under this agreement with Williams, we
expect to receive an additional $231.1 million over the next 18 months as hubs
are delivered, and at least $41.0 million through 2008 for maintenance services
we will provide over the term of the agreement.

     In February 2000, we sold 900,000 shares of our Series G Preferred Stock
for an aggregate purchase price of $900.0 million to Credit Suisse First Boston
Equity Partners, L.P., Welsh, Carson, Anderson & Stowe VIII, L.P., Microsoft
Corporation, Cascade Investments and certain affiliated purchasers. Net proceeds
from this transaction were approximately $888.0 million.

     During the year ended December 31, 1999, we used $275.6 million of cash in
operating activities. Net cash used by operating activities is primarily due to
losses from continuing operations and changes in working capital items, offset
by non-cash interest expense and depreciation and amortization.

     Cash used to fund negative EBITDA during the year ended December 31, 1999
was approximately $297.3 million. EBITDA represents losses from continuing
operations before interest, income taxes, depreciation and amortization and
other income (expense) and is commonly used in our industry to measure cash
flows and liquidity. EBITDA is not intended to represent results of operations
or cash flows from operating activities determined in accordance with accounting
principles generally accepted in the United States and may not be comparable to
similarly titled measures reported by other companies.

     Cash used in investing activities was $703.8 million during the year ended
December 31, 1999. Cash used in investing activities for the year ended
December 31, 1999 primarily consists of cash used to purchase property and
equipment of $612.1 million and cash used to purchase short-term investments of
$47.1 million. We also took delivery of certain dark fiber assets, as well as
certain specified fixed circuits, from Williams which

                                       32
<PAGE>

extended our long haul communications network, thus increasing capitalized lease
obligations by $293.1 million. We expect to pay Williams an additional
$359.4 million over the next six years for dark fiber, long-haul transport
services and other network services. During October 1999, we entered into a
second agreement with MFN to obtain dark fiber capacity in 38 major markets in
the United States and in certain markets outside the U.S. We will pay
approximately $300.0 million over 20 years under this agreement. Purchases of
property and equipment during the year ended December 31, 1999 were
approximately $1,283.0 million, of which $1,103.6 million were financed
collectively through the Lucent Facility and our arrangements with Williams and
various other equipment vendors.

     We have incurred significant operating and net losses, due in large part to
the development of our network and the growth of our sales and marketing
organization. We anticipate that such losses will continue over the near term as
we execute our growth strategy. We are in the process of ordering and installing
switches, optronics equipment, radios and other network equipment to be placed
in our key markets. Historically, we have funded our operating losses and
capital expenditures through public and private offerings of debt and equity
securities and from credit and lease facilities.

     To capitalize on opportunities in our industries, we are pursuing a rapid
expansion of services offered to our current 60 U.S. markets. We are also
planning to offer our services in up to 50 foreign markets by the end of 2004.
This expansion will require significant amounts of capital to finance capital
expenditures of approximately $1.0 billion this year as well as anticipated
operating losses. We have the ability to moderate our capital spending and
operating losses to some extent by varying the pace of our growth, including the
number of markets in which we build network and offer services, and by
determining how many buildings we enter in each market. In the event that we
slow the speed or narrow the focus of our business plan, we would expect to
reduce our capital requirements and operating losses.

     We anticipate, based on our business plan and certain assumptions
(including consummation of the proposed private placement, tender and exchange
transactions, full availability of the undrawn $1.2 billion of the Lucent
Facility and $1.0 billion under the proposed credit facilities), that the net
proceeds from the proposed private placement, together with our existing
financial resources, will be sufficient to fund our planned operations and
capital requirements. We may be required to seek additional sources of capital
if: our operating assumptions change or prove to be inaccurate; we are unable to
draw the full amount of the undrawn commitment under the Lucent Facility; we do
not consummate the proposed private placement; we consummate any acquisitions of
significant businesses or assets (including spectrum licenses); or we further
accelerate our plan and enter markets more rapidly than currently anticipated.
We continually evaluate the financing alternatives available to us and may
decide to seek a variety of forms of additional debt and/or equity financing.

PROPOSED DEBT TRANSACTIONS

     In March 2000, we initiated a series of transactions relating to our
outstanding notes and one series of our preferred stock. These transactions
include an institutional private placement of $2.0 billion of new unsecured
senior notes, a portion of which will be used for the exchange offers described
below; a tender offer to purchase for cash all of our outstanding senior notes
which have an aggregate principal or accreted amount of approximately $660.0
million; an offer to exchange new senior notes for all of our outstanding
subordinated notes which have an aggregate principal or accreted amount of
approximately $640.0 million; and a proposed agreement to exchange for new
senior notes, a substantial majority of our 14 1/4% Series C Senior Cumulative
Exchangeable Preferred Stock Due 2007, which has a current liquidation
preference of approximately $230.0 million.

     We intend to use the net cash proceeds of the private placement and the
proposed credit facility to fund the tender offer described above and for
general corporate purposes. The above transactions, if consummated, would
provide us with estimated excess proceeds of approximately $250.0 million.

     The consummation of each of these transactions is conditioned on the
consummation of the others.

     In addition, we have obtained a commitment from a group of commercial banks
for a $1.0 billion senior secured credit facility, the closing of which is
subject to certain amendments to the Lucent Facility and other customary
conditions.

                                       33
<PAGE>

YEAR 2000 COMPLIANCE

     The Year 2000 problem is the result of certain computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000, or not recognize the
date at all. If not corrected, this could result in system failures or
miscalculations that could result in service or other interruptions. To date, we
have not experienced any significant Year 2000 problems. Testing and compliance
monitoring as part of the Winstar Year 2000 program will continue into 2000 to
ensure proper operations and that system changes and additions are Year 2000
compliant, and to support the growth and development of our network.

EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In September 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS 133 also specifies new
methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies detailed criteria to be met to
qualify for hedge accounting. SFAS 133, as amended by SFAS 137, is effective for
fiscal years beginning after September 15, 2000. We currently do not use
derivative instruments as defined by SFAS No. 133. If we continue to not use
these derivative instruments by the effective date of SFAS No. 133, the adoption
of this statement will have no effect on our results of operations or our
financial position.

                           FORWARD LOOKING STATEMENTS

     This report include forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to our
future prospects, developments and business strategies.

     These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained
under Item 1, "Business", under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations.

     These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing levels;
changes in political, social and economic conditions and local regulations;
changes in technology and the development of new technology; foreign currency
fluctuations; reductions in sales to any significant customers; changes in sales
mix; industry capacity; competition; disruptions of established supply channels;
manufacturing capacity constraints; and the availability, terms and deployment
of capital. Our risks are more specifically described under Item 1, "Business"
section of this report. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, our actual results
may vary materially from those expected, estimated or projected.

     We do not undertake to update our forward-looking statements or risk
factors to reflect future events or circumstances.

                                       34
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  INTEREST RATE RISK

     Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio, redeemable preferred stock and long-term debt
obligations. We do not use derivative instruments in our investment portfolio.
We place our investments with high credit quality issuers and, by policy, limit
the amount of credit exposure to any one issuer. Our redeemable preferred stock
and long-term obligations primarily consist of fixed rate instruments, and
accordingly, would not be impacted by changes in interest rates. Amounts
borrowed under the Lucent Facility and the accounts receivable securitization
financing arrangement bear interest at the LIBOR rate plus applicable margins.
Therefore, the interest rate on these facilities will fluctuate as the LIBOR
rate fluctuates. We primarily enter into debt obligations to support the
construction of our network and working capital needs.

     The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio,
redeemable preferred stock and debt obligations. All investments mature, by
policy, in twelve months or less.

<TABLE>
<CAPTION>
                                                                                                     FAIR VALUE AT
                       2000      2001     2002       2003        2004      THEREAFTER     TOTAL      DECEMBER 31, 1999
                     --------   ------   -------   --------   ----------   ----------   ----------   -----------------
                                                      (IN THOUSANDS)
<S>                  <C>        <C>      <C>       <C>        <C>          <C>          <C>          <C>
ASSETS
Cash equivalents
  Fixed rate.......  $ 93,331   $   --   $    --   $     --   $       --   $       --   $   93,331      $    93,331
  Average interest
    rate...........       5.7%                                                                 5.7%
Short-term
  investments
  Fixed rate.......   152,640       --        --         --           --           --      152,640          152,640
  Average interest
    rate...........       5.8%                                                                 5.8%
Total investment
  securities.......   245,971       --        --         --           --           --      245,971          245,971
  Average interest
    rate...........       5.8%                                                                 5.8%
LONG-TERM DEBT
  Fixed rate.......     5,012    3,134     2,387        992      250,993    1,051,473    1,313,991        1,452,256
  Average interest
    rate...........       8.7%     9.3%      9.7%       9.4%        12.4%        12.6%        12.6%
  Variable rate....    13,500       --    41,923    178,006      208,951      406,923      849,303          849,303
  Average interest
    rate...........       8.4%      --       9.5%       9.5%         9.5%         9.5%         9.5%
REDEEMABLE
  PREFERRED STOCK
  Fixed rate.......        --       --        --         --           --      431,212      431,212          525,520
  Average interest
    rate...........                                                              10.9%        10.9%
</TABLE>

  EQUITY PRICE RISK

     We do not have any significant investments in marketable equity securities.
From time to time, we may consider acquiring equity securities for investment or
strategic purposes.

                                       35
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements required by Item 8 are included in this Report
beginning on Page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

     The information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated herein by reference to the Company's Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on June 28, 2000.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION
------   -----------------------------------------------------------------------------------------------------------
<S>      <C>   <C>
  3.1     --   Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 to the
               Company's Registration Statement on Form S-18 (No. 33-37024))
  3.2     --   Amendment to Certificate of Incorporation of the Company effecting name change from "Robern Apparel,
               Inc." to "Robern Industries, Inc." (Incorporated by reference to Exhibit 3. l(b) to the Company's
               Registration Statement on Form S-4 (No. 33-52716))
  3.3     --   Second Amendment to Certificate of Incorporation of the Company effecting name change from "Robern
               Industries, Inc." to "Winstar Communications, Inc." (Incorporated by reference to Exhibit 3. l(b) to
               the Company's Registration Statement on Form S-1 (No. 33-43915))
  3.4     --   Certificate of Designations, Preferences and Rights of Series A Preferred Stock (Incorporated by
               reference to Exhibit 3.7 to the Company's Current Report on Form 8-K filed February 14, 1997)
  3.5     --   Certificate of Designations, Preferences and Rights of Series B Preferred Stock (Incorporated by
               reference to Exhibit 4 to the Company's Current Report on Form 8-K filed July 2, 1997)
  3.6     --   Certificate of Designations, Preferences and Rights of Series C Preferred Stock (Incorporated by
               reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed December 24, 1997)
  3.7     --   Certificate of Designations, Preferences and Rights of Series D Preferred Stock (Incorporated by
               reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed March 30, 1998)
  3.8     --   Certificate of Designations, Preferences and Rights of Series E Preferred Stock (Incorporated by
               reference to Exhibit 3.8 to the Company's Annual Report on Form 10-K filed March 31, 1999)
  3.9     --   Certificates of Designations, Preferences and Rights of Series F Preferred Stock (Incorporated by
               reference to Exhibit 3 to the Company's Current Report on Form 8-K filed June 24, 1999)
  3.10    --   Certificate of Designations Preferences and Rights of Series G Preferred Stock (Incorporated by
               reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed February 3, 2000)
  3.11    --   By-Laws of the Company, as amended (Incorporated by reference to Exhibit 3.2 to the Company's
               Registration Statement on Form S-18 (No. 33-37024) and Exhibit 3.2 to the Company's Quarterly Report
               on Form 10-Q filed August 14, 1996)
  4.1     --   10% Senior Subordinated Notes Indenture, including form of Note, dated as of March 15, 1998
               (Incorporated by reference to Exhibit 4.6 to the Company's Current Report on Form 8- K filed
               March 30, 1998)
  4.2     --   11% Senior Subordinated Deferred Interest Notes Indenture, including form of Note, dated as of
               March 15, 1998 (Incorporated by reference to Exhibit 4.7 to the Company's Current Report on
               Form 8-K, filed March 30, 1998)
</TABLE>

                                       36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION
------   -----------------------------------------------------------------------------------------------------------
<S>      <C>   <C>
  4.3     --   15% Senior Subordinated Deferred Interest Notes Indenture, including form of Note, dated as of
               October 1, 1997 (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on
               Form 8-K filed October 29, 1997)
  4.4     --   12- 1/2% Guaranteed Senior Secured Notes Indenture, including form of Note, dated as of August 8,
               1997 (Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, filed
               August 8, 1997)
  4.5     --   14- 1/2% Senior Deferred Interest Notes Indenture, including form of Note of Winstar Equipment Corp.
               II, dated as of March 1, 1997 (Incorporated by reference to Exhibit 10.3 to the Company's Current
               Report on Form 8-K, filed August 8, 1997)
  4.6     --   12- 1/2% Guaranteed Senior Secured Notes Indenture of Winstar Equipment Corp., including form of
               Note, dated as of March 1, 1997 (Incorporated by reference to Exhibit 10.3 to the Company's Current
               Report on Form 8-K, filed March 18, 1997).
  4.7     --   14% Senior Notes Indenture, including form of Note, dated as of October 23, 1995 (Incorporated by
               reference to Exhibit 2 to the Company's Current Report on Form 8-K, filed October 23, 1995)
  4.8     --   Rights Agreement dated as of July 2, 1997 between the Company and the Rights Agent (Incorporated by
               reference to Exhibit 4 to the Form 8-A filed as of July 2, 1997)
  4.9     --   Amendment to the Rights Agreement dated as of June 3, 1999 between the Company and the Rights Agent
               (Incorporated by reference to Exhibit 4.2 to the Form 8-A/A filed on June 3, 1999)
  4.10    --   Second Amendment to the Rights Agreement dated as of July 15, 1999 between the Company and the Rights
               Agent (Incorporated by reference to Exhibit 4.3 to the Form 8-A/A filed on July 16, 1999)
  4.11    --   Third Amendment to the Rights Agreement dated as of February 1, 2000 between the Company and the
               Rights Agent (Incorporated by reference to Exhibit 4.4 to the Form 8-A/A, filed on February 11,
               2000)
 10.1     --   1992 Performance Equity Plan (Incorporated by reference to Exhibit 10.53 to the Company's
               Registration Statement on Form S-18 (No. 33-37024))
 10.2     --   1995 Performance Equity Plan (Incorporated by reference from Exhibit 4.1 to the Company's
               Registration Statement on Form S-8 (No. 333-31057))
 10.3     --   Qualified Employee Stock Purchase Plan (Incorporated by reference to Exhibit A to the Company's
               Definitive Proxy Statement dated May 8, 1998)
 10.4     --   Employment Agreement between the Company and William J. Rouhana, Jr. (Incorporated by reference to
               the Company's Annual Report on Form 10-K filed March 31, 1998)
 10.5     --   Employment Agreement between the Company and Nathan Kantor (Incorporated by reference to the
               Company's Annual Report on Form 10-K, filed March 31, 1999)
 10.6     --   Form of Executive Severance Agreement entered into between the Company and certain officers and other
               senior executives (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
               Form 10-Q for the quarter ended March 31, 1998)
 10.7     --   Credit Agreement, dated as of October 21, 1998, among Winstar Network Expansion, LLC, the Company,
               the Lenders, State Street Bank and Trust Company, and Lucent Technologies, Inc. (Incorporated by
               reference to Exhibit 1 to the Company's Current Report on Form 8-K, filed November 16, 1998, as
               amended by the Company's Current Report on Form 8-K/A filed February 3, 1999)
 10.8     --   Supply Agreement, dated as of October 21, 1998, between the Company and Lucent Technologies, Inc.
               (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K, filed
               November 16, 1998, as amended by the Company's Current Report on Form 8-K/A filed February 3, 1999)
</TABLE>

                                       37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION
------   -----------------------------------------------------------------------------------------------------------
<S>      <C>   <C>
 10.9     --   IRU Agreement between Winstar Wireless, Inc. and Williams Communications, Inc., dated December 17,
               1998 (long haul) (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on
               Form 8-K filed January 11, 1999, as amended by the Company's Current Report on Form 8-K/A filed
               February 3, 1999)
 10.10    --   Wireless Fiber IRU Agreement by and between Winstar Wireless, Inc. and Williams Communications, Inc.
               effective as of December 17, 1998 (Incorporated by reference to Exhibit 10.2 to the Company's Current
               Report on Form 8-K filed January 11, 1999, as amended by the Company's Current Report on Form 8-K/A
               filed February 3, 1999)
 10.11    --   Fiber Optic Private Network Agreement, dated September 30, 1999, between Winstar Wireless, Inc. and
               Metromedia Fiber Network Services, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's
               Current Report on Form 8-K, filed November 15, 1999)
 21.1     --   List of Subsidiaries (filed herewith)
 23.1     --   Consent of Grant Thornton LLP (filed herewith)
 27       --   Financial Data Schedule (filed electronically only)
</TABLE>

     (b) Current Report on Form 8-K, dated December 15, 1999, filed on
         January 3, 2000 (reporting on items 5 and 7(c)), Current Report on
         Form 8-K, dated February 1, 2000, filed on February 11, 2000 (reporting
         on items 5 and 7(c)) and Current Report on Form 8-K, dated
         February 14, 2000, filed on March 7, 2000 (reporting on items 5 and
         7(c))

     (c) Exhibits required by Section 601 of Regulation S-K (see (a) above)

     (d) Financial Statement Schedule

        Schedule II       Valuation and Qualifying Accounts

                                       38
<PAGE>

     IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, ON THE 10TH DAY OF MARCH, 2000.

                                          WINSTAR COMMUNICATIONS, INC.

                                          By:     /s/ WILLIAM J. ROUHANA, JR.
                                              ----------------------------------
                                                   William J. Rouhana, Jr.
                                                 Chairman of the Board and
                                                  Chief Executive Officer

     IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
                SIGNATURE                                        TITLE                             DATE
------------------------------------------  -----------------------------------------------   ---------------

<S>                                         <C>                                               <C>
       /s/ WILLIAM J. ROUHANA, JR.          Chairman of the Board Chief Executive              March 10, 2000
------------------------------------------  Officer and Director (Principal Executive
         William J. Rouhana, Jr.            Officer)

            /s/ NATHAN KANTOR               President, Chief Operating Officer and             March 10, 2000
------------------------------------------  Director
              Nathan Kantor

          /s/ TIMOTHY R. GRAHAM             Executive Vice President, Secretary and            March 10, 2000
------------------------------------------  Director
            Timothy R. Graham

           /s/ STEVEN B. MAGYAR             Director                                           March 10, 2000
------------------------------------------
             Steven B. Magyar

       /s/ WILLIAM J. VANDEN HEUVEL         Director                                           March 10, 2000
------------------------------------------
         William J. vanden Heuvel

            /s/ BERT WASSERMAN              Director                                           March 10, 2000
------------------------------------------
              Bert Wasserman

            /s/ JAMES I. CASH               Director                                           March 10, 2000
------------------------------------------
              James I. Cash

          /s/ HARTLEY R. ROGERS             Director                                           March 10, 2000
------------------------------------------
            Hartley R. Rogers

          /s/ LAWRENCE B. SORREL            Director                                           March 10, 2000
------------------------------------------
            Lawrence B. Sorrel

            /s/ RICHARD J. UHL              Group Executive and Chief Financial                March 10, 2000
------------------------------------------  Officer (Principal Financial Officer)
              Richard J. Uhl

           /s/ JOSEPH P. DWYER              Senior Vice President--Finance (Principal          March 10, 2000
------------------------------------------  Accounting Officer)
             Joseph P. Dwyer
</TABLE>

                                       39
<PAGE>

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----

<S>                                                                                                           <C>
Report of Independent Certified Public Accountants.........................................................    F-2

Consolidated Balance Sheets as of December 31, 1999 and 1998...............................................    F-3

Consolidated Statements of Operations, Years Ended December 31, 1999, 1998 and 1997........................    F-4

Consolidated Statements of Stockholders' Deficit, Years Ended December 31, 1999,
  1998 and 1997............................................................................................    F-5

Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998 and 1997........................    F-8

Notes to Consolidated Financial Statements.................................................................    F-9

Report of Independent Certified Public Accountants on Schedule.............................................   F-30

Schedule II--Valuation and Qualifying Accounts, Years Ended December 31, 1999,
  1998 and 1997............................................................................................   F-31
</TABLE>

                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Winstar Communications, Inc.

We have audited the accompanying consolidated balance sheets of Winstar
Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Winstar
Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.

GRANT THORNTON LLP

New York, New York
February 10, 2000

                                      F-2
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                          ------------------------
                                                                                             1999          1998
                                                                                          ----------    ----------
<S>                                                                                       <C>           <C>
                                        ASSETS
Current assets
  Cash and cash equivalents............................................................   $   93,331    $  208,257
  Short term investments...............................................................      152,640       104,773
                                                                                          ----------    ----------
    Cash, cash equivalents and short term investments..................................      245,971       313,030
  Accounts receivable, net of allowance for doubtful accounts of $15,897 and $12,869,
    respectively.......................................................................      139,725        70,939
  Inventories..........................................................................       18,194        14,880
  Prepaid expenses and other current assets............................................       86,930        28,402
                                                                                          ----------    ----------
    Total current assets...............................................................      490,820       427,251
Investments in marketable equity securities............................................       80,267        26,400
Property and equipment, net............................................................    1,793,982       639,673
Licenses, net..........................................................................      317,386       310,649
Other intangible assets, net...........................................................      193,399       178,050
Deferred financing costs, net..........................................................       54,759        53,308
Other assets...........................................................................      134,680        27,851
                                                                                          ----------    ----------
    Total assets.......................................................................   $3,065,293    $1,663,182
                                                                                          ----------    ----------
                                                                                          ----------    ----------

                         LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
  Current portion of long-term debt....................................................   $   18,512    $    6,487
  Current portion of capitalized lease obligations.....................................      121,747        59,021
  Accounts payable and accrued expenses................................................      372,505       159,252
  Deferred revenues--current...........................................................       11,699         2,105
  Net liabilities of discontinued operations...........................................        3,996         7,254
                                                                                          ----------    ----------
    Total current liabilities..........................................................      528,459       234,119
Capitalized lease obligations, less current portion....................................      179,600        49,354
Long-term debt, less current portion...................................................    2,144,782     1,396,635
Deferred revenues--non current.........................................................      164,238            --
Other liabilities......................................................................       16,604        12,588
Deferred income taxes..................................................................       14,500        18,500
                                                                                          ----------    ----------
    Total liabilities..................................................................    3,048,183     1,711,196
                                                                                          ----------    ----------

Series C cumulative exchangeable redeemable preferred stock, liquidation preference of
  $231,212 including accumulated dividends.............................................      231,212       201,478
Series D senior cumulative convertible redeemable preferred stock, liquidation
  preference of $200,000...............................................................      200,000       200,000
Commitments and contingencies
Stockholders' deficit
  Series F preferred stock, 300 and no shares issued and outstanding, respectively.....            3            --
  Series A preferred stock, 4,405 shares and 4,150 shares issued and outstanding,
    respectively.......................................................................           44            41
  Series E preferred stock, liquidation preference of $4,501, 75 shares issued and
    outstanding........................................................................            1             1
  Common stock, par value $.01; authorized 200,000 shares, issued and outstanding
    83,640 and 62,105, respectively (1)................................................          836           621
  Additional paid-in-capital (1).......................................................    1,022,229       403,905
  Accumulated deficit..................................................................   (1,457,519)     (819,242)
  Accumulated other comprehensive income (loss)........................................       20,304       (34,818)
                                                                                          ----------    ----------
    Total stockholders' deficit........................................................     (414,102)     (449,492)
                                                                                          ----------    ----------
       Total liabilities, redeemable preferred stock and stockholders' deficit.........   $3,065,293    $1,663,182
                                                                                          ----------    ----------
                                                                                          ----------    ----------
</TABLE>

------------------
(1) Common stock and additional paid-in-capital have been restated to reflect
    3-for-2 stock split effective March 2, 2000.

                 See Notes to Consolidated Financial Statements

                                      F-3
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    FOR THE YEAR ENDED
                                                                                       DECEMBER 31,
                                                                           -------------------------------------
                                                                             1999          1998          1997
                                                                           ---------     ---------     ---------
<S>                                                                        <C>           <C>           <C>
Operating revenues
  Communications
     Core
       Services.........................................................   $ 234,799     $ 123,692     $  22,653
       Enhanced network products........................................     121,274        17,774            --
                                                                           ---------     ---------     ---------
     Total core revenues................................................     356,073       141,466        22,653
     Other communications services......................................      27,688        49,643         7,143
                                                                           ---------     ---------     ---------
     Total communications revenues......................................     383,761       191,109        29,796
     Information services revenues......................................      61,876        53,338        41,354
                                                                           ---------     ---------     ---------
Total operating revenues................................................     445,637       244,447        71,150
                                                                           ---------     ---------     ---------
Operating expenses
     Cost of communications services....................................     196,487       155,617        44,461
                                                                           ---------     ---------     ---------
     Cost of enhanced network products                                        78,307        13,298            --
                                                                           ---------     ---------     ---------
       Total cost of communications services and products...............     274,794       168,915        44,461
     Cost of information services.......................................      41,468        35,833        29,437
                                                                           ---------     ---------     ---------
       Total cost of services and products..............................     316,262       204,748        73,898
     Selling, general and administrative expenses.......................     426,679       263,155       150,688
     Depreciation and amortization......................................     155,224        74,953        25,102
                                                                           ---------     ---------     ---------
Total operating expenses................................................     898,165       542,856       249,688
                                                                           ---------     ---------     ---------
     Operating loss.....................................................    (452,528)     (298,409)     (178,538)
Other income (expense)
     Interest expense...................................................    (211,744)     (156,599)      (77,257)
     Interest income....................................................      21,995        29,758        17,577
     Other income.......................................................          --            --         2,219
                                                                           ---------     ---------     ---------
Loss from continuing operations before income tax benefit...............    (642,277)     (425,250)     (235,999)
Income tax benefit......................................................       4,000         5,500         2,500
                                                                           ---------     ---------     ---------
Loss from continuing operations.........................................    (638,277)     (419,750)     (233,499)
Discontinued operations:
  Loss from operations..................................................          --        (2,702)       (9,985)
  Estimated loss on disposal (including a provision of $4,183 in 1998
     for operating losses during the phase out period)..................          --       (22,272)       (6,000)
                                                                           ---------     ---------     ---------
Loss from discontinued operations.......................................          --       (24,974)      (15,985)
                                                                           ---------     ---------     ---------
Net loss................................................................    (638,277)     (444,724)     (249,484)
Preferred stock dividends...............................................     (61,490)      (42,968)       (5,879)
                                                                           ---------     ---------     ---------
Net loss applicable to common stockholders..............................   $(699,767)    $(487,692)    $(255,363)
                                                                           ---------     ---------     ---------
                                                                           ---------     ---------     ---------
Basic and diluted loss per share (1):
  From continuing operations............................................   $   (9.15)    $   (7.98)    $   (4.80)
  From discontinued operations..........................................          --         (0.43)        (0.32)
                                                                           ---------     ---------     ---------
Net loss per share......................................................   $   (9.15)    $   (8.41)    $   (5.12)
                                                                           ---------     ---------     ---------
                                                                           ---------     ---------     ---------
Weighted average shares outstanding (1).................................      76,478        58,022        49,874
                                                                           ---------     ---------     ---------
                                                                           ---------     ---------     ---------
</TABLE>

------------------
(1) Loss per share and weighted average shares outstanding have been restated to
reflect 3-for-2 stock split effective March 2, 2000.

                 See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                  SERIES F              SERIES A              SERIES E
                              PREFERRED STOCK       PREFERRED STOCK       PREFERRED STOCK         COMMON STOCK       ADDITIONAL
                             ------------------    ------------------    ------------------    ------------------      PAID-IN
                             SHARES     AMOUNT     SHARES     AMOUNT     SHARES     AMOUNT     SHARES     AMOUNT       CAPITAL
                             -------    -------    -------    -------    -------    -------    -------    -------    -----------
<S>                          <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
BALANCES AT DECEMBER 31,
  1998....................        --    $   --       4,150    $   41          75    $    1      62,105    $  621     $   403,905
Issuances of common stock:
  For stock option
    exercises and other...                                                                       5,189        52          53,616
  For acquisitions and
    licenses..............                                                                         471         4          17,586
  February 1999 Common
    Stock Offering........                                                                       6,300        63         167,391
  For conversion of
    debentures............                                                                       8,880        89         119,387
  For conversion of
    preferred stock.......                                                                          12        --             158
Issuance of Series F
  preferred stock.........       300         3                                                                           290,836
Dividends declared on
  Series A preferred
  stock...................                                                                                                (6,366)
Dividends declared on
  Series C preferred
  stock...................                                                                                               (29,734)
Dividends declared on
  Series D preferred
  stock...................                                                                                               (14,000)
Dividends declared on
  Series F preferred
  stock...................                                                                                               (11,390)
Issuances of Series A
  preferred stock as
  dividends in kind.......                             255         3                                                       6,363
Issuances of common stock
  as dividends on Series D
  preferred stock.........                                                                         421         4          13,996
Issuances of common stock
  as dividends on Series F
  preferred stock.........                                                                         262         3          10,481
COMPREHENSIVE LOSS:
  Net loss................
  Unrealized gain on
    investments in
    marketable equity
    securities...........
  Foreign currency
    translation
    adjustment............
Total comprehensive
  loss....................
                             -------    -------    -------    -------    -------    -------    -------    -------    -----------
BALANCES AT DECEMBER 31,
  1999....................       300    $    3       4,405    $   44          75    $    1      83,640    $  836     $ 1,022,229
                             -------    -------    -------    -------    -------    -------    -------    -------    -----------
                             -------    -------    -------    -------    -------    -------    -------    -------    -----------

<CAPTION>
                                           ACCUMULATED
                                              OTHER            TOTAL
                            ACCUMULATED    COMPREHENSIVE    STOCKHOLDERS'
                              DEFICIT      INCOME (LOSS)      DEFICIT
                            -----------    -------------    -------------
<S>                          <C>           <C>              <C>
BALANCES AT DECEMBER 31,
  1998....................  $ (819,242)      $ (34,818)       $(449,492)
Issuances of common stock:
  For stock option
    exercises and other...                                       53,668
  For acquisitions and
    licenses..............                                       17,590
  February 1999 Common
    Stock Offering........                                      167,454
  For conversion of
    debentures............                                      119,476
  For conversion of
    preferred stock.......                                          158
Issuance of Series F
  preferred stock.........                                      290,839
Dividends declared on
  Series A preferred
  stock...................                                       (6,366)
Dividends declared on
  Series C preferred
  stock...................                                      (29,734)
Dividends declared on
  Series D preferred
  stock...................                                      (14,000)
Dividends declared on
  Series F preferred
  stock...................                                      (11,390)
Issuances of Series A
  preferred stock as
  dividends in kind.......                                        6,366
Issuances of common stock
  as dividends on Series D
  preferred stock.........                                       14,000
Issuances of common stock
  as dividends on Series F
  preferred stock.........                                       10,484
COMPREHENSIVE LOSS:
  Net loss................    (638,277)                        (638,277)
  Unrealized gain on
    investments in
    marketable equity
    securities............                      54,653           54,653
  Foreign currency
    translation
    adjustment............                         469              469
                                                              ---------
Total comprehensive
  loss....................                                     (583,155)
                            -----------      ---------        ---------
                                                              ---------
BALANCES AT DECEMBER 31,
  1999....................  $(1,457,519)     $  20,304        $(414,102)
                            -----------      ---------        ---------
                            -----------      ---------        ---------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                              SERIES A              SERIES A
                                          PREFERRED STOCK       PREFERRED STOCK         COMMON STOCK       ADDITIONAL
                                         ------------------    ------------------    ------------------      PAID-IN
                                         SHARES     AMOUNT     SHARES     AMOUNT     SHARES     AMOUNT       CAPITAL
                                         -------    -------    -------    -------    -------    -------    -----------
<S>                                      <C>        <C>        <C>        <C>        <C>        <C>        <C>
BALANCES AT DECEMBER 31, 1997.........     3,910    $    39         --    $    --     51,917    $   519    $   255,568
Isssuance of common stock:
  For stock option exercises and
    other.............................                                                 2,721         27         20,547
  For acquisitions and licenses.......                                                 4,538         46         99,835
  For investment in marketable equity
    securities........................                                                 2,287         23         60,321
Dividends declared on Series A
  preferred stock.....................                                                                          (6,000)
Dividends on Series C preferred
  stock...............................                                                                         (25,925)
Dividends on Series D preferred
  stock...............................                                                                         (11,043)
Issuance of Series E preferred stock..                              75          1                                2,477
Issuance of Series A preferred stock
  as dividends-in-kind................       240          2                                                      5,998
Issuance of common stock as dividends
  on Series D preferred stock.........                                                   642          6         10,454
Preferred stock issuance costs and
  other, net..........................
COMPREHENSIVE LOSS:                                                                                             (8,327)
  Net loss............................
  Unrealized loss on investments in
    marketable equity securities......
Total comprehensive loss..............
                                         -------    -------    -------    -------    -------    -------    -----------
BALANCES AT DECEMBER 31, 1998.........     4,150    $    41         75    $     1     62,105    $   621    $   403,905
                                         -------    -------    -------    -------    -------    -------    -----------
                                         -------    -------    -------    -------    -------    -------    -----------

<CAPTION>
                                                       ACCUMULATED
                                                          OTHER            TOTAL
                                        ACCUMULATED    COMPREHENSIVE    STOCKHOLDERS'
                                          DEFICIT      INCOME (LOSS)      DEFICIT
                                        -----------    -------------    -------------
<S>                                      <C>           <C>              <C>
BALANCES AT DECEMBER 31, 1997.........  $  (374,518)     $      --        $(118,392)
Isssuance of common stock:
  For stock option exercises and
    other.............................                                       20,574
  For acquisitions and licenses.......                                       99,881
  For investment in marketable equity
    securities........................                                       60,344
Dividends declared on Series A
  preferred stock.....................                                       (6,000)
Dividends on Series C preferred
  stock...............................                                      (25,925)
Dividends on Series D preferred
  stock...............................                                      (11,043)
Issuance of Series E preferred stock..                                        2,478
Issuance of Series A preferred stock
  as dividends-in-kind................                                        6,000
Issuance of common stock as dividends
  on Series D preferred stock.........                                       10,460
Preferred stock issuance costs and
  other, net..........................
COMPREHENSIVE LOSS:                                                          (8,327)
  Net loss............................     (444,724)                       (444,724)
  Unrealized loss on investments in
    marketable equity securities......                     (34,818)         (34,818)
                                                                          ---------
Total comprehensive loss..............                                     (479,542)
                                        -----------      ---------        ---------
                                                                          ---------
BALANCES AT DECEMBER 31, 1998.........  $  (819,242)     $ (34,818)       $(449,492)
                                        -----------      ---------        ---------
                                        -----------      ---------        ---------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-6
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                 SERIES A
                                                             PREFERRED STOCK         COMMON STOCK       ADDITIONAL
                                                            ------------------    ------------------      PAID-IN      ACCUMULATED
                                                            SHARES     AMOUNT     SHARES     AMOUNT       CAPITAL        DEFICIT
                                                            -------    -------    -------    -------    -----------    -----------
<S>                                                         <C>        <C>        <C>        <C>        <C>            <C>
BALANCES AT JANUARY 1, 1997..............................        --    $    --     43,484    $   435    $    75,291    $  (125,034)
Issuances of common stock for option exercises and
  other..................................................                           1,827         18          8,763
Issuances of common stock for acquisitions and
  licenses...............................................                           5,976         60         83,291
Issuance of Series A preferred stock.....................     4,000         40                               95,960
Dividends declared on Series A preferred stock...........                                                    (5,326)
Issuances of Series A preferred stock as dividends in
  kind...................................................       213          2                                5,324
Dividends on Series C preferred stock....................                                                      (553)
Conversion of Series A preferred stock to common stock...      (303)        (3)       630          6             (3)
Series C preferred stock issuance costs and other, net...                                                    (7,179)
COMPREHENSIVE LOSS:
Net loss.................................................                                                                 (249,484)
Unrealized gain on investments in marketable equity
  securities.............................................
Total comprehensive loss.................................
                                                            -------    -------    -------    -------    -----------    -----------
BALANCES AT DECEMBER 31, 1997............................     3,910    $    39     51,917    $   519    $   255,568    $  (374,518)
                                                            -------    -------    -------    -------    -----------    -----------
                                                            -------    -------    -------    -------    -----------    -----------

<CAPTION>
                                                           ACCUMULATED
                                                              OTHER            TOTAL
                                                           COMPREHENSIVE    STOCKHOLDERS'
                                                           INCOME (LOSS)      DEFICIT
                                                           -------------    -------------
<S>                                                         <C>             <C>
BALANCES AT JANUARY 1, 1997..............................    $    (363)       $ (49,671)
Issuances of common stock for option exercises and
  other..................................................                         8,781
Issuances of common stock for acquisitions and
  licenses...............................................                        83,351
Issuance of Series A preferred stock.....................                        96,000
Dividends declared on Series A preferred stock...........                        (5,326)
Issuances of Series A preferred stock as dividends in
  kind...................................................                         5,326
Dividends on Series C preferred stock....................                          (553)
Conversion of Series A preferred stock to common stock...
Series C preferred stock issuance costs and other, net...                        (7,179
COMPREHENSIVE LOSS:
Net loss.................................................                      (249,484)
Unrealized gain on investments in marketable equity
  securities.............................................          363              363
                                                                              ---------
Total comprehensive loss.................................                      (249,121)
                                                             ---------        ---------
                                                                              ---------
BALANCES AT DECEMBER 31, 1997............................    $      --        $(118,392)
                                                             ---------        ---------
                                                             ---------        ---------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-7
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      FOR THE YEAR ENDED
                                                                                         DECEMBER 31,
                                                                              -----------------------------------
                                                                                1999         1998         1997
                                                                              ---------    ---------    ---------
<S>                                                                           <C>          <C>          <C>
Cash flows from operating activities:
  Net loss.................................................................   $(638,277)   $(444,724)   $(249,484)
  Adjustments to reconcile net loss to net cash
     used in operating activities:
     Net loss from discontinued operations.................................          --       24,974       15,985
     Depreciation and amortization.........................................     155,224       74,953       25,102
     Deferred income tax benefit...........................................      (4,000)      (5,500)      (2,500)
     Provision for doubtful accounts.......................................      22,969       22,692        3,964
     Non cash interest expense.............................................     140,531      111,530       56,166
     (Increase) decrease in operating assets:
       Accounts receivable.................................................     (91,190)     (39,655)     (23,392)
       Inventories.........................................................      (3,314)      (2,732)      (9,217)
       Prepaid expenses and other current assets...........................     (50,322)     (16,083)         441
       Other assets........................................................     (92,410)     (23,814)        (199)
     Increase (decrease) in accounts
       payable and accrued expenses........................................     115,291       34,661       51,670
     Increase in deferred revenues.........................................     173,175           --           --
     Net cash used in discontinued operations..............................      (3,258)     (16,576)     (11,568)
                                                                              ---------    ---------    ---------
Net cash used in operating activities......................................    (275,581)    (280,274)    (143,032)
                                                                              ---------    ---------    ---------

Cash flows from investing activities:
  (Increase) decrease in short-term investments, net.......................     (47,081)     (87,870)      10,094
  Purchase of property and equipment, net..................................    (612,117)    (372,660)    (213,252)
  Proceeds from sale of equipment..........................................          --       22,333           --
  Acquisitions, net of cash acquired, including licenses...................     (44,593)    (216,501)     (40,190)
  Other, net...............................................................          --           --        2,494
                                                                              ---------    ---------    ---------
Net cash used in investing activities......................................    (703,791)    (654,698)    (240,854)
                                                                              ---------    ---------    ---------
Cash flows from financing activities:
  Proceeds from long-term debt, net........................................     459,188      484,952      412,029
  Net proceeds from preferred stock offerings..............................     290,839      191,914      168,138
  Net proceeds from common stock offering..................................     167,454           --           --
  Net proceeds from other equity transactions..............................      53,668       20,574      104,781
  Proceeds from sale of minority equity interest...........................          --        9,900           --
  Proceeds from equipment lease financing..................................          --       42,880        9,912
  Payment of capital lease obligations.....................................    (106,966)      (6,770)      (3,740)
  Other, net...............................................................         263       (2,780)        (316)
                                                                              ---------    ---------    ---------
Net cash provided by financing activities..................................     864,446      740,670      690,804
                                                                              ---------    ---------    ---------
Net (decrease) increase in cash and cash equivalents.......................    (114,926)    (194,302)     306,918
Cash and cash equivalents at beginning of year.............................     208,257      402,559       95,641
                                                                              ---------    ---------    ---------
Cash and cash equivalents at end of year...................................      93,331      208,257      402,559
Short-term investments at end of year......................................     152,640      104,773       16,903
                                                                              ---------    ---------    ---------
Cash, cash equivalents and short-term investments
  at end of year...........................................................   $ 245,971    $ 313,030    $ 419,462
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-8
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

     Our consolidated financial statements include our accounts and the accounts
of our subsidiaries. All material intercompany transactions and accounts have
been eliminated in consolidation.

NATURE OF BUSINESS

     We provide businesses with a broad suite of integrated broadband
communications and information services. We offer our services across our own
end-to-end broadband network in 60 major markets in the United States, including
each of the top 30 U.S. markets. We believe that our rapidly expanding network
will enable us to offer broadband services to a majority of the companies
comprising the business communications market in the United States. We also
offer services in 10 overseas markets, including Amsterdam, Brussels, Buenos
Aires and Tokyo.

     We classify revenues as communications revenues and information services
revenues. Communications revenues are divided into two categories: core
communications and other communications services.

     Core communications revenues primarily include revenues derived from: local
and long distance voice services, Internet connectivity, capacity and equipment
sales; data transmission services; web hosting, web design and development
services; and professional and enhanced services, including network design and
implementation, equipment selection, procurement and installation. Sales of
network capacity and telecommunications equipment through our enhanced service
provider channel are classified as enhanced network products revenue.

     Other communications services revenues are those derived from a portion of
an acquired long distance customer base located in markets which we do not have
current plans to serve with our fixed wireless services.

     We also develop and distribute information content and provide related
services through traditional media, such as television, video, cable and radio,
and over the Internet.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term investments
are widely diversified and consist of investments with an original maturity of
greater than three months and less than twelve months. Short-term investments
principally consist of certificates of deposit, money market deposits, U.S.
Government or Government Agency securities, commercial paper rated "A-1/P-1" or
higher, and municipal securities rated "A" or higher. Short-term investments are
considered held-to-maturity and are stated at amortized cost which approximates
fair value.

     Our investments in other entities are carried at their historical cost.
Certain of these cost based investments, which are classified as available for
sale securities in the accompanying balance sheet, are marked to market at the
balance sheet date to reflect their fair value. The unrealized gains and losses
are reflected as a component of accumulated other comprehensive income (loss).

     Included in other assets as of December 31, 1999 and 1998 is approximately
$18.4 million and $10.4 million of restricted cash which serves as collateral on
letters of credit and bank guarantees.

INVENTORIES

     Inventories are composed of computer equipment inventories and film
inventories. Computer equipment inventories are carried at the lower of cost or
market using the specific identification method. Film inventories include direct
and indirect production costs, which are amortized to expense in the proportion
that revenue recognized during the year for each film bears to the estimated
total revenue to be received from all sources under

                                      F-9
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
the individual film forecast method. Our estimate of forecasted revenues exceeds
the unamortized costs on an individual program basis. Such forecasted revenue is
subject to revision in future periods if warranted by changing market
conditions.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost. Depreciation and amortization are
generally computed using the straight-line method over the estimated useful
lives of the related assets.

     Costs incurred during the application development stage for internal use
software, including operations support systems, are capitalized as incurred and
aggregated approximately $70.0 million and $8.9 million for the years ended
December 31, 1999 and 1998, respectively, and were insignificant in prior years.

     We capitalize interest expense as a component of the cost of our
self-constructed telecommunications equipment. Interest capitalized amounted to
approximately $23.5 million and $1.7 million for the years ended December 31,
1999 and 1998, respectively.

SPECTRUM LICENSES AND OTHER INTANGIBLE ASSETS

     Spectrum licenses were acquired through business combinations, third party
purchases, applications to the Federal Communications Commission ("FCC") and FCC
auctions. Intangible assets arose in connection with business combinations and
include goodwill and purchased customer lists. Spectrum licenses and intangible
assets are being amortized by the straight-line method over their estimated
useful lives.

     Our 38 GHz licenses and 28 GHz LMDS licenses are subject to renewal by the
FCC in February 2001 and August 2008, respectively. As of December 31, 1999 and
1998, the carrying value of our licenses was $317.4 million and $310.6 million,
net of accumulated amortization of $19.5 million and $11.3 million,
respectively.

     Our policy is to measure long lived asset impairment by considering a
number of factors as of each balance sheet date including (i) current operating
results of the applicable business, (ii) projected future operating results of
the applicable business, (iii) the occurrence of any significant regulatory
changes which may have an impact on the continuity of the business, and
(iv) any other material factors that affect the continuity of the applicable
business. The amortization period for goodwill and purchased customer lists is
determined on a case-by-case basis for each acquisition from which goodwill and
purchased customer lists arise based on a review of the nature of the business
acquired as well as the factors cited above. The amortization period for
spectrum licenses is forty years.

INCOME TAXES

     Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities, loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.

REVENUE RECOGNITION

     Communications revenues are recorded upon placing of calls or as a monthly
recurring usage charge. We also sell capacity to our customers under contracts
that provide a long term, indefeasible right to use portions of our network.
Revenues from the sale of network capacity that qualify under generally accepted
accounting principles as sales are recognized in the period that the rights and
obligations of ownership transfer to the purchaser. Revenues from operating
leases of private line circuits are recognized on a straight line basis over the

                                      F-10
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
life of the lease. Revenues from equipment sales are recognized when the
equipment is delivered to the customer. Professional services revenues are
recognized under the percentage of completion method.

     Information services revenues from film productions are recognized when a
program is accepted by the licensee and is available for broadcast. Revenues
from the licensing of film productions are recognized when the license period
begins and the film is available for broadcast. Revenues from advertising sales
are recognized when the related advertising is broadcast.

BASIC AND DILUTED LOSS PER SHARE

     Basic and diluted loss per share is calculated by dividing the net loss,
after consideration of preferred stock accretion and dividends, by the weighted
average number of shares of common stock outstanding during each period. Stock
options and warrants have been excluded from the calculation of diluted loss per
share as their effect would have been antidilutive. (See Notes 10 and 11.)

STOCK SPLIT EFFECTED IN THE FORM OF A DIVIDEND

     On February 3, 2000 we announced a 50% common stock dividend, pursuant to
which holders of our common stock will receive one additional share of common
stock for every two shares they own. The stock dividend applies to holders of
record as of February 16, 2000 and was distributed on March 2, 2000. All share
and per-share amounts in the accompanying consolidated financial statements have
been restated to give effect to the stock dividend.

CONCENTRATION OF CREDIT RISK

     Financial instruments which potentially subject us to concentration of
credit risk consist principally of trade receivables and non current trade
receivables, which are included in other assets. Concentration of credit risk
with respect to these receivables is generally diversified due to the large
number of entities comprising our customer base and their dispersion across
geographic areas. We routinely address the financial strength of our customers
and, as a consequence, we believe that our receivable credit risk exposure is
limited. Our short term investments and cash equivalents are potentially subject
to concentration of credit risk, but such risk is limited due to such amounts
being invested in investment grade securities.

ADVERTISING COSTS

     Advertising costs are charged to operations when the advertising first
takes place. Advertising expense for the years ended December 31, 1999, 1998 and
1997 was approximately $25.6 million, $15.1 million and $11.0 million,
respectively.

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

     In preparing financial statements in conformity with generally accepted
accounting principles, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In September 1998, the Financial Accounting Standards Board issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS 133 also specifies new
methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies

                                      F-11
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
detailed criteria to be met to qualify for hedge accounting. SFAS 133, as
amended by SFAS 137, is effective for fiscal years beginning after
September 15, 2000. We currently do not use derivative instruments as defined by
SFAS No. 133. If we continue to not use these derivative instruments by the
effective date of SFAS No. 133, the adoption of this statement will have no
effect on our consolidated results of operations or our consolidated financial
position.

SEGMENT INFORMATION

     Segment information is presented in accordance with SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." This standard is based
on a management approach, which requires segmentation based upon our internal
organization that is used by us for making operating decisions and assessing
performance as the source of our reportable operating segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers.

RECLASSIFICATIONS

     Certain prior period amounts have been reclassified to conform to the
current period presentation.

NOTE 2--ACQUISITIONS

     During 1999 and 1998, we acquired a number of small companies engaged in
professional services, systems integration and Internet-related services. The
accounts of the acquired companies have been consolidated in our financial
statements as of the effective date of the acquisitions. These acquisitions were
treated as purchases for accounting purposes. The aggregate consideration for
the 1999 acquisitions was $36.6 million, consisting of $20.9 million in cash,
413,105 shares of our common stock valued at $13.5 million and 52,632 warrants
to acquire our common stock valued at $2.2 million. The aggregate consideration
for the 1998 acquisitions, excluding the acquisition of Midcom Communications,
Inc., was approximately $85.8 million, consisting of $46.0 million in cash,
479,043 shares of our common stock valued at $37.3 million and 75,100 shares of
our Series E Preferred Stock valued at $2.5 million. Unaudited pro forma results
of operations for these acquisitions have not been included because they are not
material to our consolidated statement of operations.

     On January 21, 1998, pursuant to an agreement between us and Midcom
Communications Inc. and its subsidiaries ("Midcom"), we acquired substantially
all of Midcom's assets and businesses for a purchase price of approximately
$92.0 million in cash. Midcom was an entity in bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code.

     We retained an independent third party to fully evaluate the assets and
certain liabilities of Midcom, in order to complete the allocation of the
purchase price of the acquisition. The results of this evaluation did not result
in a material adjustment. The acquisition was treated as a purchase for
accounting purposes. The financial statements of Midcom were consolidated into
our financial statements as of the date of acquisition.

     Midcom was a provider of long distance voice and frame relay data
telecommunications services primarily to small and medium-sized businesses, most
of which are located in major metropolitan areas of California, Florida,
Illinois, New York, Ohio and Washington.

                                      F-12
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--ACQUISITIONS--(CONTINUED)
     Unaudited pro forma results of operations, which reflect the combined
operations of Winstar and Midcom as if the acquisition was consummated at the
beginning of the earliest period presented, are as follows (in thousands, except
per share data):

<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED    FOR THE YEAR ENDED
                                                        DECEMBER 31, 1998     DECEMBER 31, 1997
                                                        ------------------    ------------------
<S>                                                     <C>                   <C>
Operating revenues...................................       $  248,219            $  169,433
Net loss applicable to common stockholders...........       $ (488,094)           $ (348,200)
Basic and diluted loss per share.....................       $    (8.41)           $    (6.98)
</TABLE>

     The unaudited pro forma results of operations do not purport to represent
the results of operations that would have actually resulted had the purchase
occurred at the beginning of the earliest period presented, nor should it be
taken as indicative of future results of operations.

NOTE 3--PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                              DECEMBER 31,    DECEMBER 31,        ESTIMATED
                                                 1999            1998            USEFUL LIFE
                                              ------------    ------------   --------------------
                                                     (IN THOUSANDS)
<S>                                           <C>             <C>            <C>
Telecommunications equipment and
  software.................................    $1,026,443      $  566,331    5 to 25 years
Furniture, fixtures and other..............       180,791          25,773    4 to 5 years
                                                                             Lesser of life of
                                                                               lease or life of
Leasehold improvements.....................        43,633          18,234      the asset
                                               ----------      ----------
                                                1,250,867         610,338
Less accumulated depreciation and
  amortization.............................      (227,524)        (98,100)
                                               ----------      ----------
                                                1,023,343         512,238
Network construction in progress...........       770,639         127,435
                                               ----------      ----------
                                               $1,793,982      $  639,673
                                               ----------      ----------
                                               ----------      ----------
</TABLE>

NOTE 4--OTHER INTANGIBLE ASSETS AND LICENSES

     Other intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                   DECEMBER 31,    DECEMBER 31,      ESTIMATED
                                                      1999            1998          USEFUL LIFE
                                                   ------------    ------------    -------------
                                                          (IN THOUSANDS)
<S>                                                <C>             <C>             <C>
Goodwill........................................    $  184,035      $  158,368     3 to 30 years
Purchased customer lists........................        31,579          29,758     5 to 25 years
Covenants not to compete and other..............         5,735           1,881     5 to 10 years
                                                    ----------      ----------
                                                       221,349         190,007
Less accumulated amortization...................       (27,950)        (11,957)
                                                    ----------      ----------
                                                    $  193,399      $  178,050
                                                    ----------      ----------
                                                    ----------      ----------
</TABLE>

                                      F-13
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--DEBT

     Debt consists of the following:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                       1999            1998
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
<S>                                                                 <C>             <C>
14% Senior Discount Notes Due 2005...............................    $  263,958      $  231,051
14% Convertible Senior Subordinated Discount Notes Due 2005......            --         115,525
14 1/2% Senior Deferred Interest Notes Due 2005..................       147,485         128,474
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC............       200,000         200,000
12 1/2% Guaranteed Senior Secured Notes Due 2004,
  WEC II.........................................................        50,000          50,000
15% Senior Subordinated Deferred Interest Notes Due 2007.........       137,893         119,695
10% Senior Subordinated Notes Due 2008...........................       200,000         200,000
11% Senior Subordinated Deferred Interest Notes Due 2008.........       302,137         271,897
Lucent Facility..................................................       835,803          77,514
Accounts Receivable Securitization Notes.........................         9,000              --
Other Notes Payable..............................................        17,018           8,966
                                                                     ----------      ----------
  Total Debt.....................................................     2,163,294       1,403,122
Less Current Portion.............................................       (18,512)         (6,487)
                                                                     ----------      ----------
Total Long-Term Debt.............................................    $2,144,782      $1,396,635
                                                                     ----------      ----------
                                                                     ----------      ----------
</TABLE>

1995 DEBT PLACEMENT

     In October 1995, we completed a $225.0 million private placement of debt
securities consisting of two components: a) $150.0 million of our 14% Senior
Discount Notes Due 2005, and b) $75.0 million of our 14% Convertible Senior
Subordinated Discount Notes Due 2005. On June 2, 1999, the Convertible Senior
Subordinated Discount Notes automatically converted into 8.9 million shares of
our common stock. At the time of the conversion the notes had an accreted value
of $122.1 million and we had unamortized deferred financing costs of
approximately $2.6 million. Pursuant to the applicable indenture, these notes
converted at a fixed conversion rate of $13.75 per share.

     The Senior Discount Notes accrue interest at 14% per annum, with no
interest payable during the first five years, and principal payable only at
maturity in October 2005. Commencing April, 2001, the Senior Discount Notes
require the payment of interest only, in cash, until maturity.

1997 DEBT PLACEMENTS

     In March 1997, we and Winstar Equipment Corp. ("WEC"), one of our
wholly-owned subsidiaries which was formed to facilitate the purchase of
equipment, issued an aggregate of $300.0 million of notes, consisting of
(i) $100.0 million of our 14 1/2% Senior Deferred Interest Notes Due 2005,
ranking pari passu with the 1995 Senior Discount Notes, and
(ii) $200.0 million of WEC's 12 1/2% Guaranteed Senior Secured Notes Due 2004
(the "WEC Notes"). In August 1997, Winstar Equipment II Corp. ("WEC II"), one of
our wholly-owned subsidiaries which was also formed to facilitate the purchase
of equipment, issued $50.0 million of its 12 1/2% Guaranteed Senior Secured
Notes Due 2004. In October 1997, we issued an aggregate of $100.0 million
principal amount of our 15% Senior Subordinated Deferred Interest Notes Due
2007.

     The obligations of WEC and WEC II are unconditionally guaranteed by Winstar
and are secured by a security interest in the equipment and other property
purchased by WEC and WEC II, as the case may be, with the proceeds thereof.

                                      F-14
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--DEBT--(CONTINUED)
     Both the WEC and WEC II Notes bear interest at a rate of 12 1/2% per annum,
payable on March 15 and September 15, commencing September 15, 1997. The WEC and
WEC II Notes will mature on March 15, 2004 and are redeemable on or after
March 15, 2002, at our option, in whole or in part, at certain specified prices.

     The 14 1/2% Senior Deferred Interest Notes are unsecured, senior
indebtedness, rank pari passu in right of payment with all of our existing and
future senior indebtedness, and are senior in right of payment to all of our
existing and future subordinated indebtedness. Interest on our 14 1/2% Senior
Deferred Interest Notes will accrue and compound semiannually, but will not be
payable in cash until October 15, 2000. Interest on the accumulated amount of
the Senior Notes as of October 15, 2000 will be payable semiannually in cash on
April 15 and October 15 of each year commencing April 15, 2001. The Senior Notes
mature on October 15, 2005 and are redeemable on or after October 15, 2000, at
our option, in whole or in part, at certain specified prices.

     The 15% Senior Subordinated Deferred Interest Notes are unsecured, senior
subordinated obligations, and are junior in right of payment to all of our
existing and future senior indebtedness. These Notes bear interest at a rate of
15% per annum, which is payable on each March 1 and September 1, commencing
September 1, 2002. Until March 1, 2002, interest on these Notes will accrue and
be compounded semiannually, but will not be payable in cash. Interest on the
accumulated amount of the Notes as of March 1, 2002 will be payable semiannually
commencing September 1, 2002. The Notes will mature on March 1, 2007 and are
redeemable on or after March 1, 2002, at our option, in whole or in part, at
certain specified prices.

1998 DEBT PLACEMENTS

     In March 1998, we issued $200.0 million in aggregate principal amount of
our 10% Senior Subordinated Notes Due 2008 and $250.0 million in aggregate
principal amount of our 11% Senior Subordinated Deferred Interest Notes Due
2008. These Notes are unsecured, senior subordinated obligations, rank pari
passu in right of payment with the 1997 Senior Subordinated Notes, and are
junior in right of payment to all of our existing and future senior
indebtedness.

     The 10% Senior Subordinated Notes bear interest at the rate of 10% per
annum, which is payable on each March 15 and September 15, commencing
September 15, 1998. The 10% Senior Subordinated Notes will mature on March 15,
2008 and are redeemable on or after March 15, 2003, at our option, in whole or
in part, at specified prices.

     The 11% Senior Subordinated Deferred Interest Notes bear interest at a rate
of 11% per annum, which is payable on each March 15 and September 15, commencing
September 15, 2003. Interest on the 11% Notes will accrue and be compounded
semiannually, but will not be payable in cash. Interest on the accumulated
amount of the 11% Notes as of March 15, 2003 will be payable semiannually
commencing September 15, 2003. The 11% Notes will mature on March 15, 2008 and
are redeemable on or after March 15, 2003, at our option, in whole or in part,
at specified prices.

     We consummated exchange offers whereby all of the Notes sold in the 1995,
1997 and 1998 debt placements were exchanged for new notes which were identical
in every respect to the original notes except that the new notes were registered
under the Securities Act of 1933.

LUCENT FACILITY

     In October 1998, we entered into the Lucent Facility which sets forth the
terms and conditions under which Lucent or its assignee lenders will provide us
with up to $2.0 billion of purchase money financing for the purchase of
equipment and services pursuant to the terms of a related supply agreement with
Lucent.

     Lucent is not required to fund commitments if, at any one time, the
outstanding aggregate loans held by Lucent or for which Lucent is otherwise
obligated exceed $500.0 million. Additional amounts under the Lucent Facility
become available on a dollar-for-dollar basis as outstanding loans or unfunded
commitments are

                                      F-15
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--DEBT--(CONTINUED)
syndicated by Lucent to other lenders. We may draw against available commitments
until such time as they have been fully drawn or the fifth anniversary of the
credit agreement, whichever is earlier. The Lucent Facility provides that
borrowings will fall into one of the five annual tranches. The tranche under
which a loan is drawn determines when the loan is to be repaid, with each
tranche having an eight year term.

     As of December 31, 1999, the total amount outstanding under the Lucent
Facility was approximately $835.8 million, portions of which are held by a
commercial bank. We had an immediate availability of $264.2 million and a
remaining commitment of $1,164.2 million under this facility as of December 31,
1999. In certain circumstances, the bank may convert the loans it holds into
senior secured notes of our borrowing subsidiary which will be issued pursuant
to an indenture similar to those governing some of our other indebtedness and
guaranteed by us.

     Interest on loans under the Lucent Facility accrues at a floating rate
equal to, at our election, a base rate determined in relation to the then
current prime rate, or at the London Inter-Bank Offered Rate ("LIBOR"), in each
case plus a margin which may vary over the life of the Lucent Facility (9.63% at
December 31, 1999). Interest will be payable quarterly in arrears for base rate
advances and at the end of each interest period (which can be one, three or six
months in length, at our election) for LIBOR advances. However, the interest on
loans accruing during the first year of each tranche of which a loan is a part
may, at our election, be deferred. The deferred interest shall then accrue at
the same rates as the principal of the loans.

     The principal of any tranche as well as any deferred interest thereon will
be repaid in sixteen equal installments. Installments are payable on the last
day of each calendar quarter, commencing on the last day of the first quarter
following the fourth anniversary of the date the applicable tranche first
becomes available.

ACCOUNTS RECEIVABLE SECURITIZATION

     In June 1999, we completed a $35.0 million accounts receivable
securitization financing. Under this financing, we may borrow up to the lesser
of the maximum amount of the facility (which has been initially set at $25.0
million, increasing to $35.0 million when certain conditions are met) and the
amount determined under a borrowing base formula. Borrowings under this facility
will bear interest at LIBOR, plus 1.5% (8.27% at December 31, 1999). As of
December 31, 1999, we had $9.0 million outstanding, leaving an availability of
$3.3 million under this financing.

     The terms of the Indentures relating to the 1995, 1997 and 1998 Debt
Placements, the Lucent Facility and the Certificates of Designation relating to
certain of the Company's preferred stock agreements and the accounts receivable
securitization contain covenants placing certain restrictions on our ability to
pay dividends or make other restricted payments, incur additional indebtedness,
issue guarantees, sell assets, or enter into certain other specified
transactions, as well as the requirements to meet certain financial ratios.

     Debt maturities as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
                                                                        (IN THOUSANDS)
                                                                        --------------
<S>                                                                     <C>
2000.................................................................     $   18,512
2001.................................................................          3,134
2002.................................................................         44,310
2003.................................................................        178,998
2004.................................................................        459,944
Thereafter...........................................................      1,458,396
                                                                          ----------
                                                                          $2,163,294
                                                                          ----------
                                                                          ----------
</TABLE>

                                      F-16
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of our financial instruments classified as current assets or
liabilities, including cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable and accrued expenses approximate
carrying value, principally because of the short maturity of these items.
Investment in marketable equity securities are carried at quoted market value.

     The fair values of capitalized lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.

     Estimated fair values of the Company's Long-Term Notes Payable, Convertible
Notes Payable, Exchangeable Redeemable Preferred Stock and Cumulative
Convertible Redeemable Preferred Stock which were calculated based upon quoted
market prices, are as follows:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31, 1999         DECEMBER 31, 1998
                                                                    ----------------------    ----------------------
                                                                    CARRYING                  CARRYING
                                                                     AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                                                    --------    ----------    --------    ----------
                                                                                     (IN THOUSANDS)
<S>                                                                 <C>         <C>           <C>         <C>
14% Senior Discount Notes Due 2005...............................   $263,958     $253,399     $231,051     $169,000
14% Convertible Senior Subordinated Discount Notes Due 2005......         --           --      115,525      179,000
14 1/2% Senior Deferred Interest Notes Due 2005..................    147,485      228,601      128,474      148,000
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC............    200,000      209,731      200,000      204,000
12 1/2% Guaranteed Senior Secured Notes Due 2004,
  WEC II.........................................................     50,000       53,500       50,000       50,000
15% Senior Subordinated Deferred Interest Notes Due 2007.........    137,893      190,292      119,695      111,000
10% Senior Subordinated Notes Due 2008...........................    200,000      192,000      200,000      168,000
11% Senior Subordinated Deferred Interest Notes Due 2008.........    302,137      308,180      271,897      204,000
Lucent Facility..................................................    835,803      835,803       77,514       78,000
Accounts Receivable Securitization Notes.........................      9,000        9,000           --           --
14 1/4% Series C Senior Cumulative Exchangeable Redeemable
  Preferred Stock Due 2007.......................................    231,212      214,000      201,478      161,000
7% Series D Senior Cumulative Convertible Redeemable Preferred
  Stock Due 2010.................................................    200,000      311,520      200,000      185,000
</TABLE>

NOTE 7--CAPITAL LEASE OBLIGATIONS

     We lease telecommunications and other assets through various equipment
lease financing facilities. Such leases have been accounted for as capital
leases.

     Future minimum lease payments on these capital leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                                (IN THOUSANDS)
---------------------------------------------------------------------   --------------
<S>                                                                     <C>
2000.................................................................      $128,739
2001.................................................................       157,531
2002.................................................................        11,028
2003.................................................................        12,084
2004.................................................................           648
                                                                           --------
Total payments.......................................................       310,030
Less amount representing interest....................................        (8,683)
                                                                           --------
Present value of minimum lease payments..............................      $301,347
                                                                           --------
                                                                           --------
</TABLE>

                                      F-17
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7--CAPITAL LEASE OBLIGATIONS--(CONTINUED)
     The carrying value of assets under capital leases was $358.0 million and
$103.7 million at December 31, 1999 and 1998 respectively, and is included in
property and equipment. Amortization of these assets is included in depreciation
expense.

NOTE 8--COMMITMENTS AND CONTINGENCIES

A. OPERATING LEASES

     We have operating leases for most U.S. and international sales and support
offices, switching facilities and warehousing facilities, along with various
equipment and roof access rights.

     Future minimum lease payments under these noncancellable operating leases
are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                                (IN THOUSANDS)
---------------------------------------------------------------------   --------------
<S>                                                                     <C>
2000.................................................................      $ 42,945
2001.................................................................        42,989
2002.................................................................        42,960
2003.................................................................        41,694
2004.................................................................        39,388
Thereafter...........................................................       235,694
                                                                           --------
                                                                           $445,670
                                                                           --------
                                                                           --------
</TABLE>

     Rent expense for the years ended December 31, 1999, 1998 and 1997 was $42.4
million, $29.8 million, and $11.6 million, respectively.

B. LEGAL PROCEEDINGS

     We are subject to various claims and proceedings that occur in the ordinary
course of business. Based on information currently available to us, we believe
that none of these current claims or proceedings, either individually or in the
aggregate, will have a material effect on our business.

C. SALE OF WIRELESS FIBER CAPACITY

     In December 1998, we sold a 25 year Indefeasible Right to Use ("IRU") for
up to 2% of our current and future local Wireless Fiber capacity (up to a
defined maximum number of circuits) in the United States. Under the terms of the
contract, our customer will pay us $400.0 million with payments due ratably as
we construct 270 hub sites. We delivered 114 hub sites through December 31, 1999
and have been paid approximately $173.4 million by our customer. We will also
provide certain maintenance services to our customer through 2026 for total
remaining consideration of approximately $41.0 million which will be paid on a
monthly basis through December 2008. We have recognized revenues of
$5.6 million and $0.2 million under this IRU for the years ended December 31,
1999 and 1998, respectively.

D. PURCHASES OF DARK FIBER CAPACITY

     In October 1999 we entered into an agreement with Metromedia Fiber Network
to obtain dark fiber capacity in 38 major markets in the United States and three
major international markets. We will pay Metromedia approximately
$300.0 million over a 20-year period commencing with the delivery of the fiber.

     In December 1998, we purchased an IRU from Williams Communications, Inc. to
four strands of dark fiber optic cable on a national route of approximately
14,684 route miles and a seven year option to purchase two additional strands of
dark fiber optic cable on the same route. We are obligated to pay Williams
$643.0 million over seven years in monthly installments of $7.7 million. The
seven year option is exercisable for an additional

                                      F-18
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
payment of $51.0 million. In April 1999 we amended the original IRU to include
an additional exclusive 20-year indefeasible right to use additional specified
fixed circuits which extended our long haul telecommunications network. Pursuant
to this amendment we will pay Williams an additional $100.0 million over the
next seven years.

NOTE 9--INCOME TAXES

     Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,    DECEMBER 31,
                                                                                 1999            1998
                                                                              ------------    ------------
                                                                                     (IN THOUSANDS)
<S>                                                                           <C>             <C>
DEFERRED TAX ASSETS:
  Net operating loss carryforward..........................................    $  540,712      $  310,454
  Deferred interest expense................................................        83,997          51,403
  Allowance for doubtful accounts..........................................        10,683           3,906
  Deferred compensation....................................................         6,840           2,468
  Deferred revenue.........................................................        67,147              --
  Other....................................................................        16,366             146
                                                                               ----------      ----------
  Gross deferred tax assets................................................       725,745         368,377
  Valuation allowance......................................................      (565,019)       (280,681)
                                                                               ----------      ----------
  Deferred tax asset net of allowance......................................       160,726          87,696
                                                                               ----------      ----------
DEFERRED TAX LIABILITIES:
  Depreciation.............................................................       (89,628)        (21,861)
  Amortization.............................................................       (65,603)        (64,340)
  Investment in marketable equity securities...............................       (19,995)        (19,995)
                                                                               ----------      ----------
  Gross deferred tax liabilities...........................................      (175,226)       (106,196)
                                                                               ----------      ----------
Net deferred tax liability.................................................    $  (14,500)     $  (18,500)
                                                                               ----------      ----------
                                                                               ----------      ----------
</TABLE>

     The provision for income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                  1999            1998            1997
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
FEDERAL:
  Current...................................................     $     --        $     --        $     --
  Deferred..................................................       (2,791)         (5,797)         (1,379)
STATE AND LOCAL:
  Current...................................................           --              --              --
  Deferred..................................................       (1,209)            297          (1,121)
                                                                 --------        --------        --------
                                                                 $ (4,000)       $ (5,500)       $ (2,500)
                                                                 --------        --------        --------
                                                                 --------        --------        --------
</TABLE>

     The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income from continuing operations primarily as a result of increases in
our deferred tax valuation allowance.

     At December 31, 1999, the U.S. federal net operating loss carryforward is
approximately $1,348.0 million, and the foreign net operating loss carryforward
is approximately $14.6 million. If not utilized, the net operating loss
carryforwards will expire in various amounts through the year 2019.

                                      F-19
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--INCOME TAXES--(CONTINUED)
     Some of these losses are subject to utilization limitations under Section
382 of the Internal Revenue Code. However, the Company believes that
substantially all of such losses will be available to offset future income.

     A valuation allowance against deferred tax assets is required, if, based on
the weight of available evidence, it is more likely than not that some or all of
the deferred tax assets may not be realized. The valuation allowances at
December 31, 1999 and December 31, 1998, primarily pertain to uncertainties with
respect to future utilization of net operating loss carryforwards.

     On January 2, 1997, a net deferred tax liability of $26.5 million was
recorded in connection with an acquisition. This deferred tax liability resulted
from the temporary difference between the book and tax basis of the acquired
licenses, and related to the scheduled reversal of the temporary differences
through amortization in years 2018 through 2036 that could not be offset by
deferred tax assets existing at January 2, 1997, the date of the acquisition.

     During 1999, 1998 and 1997, respectively, we recognized deferred income tax
benefits of $4.0 million, $5.5 million and $2.5 million relating to our net loss
carryforwards. We recognize income tax benefits to the extent of future
reversals of existing temporary differences.

NOTE 10--STOCKHOLDERS' DEFICIT

COMMON STOCK

     Our authorized capital stock includes 200.0 million shares of common stock,
$.01 par value. The holders of our common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Although we do not currently intend to pay any cash dividends (and are currently
restricted from doing so under the indentures and other instruments governing
our indebtedness and Series C Preferred Stock), holders of our common stock are
entitled to receive ratably such dividends as may be declared by our Board of
Directors. In the event of a liquidation or dissolution, holders of the common
stock are entitled to share ratably in all assets remaining after payment of all
liabilities and the liquidation preferences of preferred shares.

PREFERRED STOCK

     Our authorized capital stock includes 15.0 million shares of "Blank Check"
preferred stock, which may be issued from time to time in one or more series
upon authorization by our Board of Directors. Our Board of Directors has the
authority to fix the rights and terms, conversion rights, voting rights,
redemption rights and terms, liquidation preferences and any other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock.

SERIES A PREFERRED STOCK AND WARRANTS

     In February 1997, we sold 4.0 million shares of Series A 6% Cumulative
Convertible Preferred Stock, par value $0.01, together with warrants to purchase
2.4 million shares of our common stock for $16.67 per share. The aggregate
purchase price for the securities was $100.0 million. The preferred stock earns
a 6% annual dividend, payable quarterly in kind, and matures on February 11,
2002. For the years ended December 31, 1999 and 1998, dividends totaling $6.4
million and $6.0 million, respectively, were paid in kind.

     Two million shares of preferred stock became convertible beginning on
August 11, 1997, and certain of these shares were converted at prices ranging
from $11.17 per share to $12.57 per share, while the remainder became
convertible on February 11, 1998. All remaining outstanding shares are
convertible at $16.67 per share.

     We are permitted to accelerate the expiration date of the warrants if the
closing price of our common stock trades over $26.67 for twenty consecutive
trading days. On February 4, 2000 we announced that we have accelerated the
expiration dates of the warrants to March 8, 2000.

                                      F-20
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--STOCKHOLDERS' DEFICIT--(CONTINUED)
RIGHTS TO PURCHASE SERIES B PREFERRED STOCK

     Under our Rights Agreement, holders of our common stock received as a
dividend, preferred stock purchase rights at the rate of one right for each
share of our common stock held as of the close of business on July 14, 1997. One
right will also attach to each share of our common stock issued thereafter.
Currently the rights are not separate from our common stock and are not
exercisable. The rights will only separate from our common stock and become
exercisable if a person or group acquires 10% or more of our outstanding common
stock or launches a tender or exchange offer that would result in ownership of
10% or more of our outstanding common stock.

     Each right that is not owned by an acquiring person entitles the holder of
the right to buy one one-thousandth of one share of our Series B Preferred Stock
with a market value of $450. However, if we are involved in a business
combination in which we are not the surviving entity, or if we sell 50% or more
of our assets or earning power to another person, then the rights agreement
provides that each right entitles the holder to purchase, for $225, shares of
the common stock of the acquiring person's ultimate parent having a market value
of $450.

     At any time until ten days following the date on which a person acquires
10% or more of our common stock, we may redeem all, but not less than all, of
the rights for $0.0001 per right. The rights expire in ten years. The Series B
Preferred Stock will have dividend and liquidation preferences over our common
stock but will be junior to any other Series of our preferred stock.

SERIES C EXCHANGEABLE REDEEMABLE PREFERRED STOCK

     On December 17, 1997, we sold in a private placement 175,000 shares of our
14 1/4% Series C Senior Cumulative Exchangeable Preferred Stock Due 2007 for an
aggregate purchase price of $175.0 million. We exchanged the preferred stock for
new preferred stock identical in every respect except that it was registered
under the Securities Act of 1933.

     Dividends on the Series C Preferred Stock accrue from December 22, 1997 at
the rate per share of 14 1/4% of the accumulated amount per annum. Dividends are
compounded semiannually on each June 15 and December 15, but will not generally
be payable in cash. However, on the first June 15 or December 15 which is at
least six months after the later of December 15, 2002, and the specified debt
satisfaction date described in the Certificate of Designations, dividends on the
Series C Preferred Stock will be payable in cash at a rate per annum equal to
14 1/4%. In the event that the specified debt satisfaction date shall not have
occurred before December 15, 2002, the rate otherwise applicable to the
Series C Preferred Stock shall be increased by 150 basis points from
December 15, 2002, until the dividend payment date falling on or after the
specified debt satisfaction date. For the years ended December 31, 1999 and 1998
dividends totaling approximately $29.7 million and $25.9 million, respectively,
have been recorded.

     The Series C Preferred Stock is not redeemable prior to December 15, 2002.
On or after December 15, 2002, the Series C Preferred Stock is redeemable at our
option, in whole or in part, at specified redemption prices plus accumulated and
unpaid dividends, if any, to the date of redemption. We are required to redeem
the Series C Preferred Stock at the liquidation preference thereof, plus
accumulated and unpaid dividends, if any, on December 15, 2007, out of any funds
legally available therefor.

     The Series C Preferred Stock ranks (i) senior to all existing and future
junior stock including the Series A Preferred Stock and Series E Preferred
Stock; (ii) on a parity basis with all existing and future parity stock,
including the Series D Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock; and (iii) junior to all senior stock. In addition the Series C
Preferred Stock is junior in right of payment to all of our indebtedness and
indebtedness of our subsidiaries.

     On any scheduled dividend payment date following the specified debt
satisfaction date, we may, at our option, exchange all but not less than all of
the shares of Series C Preferred Stock then outstanding for 14 1/4%

                                      F-21
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--STOCKHOLDERS' DEFICIT--(CONTINUED)
Senior Subordinated Deferred Interest Notes Due 2007 in an aggregate accumulated
amount equal to the aggregate accumulated amount of the shares of Series C
Preferred Stock outstanding at the time of such exchange, plus accumulated and
unpaid dividends to the date of exchange. Interest on the outstanding exchange
debentures if any, will accrue at a rate of 14 1/4% of the accumulated amount
per annum and will be compounded semiannually on each June 15 and December 15
but will not be payable in cash except as set forth in the next sentence.
Commencing on the first interest payment date following the later of the
exchange date or the cash payment date, interest will be payable in cash at a
rate per annum equal to 14 1/4% of the accumulated amount as of the exchange
date. The exchange debentures, if issued, will be unsecured, senior subordinated
obligations, subordinated in right of payment to all of our senior indebtedness
and to all indebtedness and other liabilities (including trade payables) of our
subsidiaries, and will rank pari passu with our existing 1997 senior
subordinated notes and our convertible notes.

SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK

     On March 17, 1998, we sold in a private placement 4,000,000 shares of 7%
Series D Senior Cumulative Convertible Preferred Stock Due 2010 for an aggregate
purchase price of $200.0 million.

     Dividends are payable at the rate of 7% per annum on the Series D Preferred
Stock, are cumulative from the date of issuance and are payable quarterly in
arrears on each March 15, June 15, September 15 and December 15, commencing
September 15, 1998, out of funds legally available therefor. Dividends shall be
payable (1) in cash or at our election (2) through the issuance of shares of our
common stock. The Series D Preferred Stock is convertible at any time after the
issue date, at the option of the holders thereof, into shares of our common
stock at a rate 1.5119 shares of our common stock for each share of Series D
Preferred Stock, equivalent to a conversion price of $33.07 for each share of
the Company's common stock. As of December 31, 1999 and 1998 dividends of
approximately $14.0 million and $11.0 million, respectively, have been recorded.

     The Series D Preferred Stock ranks (1) senior to all existing and future
Junior Stock, including our Series A Preferred Stock and Series E Preferred
Stock; (2) pari passu with all existing and future parity stock, including the
Series C Preferred Stock, Series F Preferred Stock and Series G Preferred Stock;
and (3) junior to all future senior stock. In addition, the Series D Preferred
Stock will rank junior in right of payment to all of our indebtedness and the
indebtedness of our subsidiaries.

     The Series D Preferred Stock is not redeemable prior to March 20, 2001. On
or after such date, the Series D Preferred Stock will be redeemable at our
option, in whole or in part, at any time or from time to time, at specified
redemption prices plus accrued and unpaid dividends, if any. The Series D
Preferred Stock is subject to mandatory redemption on March 15, 2010, at a
redemption price of $50 per share plus accrued and unpaid dividends, if any.
Upon the occurrence of a change in control, we will be obligated to adjust the
conversion price as provided in the certificate of designations relating to the
Series D Preferred Stock.

SERIES E PREFERRED STOCK

     In connection with an acquisition, we issued 75,100 shares of our Series E
Preferred Stock. The Series E Preferred Stock is non-voting, non-redeemable
junior convertible preferred stock which does not earn dividends. The holders of
the Series E Preferred Stock may convert all, but not less than all into shares
of our common stock on a one-for-one basis anytime after August 1, 1999. Each
share of Series E Preferred Stock has a liquidation preference of $59.93 per
share. (See Note 2).

                                      F-22
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--STOCKHOLDERS' DEFICIT--(CONTINUED)
SERIES F PREFERRED STOCK

     In June 1999, we sold 300,000 shares of our Series F 7 1/4% Senior
Cumulative Convertible Preferred Stock (Liquidation Preference $1,000 per share)
for net proceeds of approximately $290.5 million.

     Dividends are payable at the rate of 7 1/4% per annum on the Series F
Preferred Stock, are cumulative from the date of issuance and are payable
quarterly in arrears on each March 15, June 15, September 15, and December 15
out of funds legally available therefor. Dividends shall be payable in (1) cash
or at our election (2) through the issuance of shares of our common stock. As of
December 31, 1999, dividends of $11.4 million have been recorded, of which $10.5
million were paid through the issuance of our common stock.

     The shares are convertible, at the option of the holder into shares of our
common stock at a conversion rate of 24.20868 shares of common stock for each
share of Series F Preferred Stock (representing a conversion price of $41.31 per
share of common stock), subject to adjustment in certain events.

     The Series F Preferred Stock is on a parity with our Series C Preferred
Stock.

SERIES G PREFERRED STOCK

     In February 2000, we sold 900,000 shares of our Series G Cumulative
Participating Convertible Preferred Stock in a private placement for an
aggregate purchase price of $900.0 million. The Series G Preferred Stock pays
cumulative dividends quarterly in arrears on March 15, June 15, September 15 and
December 15, at a rate equal to the excess (if any) of (i) 5.75% per annum on
the liquidation preference over (ii) the amount of any regular cash dividends
per share of Series G Preferred Stock that have been paid during the applicable
dividend period on our common stock. If we do not pay any dividends in cash, the
amount of such dividends will be added to the liquidation preference of the
Series G Preferred Stock.

     Each share of Series G Preferred Stock is convertible, at the option of the
holder, into shares of common stock at a conversion price of $45.00 per share,
subject to certain adjustments. We will have the option to convert all of the
shares of Series G Preferred Stock into common stock at the conversion price if
on any date after February 1, 2003, the volume weighted average trading price
of our common stock on Nasdaq for the 20 consecutive trading days immediately
prior to such date is at least equal to 155% of the conversion price on such
date.

NOTE 11--BENEFIT PLANS

A. STOCK OPTION PLANS

     We have three stock option plans, the 1990 Plan, the 1992 Performance
Equity Plan ("1992 Plan"), and the 1995 Performance Equity Plan ("1995 Plan").
The 1990 Plan is a non-qualified common stock incentive plan, pursuant to which
options to purchase an aggregate of 225,000 shares of our common stock may be
granted to key employees as selected by the Board of Directors. The exercise
price for shares covered by options granted pursuant to this plan will not be
less than the fair market value of the shares on the date of the grant. The 1992
Plan authorizes the granting of awards up to 2.3 million shares of our common
stock to key employees, officers, directors and consultants. Awards consist of
stock options (both non-qualified options and options intended to qualify as
"incentive" stock options under the Internal Revenue Code), restricted stock
awards, deferred stock awards, stock appreciation rights and other stock-based
awards. The plan provides for automatic issuance of 15,000 stock options
annually to each director on January 13, at the fair market value at that date,
subject to availability. The 1995 Plan, as amended, authorizes the granting of
awards of up to 22.5 million shares of our common stock to key employees,
officers, directors and consultants. The 1995 Plan is similar to the 1992 Plan,
except that the 1995 Plan does not provide for annual automatic director grants.
We have also granted options to certain individuals outside the three plans. The
options vest and become exercisable over a period ranging from

                                      F-23
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--BENEFIT PLANS--(CONTINUED)
immediately to five years after the date of the most recent grant, depending on
option terms. As of December 31, 1999, there were 451,538 and 3,138,951 shares
available for grant under the 1992 Plan and 1995 Plan, respectively. There are
no shares available for grant under the 1990 Plan.

     The following table summarizes option activity for the three years ended
December 31, 1999:

<TABLE>
<CAPTION>
                                                                                                    WEIGHTED AVERAGE
                                                                               NUMBER OF OPTIONS    EXERCISE PRICE
                                                                               -----------------    ----------------
                                                                                (IN THOUSANDS)
<S>                                                                            <C>                  <C>
Balance, January 1, 1997....................................................         14,568              $ 7.62
  Granted...................................................................          5,858              $10.41
  Exercised.................................................................         (1,821)             $ 4.76
  Canceled..................................................................         (1,128)             $10.79
                                                                                    -------
Balance, December 31, 1997..................................................         17,477              $ 8.85
  Granted...................................................................         10,427              $22.71
  Exercised.................................................................         (2,702)             $ 7.48
  Canceled..................................................................         (1,775)             $16.61
                                                                                    -------
Balance, December 31, 1998..................................................         23,427              $14.55
  Granted...................................................................         11,523              $31.94
  Exercised.................................................................         (4,970)             $10.29
  Canceled..................................................................         (2,707)             $21.89
                                                                                    -------
Balance, December 31, 1999..................................................         27,273              $21.83
                                                                                    -------
                                                                                    -------
</TABLE>

     As of December 31, 1999, options outstanding for 8.9 million shares were
exercisable at prices ranging from $1.29 to $33.13, and the weighted average
remaining contractual life was 6.09 years.

     The following table summarizes option data as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                 WEIGHTED           WEIGHTED                      WEIGHTED
                                                                  AVERAGE           AVERAGE                       AVERAGE
RANGE OF                                      OUTSTANDING        REMAINING          EXERCISE    EXERCISABLE       EXERCISE
EXERCISE PRICE:                               (IN THOUSANDS)    CONTRACTUAL LIFE     PRICE      (IN THOUSANDS)     PRICE
-------------------------------------------   --------------    ----------------    --------    --------------    --------
<S>                                           <C>               <C>                 <C>         <C>               <C>
$ 1.29-$10.72..............................        5,498               3.28          $ 6.40          4,311         $ 5.79
$10.75-$17.33..............................        5,547               4.60          $14.23          3,182         $14.28
$17.50-$27.00..............................        5,942               6.32          $23.23          1,098         $23.33
$27.04-$33.13..............................        5,823               7.13          $28.88            333         $28.22
$33.25-$51.22..............................        4,463               9.75          $39.21             --             --
                                                  ------                                            ------
$ 1.29-$51.22..............................       27,273               6.09          $21.83          8,924         $11.80
                                                  ------                                            ------
                                                  ------                                            ------
</TABLE>

     Compensation cost charged to operations for non-employee options was
immaterial for the years ended December 31, 1999, 1998 and 1997.

     We measure compensation in accordance with the provisions of APB Opinion
No. 25 in accounting for our stock compensation plans. Accordingly, no
compensation cost has been recorded for options granted to employees or
directors in the years ended December 31, 1999, 1998 or 1997. The fair value of
each option

                                      F-24
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--BENEFIT PLANS--(CONTINUED)
granted has been estimated on the grant date using the Black-Scholes Option
Valuation Model. The following assumptions were made in estimating fair value:

<TABLE>
<CAPTION>
                                                                                 1999         1998         1997
                                                                               ---------    ---------    ---------
<S>                                                                            <C>          <C>          <C>
Dividend Yield..............................................................          0%           0%           0%
Risk-Free Interest Rate.....................................................        5.6%         6.0%         6.0%
Expected Life after Vesting Period
  Directors and Officers....................................................   2.0 Years    2.0 Years    2.0 Years
  Others....................................................................   0.5 Years    0.5 Years    0.5 Years
Expected Volatility.........................................................      66.88%       66.88%       66.88%
</TABLE>

     Had compensation cost been determined under FASB Statement No. 123, net
loss and loss per share would have been increased as follows:

<TABLE>
<CAPTION>
                                                                            YEAR            YEAR            YEAR
                                                                            ENDED           ENDED           ENDED
                                                                         DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                            1999            1998            1997
                                                                         ------------    ------------    ------------
                                                                                        (IN THOUSANDS)
<S>                                                                      <C>             <C>             <C>
Net Loss Applicable to Common Stockholders:
  As reported.........................................................    $ (699,767)     $ (487,692)     $ (255,363)
  Pro forma for FASB No. 123..........................................    $ (726,931)     $ (538,740)     $ (272,497)
Loss Per Share--Basic and Diluted:
  As reported.........................................................    $    (9.15)     $    (8.41)     $    (5.12)
  Pro forma for FASB No. 123..........................................    $    (9.51)     $    (9.29)     $   ( 5.46)
</TABLE>

     The weighted average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 was $17.73, $10.70, and $10.42 per share,
respectively.

     Warrants to purchase our common stock, see Note 10, were issued as follows
(warrants in thousands):

<TABLE>
<CAPTION>
                                          YEAR ENDED                  YEAR ENDED                  YEAR ENDED
                                      DECEMBER 31, 1999           DECEMBER 31, 1998           DECEMBER 31, 1997
                                   ------------------------    ------------------------    ------------------------
                                   WARRANTS    PRICE/SHARE     WARRANTS    PRICE/SHARE     WARRANTS    PRICE/SHARE
                                   --------    ------------    --------    ------------    --------    ------------
<S>                                <C>         <C>             <C>         <C>             <C>         <C>
Beginning Balance...............     3,000     $8.00-$16.67      3,000     $8.00-$16.67        600     $ 8.00-$8.67
Warrants Issued.................                                                             2,400           $16.67
                                    ------                      ------                      ------
Ending Balance..................     3,000     $8.00-$16.67      3,000     $8.00-$16.67      3,000     $8.00-$16.67
                                    ------                      ------                      ------
                                    ------                      ------                      ------
</TABLE>

B. 401K PLAN

     We have a defined contribution 401k Plan for substantially all full time
employees. For the years ended December 31, 1999, 1998 and 1997, we made a 25%
matching contribution for up to 6% of a participant's compensation, subject to
certain limitations. Effective January 1, 2000, we will make a 50% matching
contribution for up to 6% of a participant's compensation, subject to certain
limitations. Our Company contribution vests over a five year period. Our
contributions to date have not been significant.

C. EMPLOYEE STOCK PURCHASE PLAN

     In June 1998, our shareholders approved the adoption of our Qualified
Employee Stock Purchase Plan which covers 1,125,000 shares of our common stock.
The Employee Stock Purchase Plan permits employees and certain officers of
Winstar to acquire shares of common stock at a discount of up to 15% below the
then current market value of the common stock. The Employee Stock Purchase Plan
became effective on October 12, 1998. As of December 31, 1999, 918,006 shares of
our stock remain available for purchase under this plan.

                                      F-25
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--RELATED PARTY TRANSACTIONS

     In October 1998, one of our subsidiaries made loans to certain executive
officers in the aggregate principal amount of $7.3 million. These loans were
made with full recourse to the individuals and bore interest at 1% over the
prime rate. The proceeds of these loans were used to repay margin debt which was
secured by shares of our common stock owned by them. The entire principal and
interest on these loans were repaid prior to December 31, 1998.

NOTE 13--SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest during the years ended December 31, 1999, 1998 and
1997 was approximately $71.2 million, $45.1 million and $21.1 million,
respectively.

     During the year ended December 31, 1999, we completed the following
material non-cash transactions: (i) the payment of in-kind dividends on the
Series A Preferred Stock in the amount of $6.4 million; (ii) the payment or
accretion of common stock dividends on the Series C Preferred Stock, Series D
Preferred Stock and Series F Preferred Stock in the amounts of $29.7 million,
$14.0 million, and $10.5 million, respectively; (iii) the acquisition of $291.8
million in property and equipment through capital leases; (iv) the issuance of
413,105 shares of our common stock, with a value of $13.5 million, in connection
with the acquisition of several companies.

     During the year ended December 31, 1998, we completed the following
material non-cash transactions: (i) the payment of in-kind dividends on the
Series A Preferred Stock in the amount of $6.0 million; (ii) the payment or
accretion of common stock dividends on Series C Preferred Stock and Series D
Preferred Stock in the amount of $25.9 million and $11.0 million, respectively;
(iii) the acquisition of $45.9 million in property and equipment through capital
leases; (iv) the issuance of 4.5 million shares of our common stock, with a
value of $99.9 million, in connection with the acquisition of several companies,
as well as spectrum licenses; (v) the issuance of 75,100 shares of our Series E
Preferred Stock, with a value of $2.5 million, in connection with the
acquisition of a company; (vi) the issuance of 2.25 million shares of our common
stock, with a value of $60.3 million, in connection with the purchase of certain
marketable equity securities.

     During the year ended December 31, 1997, we completed the following
material non-cash transactions: (i) the payment of in-kind dividends on the
Series A Preferred Stock of $5.3 million, (ii) the accretion of common stock
dividends on Series C Preferred Stock of $0.6 million; (iii) the acquisition of
$8.9 million in property and equipment through various capitalized leases; (iv)
the issuance of 506,472 shares of our common stock with a value of $7.5 million
in connection with the acquisition of spectrum licenses; (v) the issuance of
5,391,930 shares of our common stock with a value of approximately $75 million
in connection with the acquisition of Milliwave Limited Partnership.

NOTE 14--BUSINESS SEGMENTS

     We are an integrated communications provider, and as such have two
reportable operating segments. Our operating segments are managed separately and
represent business units that offer different products and serve different
markets. The Communications and Interactive Services segment derives its
revenues by offering its customers a variety of individual and bundled services,
including local and long distance voice services, high speed data transport,
Internet access and other enhanced communications services. The Traditional
Media Services segment derives its revenues by marketing and distributing
information content and services in traditional markets, such as television,
video, cable and radio. Substantially all of our revenue is attributable to
customers in the United States, and all assets are predominately located in the
United States. No one customer comprises more than 10% of our consolidated
revenues. For the year ended December 31, 1999 shared administrative services
provided to the business units were classified as Corporate Expenses. For the
years ended December 31, 1998 and 1997 direct and certain indirect costs
incurred by Corporate were allocated among the business units based upon the
nature of the underlying costs.

                                      F-26
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14--BUSINESS SEGMENTS--(CONTINUED)
     International activities, including joint ventures, as of December 31, 1999
were not material. Information relating to our reportable operating segments is
as follows:

<TABLE>
<CAPTION>
                            COMMUNICATIONS &    TRADITIONAL     TOTAL FOR     CORPORATE
                             INTERACTIVE          MEDIA        REPORTABLE     EXPENSES &    DISCONTINUED
                              SERVICES          SERVICES        SEGMENTS        ASSETS      OPERATIONS        TOTAL
                            ----------------    -----------    -----------    ----------    ------------    ----------
<S>                         <C>                 <C>            <C>            <C>           <C>             <C>
FOR THE YEAR ENDED
  DECEMBER 31, 1999
  External revenue.......      $  393,777         $51,860      $   445,637    $      --        $   --       $  445,637
  Segment operating
     loss................        (313,763)         (2,768)        (316,531)    (135,997)           --         (452,528)
  Interest expense.......           1,250           3,212            4,462      207,282            --          211,744
  Depreciation and
     amortization........         152,238           2,776          155,014          210            --          155,224
  EBITDA (1).............        (161,525)              8         (161,517)    (135,787)           --         (297,304)
  Segment assets.........       2,709,655          27,463        2,737,118      328,175            --        3,065,293
  Capital expenditures...       1,278,283           4,722        1,283,005           --            --        1,283,005
FOR THE YEAR ENDED
  DECEMBER 31, 1998
  External revenue.......      $  195,596         $48,851      $   244,447    $      --        $   --       $  244,447
  Segment operating
     loss................        (233,797)         (7,387)        (241,184)     (57,225)           --         (298,409)
  Interest expense.......             907             834            1,741      154,858            --          156,599
  Depreciation and
     amortization........          72,893           1,606           74,499          454            --           74,953
  EBITDA (1).............        (160,904)         (5,781)        (166,685)     (56,771)           --         (223,456)
  Segment assets.........         917,580          58,272          975,852      687,330            --        1,663,182
  Capital expenditures...         401,278             777          402,055          151            --          402,206
FOR THE YEAR ENDED
  DECEMBER 31, 1997
  External revenue.......      $   33,798         $37,352      $    71,150    $      --        $   --       $   71,150
  Segment operating
     loss................        (147,897)         (3,329)        (151,226)     (27,312)           --         (178,538)
  Interest expense.......           2,045              42            2,087       74,740           430           77,257
  Depreciation and
     amortization........          23,577           1,134           24,711          391            --           25,102
  EBITDA (1).............        (124,320)         (2,195)        (126,515)     (26,921)           --         (153,436)
  Segment assets.........         394,002          30,376          424,378      548,311         1,145          973,834
  Capital
     expenditures........         219,875             612          220,487        1,709            --          222,196
</TABLE>

------------------

(1) EBITDA represents losses from continuing operations before interest, income
    taxes, depreciation and amortization and other income (expense).

                                      F-27
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     Our unaudited quarterly financial data for 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                               QUARTER ENDED 1999
                                                              -----------------------------------------------------
                                                              MARCH 31      JUNE 30     SEPTEMBER 30    DECEMBER 31
                                                              ---------    ---------    ------------    -----------
                                                                                 (IN THOUSANDS)
<S>                                                           <C>          <C>          <C>             <C>
Operating revenues.........................................   $  88,093    $  96,505     $  119,535      $ 141,504
Operating expenses:
  Cost of services and products............................      67,942       73,353         83,555         91,412
  Selling, general and administrative expenses.............      99,921      106,242        108,601        111,915
  Depreciation and amortization............................      28,483       34,818         42,976         48,947
                                                              ---------    ---------     ----------      ---------
Total operating expenses...................................     196,346      214,413        235,132        252,274
                                                              ---------    ---------     ----------      ---------
Operating loss.............................................   $(108,253)   $(117,908)    $ (115,597)     $(110,770)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
Net loss applicable to common stockholders.................   $(165,103)   $(175,379)    $ (178,867)     $(180,418)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
  EBITDA...................................................   $ (79,770)   $ (83,090)    $  (72,621)     $ (61,823)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
Basic and diluted loss per share:
  From continuing operations...............................   $   (2.48)   $   (2.35)    $    (2.18)     $   (2.19)
  From discontinued operations.............................          --           --             --             --
                                                              ---------    ---------     ----------      ---------
Net loss per share.........................................   $   (2.48)   $   (2.35)    $    (2.18)     $   (2.19)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
</TABLE>

<TABLE>
<CAPTION>
                                                                               QUARTER ENDED 1998
                                                              -----------------------------------------------------
                                                              MARCH 31      JUNE 30     SEPTEMBER 30    DECEMBER 31
                                                              ---------    ---------    ------------    -----------
                                                                                 (IN THOUSANDS)
<S>                                                           <C>          <C>          <C>             <C>
Operating revenues.........................................   $  45,978    $  56,230     $   61,146      $  81,093
Operating expenses:
  Cost of services and products............................      41,252       45,225         45,722         72,549
  Selling, general and administrative expenses.............      52,492       59,139         63,764         87,760
  Depreciation and amortization............................      11,399       16,895         20,372         26,287
                                                              ---------    ---------     ----------      ---------
     Total operating expenses..............................     105,143      121,259        129,858        186,596
                                                              ---------    ---------     ----------      ---------
Operating loss.............................................   $ (59,165)   $ (65,029)    $  (68,712)     $(105,503)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
Net loss applicable to common stockholders.................   $ (93,157)   $(105,585)    $ (134,051)     $(154,899)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
EBITDA.....................................................   $ (47,766)   $ (48,134)    $  (48,340)     $ (79,216)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
Basic and diluted loss per share:
  From continuing operations...............................   $   (1.67)   $   (1.84)    $    (1.89)     $   (2.53)
  From discontinued operations.............................       (0.06)       (0.01)         (0.35)            --
                                                              ---------    ---------     ----------      ---------
Net loss per share.........................................   $   (1.73)   $   (1.85)    $    (2.24)     $   (2.53)
                                                              ---------    ---------     ----------      ---------
                                                              ---------    ---------     ----------      ---------
</TABLE>

NOTE 16--DISCONTINUED OPERATIONS

A. WINSTAR GLOBAL PRODUCTS

     On May 13, 1997, a formal plan of disposal for our consumer products
subsidiary, Winstar Global Products, Inc. was approved by the Board of
Directors. The disposal of Global Products was accounted for as a discontinued
operation and, accordingly, this operation was carried at its estimated net
realizable value. In November 1998, we entered into an asset purchase agreement
and sold the remaining assets of Global Products. Under the agreement, we
received certain assets recorded at a nominal value. Accordingly, we recorded an
additional loss on the disposition of Global Products of $16.8 million.

                                      F-28
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 16--DISCONTINUED OPERATIONS--(CONTINUED)
B. WINSTAR GATEWAY NETWORK

     In November 1998, a formal plan of disposal for Winstar Gateway Network,
Inc. our residential long distance subsidiary, was approved by management. All
residential phone service (other than to employees) was terminated prior to
September 30, 1999, and disposal of this operation was completed in the fourth
quarter of 1999. The disposal of Gateway was accounted for as a discontinued
operation and accordingly, its net liabilities have been segregated from the net
assets of continuing operations in the accompanying consolidated balance sheets
and its operating results are segregated from continuing operations and are
reported as discontinued operations in the accompanying consolidated statements
of operations and cash flows. Cumulative losses from the measurement date
through December 31, 1999 were $2.6 million compared to an accrued phase out
loss of $4.2 million.

NOTE 17-- CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP. AND WINSTAR
        EQUIPMENT II CORP.

     Our wholly-owned subsidiaries, WEC and WEC II, each of which is a special
purpose corporation which was formed to facilitate the financing and purchase of
telecommunications equipment and related property, received $200.0 million and
$50.0 million in gross proceeds, respectively, from the issuance and sale of
12 1/2% Guaranteed Senior Secured Notes in placements of debt in March and
August of 1997, respectively (see Note 5).

     WEC and WEC II have no independent operations other than to purchase
designated equipment to lease to our other telecommunications subsidiaries.
Given this operating environment, it is unlikely, in the opinion of management,
that WEC or WEC II will generate sufficient income, after the payment of
interest on the WEC and WEC II Notes, to pay dividends or make other
distributions to the Company.

     Summary financial information of WEC and WEC II, which are included in our
consolidated financial statements of the Company, are as follows (in thousands):

     Balance sheet information at December 31:

<TABLE>
<CAPTION>
                                                                              WEC                    WEC II
                                                                      --------------------    --------------------
                                                                        1999        1998        1999        1998
                                                                      --------    --------    --------    --------
<S>                                                                   <C>         <C>         <C>         <C>
Current assets.....................................................   $ 12,641    $ 40,533    $  3,145    $  1,025
Long-term assets...................................................    219,695     186,939      40,187      50,891
Current liabilities................................................     (7,561)     (9,388)     (1,824)     (5,941)
Long-term debt.....................................................   (200,000)   (200,000)    (50,000)    (50,000)
Due to parent......................................................    (67,263)    (45,130)     (1,900)     (1,900)
                                                                      --------    --------    --------    --------
Stockholders' deficit..............................................   $(42,488)   $(27,046)   $(10,392)   $ (5,925)
                                                                      --------    --------    --------    --------
                                                                      --------    --------    --------    --------
</TABLE>

     Statements of operations information for WEC and WEC II for the years ended
December 31, 1999 and December 31, 1998, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      WEC                            WEC II
                                                          ----------------------------    ----------------------------
                                                          YEAR ENDED      YEAR ENDED      YEAR ENDED      YEAR ENDED
                                                          DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                             1999            1998            1999            1998
                                                          ------------    ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>             <C>
Rental revenues from other Winstar subsidiaries........     $  4,281        $  2,667        $    501        $     --
Interest income from other Winstar subsidiaries........       12,747           6,538           2,498              --
Interest income--investments...........................           --           3,213              --           2,068
Selling, general and administrative expenses...........       (6,542)         (3,976)           (964)            (24)
Interest expense.......................................      (25,928)        (24,415)         (6,502)         (6,484)
                                                            --------        --------        --------        --------
Net loss...............................................     $(15,442)       $(15,973)       $ (4,467)       $ (4,440)
                                                            --------        --------        --------        --------
                                                            --------        --------        --------        --------
</TABLE>

     We have not presented separate financial statements for WEC or WEC II
because we have determined that such information would not provide any material
information that is not already presented in our consolidated financial
statements.

                                      F-29
<PAGE>

                        REPORT OF INDEPENDENT CERTIFIED
                         PUBLIC ACCOUNTANTS ON SCHEDULE

Board of Directors and Stockholders
Winstar Communications, Inc.

In connection with our audit of the consolidated financial statements of Winstar
Communications, Inc. and Subsidiaries referred to in our report dated February
10, 2000, which is included in this Annual Report on Form 10-K, we have also
audited Schedule II for the years ended December 31, 1999, 1998 and 1997.

In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be set forth therein.

GRANT THORNTON LLP

New York, New York
February 10, 2000

                                      F-30
<PAGE>

                          WINSTAR COMMUNICATIONS, INC.
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                    COLUMN A                        COLUMN B       COLUMN C             COLUMN D         COLUMN E
-------------------------------------------------   ---------    ------------------    -------------    --------------
                                                     BALANCE         ADDITIONS
                                                       AT             CHARGED
                                                    BEGINNING       TO COSTS AND                         BALANCE AT END
                   DESCRIPTION                      OF PERIOD    EXPENSES AND OTHER    DEDUCTIONS(b)      OF PERIOD
-------------------------------------------------   ---------    ------------------    -------------    --------------
<S>                                                 <C>          <C>                   <C>              <C>
Reserves deducted from assets to which they
  apply:
Year ended December 31, 1999
  Allowance for doubtful accounts(a).............    $12,869          $ 22,969            $19,941          $ 15,897
                                                     -------          --------            -------          --------
                                                     -------          --------            -------          --------

Year ended December 31, 1998

  Allowance for doubtful accounts(a).............    $ 2,814          $ 22,692            $12,637          $ 12,869
                                                     -------          --------            -------          --------
                                                     -------          --------            -------          --------

Year ended December 31, 1997

  Allowance for doubtful accounts(a).............    $   428          $  3,964            $ 1,578          $  2,814
                                                     -------          --------            -------          --------
                                                     -------          --------            -------          --------
</TABLE>

------------------
(a) Deducted from accounts receivable (excludes amounts relating to discontinued
operations)

(b) Uncollectible accounts receivable charged against allowance

                                      F-31