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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR

              [  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

             COMMISSION FILE NUMBER             1-10726
                            ................................................
                          WINSTAR COMMUNICATIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


           DELAWARE                               13-3585278
    (STATE OF INCORPORATION)           (I.R.S. EMPLOYER IDENTIFICATION NO.)


                                230 PARK AVENUE
                            NEW YORK, NEW YORK 10169
                                 (212) 584-4000
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
                 AREA CODE, OF REGISTRANT'S 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

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
                ---     ----

     Check if disclosure of delinquent filers in response to item 405 of
Regulation S-K is not contained in this form, and no disclosure will 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

                                    ------

     Issuer's revenues for its most recent fiscal year: $79,631,000

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of March 27, 1998, the aggregate market value of such stock was
approximately $1,599 million.

     State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date: As of March 27, 1998, the
number of shares of Common Stock outstanding was approximately 37,217,000.

                      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 10, 1998, which will be
filed by the Registrant within 120 days after the close of its fiscal year.

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ITEM 1. BUSINESS

GENERAL

     WinStar Communications, Inc. ('WinStar' or the 'Company') provides
facilities-based voice and data telecommunications services to businesses and
other customers in major metropolitan areas throughout the United States.
WinStar holds licenses ('Wireless Licenses') which provide it with the largest
amount of 38 GHz radio spectrum in the country, as well as other spectrum,
covering more than 125 Metropolitan Statistical Areas ('MSAs') with a total
population of approximately 185 million, including the 50 largest MSAs. The
Company is building a unique nationwide network using its fiber-quality digital
capacity in the 38 GHz spectrum and other portions of the radio spectrum
('Wireless Fiber (Service Mark)') in order to provide its customers with a broad
range of attractively priced services and an alternative to the incumbent local
exchange carriers ('ILECs'), other competitive local exchange carriers ('CLECs')
and the interexchange carriers ('IXCs'). WinStar believes that its ability to
provide information content and services further differentiates it from
competitors. The annual business telecommunications market in the United States
is estimated at $110 billion, with local telephony and data services, WinStar's
target segment, accounting for approximately $47 billion.

     WinStar is rapidly building a modern telecommunications infrastructure. It
currently provides telecommunications services on a switched basis in 21 major
metropolitan markets, including Atlanta, Boston, Chicago, Dallas, Los Angeles,
New York City, San Diego and Washington, D.C. WinStar expects to provide
telecommunications services using its own switches in 30 major metropolitan
markets by the end of 1998 and 40 major metropolitan markets by the end of 1999.
WinStar's network buildout has been accelerated through several recent strategic
acquisitions. In October 1997, the Company purchased from US ONE Communications
Corp. ('US ONE') 12 Lucent 5ESS switches, seven of which are located in markets
that WinStar had targeted but had not yet entered. In January 1998, WinStar
purchased GoodNet, a Tier I Internet Service Provider ('ISP'), from Telesoft
Corp. ('Telesoft'). GoodNet maintains a national Asynchronous Transfer Mode
('ATM') backbone, points of presence ('POPs') in 27 cities throughout the United
States and more than 130 peering arrangements with other ISPs. Also in January
1998, as part of its acquisition of the assets of Midcom Communications, Inc.
('Midcom'), WinStar acquired PacNet, a data transmission services provider.
PacNet maintains a network of frame relay data switches, POPs in 20 cities
throughout the western United States and, through its membership in the Unispan
consortium, interconnection and cooperative service arrangements with other
frame relay providers with networks across the United States and
internationally.

NETWORK STRENGTHS

     WinStar believes that its Wireless Fiber and switch-based infrastructure
provides it with significant competitive advantages, including:

     Ability to Provide a Full Range of Voice and Data Telecommunications
Services. The large amount of bandwidth afforded by the Wireless Licenses,
together with WinStar's voice and data switching facilities, allow WinStar to

offer customers a full range of voice and data telecommunications services,
including (i) local dial tone, private branch exchange ('PBX') trunks,
individual business lines, Centrex and long distance, (ii) data services, such
as Internet access, Wide Area Network ('WAN') services utilizing frame relay,
Internet Protocol ('IP') and ATM data transport, and private network services
and (iii) facilities-based broadband local access and digital network services
('Carrier Services'). WinStar holds Wireless Licenses in each of the 50 largest
MSAs. Including certain additional 38 GHz licenses which WinStar has agreed to
acquire and the 28 GHz Local Multipoint Distribution Services licenses ('LMDS
Licenses') for which the Company was the highest bidder in the FCC's recently
concluded auction ('LMDS Auction'), the Wireless Licenses provide an average
bandwidth capacity of more than 750 MHz in the top 30 U.S. markets and
approximately 740 MHz in the 50 largest U.S. markets. Each 100 MHz Wireless
Fiber channel can support transmission capacity of one DS-3 at 45 Mbps, which is
over 750 times the rate of the fastest dial-up modem in general use (56 Kbps)
and over 350 times the rate of the fastest integrated services digital network
('ISDN') line in general use (128 Kbps). It is anticipated that the Company's
commercial deployment of multipoint facilities, planned to begin in late 1998,
will allow a single 100 MHz Wireless Fiber channel to support one OC-3
equivalent of capacity at 155 Mbps. See '--Networks--Wireless Licenses.'

                                       2

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ITEM 1. BUSINESS--(CONTINUED)

     Rapid and Cost-Effective Deployment of Infrastructure. Wireless Fiber
services generally can be deployed considerably more rapidly than wireline
services because of the construction time and permit procedures required for
wireline buildout. Further, the equipment used for 38 GHz transmission (e.g.,
antennae, transceivers and digital interface units) is small, unobtrusive and
relatively inexpensive.

     Ability to Penetrate Target Markets. In implementing its network plan,
WinStar identifies strategically located sites to serve as hubs in each of its
metropolitan areas. These hub sites are connected via Wireless Fiber links to
customer buildings. Certain characteristics of the 38 GHz frequency, including
the effective range of its radio signal and the small amount of dispersion
(i.e., scattering) of the radio beam as compared to the more dispersed radio
beams produced at lower frequencies, allow for multiple hub sites using the same
channel in a licensed area. Further, WinStar's ability to use multiple 38 GHz
channels in its target markets provides it with advantages over other providers
of fixed wireless telecommunications services that possess fewer channels in
their respective portions of the radio spectrum. WinStar believes that its
multiple channels, together with the deployment of multipoint technology and
it's hub-based network architecture, will allow it to address the needs of a
significant portion of the business customers in its target markets via its
Wireless Fiber services.

     Scalable Capital Expenditures. Because of WinStar's Wireless Fiber capacity
and hub-based network architecture, a substantial portion of WinStar's planned
capital expenditures is variable and more directly tied to demand. WinStar
expects to be able to minimize non-revenue generating deployment of

infrastructure because (i) it does not need to fully build out its network in a
market before offering services in that market, (ii) bandwidth can be more
easily allocated as demanded and (iii) the small size and relatively low cost of
radio transceivers and other equipment allows for cost-efficient redeployment as
customer demands change.

     Deployment of Multipoint Technology. WinStar expects that its planned
deployment of point-to-multipoint technology within its networks will allow it
to further reduce per-building installation and equipment costs, better leverage
existing and future investment in hub equipment, address a significantly greater
number of buildings in each market and provide customers with variable amounts
of bandwidth as their demands and needs change. The Company believes that it
will be able to efficiently integrate point-to-multipoint technology into its
point-to-point network infrastructure, thereby enabling the Company to create
point-to-multipoint infrastructure in its markets rapidly and cost effectively.

     Other Core Assets. WinStar has accumulated a group of core assets, in
addition to those described above, which it believes are necessary for it to
commercially deploy its telecommunications services. Among these assets are: (i)
authorizations to operate as a CLEC in 30 states and the District of Columbia,
(ii) agreements that allow the Company to interconnect its facilities with those
of other carriers in 41 of the 50 most populated MSAs, (iii) roof rights to
install its radios on more than 2,200 buildings and (iv) state-of-the-art
information systems platforms to assure the accurate and flexible handling of
the billing and customer satisfaction requirements of a diverse customer base
purchasing a variety of telecommunications services. WinStar intends to acquire
additional core assets as it further rolls out its services and expands its
network coverage.

BUSINESS STRATEGY

     The telecommunications industry is being reshaped by a number of factors,
including the deregulation of local telecommunications markets, growing demand
for high-speed, high-capacity digital telecommunications services and the rapid
advances in wireless technologies that enable service providers to address this
demand, as well as the increasing importance to customers of information
services. WinStar believes it is well-positioned to compete successfully in this
new telecommunications environment. Key elements of WinStar's strategy to
continue its growth as a national provider of telecommunications services are
to:

     Continue to Expand Network Infrastructure. WinStar currently provides
switch-based telecommunication services in 21 major metropolitan markets and
expects to provide telecommunications services using its own switches in 30
major metropolitan markets by the end of 1998 and 40 major metropolitan markets
by the end of 1999. WinStar is continuing to deploy network infrastructure on a
city-by-city basis using its Wireless Fiber capabilities, its voice and data
switches and, where appropriate, facilities leased from other carriers. The
Company believes that a limited number of hub sites (generally less than 10) in
each metropolitan area will allow

                                       3

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ITEM 1. BUSINESS--(CONTINUED)

it to address more than 70% of its targeted buildings and ultimately to carry
the majority of its customers' traffic on its own network instead of the
higher-cost facilities of other carriers. WinStar also intends over time to
interconnect all of its local networks through intercity fiber optic facilities,
creating a single network capable of providing facilities-based voice and data
telecommunications services among the metropolitan areas in which the Company
has local networks. By building and utilizing its own network, WinStar reduces
its reliance on the facilities of other providers, such as the ILECs, enhances
service to its customers and reduces its cost of providing services. Unlike most
fiber-based CLECs, which typically use facilities leased from incumbent
providers to carry the majority of their telecommunications traffic, WinStar
anticipates enhancing its operating margins by routing a significant portion of
its traffic over its own network as this network and WinStar's presence in its
markets mature.

     Exploit First-to-Market Advantage. WinStar seeks to exploit its
'first-to-market' advantage as the leading provider of fixed wireless local
switched and dedicated telecommunications services with an established operating
infrastructure and broad geographic license coverage. WinStar believes that
early entrance into its markets provides it with advantages over many potential
competitors by allowing it to (i) expand its customer base prior to widespread
competition from many other CLECs, (ii) develop a proven, reliable and low-cost
network infrastructure using its own switching and transmission capabilities
ahead of many other CLECs, (iii) develop and implement the advanced information,
data and other systems necessary to integrate its fixed wireless infrastructure
into the existing global telecommunications network, and (iv) acquire roof
rights for antennae placement on a large number of buildings on favorable terms
and in advance of other fixed wireless service providers.

     Provide Integrated Voice and Data Telecommunications and Information
Services. WinStar has found that customers typically prefer to purchase their
voice and data telecommunications services as a single package. WinStar offers
its customers a broad range of telecommunications services, including basic
local dial tone and long distance and, with the acquisitions of GoodNet and
PacNet, high-speed switched and dedicated data and Internet access services.
WinStar believes that the ability to package information, entertainment and
other content and services with telecommunications services will become an
increasingly important factor in the business customer's decision to select or
retain a telecommunications provider. Accordingly, WinStar actively seeks
opportunities to expand its information and content assets and services and to
use them to enhance the marketability of its telecommunications services.

     Focus on Business Customers. WinStar believes that a substantial
opportunity exists to attract a significant base of business customers by
rapidly penetrating local markets with high-bandwidth telecommunications
services. Initially, WinStar targeted small and medium-sized business customers
in buildings that have more than 100,000 square feet of commercial space and
which, in most instances, are not served by fiber facilities provided by CLECs.
The Company estimates that there are more than 8,000 buildings that meet the
criteria of this initial target group. WinStar believes that the growth of its
infrastructure and the planned deployment of point-to-multipoint technology will

make it cost-effective for the Company to target smaller buildings as well,
increasing the number of target buildings to more than 30,000. Furthermore,
WinStar's introduction of its data communications services and the expansion of
its sales and marketing capabilities now allows it to target larger business
customers.

     Market Wireless Fiber to Other Carriers. WinStar offers its broadband
Carrier Services to other telecommunications providers, including providers of
personal communications, cellular and specialized mobile radio services
('CMRS'). WinStar also believes that its Carrier Services present an attractive,
economical method for telecommunications providers to add a high-capacity
extensions to their own networks, especially as they seek to rapidly penetrate
new markets opening as a result of the Telecommunications Act. WinStar's Carrier
Services also can provide cost-efficient route diversity where network
reliability concerns require multiple telecommunications paths.

     Offer High Quality Networks and Superior Customer Service. WinStar believes
that it offers cost and service quality advantages over ILECs and other CLECs as
a result of its Wireless Fiber technology, integrated service offerings,
customer support and network management and monitoring systems. WinStar consults
with its customers to develop competitively priced telecommunications services
that are tailored to meet their particular

                                       4

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ITEM 1. BUSINESS--(CONTINUED)

needs. WinStar's centrally-managed customer care and support operations are also
designed to facilitate the processing of orders for changes and upgrades in
services. WinStar believes that it provides greater attention and responsiveness
to its customers than do the ILECs.

     Capitalize on Management Team Experience. WinStar has assembled a
management team and hired operating personnel experienced in all areas of
telecommunications and information services, including more than 250 former
officers and employees of MCI Communications ('MCI') and Sprint Corporation
('Sprint'), as well as numerous executives and other employees from RBOCs and
other established telecommunications companies. WinStar continues to hire
additional experienced telecommunications and information services personnel as
appropriate.

SERVICES

     WinStar offers a full range of telecommunications services, including local
telephony, long distance, high-speed switched data and dedicated services. Local
telephony services offered by WinStar primarily use high-capacity digital
switches to route voice transmission anywhere on the public switched telephone
network. WinStar's data transmission services include Internet access and WAN
services using frame relay, IP and ATM data transport protocols. Dedicated
services offered by WinStar, which include private network services and Carrier
Services, use high-capacity digital circuits to carry voice and data
transmission in multiple configurations.


     WinStar makes its services attractive to potential customers by (i)
offering a broad range of telecommunications services that specifically address
its target customers' needs, while providing levels of customer satisfaction
that exceed those provided by larger competitors and (ii) exploiting the
Company's Wireless Fiber service whenever feasible for cost-effective
origination and termination of customer traffic, thereby allowing for attractive
pricing of services.

  Local and Long Distance Telephony Services

     WinStar provides customers with local dial tone and connection to both
regional and long distance calling. WinStar's services in these areas include
the following:

     Basic and Enhanced Voice Transmission Services. WinStar offers analog and
digital voice-only telephone lines to customers. WinStar owns, manages and
maintains its switches, while customizing network configurations and solutions
to meet the individual needs of customers. WinStar offers its customers a wide
range of other features such as call waiting, call forwarding, conference
calling and voice mail, as well as operator and directory assistance services.

     Centrex Services. Business customers can use WinStar as their primary
Centrex provider, as a supplement to the LEC's Centrex service, or as an
addition to customer-owned PBX.

     PBX Services. WinStar's PBX services provide businesses with access to the
local, regional and long distance telephone public networks. WinStar's PBX
service allows customers to use either the Company's telephone numbers or their
ILEC-assigned telephone numbers. Connection between the customer's PBX port and
WinStar's network is made via Wireless Fiber link or digital facilities leased
from the ILECs and other CLECs.

     Integrated Long Distance Services. WinStar also offers long distance
services to its business customers Currently, WinStar primarily resells long
distance through agreements with MCl and Sprint, which provides the Company with
access to these carriers' long distance networks at rates that are discounted,
varying with monthly traffic generated by the Company.

  Data Services

     The proliferation of LANs, WANs, Internet services and video enhanced
services is causing data flow to become an increasing portion of overall
telecommunications traffic. The ability to quickly access and distribute such
data and other information is critical to business, education and government
entities. The Company believes that by utilizing its broadband local networks
and national data transport backbone, it will be able to deliver broadband data
services to businesses and other high-capacity users that are currently unable
to receive such

                                       5

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ITEM 1. BUSINESS--(CONTINUED)

service offerings from their telecommunications providers. The acquisitions of
the GoodNet and PacNet businesses and assets has enabled the Company to more
rapidly deploy its network infrastructure, which is critical to the
cost-effective provision of data services. To address the growing demand for
high-speed, high-bandwidth data telecommunications, WinStar offers its customers
a wide range of data telecommunications services including:

     Dedicated and Dial-Up Internet Access. WinStar offers dedicated and dial-up
Internet access services, as well as web hosting and co-location services. A
majority of WinStar's ISP business is as a National Services Provider providing
Internet access to other ISPs through WinStar's Internet backbone acquired with
the GoodNet business. WinStar is one of the largest Internet backbone providers
in the United States. In addition to other ISPs, WinStar's Internet customers
include universities and colleges, large landlords, RBOCs, cable television
operators and value-added resellers.

     The Company also provides high-speed Internet access services and
specialized software with educational content for schools and libraries in the
New York City metropolitan area. The Company is currently working with the
'Lattice' consortium in the District of Columbia to develop cost-effective,
high-capacity Internet connectivity to schools and to nearby subsidized urban
housing. WinStar's application suite provides educators with the tools to
integrate the educational resources of the World Wide Web into school curricula,
enabling them to create their own 'electronic libraries,' create forums for
discussion and debate, and engage in collaborative projects with students and
educators throughout the world. The Company intends to expand its reach to other
markets by linking schools and libraries to the Internet through its Wireless
Fiber services.

     Data Transport Services. WinStar utilizes its ATM backbone to provide WAN
data transport services which allow customers to interconnect LANs maintained at
different sites at native speeds, thereby enabling the connection of
workstations and personal computers on one or more LANs. WinStar's WAN services
provide customers with transmission capacity for various protocol speeds.
WinStar's native-speed WAN services avoid bottleneck problems that are
frequently encountered with customary DS-1 connections by providing the customer
with a circuit that matches the transmission speeds of its networks. The
Company's ATM backbone network supports evolving high-speed applications, such
as multimedia, desktop video conferencing and medical imaging. WinStar's WAN
services are offered at a variety of capacities to allow customers to choose the
level which meets their specific needs.

     WinStar also offers frame relay services that provide customers with
high-performance, cost-efficient global interconnection of multiple LANs.
WinStar's frame relay services are high-speed packet switching systems that
utilize transmission links only when required. Frame relay allows for the
transportation of data much more rapidly than other packet switching protocols
such as X.25. The Company is affiliated with Unispan, a consortium of frame
relay providers that enables the frame relay traffic of such providers to be
routed throughout the United States and internationally, and terminated in every
local access transport area in the United States through interconnections with
the RBOCs.


     ISDN Services. WinStar provides customers with multiple voice and data
communications services over a single telecommunications line. The Company's
switches have been configured to permit the provision of ISDN services. ISDN
lines allow customers to perform multiple functions such as simultaneous voice
and computer links. High-speed ISDN applications include desk top
videoconferencing, interconnection of LANs and Internet access.

     Potential Interactive Video Applications. The inherent qualities of 38 GHz
also offer substantial opportunities for broadband interactive video
applications, such as video conferencing, appropriate for highly customized
commercial and institutional demands. The narrow-beam characteristics of the 38
GHz band, allowing for frequency reuse within a small area, coupled with its
broadband capacity and multichannel capabilities may offer a significant market
opportunity in the future as the appropriate technologies emerge, although there
can be no assurance of the consumer acceptance or commercial viability of such
video services.

                                       6

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ITEM 1. BUSINESS--(CONTINUED)

  Dedicated Services

     Private Network Services. WinStar markets its Wireless Fiber services to
businesses, government agencies and institutions with multiple locations within
the Company's licensed areas and which generate heavy telecommunications traffic
between such locations. These entities can utilize Wireless Fiber services to
establish their own independent telecommunications systems, creating a dedicated
private network.

     Wireless Fiber services present the Company's customers with: (i) a method
for providing high bandwidth telecommunications connections between their
buildings on a cost-effective basis; (ii) a viable alternative to the ILECs'
networks which frequently use low-capacity copper wire for 'last mile' delivery,
generally allowing for faster, more reliable data transmissions; (iii) greater
control over their local telecommunications traffic and costs; (iv) diverse
routing and thus higher reliability against outage; and (v) greater security
because of the private line nature of these connections. WinStar's private
network services use high-capacity digital circuits to carry voice and data
transmission from point-to-point in flexible configurations involving different
standardized transmission speeds and circuit capacities, including:

     o  DS-O. A dedicated service that accommodates business communications with
        digital transmission through a voice-grade equivalent circuit with a
        capacity of up to 64 Kbps. This service offers a private line digital
        channel for connecting telephones, fax machines, personal computers and
        other telecommunications equipment. WinStar offers multiple DS-0
        services in a variety of combinations and can also provide voice grade
        analog connections.

     o  DS-1. A high-speed digital channel that typically links customer

        locations to IXCs, ISPs or other customer locations and which can carry
        voice and data transmissions. DS-1 services accommodate digital data
        transmission capacity of up to 1.544 Mbps, the equivalent of 24
        voice-grade (DS-O) circuits.

     o  DS-3. The Company currently offers dedicated service capacity equivalent
        to 28 DS-1 circuits or 672 voice-grade equivalent circuits. It is
        anticipated that this capacity will continue to expand over time with
        further developments in high frequency radio technology by manufacturers
        and the advent of point-to-multipoint service. This digital service can
        be used to link multiple sites and for data services applications.

     Carrier Services. WinStar markets and provides wireless broadband,
high-capacity local access and dedicated network services to other
telecommunications providers. Using its Wireless Fiber capacity, WinStar offers
numerous wireless telecommunications services to support a wide range of local
access and dedicated service needs with a high degree of reliability, including:

     o  Local By-Pass for Long Distance Carriers. IXCs can utilize the Company's
        Wireless Fiber services to connect certain call termination or
        origination points in a particular licensed area to such carriers' POPs
        in the licensed area at more economical rates than those generally
        charged by ILECs and to connect two or more of their respective POPs in
        a single licensed area.

     o  Wireless Complement to CAP and ILEC Networks. Competitive access
        providers ('CAPs') typically compete with ILECs by utilizing their own
        fiber-optic cable rings and lease the other facilities necessary to
        complete their networks from the ILECs. Due to the large capital
        investment required to construct such networks, CAPs generally build
        their networks in limited, densely populated areas and offer services
        primarily to large customers such as long distance carriers,
        medium-sized and large businesses, government agencies and institutions.
        CAPs can utilize Wireless Fiber services to bypass facilities typically
        leased by them from the ILECs. CAPs can also utilize the Company's
        Wireless Fiber services to facilitate the buildout and enhance the
        reliability of their own local telecommunications networks and expand
        their marketing opportunities.

     o  Backbone Interconnection and Redundancy for CMRS Providers. Wireless
        Fiber services can be utilized by CMRS providers for interconnecting
        traffic (backbone network traffic) between and among cell sites,
        repeaters and the wired local network.

                                       7

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ITEM 1. BUSINESS--(CONTINUED)

  International Opportunities

     WinStar has begun to develop its position in certain foreign markets where
the Company believes it can leverage its expertise in the application of

Wireless Fiber services. WinStar is seeking opportunities to provide
telecommunications services in other countries similar to those it provides
domestically. The Company may seek such opportunities directly or with other
entities on a joint venture or similar basis.

NETWORKS

  General

     WinStar uses advanced voice and data switches and hub-based fixed wireless
network architecture to deliver reliable, high-speed digital transmission of
voice and data telecommunications traffic. Customer buildings are interconnected
to WinStar's hub sites using Wireless Fiber links and/or facilities leased from
other carriers. Traffic between hub sites is carried using Wireless Fiber
services or, as needed, on fiber-optic facilities leased from other carriers.
WinStar installs customer-dedicated or shared equipment at a location near or in
customer premises to terminate links. WinStar serves its customers from one or
more hub sites strategically positioned throughout its networks. The hub site
houses or is interconnected with the switches and other transmission equipment
needed to connect customers with each other, the IXCs and other local exchange
networks. Redundant electronics, with automatic switching to the backup
equipment in the event of failure, protect against signal deterioration or
outages.

     WinStar's planned deployment of point-to-multipoint technology will allow
transmissions between a single hub site antenna and multiple customer antennas,
thereby allowing WinStar to share the same spectrum among its customers and
reducing its capital expenditures. This deployment also will allow WinStar to
allocate and share network capacity on an as-needed basis and supply customers
with bandwidth-on-demand to address their changing requirements.

     WinStar adds data services to its basic transmission platform by installing
digital electronics at its switch sites and at customer locations and by
accessing the Company's ATM and/or frame relay networks. WinStar's digital
telephone switches are interconnected with multiple ILECs and long distance
carrier switches to provide WinStar customers access to the entire local market
as well as across the country and around the world. Similarly, WinStar provides
ATM switches and LAN multiplexers at customer premises and in its switch sites
to provide high speed LAN interconnection and native ATM services.

     The Company's networks are monitored 24 hours a day, seven days a week
through WinStar's state-of-the-art network operations center ('NOC') located in
Tysons Corner, Virginia. The NOC provides the Company with points of contact for
network monitoring, troubleshooting and dispatching repair personnel in each
market. The NOC provides a wide range of network surveillance functions for each
network, providing the Company with the ability to remotely receive data
regarding the diagnostics, status and performance of such networks. Continuous
monitoring of system components by the NOC focuses on proactively avoiding
problems as well as reacting to known problems. The Company believes that it
provides service reliability equal to or exceeding that provided by the ILECs
and other CLECs. PacNet also maintains a separate network operations center in
Seattle, Washington which allows the Company to monitor PacNet's frame relay
data network.


  Wireless Fiber Links

     The Company uses its Wireless Fiber capacity as an integral component of
its networks for the origination and termination of local voice and data traffic
and the interconnection of hub and switching sites. Each Wireless Fiber link
currently provides up to eight T-1s of capacity (equivalent to 192 voice lines)
or one DS-3 of capacity (equivalent to 672 voice lines). The Company's planned
deployment of point-to-multipoint facilities, which are proceeding on a test
basis through mid-1998, will allow each of the Company's 100 MHz channels to
support one OC-3 equivalent of capacity at 155 Mbps, and the Company believes
that there will be additional increases in the capacity of Wireless Fiber
services over time as the technology evolves, although no assurance can be given
that this will be the case. The Wireless Fiber links meet or exceed general
telephone industry standards, provide

                                       8

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ITEM 1. BUSINESS--(CONTINUED)

transmission quality equivalent to that produced by fiber optic-based
facilities, and address the growing demand for high-speed, high-capacity,
digital telecommunications services for voice, data and video applications,
including traditional local access, Internet access and network interconnection
services.

     Each point-to-point Wireless Fiber path consists of transmission links,
which are paired digital millimeter wave radio transceivers generally placed at
a distance of less than three miles from one another within a direct,
unobstructed line of sight. The transceivers are typically installed on rooftops
or towers or in windows. Each point-to-multipoint path will consist of a radio
transceiver and antenna system located at a hub site and a transceiver placed at
a customer building in line-of-sight with the hub site. Subject to obtaining
adequate line of sight, a single multipoint hub transceiver will typically be
able to address in excess of 100 customer buildings.

     Significant features of Wireless Fiber services include: (i) 38 GHz digital
millimeter wave transmissions having narrow beam width, reducing the potential
for channel interference and allowing dense deployment and channel re-use; (ii)
100 MHz bandwidth in each channel, allowing for high subdivision of voice and
data traffic; (iii) a range of up to five miles between transmission links
(although the Company generally maintains link distances of less than three
miles or shorter distances in certain areas to meet its internally established
performance standards); (iv) performance engineered to provide up to 99.999%
reliability, as tested; (v) transmission accuracy engineered to provide bit
error rates of 10-13 (unfaded); (vi) 24-hour network monitoring by the Company's
NOC; and (vii) relatively low installed cost for each pair of transceivers
comprising a transmission link, with even lower costs allowed through the
deployment of point-to-multipoint radios.

     In order to provide quality transmission, Wireless Fiber links require an
unobstructed line of sight between the two transceivers comprising a link, with
a maximum distance between any two corresponding transceivers of up to five

miles, although in certain areas, weather conditions may necessitate shorter
distances to maintain desired transmission quality. The Company typically limits
its link distances to less than three miles. The areas in which such shorter
distances are required are those where rainfall intensity and the size of the
raindrops adversely impact transmission quality at longer distances. Other
weather conditions, such as snow, electrical storms and high winds, have not, in
the Company's experience, affected transmission quality or reliability. The cost
of additional transceivers where required by weather, physical obstacles or
distance may render the provision of Wireless Fiber services uneconomical in
certain instances.

     The use of wireless equipment may pose health risks to humans due to radio
frequency ('RF') emissions from the radio/antenna unit. Any allegations of
health risks, if proven, could result in liability on the part of the Company.
If the Company were held liable in any product liability suit, such liability
could have a material adverse effect on the financial condition and operations
of the Company. The FCC recently adopted new guidelines and methods for
evaluating the environmental effects of RF emissions from FCC-regulated
transmitters, including wireless antennas. The updated guidelines and methods
generally are more stringent than those previously in effect. The Company
expects that the wireless equipment to be provided by its vendors will comply
with applicable FCC guidelines.

  Roof Rights

     WinStar must obtain roof rights (or rights to access other locations such
as towers where lines of sight are available (collectively, 'Roof Rights') on
each building where a transceiver will be placed. The Company's prequalification
activities may include the payment of option fees for Roof Rights to the
buildings that are being prequalified. In connection with the development of its
Wireless Fiber capacity for both its Carrier Services and CLEC businesses, the
Company has been following a plan pursuant to which it seeks to negotiate, prior
to receipt of actual service orders, Roof Rights for the installation of
Wireless Fiber links on buildings in the metropolitan areas covered by the
Wireless Licenses, including hub site buildings which give direct lines of sight
to a number of other buildings targeted by the Company and buildings that can
provide interconnection access to IXCs' POPs, switch locations and local access
nodes.

     WinStar acquires Roof Rights on targeted buildings where direct selling
efforts are also initiated. If customer traffic is generated prior to the
installation of a transceiver on a building, the traffic is generally sent to

                                       9

<PAGE>

ITEM 1. BUSINESS--(CONTINUED)

the Company's switch via circuits leased from other carriers. Once a transceiver
and antenna are installed, new traffic from the building is sent to a hub site
via Wireless Fiber service and existing traffic being carried over leased
circuits may be transitioned over time to Wireless Fiber service. This approach
enables WinStar to deploy capital in a highly efficient manner and avoid the

need to make front-end investments in transmission capacity for where no
customer traffic has been generated. The Company currently has the necessary
Roof Rights to install its Wireless Fiber transmission facilities on more than
2,200 buildings in its licensed areas.

     In addition to obtaining Roof Rights, the Company must secure other
building access rights, including access to conduits and wiring, from the owners
of each building or other structures on which it proposes to install its
equipment, and may require construction, zoning, franchises or other
governmental permits. There can be no assurance that the Company will obtain
sufficient Roof Rights and other building access, franchises or permits to
successfully carry out its business objectives.

WIRELESS LICENSES

     The Wireless Licenses (including the LMDS Licenses for which the Company
was the highest bidder in the LMDS Auction) provide in excess of 400 MHz of
bandwidth in each of the following cities:

<TABLE>
<CAPTION>
METROPOLITAN AREA                                 MHZ
----------------------------------------------   -----
<S>                                              <C>
Atlanta.......................................     900
Baltimore.....................................     600
Boston........................................     500
Buffalo.......................................     800
Chicago.......................................     700
Cincinnati....................................     800
Cleveland.....................................     500
Dallas........................................     800
Denver........................................     700
Detroit.......................................     500
Fort Worth....................................     900
Ft. Lauderdale................................   1,000
Greensboro....................................   1,350
Houston.......................................     900
Indianapolis..................................     500
Kansas City...................................     600
Las Vegas.....................................     500
Long Island, New York.........................     500
Los Angeles...................................     500
Memphis.......................................     600
Miami.........................................   1,000
Milwaukee.....................................     600

<CAPTION>
METROPOLITAN AREA                                 MHZ
----------------------------------------------   -----
<S>                                              <C>
Minneapolis...................................     600
Newark........................................     600
New Orleans...................................   1,350

New York......................................     900
Norfolk.......................................   1,350
Oakland.......................................   1,650
Orlando.......................................   1,450
Philadelphia..................................     600
Phoenix.......................................     600
Pittsburgh....................................     600
Saginaw.......................................     400
St. Louis.....................................     900
Salt Lake City................................   1,250
San Diego.....................................     400
San Francisco.................................   1,650
San Jose......................................   1,250
San Juan......................................     500
Seattle.......................................     800
Spokane.......................................     900
Tacoma........................................     600
Tampa.........................................   1,000
Trenton.......................................     600
Washington, D.C...............................     500
</TABLE>

     The Company also holds licenses for a limited amount of spectrum in
frequency bands other than 38 GHz, including 6 GHz, 10 GHz, 18 GHz and 23 GHz.
The Company uses these licenses to support and enhance the coverage of its
existing 38 GHz spectrum.

     On February 10, 1998, the FCC granted the Company additional 38 GHz
channels in Atlanta, Buffalo, Cincinnati, Dallas, Houston, Miami, New York,
Seattle, St. Louis, Spokane and Tampa. On March 12, 1998, several parties filed
petitions for reconsideration of these grants, other than the Seattle grant,
with the FCC alleging, among other things, that these channels were granted in
violation of the FCC's processing rules and the FCC's November 1997 Report and
Order and Second Notice of Proposed Rulemaking (the '38 GHz Order'). WinStar
intends to oppose these petitions.

     WinStar participated in the FCC's recently concluded LMDS Auction. At the
close of the LMDS Auction, WinStar was the highest bidder for A-block licenses
in 9 markets and B-block licenses in 6 markets. Each LMDS License covers a
defined Basic Trading Area (BTA), with the A-block licenses consisting of 1,150
MHz of spectrum and the B-block licenses consisting of 150 MHz of spectrum.
WinStar made aggregate bids for

                                       10

<PAGE>

ITEM 1. BUSINESS--(CONTINUED)

such 15 licenses of approximately $57.8 million. However, WinStar has claimed a
25% bidding credit in the LMDS Auction, making its total commitment to purchase
LMDS Licenses approximately $43.4 million. Prior to the auction, WinStar made a
$13 million payment which will be offset against this amount. The balance of
these payments is due to the FCC when the licenses are granted, which WinStar

anticipates will take place in the second quarter of 1998, although such grants
are currently subject to final FCC approval.

ADVERTISING AND MARKETING OF TELECOMMUNICATIONS SERVICES

     The Company markets its telecommunications services on a city-by-city basis
through combinations of direct sales, alternative sales channels, television,
print and other media. For example, the Company has used its first series of
television commercials and print advertising in introducing its
telecommunications services and creating brand awareness in Boston, Chicago, Los
Angeles, New York and Washington, D.C. This mass media advertising supports the
Company's core marketing efforts, which are primarily focused on its 8,000
target buildings. The Company concentrates its marketing efforts on the
telecommunications decision-makers in those buildings, which are viewed as
'vertical villages' for the Company's sales force to penetrate. The Company also
deploys a variety of building-based and other local marketing programs to
reinforce its message in these buildings.

     The Company is targeting business customers, especially those in buildings
in which the Company's Wireless Fiber capacity can be utilized most effectively.
In the future, with the deployment of point-to-multipoint service, the Company
also intends to market services to residences in multiple-dwelling units, such
as apartment buildings.

     Consistent with its marketing strategy of emphasizing business customers,
the Company has, among other things, introduced products and services readily
marketable to business long distance customers, including prepaid phone card
services and a broad array of toll-free services, including services which allow
toll-free calls to be originated nationwide. The Company also offers business
customers several flexible billing services.

     The Company markets its Carrier Services: (i) by performing field
demonstrations and testing of Wireless Fiber services; (ii) by providing
potential customers with Wireless Fiber services at reduced rates, in order to
educate such customers about the efficacy and reliability of such services;
(iii) by appearing at trade shows and advertising in trade publications; (iv)
through national sales agents and direct sales; and (v) directly to existing and
potential customers of the Company's other telecommunications services.

COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY

     The local telecommunications market is intensely competitive and currently
is dominated by the ILECs. The Company has been marketing local access and other
Carrier Services since December 1994 and local exchange services as a CLEC since
April 1996, and, accordingly, the Company has not obtained significant market
share in any of the areas where it offers such services, nor does it expect to
do so given the size of the local telecommunications services market, the
intense competition and the diversity of customer requirements. tn each area
covered by the Wireless Licenses, the services offered by the Company compete
with those offered by the ILECs which currently dominate the provision of local
services in their markets. The ILECs have long-standing relationships with their
customers, have the potential to subsidize competitive services with revenues
from a variety of business services (to the extent lawful) and benefit from
existing state and federal regulations that currently favor the ILECs over the

Company in certain respects. While legislative and regulatory changes have
provided increased business opportunities for competitive telecommunications
providers such as the Company, these same decisions have given the ILECs
increased flexibility in their pricing of services. This may allow the ILECs to
offer special discounts to the Company's and other CLECs' customers and
potential customers. Further, as competition increases in the local
telecommunications market, the Company expects general pricing competition and
pressures to increase significantly. As ILEC prices decrease, other
telecommunications providers will be forced by market conditions to charge less
for their services in order to compete.

                                       11

<PAGE>

     In addition to competition from the ILECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs and
CLECs, competitors offering wireless telecommunications services, including
leading telecommunications companies, such as AT&T Wireless, and other wireless
entities that hold or have applied for 38 GHz licenses or which may acquire such
licenses or other wireless licenses from others or the FCC. There is at least
one other CLEC in each metropolitan area covered by the Company's Wireless
Licenses, including, in many such areas, companies such as MCI, WorldCom,
Teleport Communications ('Teleport') and Time Warner. Many of these entities
(and the ILECs) already have existing infrastructure which allows them to
provide local telecommunications services at potentially lower marginal costs
than the Company currently can attain and which could allow them to exert
significant pricing pressure in the markets where the Company provides, or seeks
to provide, telecommunications services. In addition, many CAPs and CLECs have
acquired or plan to acquire switches so that they can offer a broad range of
local telecommunications services.

     The Company currently also faces competition from other entities which
offer, or are licensed to offer, 38 GHz services, such as AT&T (through its own
licenses and its pending ownership of Teleport) and Advanced Radio
Telecommunications, Inc. The Company also faces competition in certain aspects
of its existing and proposed businesses from a number of competitors providing
wireless services in other portions of the radio spectrum, such as
CellularVision USA, a provider of wireless television services and wireless
Internet access, which may in the future provide other local telecommunications
services, and Teligent, Inc., a provider of wireless services utilizing spectrum
in the 24 GHz band. In many instances, these service providers hold 38 GHz
licenses or licenses for other frequencies (such as 2, 18, 24, 28, 31 and 47
GHz) in geographic areas which encompass or overlap the Company's market areas.
Additionally, some of these entities may have greater spectrum resources or
enjoy the substantial backing of, or include among their stockholders, major
telecommunications entities. Due to the relative ease and speed of deployment of
38 GHz and some other wireless-based technologies, the Company could face
significant price competition from these and other wireless-based service
providers.

     The FCC recently completed the LMDS Auction. The LMDS Licenses allow for
the provision of high capacity, wide-area fixed wireless point-to-multipoint
systems. The Company participated in the auction and had the highest bid for the

A-Block (aggregate 1150 MHz of bandwidth) LMDS License for nine markets and the
B-Block (aggregate 150 MHz of bandwidth) LMDS License for six markets, although
there can be no assurance that the Company will receive such licenses until such
time as the entire auction process and the bids made therein are reviewed and
approved by the FCC. Numerous other entities participated in the auction and had
highest bids for LMDS Licenses covering other major metropolitan areas,
including entities that had the highest bid for a large number of metropolitan
areas. It is likely that one or more of the participants in this auction, or
subsequent purchasers of LMDS Licenses from such participants, will use this
spectrum to provide telecommunications services in competition with the Company.

     The FCC has adopted rules to auction geographical area-wide licenses for
the operation of fixed wireless point-to-point and point-to-multipoint
communications services in the 38 GHz band, although many 38 GHz licenses
already have been issued nationwide. The FCC has indicated that the 38 GHz
auction is expected to occur later in 1998. MMDS, also known as 'wireless
cable,' also currently competes for metropolitan wireless broadband services.
Although wireless cable licenses currently are used primarily for the
distribution of video programming and have only a limited capability to provide
two-way communications needed for wireless broadband telecommunications
services, there can be no assurance that this will continue to be the case. The
FCC has initiated a proceeding to determine whether to provide wireless cable
operators with greater technical flexibility to offer two-way services. CMRS
providers may also offer fixed services over their licensed frequencies.
Finally, the FCC has allocated a number of spectrum blocks for use by wireless
devices that do not require site or network licensing. A number of vendors have
developed such devices that may provide competition to the Company, in
particular for certain low data rate transmission services.

     The Company also may face competition from cable companies, electric
utilities, ILECs operating outside their current local service areas, long
distance carriers and other entities in the provision of local
telecommunications services. The great majority of these entities provide
transmission services primarily over fiber-optic, copper-based and/or microwave
networks, which, unlike the Company's Wireless Fiber services, enjoy proven
market acceptance for the carriage of telecommunications traffic. Moreover, the
consolidation of telecommunications companies and the formation of strategic
alliances within the telecommunications industry,

                                       12

<PAGE>

which are expected to accelerate, could give rise to significant new or stronger
competitors to the Company. There can be no assurance that the Company will be
able to compete effectively in its markets.

     The Company's data services also face significant competition from other
telecommunications providers, including the ILECs, IXCs and other major
providers, and Internet service providers, dedicated network transmission
service providers, and frame relay providers, as well as from cable television
operators deploying cable modems, which provide high-speed data capability over
installed coaxial cable television networks. Further, Internet access services
based on existing technologies such as ISDN and, in the future, on such

technologies as ADSL and HDSL, will likely provide additional sources of
competition to the Company's data transmission services.

     The long distance market has relatively insignificant barriers to entry,
numerous entities competing for the same customers and a high (and increasing)
average churn rate as customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. The Company competes with major carriers such as AT&T, MCI,
WorldCom, LCI and Sprint, as well as other national and regional long distance
carriers and resellers, many of whom own substantially all of their own
facilities and are able to provide services at costs lower than the Company's
current costs since the Company generally leases its access facilities. The
Company believes that the RBOCs also will become significant competitors in the
long distance telecommunications industry for certain types of services once
they are permitted to enter this market and that Internet service providers also
will compete in this market.

     The Company believes that the principal competitive factors affecting its
market share are pricing, customer service, reliability, accurate billing, clear
pricing policies and variety of services. The ability of the Company to compete
effectively will depend upon its ability to continue to provide a broad range of
telecommunications services and to maintain high-quality, market-driven services
at prices generally perceived to be equal to or below those charged by its
competitors. To maintain its competitive posture, the Company believes that it
must be in a position to reduce its prices in order to meet reductions in rates,
if any, by others. Any such reductions could adversely affect the Company. In
addition, ILECs have been obtaining additional pricing flexibility. This may
enable ILECs to grant volume discounts to larger long distance companies, as
well as to individual customers, which also would put the Company's long
distance business at a disadvantage in competing with larger providers.

GOVERNMENT REGULATION OF TELECOMMUNICATIONS OPERATIONS

     The Company's telecommunications services and those of its competitors are
subject to regulation by various authorities, including federal, state and local
governments. The nature and extent of such regulations effect the scope of the
Company's services, their profitability and the degree to which other entities
can successfully offer services in competition with the Company. Generally, the
FCC exercises jurisdiction over all telecommunications service providers to the
extent such services involve the provision of jurisdictionally interstate or
international telecommunications, including the resale of long distance
services, the provision of local access services necessary to connect callers to
long distance carriers providing interstate services, and the use of
electromagnetic spectrum (i.e., wireless services). The Company's Wireless
Licenses were granted by the FCC and many of the Company's services are subject
to the FCC's continuing oversight and jurisdiction. With the passage of the
Telecommunications Act, the FCC's jurisdiction has been extended to include
certain interconnection and related issues that traditionally have been
considered subject primarily to state regulation (e.g., number portability). The
Company has sought and obtained numerous licenses and authorizations from the
FCC and is in the process of obtaining additional FCC licenses and
authorizations.

     The allocation of jurisdiction between federal and state regulators over

dedicated circuits that carry both interstate and intrastate traffic (including
private line and special access services) poses certain jurisdictional issues.
Although the FCC does not generally rule on the jurisdictional nature of a
carrier's traffic, under current FCC practice, non-switched telecommunications
services are considered jurisdictionally interstate (subject to FCC
jurisdiction) unless more than 90% of the traffic is intrastate in nature.
Currently, the Company's dedicated service offerings are primarily
jurisdictionally interstate in nature. The Company believes that these services
include virtually all service between a long distance carrier's POP and another
POP of that long distance carrier or another long distance carrier, and between
an end user and a long distance carrier's POP.

     The Company currently is not subject to price-cap or rate-of-return
regulation and it may install and operate non-radio facilities for the
transmission of interstate (but not international) communications without prior
FCC authorization.

                                       13

<PAGE>

     The Company has filed tariffs with the FCC as required with respect to its
provision of interstate service. In October 1996, the FCC ruled that
non-dominant inter-exchange carriers such as the Company may no longer file
tariffs with the FCC and existing tariffs were required to be withdrawn by
September 22, 1997. This requirement has been stayed by court order. The
Company, through state-specific subsidiaries, has received certification or
other appropriate regulatory authority to provide intrastate non-switched
service in 31 states and the District of Columbia and has applied for authority
in a number of additional states. In addition, the Company recently consummated
the Midcom Asset Acquisition. Midcom is a provider of interstate and intrastate
long distance services and data transport services. The former customers of
Midcom acquired by the Company are currently being provided service by the
Company pursuant to the order of the bankruptcy court approving the Midcom Asset
Acquisition. The Company has filed for and is in the process of obtaining
regulatory approvals from appropriate state regulatory agencies.

     Some of the Company's services are classified as intrastate and therefore
currently are subject to extensive state regulation. The nature of such
regulation varies from state to state, but in some states it may be more
extensive than the regulations imposed by the FCC. In all states where the
Company is offering jurisdictionally intrastate Carrier Services or CLEC
services, the Company (through its state-specific operating subsidiaries) is
certified or otherwise operating with appropriate state authorization. The
Company provides intrastate long distance service pursuant to certification,
registration or (where appropriate) on a deregulated basis in more than 40
states. The Company expects that as its business and product lines expand and as
more pro-competitive regulation of the local telecommunications industry is
implemented, it will offer additional intrastate services. The Company is
seeking to expand the scope of its intrastate services in various jurisdictions,
a process which depends upon regulatory action and, in some cases, legislative
action in the individual states. Interstate and intrastate regulatory
requirements are changing rapidly and will continue to change. The inability to
obtain state approvals to expand the Company's services, or the modification of

existing state approvals to offer services, could have a material adverse effect
on the Company.

     Although the Company believes that it is in substantial compliance with all
material laws, rules and regulations governing its operations and has obtained,
or is in the process of obtaining, all licenses and approvals necessary and
appropriate to conduct its operations, changes in existing laws and regulations,
including those relating to the provision of wireless local telecommunications
services via 38 GHz and/or the future granting of 38 GHz licenses, or any
failure or significant delay in obtaining necessary regulatory approvals, could
have a material adverse effect on the Company. On December 15, 1995, the FCC
announced the issuance of a Notice of Proposed Rulemaking ('NPRM'), pursuant to
which it proposed to amend its current rules relating to 38 GHz and ordered that
those applications that were subject to mutual exclusivity with other applicants
or that were placed on public notice by the FCC after September 13, 1995 would
be held in abeyance and not processed by the FCC pending the outcome of the
proceeding initiated by the NPRM.

     In January 1997, the FCC released a Memorandum and Order ('MO') addressing
some application processing matters raised by the NPRM. In the MO, the FCC
decided to process certain amendments filed between November 13, 1995 and
December 15, 1995. Other amendments filed on or after November 13, 1995 remain
subject to the freeze. Applications that were amended to resolve mutual
exclusivity by December 15, 1995 would be processed, provided they had completed
their 60 day public notice period as of November 13, 1995. Amendments to reduce
existing license areas or delete frequency blocks on licenses would be
permitted.

     In November 1997, the FCC issued the 38 GHz Order in the proceeding which
addressed service rules and a procedure for auctioning unlicensed 38 GHz
spectrum. The FCC adopted many of the major positions advocated by WinStar in
the NPRM, including: (i) flexible use of licenses, including multi-point and
mobile operations (subject to the development of inter-licensee and
inter-services standards); (ii) no quantitative restrictions on the accumulation
of 38 GHz spectrum; (iii) rejection of commercial satellite industry positions
that 39.5 to 40.0 GHz should be solely designated for satellite operation and
that 38 GHz service rules should be delayed; (iv) rejection of equipment
efficiencies standards; (v) permit licensees to utilize their licenses as the
market dictates and engage in geographic partitioning and spectrum
disaggregation under certain circumstances; (vi) limited buildout requirements
based on substantial service; (vii) process pending unencumbered applications;
(viii) institute border interference standards; (ix) permit use of spectrum for
both common carrier and private carriage operations; and (x) auction of
unlicensed areas of the 38 GHz band.

     In the 38 GHz Order, a substantial service buildout requirement was adopted
which generally requires the licensee to establish, during the license renewal
procedure, that the license is being utilized in the public interest. The
earliest license expirations for the Company occur on February 1, 2001.
Licensees are granted an expectation

                                       14

<PAGE>


of renewal, but such an expectation is not guaranteed. The FCC did not mandate
specific buildout criteria, but did offer an example of 'substantial service'
for a typical point-to-point licensee of four wireless transmission links per
million population within a service area.

     The FCC is currently processing all pending eligible license applications.
Those with defects or which are encumbered by mutually exclusive competing
applications will be dismissed. The FCC decided to dismiss all unripe
applications (e.g., those applications which did not stay on Public Notice for
60 days prior to the November 13, 1995 application freeze) and all pending
mutually exclusive applications. Pending petitions at the FCC seeking to protect
these dismissed applications have yet to be addressed. The clear channel
portions of pending multichannel applications will be processed. Mutually
exclusive channels from those multichannel applications will be dismissed.

     Currently unlicensed channels will be auctioned on a Rand McNally BTA
(Basic Trading Area) basis. The auction will cover 493 BTA areas. In BTAs where
an incumbent's rectangular service area license exists, the auction will only be
for the portion of the BTA which is not covered by an incumbent license. The
exact timing of the 38 GHz auction was not specified, but the FCC has announced
that it is seeking to conduct the auctions in the third quarter of 1998. In the
R&O the Commission identified two future rule makings. The first will address
inter- and intraservice interference standards which could have a substantial
impact on the Company's services by limiting the amount of power transmitters
may use or by imposing other technical constraints on the Company's systems. The
second will determine the reserve price and minimum opening bid criteria for the
38 GHz auction. Because the Company has traditionally received its 38 GHz
licenses without the payment of auction-based fees, the second rulemaking and
the use of competitive bidding generally to license spectrum in the 38 GHz band
could impact the price and availability of additional 38 GHz licenses to expand
or further develop the Company's services. The Commission did not state when
either of these rule makings would occur, but the latter must be concluded
before the auction takes place.

     The rules set forth in the 38 GHz Order are scheduled to become effective
on April 7, 1998. Petitions for reconsideration have been filed with the FCC
which challenge a number of the findings set forth in the 38 GHz Order. Appeals
may be filed until April 7, 1998. The changes adopted by the 38 GHz Order are
expected to be the subject of numerous comments by members of the
telecommunications industry, the satellite industry, various government agencies
and others. Consequently, there can be no assurance that the 38 GHz Order will
result in the retention of rules consistent with the rules initially proposed in
the NPRM, or that any rules will be adopted. Until administrative and judicial
remedies are exhausted, the actual effect of the new rules adopted in the 38 GHz
Order remain uncertain. On March 9, 1998, several parties filed the Petitions
alleging, among other things, that the FCC's February 10, 1998 grants to WinStar
of additional channels in 11 markets were in violation of the FCC's processing
rules. Such Petitions were made available to the public on March 10, 1998. At
least one of these parties stated its intent to file a separate pleading on this
issue. There can be no assurance that the Petitions will not result in such
additional channel grants to WinStar being rescinded.

     The Telecommunications Act gives local government the authority to regulate

certain aspects of the telecommunications infrastructure. Such aspects include
franchises, laying of cable and management of certain rights of way and may also
include the siting of certain radio facilities, such as antenna and antenna
towers which, under the Telecommunications Act, must be administered in a
non-discriminatory manner. The type and timing of local approvals, as well as
the specific equipment or facilities requiring approval, and the applicable
fees, if any, varies among the local governments. The scope of local authority
under the Telecommunications Act has been the subject of a number of disputes
between telecommunications carriers and local authorities and the Company
anticipates that administrative proceedings and litigation relating to such
disputes are likely to continue. The FCC has recently preempted, and thereby
prevented enforcement of, certain state and local regulations that had the
effect of inhibiting local competition. Further, certain jurisdictions
including, but not limited to, the city of Dallas, have sought to impose a
franchise fee requirement on carriers, including microwave carriers, that do not
own or maintain facilities in the public rights-of-way, and in some cases also
have attempted to predicate each carrier's right to connect to the 9-1-1 PSAP
(public service administration point) on the carrier's first obtaining a
franchise. Any inability or unwillingness by the FCC and/or courts of competent
jurisdiction to preempt, stay, and/or enjoin such additional state and local
regulations in a timely fashion could have a material adverse impact on the
Company.

     In July 1996, the FCC mandated that the responsibility for administering
and assigning local telephone numbers be transferred from Bellcore to a neutral
entity. In August 1996, the FCC adopted regulations that address certain of
these issues, but left others for decision by the states and the neutral number
plan administrator.

                                       15

<PAGE>

In August 1997, the FCC designated Lockheed Martin as the neutral numbering plan
administrator and the process of transferring numbering administration to this
entity officially was completed in January 1998. The new FCC regulations (a)
require states, in creating new area codes, to impose the same dialing
procedures on ILECs for all local numbers (including both previously issued and
new numbers) as on new entrants (such as the Company); and (b) prohibit ILECs
from charging 'code opening' fees to competitors (such as the Company) unless
they charge the same fee to all carriers including themselves. In addition, each
carrier is required to contribute to the cost of numbering administration
through a formula based on net telecommunications revenues. In the July 1996,
the FCC permitted both residential and business customers to retain their
telephone numbers when switching from one local service provider to another
(known as 'number portability'). Interim number portability, using remote call
forwarding and other processes, was to be implemented immediately. 'Permanent'
number portability, using a centralized data base solution, initially was to
commence as of October 1, 1997. In particular, RBOCs initially were required to
commence implementing permanent number portability in the 100 largest markets by
October 1, 1997 and to complete such implementation by December 31, 1998. The
October 1 date, however, was thereafter extended to March 1998 at the request of
the industry. In smaller markets, RBOCs must implement number portability within
six months of a request therefore commencing December 31, 1998. Other ILECs were

required to implement number portability by October 31, 1997 in those of the
largest 100 markets where the feature is required by another ILEC. Non-RBOC
ILECs are not required to implement number portability in any additional markets
until December 31, 1998, and then only in markets where the feature is required
by another ILEC. Lockheed Martin and a second vendor initially were selected as
administrators for such permanent number portability implementation in assigned
regions of the country. Subsequently, the second vendor was unable to meet
requisite implementation deadlines and its regions (i.e., West, Pacific, and
Southeast, corresponding principally to those incumbent regions served by US
West, Pacific Bell, and BellSouth, respectively) are in the process of being
assumed by Lockheed Martin. In response, the FCC has issued an order allowing
affected ILECs to request a waiver from the original implementation schedule,
and several such waivers have now been filed.

     The competitive environment in which the Company operates changed
significantly with the passage of the Telecommunications Act. The
Telecommunications Act is intended to remove the formal barriers between the
long distance and local telecommunications services markets, allowing service
providers from each market (as well as providers of cable television and other
services) to compete in all communications markets. Section 271 of the
Telecommunications Act establishes procedures to permit RBOCs that meet certain
statutory requirements, including a 14-point competitive checklist designed to
open the local telecommunications market to competition, to compete in the
provision of long distance services ('lnterLATA Services') across local access
transport areas ('LATAs'). Additionally, the FCC must promulgate new regulations
over the next several years to address mandates contained in the
Telecommunications Act, which may change the regulatory environment
significantly. The Telecommunications Act generally requires ILECs to provide
competitors with interconnection and nondiscriminatory access to the ILEC
network on more favorable terms than have been available in the past. However,
such interconnection and the terms thereof are subject to negotiations with each
ILEC, which may involve considerable delays and may not necessarily be obtained
on terms and conditions that are acceptable to the Company. However, such
interconnection and the terms thereof are subject to negotiations with each
ILEC, which may involve considerable delays, and may not necessarily be obtained
on terms and conditions that are acceptable to the Company. In such instances,
although the Company may petition the proper regulatory agency to arbitrate
disputed issues, there can be no assurance that the Company will be able to
obtain acceptable interconnection agreements.

     As required by the Telecommunications Act, the FCC, in August 1996, adopted
new rules implementing the interconnection and resale provisions of the
Telecommunications Act (the 'Interconnection Order'). These rules constitute a
pro-competitive, deregulatory national policy framework designed to remove or
minimize the regulatory, economic and operational impediments to full
competition for local services, including switched local exchange service.
Although setting minimum uniform national rules, the Interconnection Order also
relied heavily on states to apply these rules and to exercise their own
discretion in implementing a pro-competitive regime in their local telephone
markets. Among other things, the Interconnection Order: established rules
requiring incumbent ILECs to interconnect with new entrants such as the Company
at specified network points; required incumbent ILECs to provide carriers
nondiscriminatory access to network elements on an unbundled basis at rates that
are just, reasonable and nondiscriminatory; established rules requiring

incumbent ILECs to allow interconnection via physical and virtual co-location;
required the states to set prices for interconnection,

                                       16

<PAGE>

unbundled elements, and termination of local calls that are nondiscriminatory
and cost-based; required incumbent ILECs to offer for resale any
telecommunications service that the carrier provides at retail to end users at
prices to be established by the states but which generally are at retail prices
minus reasonably avoided costs; and required ILECs and utilities to provide new
entrants with nondiscriminatory access to poles, ducts, conduit and
rights-of-way owned or controlled by ILECs or utilities. Exemptions to some of
these rules are available to ILECs which qualify as rural ILECs under the
Telecommunications Act. The Interconnection Order also required that: ILECs
provide new entrants with nondiscriminatory access to directory assistance
services, directory listings, telephone numbers, and operator services; and
ILECs comply with certain network disclosure rules designed to ensure the
interoperability of multiple local switched networks. There can be no prediction
as to the manner in which the Interconnection Order will be implemented or
enforced or as to what effect such implementation or enforcement will have on
competition within the telecommunications industry generally or on the
competitive position of the Company specifically. In July 1997, the United
States Court of Appeals for the Eighth Circuit invalidated certain provisions of
the Interconnection Order, including those provisions in which the FCC asserted
jurisdiction over the pricing of interconnection elements and the
'pick-and-choose' provisions for carriers to adopt select provisions of other
carriers interconnection agreements. As has been the case since the
Interconnection Order was stayed by the Court of Appeals in October 1996, many
states continue to set the prices for interconnection, resale and unbundled
network elements in a similar manner to that proposed by the FCC in the
Interconnection Order. In August and October 1997, the Eighth Circuit issued
additional decisions invalidating portions of the FCC's interconnection orders,
including those pertaining to dialing parity requirements and bundling of
network elements. The FCC has appealed the Eighth Circuit's rulings to the
United States Supreme Court, which has agreed to hear such appeal in the Fall of
1998.

     On January 22, 1998, the Eighth Circuit ruled that the FCC cannot apply its
local competition pricing rules in reviewing applications of the RBOCs for
authorization under Section 271 to provide InterLATA Services in one of their
in-region states. If upheld, this decision could make it somewhat easier for the
RBOCs to enter the market for in-region long distance services. Although the
Company believes that the final outcome of the Eighth Circuit cases, including
any further proceedings or a Supreme Court appeal, will not materially adversely
affect its operations, there can be no assurance of this.

     On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271. The District Court has granted the request of the FCC and certain
IXCs for a stay, and the Company expects that the FCC and certain IXCs will file
appeals of the decision with the United States Court of Appeals for the Fifth
Circuit. Although there can be no assurance as to the outcome of this

litigation, the Company believes that significant parts of the District Court
decision may be reversed or vacated on appeal. If Section 271 is struck down,
RBOC entry into the in-region inter-LATA market would likely be expedited. No
RBOC has yet received in-region inter-LATA authority.

     Pursuant to the Telecommunications Act, the FCC recently issued orders
reforming ILEC access charge mechanisms and establishing new support mechanisms
for the provision of universal service. Under the access reform orders, the FCC
took steps to make the rate structure in interstate access more efficient and to
move access charges (i.e., the transmission of long distance calls from the
caller's location to the long distance provider's POP, and from the terminating
POP to the recipient of the call) closer to the actual cost of providing such
services. As a result, incumbent ILECs that are subject to price cap regulation
(e.g., the RBOCs, GTE and Sprint) are required under the order to reduce the
interstate rates they charge IXCs for switched local access. For CAPs, such as
the Company's Carrier Services operations, which provide local access at rates
that are discounted from the rates charged by the incumbent ILECs, access charge
reform may have both positive and negative effects (e.g., CAPs might be forced
to reduce the rates they charge long distance providers, resulting in lower
gross margins (which, in the case of the Company currently are negative); but
the more rational cost structure may give CAPs additional opportunities to
provide access services to small and mid-sized interexchange carriers). In
addition, under the FCC's universal service order, all interstate
telecommunications service providers are required to pay for universal service
support based on percentages of their end-user revenues to be established
quarterly by the FCC. If the Company's operating subsidiaries provide subsidized
services, they are eligible to receive universal service support provided they
meet certain statutory requirements. The FCC's access charge and universal
service orders have been appealed.

     The Company is unable to predict what effect the Telecommunications Act
(including any changes thereto, interpretations thereof and orders issued
thereunder) will have on the telecommunications industry in general and on the
Company in particular. No assurance can be given that any regulation will
broaden the opportunities

                                       17

<PAGE>

available to the Company or will not have a material adverse effect on the
Company and its operations. Further, there can be no assurance that the Company
will be able to comply with additional applicable laws, regulations and
licensing requirements or have sufficient resources to take advantage of the
opportunities which may arise from this dynamic regulatory environment.

     Pursuant to an international agreement to which the United States is a
signatory, the 38.6 to 40.0 GHz band is allocated on a co-primary basis to the
Fixed Satellite Services ('FSS') and the 39.5 to 40.5 GHz band is allocated on a
co-primary basis to the Mobile Satellite Services. The FCC has not proposed
rules to implement the agreement provisions, although comments and a petition
for rulemaking have been filed with the FCC by Motorola requesting that such
rules be considered and, in particular, that power flux density limits be
adopted. In response, on May 21, 1996, the FCC placed on public notice for

comment the petition to allocate the 37.5 to 38.6 GHz bands to the FSS and to
establish Technical Rules for the 37.5 to 38.6 GHz band. In addition, Motorola
requested the FCC to adopt the power flux density limitations of the ITU Radio
Regulations for the 37.5 to 40.5 GHz band in order to allow FSS systems and
terrestrial microwave operators to co-exist on a co-primary basis. In September
1996, Motorola filed an application at the FCC to offer fixed satellite services
using a portion of the radio spectrum that includes the 38.6-40.0 GHz band where
the Company holds its Wireless Licenses. On July 14, 1997, Hughes
Communications, Inc. filed an application at the FCC to offer fixed satellite
services using a portion of the radio spectrum that includes 39.5 to 40.0 GHz.
On July 22, 1997, the FCC issued a Public Notice inviting new applicants to
construct, launch and operate U.S. licensed space stations to provide satellite
services in the 40 GHz band. In response, a number of additional companies have
filed applications with the FCC seeking to utilize some or all of the 38 GHz
band on a shared basis with terrestrial users including TRW, Inc., Lockheed
Martin Corporation, GE American Communications and PanAmSat Corporation. If the
FCC were to allow transmissions from space to earth as proposed by such
applicants, such transmissions could possibly adversely affect the Company's
existing or future operations by creating interference or causing the FCC to
institute power and other limitations upon the Company's transmissions. If
adopted as proposed, a number of these applications would likely require changes
in the FCC's rules, although it would likely be a number of years before such
satellite systems could be launched. The extent of the adverse impact upon the
Company's operations if such applications were to be granted in their current
form is unknown, but there can be no assurance that the Company's operations
would not be adversely effected. Although the majority of these applications
have not yet been placed on public notice for comment and no final order has
been issued in connection with these applications, the FCC issued an NPRM in a
band plan proceeding proposing that the 38.6 to 40.0 GHz band be designated for
fixed terrestrial wireless services. In the 38 GHz Order, the FCC declined to
change this service designation. However, this designation could change in the
future.

     As described in the 38 GHz Order, the FCC's policy is to align the
expiration dates of all outstanding 38 GHz licenses such that they mature
concurrently on February 1, 2001 and, upon expiration, to renew all such
licenses for ten years if the FCC's 'substantial service' buildout requirements
are met at renewal. While the Company believes that all of its Wireless Licenses
will be renewed based upon FCC custom and practice establishing a presumption in
favor of licensees that have complied with their regulatory obligations during
the initial license period, there can be no assurance that any Wireless License
will be renewed upon expiration of its initial term. The failure of the Company
to meet the buildout requirement and obtain a renewal of its Wireless Licenses
would have a material adverse effect on the Company.

     State regulatory commissions retain nonexclusive jurisdiction over the
provision of telecommunications services to the extent such services involve the
provision of jurisdictionally intrastate telecommunications. The Company has
authorizations to provide services from numerous states and may need to seek
additional state authorizations in the future. Municipalities also may regulate
limited aspects of the Company's business by, for example, imposing zoning
requirements, permit or right-of-way procedures, and certain taxes or franchise
fees.


     Under the Telecommunications Act, the FCC may, if it finds that the public
interest will be served, deny or revoke a common carrier radio license if more
than 25% of the capital stock of the entity that directly or indirectly controls
the applicant or licensee is owned of record or voted by non-U.S. citizens,
foreign governments or their representatives, or non-U.S. corporations. The
Telecommunications Act also prohibits a licensee from holding a common carrier
radio license if more than 20% of the capital stock of the licensee is owned of
record or voted by non-U.S. citizens, foreign governments or their
representatives, or non-U.S. corporations. As a result of U.S. commitments to
the World Trade Organization ('WTO') Basic Telecommunications Agreement, the FCC
adopted, on November 25, 1997, a Report and Order and Order on Reconsideration
in which the FCC adopted a liberalized entry policy for carriers from WTO member
countries to

                                       18

<PAGE>

access the U.S. telecommunications market. The FCC extended this new policy to
foreign ownership of common carrier radio licenses, and adopted a rebuttable
presumption that greater than 25% ownership by an entity from a WTO member
country of a corporation indirectly or directly controlling a common carrier
radio licensee is in the public interest. The 20% capital stock restriction on
direct investment by all non-US entities in common carrier radio licensees
remains in effect. With respect to investors from non-WTO member countries, the
FCC will continue to apply an 'effective competitive opportunities' test in the
exercise of its statutory discretion to permit foreign ownership of more than
25% of a corporation controlling a common carrier radio licensee. In applying
the 'effective competitive opportunities' test, the FCC generally will consider
the ability of U.S. telecommunications carriers to provide services in the home
market of the non-WTO Member country at issue. The new policies and rules in the
Report and Order and Order on Reconsideration took effect on February 9, 1998.

     Additionally, providers of telecommunication services are coming under
intensified regulatory scrutiny for marketing activities by them or their agents
that result in alleged unauthorized switching of customers from one service
provider to another. The FCC and a number of state authorities are seeking to
introduce more stringent regulations or take other actions to curtail the
intentional or erroneous switching of customers, which could 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, pursuant to the Telecommunications Act, the FCC has
proposed regulations imposing procedures for verifying the switching of
customers and additional remedies on behalf of carriers for unauthorized
switching of their customers. The effect, if any, of the adoption of any such
proposed regulations or other actions on the telecommunications industry and the
manner of doing business therein, cannot be anticipated. Other statutes and
regulations which are or may become applicable to the Company as it expands
could require the Company to alter methods of operations, at costs which could
be substantial, or otherwise limit the types of services offered by the Company.
See '--Legal Proceedings.'

     The Communications Decency Act (the 'Decency Act'), which was passed as
part of the Telecommunications Act, imposed criminal penalties on anyone who

distributes obscene, lascivious or indecent communications on the Internet. As
enacted, the Decency Act imposed fines on any entity that: (i) by means of a
telecommunications device, knowingly sends indecent or obscene material to a
minor; (ii) by means of an interactive computer service, sends or displays
indecent material to a minor; or (iii) permits any telecommunications facility
under such entity's control to be used for the foregoing purposes. That
provision, as applied to indecent material, was declared unconstitutional in
June 1997 by the United States Supreme Court. While the Clinton Administration
has announced that it will not seek passage of similar legislation to replace
this provision, action by Congress in this area remains possible. Prior to the
enactment of the Decency Act, a federal district court held than an ISP could be
found liable for defamation on the grounds that it exercised active editorial
control over postings to its service. The Decency Act contains a provision
which, one court has held, shields ISPs from such liability for material posted
to the Internet by their subscribers or other third parties.

NEW MEDIA BUSINESS

     WinStar believes that the ability to package information, entertainment and
other content and services with telecommunications services will become an
increasingly important factor in the business customer's decision to select or
retain a telecommunications provider. The Company actively seeks opportunities
to acquire the rights or means to market and distribute information and
entertainment content and services both in traditional markets (such as
television, video, cable and radio) and through new media channels such as
Internet sales and services. The Company believes that such content services
will enhance the marketability of the Company's telecommunications services.

     The Company's media and information services and entertainment content
operations are conducted through its wholly-owned subsidiary, WinStar New Media
Company, Inc. ('WinStar New Media'), and WinStar New Media's subsidiaries, and
are organized into three operating units: WinStar for Business; WinStar TV and
Video; and WinStar Networks.

     WinStar for Business(Trademark) provides business information to businesses
through WinStar Telebase Inc. ('WinStar Telebase'), an on-line business
information service. WinStar Telebase designs, manages and markets on-line
information services culled from more than 1,000 databases and leading
electronic information services, including Dialogue, Dun & Bradstreet and TRW.
WinStar Telebase's services provide 'pay-as-you go' access to business, research
and specialized information both directly and indirectly through more than 25
private label

                                       19

<PAGE>

distributors such as CompuServe (now owned by AOL), Prodigy and AOL. These
services allow users to search over 1,000 on-line resources, including
specialized and technical publications, news and financial sources in order to
access a variety of material such as credit, medical, patent and trademark
information. WinStar Telebase recently launched the WinStar Business Info
Center(Trademark), a private-label on demand business information service
customized for WinStar's customers and being offered through WinStar's

telecommunications sales force.

     WinStar TV and Video produces and distributes non-fiction and entertainment
programming. Historical documentaries produced by WinStar New Media include The
Great Ships and Gunfighters of the Old West, for exhibition on the cable
television outlets The History Channel and The Learning Channel, respectively.
This unit also distributes television and film products to broadcast, satellite
and cable channels on a worldwide basis, drawing from a library of approximately
1,500 hours of documentary, light entertainment and special interest titles. The
unit's U.S. video division focuses on the distribution of classic foreign and
art films under its Fox/Lorber label, such as Umbrellas of Cherbourg and Z, and
releases special interest video titles under its WinStar Home Entertainment
label, such as Leslie Nielsen's Stupid Little Golf Video. In addition, WinStar
Broadcasting Corp., a wholly-owned subsidiary of WinStar New Media, has
broadcast license applications pending with the FCC in a number of television
markets.

     WinStar Networks owns and operates SportsFan Radio ('SportsFan'), which
provides live sports talk and information to approximately 350 radio stations
across the United States, up to 24 hours a day, seven days a week, featuring
on-air personalities such as John Madden, James Brown, Pat O'Brien and Keith
Olbermann. SportsFan also has a developing on-line presence on the World Wide
Web and AOL (AOL Keyword: SportsFan). In addition, WinStar Networks sells both
advertising time for third-party syndicated radio program suppliers and
advertising for content-driven interactive media sites.

     The industry in which the Company's new media operation competes consists
of a very large number of entities producing, owning or controlling news,
sports, entertainment, business and educational and informational content and
services, including telecommunications companies, television broadcast
companies, sports franchises, film and television studios, record companies,
newspaper and magazine publishing companies, universities and on-line computer
services and networks. Competition is intense for timely and highly marketable
or usable information and entertainment content. Almost all of the entities with
which the Company's new media operation competes have significantly greater
presence in the various media markets and greater resources than the Company,
including existing content libraries, financial resources, personnel and
existing distribution channels. There can be no assurance that the Company will
be able to successfully compete in the emerging new media industry.

OTHER BUSINESS

     The Company has historically generated a significant portion of its
revenues from the resale of long distance services to residential customers. As
part of its CLEC service offerings, the Company is focusing on the sale of long
distance services to businesses and is not currently marketing such services to
residential customers on an active basis. In connection with the Midcom Asset
Acquisition, the Company also acquired a cellular services reseller which
provides services in the northwest United States and a minority interest in a
provider of telecommunication services in the Russian Far East.

     Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath and
beauty products, through Global Products, a nonstrategic subsidiary. That

subsidiary continues to sell such products, primarily to large retailers, mass
merchandisers, discount stores, department stores, national and regional drug
store chains and other regional retail chains. The Company expects to divest
itself of this subsidiary during the next 12 months, and the operations of
Global Products are reflected in the Company's financial statements as
discontinued operations.

EMPLOYEES

     As of March 20, 1998, the Company had approximately 2,100 employees. The
Company is not a party to any collective bargaining agreements and has never
experienced a strike or work stoppage. The Company considers its relations with
its employees to be satisfactory.

                                       20

<PAGE>

ITEM 2. PROPERTIES

     The Company's corporate headquarters are located at 230 Park Avenue, New
York, New York 10169. These headquarters are situated in approximately 18,000
square feet of space which are leased by the Company. The Company has leases for
additional office space of approximately 6,000 square feet and 11,500 square
feet, each at 230 Park Avenue. Each of the above-described leases expires in
November 2006. The Company maintains leases on other properties used in the
operations of its subsidiaries, including leases for its CLEC operations
facilities in Tysons Corner and Vienna, Virginia. The Company believes that its
insurance coverage on its properties is adequate and that the Company, and each
of its subsidiaries, as the case may be, is in compliance with the related
leases.

ITEM 3. LEGAL PROCEEDINGS

     WinStar Gateway Network, Inc., the Company's residential long distance
subsidiary ('WinStar Gateway') occasionally receives inquiries from state
authorities and the FCC with respect to consumer complaints concerning the
provision of telecommunications services, including allegations of unauthorized
switching of long distance carriers and misleading marketing. The Company
believes such inquiries are common in the long distance industry and addresses
such inquiries in the ordinary course of business. In December 1996, the FCC and
WinStar Gateway entered into a consent decree which terminated an inquiry by the
FCC into any alleged violations of unauthorized carrier conversions through the
use of contest programs by some of WinStar Gateway's agents. The FCC cited
WinStar Gateway's efforts in identifying the problems caused by these agents and
its proactive response in implementing remedial actions on its own as
significant factors leading to the consent decree in lieu of initiating a formal
investigation. The Company entered into assurances of voluntary compliance with
the attorneys general of a number of states and has also initiated negotiations
with other state authorities to resolve any claims by such authorities arising
from the contest programs. The Company does not believe that resolution of these
issues will have a material adverse effect on the Company, its financial
condition or its results of operations.


     In June 1996 the Company, as plaintiff, commenced an action for declaratory
judgment against Nelson Thibodeaux, a former officer of WinStar Gateway, in the
Federal District Court for the Southern District of New York, seeking a
declaration that the Company has no obligation to Mr. Thibodeaux under stock
option agreements granted to him during his employment with WinStar Gateway.
This action was commenced in response to claims made by Mr. Thibodeaux that he
is entitled to a significant number of additional options (or the cash value
thereof) pursuant to the antidilution provisions of such agreements. The Company
strongly believes that no events have taken place which would have triggered
such antidilution provisions. Additionally, the Company seeks monetary damages
arising from an alleged breach by Mr. Thibodeaux of the non-competition and
related provisions contained in his employment agreement with the Company. Mr.
Thibodeaux has answered the Company's complaint, denying all of the Company's
assertions and asserting counterclaims seeking damages against the Company, Mr.
Rouhana and Fredric E. von Stange, who is a former director and Chief Financial
Officer of the Company, all of whom deny any liability to Mr. Thibodeaux. The
Company intends to diligently proceed with this action which is currently in the
discovery phase.

     In January 1998, a stockholder suit, purported to be a class action, was
commenced against the Company, its directors (and certain former directors) and
one non-director officer in the Delaware Chancery Court seeking, among other
things, to invalidate certain portions of the Company's Stockholder Rights Plan,
adopted in July 1997 (the 'Rights Plan'), and to recover unspecified damages and
attorneys' fees. The complaint alleges that certain provisions of the Rights
Plan, particularly the so-called 'Continuing Directors' provision, are not
permitted under the Delaware General Corporate Law and the Company's Certificate
of Incorporation. The Company believes that these allegations are without merit
and that the Rights Plan was properly adopted and is valid in its entirety. The
Company is reviewing its available alternatives with regard to responding to
this action.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

     None.

                                       21

<PAGE>
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS 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 last sale prices of the Common Stock as reported on the Nasdaq National
Market. The quotes represent 'inter-dealer' prices without adjustment or
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
PERIOD ENDING                                                                                 HIGH         LOW
-------------------------------------------------------------------------------------------   ----         ---
<S>                                                                                           <C>       <C>
March 31, 1996.............................................................................   $18 1/2    $13  3/8
June 30, 1996..............................................................................    32 1/4     16
September 30, 1996.........................................................................    29         15 3/4
December 31, 1996..........................................................................    23 7/8     16 1/2
March 31, 1997.............................................................................    20 1/4     11 5/8
June 30, 1997..............................................................................    14 5/8     10 1/8
September 30, 1997.........................................................................    19 3/16    14 1/4
December 31, 1997..........................................................................    29 1/4     21 1/4
January 1, 1998 through March 27, 1998.....................................................    46 3/8     24 5/8
</TABLE>

     The last sale price of the Common Stock on March 27, 1998 was $44.75 per
share. As of that date the Company had approximately 37,217,000 shares of
Common Stock outstanding held by more than 1,000 beneficial holders.

     The following securities were issued by the Company in unregistered
transactions in the fourth quarter of 1997:

<TABLE>
<CAPTION>
                                                                                             TERMS OF
SECURITIES SOLD                                                         EXEMPTION         CONVERSION OR
(DATE SOLD)                 PURCHASERS           CONSIDERATION           CLAIMED             EXERCISE            USE OF PROCEEDS
----------------------    ---------------    ----------------------    ------------    --------------------    --------------------
<S>                       <C>                <C>                       <C>             <C>                     <C>
175,000 shares of         Certain            $175 million, less        Rule 144(A)     Not applicable          The proceeds of
Series C Preferred        Institutions       certain discounts                                                 this issuance
Stock                                        and expenses                                                      was/will be used
                                                                                                               for the MidCom
                                                                                                               Acquisition Growth
                                                                                                               of the Company's
                                                                                                               business and working
                                                                                                               capital.

251,547 shares of         Various            Shares issued as          4(2)            Not applicable          The Company did not
Common Stock              individuals        consideration in                                                  receive cash proceeds
(Various dates            and entities       various acquisitions                                              for these shares.
from 10/1/97-12/31/97)

</TABLE>

                                       22


<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

     The financial data presented below has been derived from the Company's
audited Consolidated Financial Statements. The data has been presented to
reflect the operations of WinStar Global Products, Inc. ('Global Products'), the
Company's merchandising subsidiary, as a discontinued operation.

<TABLE>
<CAPTION>
                                                                     TEN MONTHS
                                                 YEAR ENDED            ENDED             YEAR ENDED
                                                FEBRUARY 28,        DECEMBER 31,        DECEMBER 31,
                                             -------------------    ------------    ---------------------
                                              1994        1995          1995          1996        1997
                                             -------    --------    ------------    --------    ---------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>        <C>         <C>             <C>         <C>
Statement of Operations Data:
  Net sales:
     Telecommunications...................   $ 8,505    $ 14,909      $ 13,137      $ 33,969    $  38,277
     Information services.................        --         473         2,648        14,650       41,354
     Other................................     1,278          --            --            --           --
                                             -------    --------    ------------    --------    ---------
       Total net sales....................     9,783      15,382        15,785        48,619       79,631
                                             -------    --------    ------------    --------    ---------
                                             -------    --------    ------------    --------    ---------
  Operating income (loss):
     Telecommunications...................      (660)     (4,984)       (7,288)      (43,698)    (153,139)
     Information services.................        --        (157)          217        (1,409)      (4,092)
     Other................................      (272)         --            --            --           --
     General corporate....................    (1,342)       (944)       (3,861)      (11,373)     (30,815)
                                             -------    --------    ------------    --------    ---------
       Total operating loss...............    (2,274)     (6,085)      (10,932)      (56,480)    (188,046)
Interest expense..........................      (724)       (375)       (7,186)      (36,748)     (77,257)
Interest income...........................       109         343         2,890        10,515       17,577
Other (expenses) income, net (a)..........    (5,316)     (1,109)         (866)           --        4,719
                                             -------    --------    ------------    --------    ---------
Loss from continuing operations...........    (8,205)     (7,226)      (16,094)      (82,713)    (243,007)
(Loss) income from discontinued
  operations..............................        10          (4)          237        (1,010)      (6,477)
                                             -------    --------    ------------    --------    ---------
Net loss..................................    (8,195)     (7,230)      (15,857)      (83,723)    (249,484)
Preferred stock dividends.................        --          --            --            --       (5,879)
                                             -------    --------    ------------    --------    ---------
Net loss applicable to common stock.......   $(8,195)   $ (7,230)     $(15,857)     $(83,723)   $(255,363)
                                             -------    --------    ------------    --------    ---------
                                             -------    --------    ------------    --------    ---------
Basic and diluted loss per share:
  Loss per common share from continuing
     operations...........................   $ (1.06)   $  (0.42)     $  (0.71)     $  (2.96)   $   (7.49)
  (Loss) income per common share from
     discontinued operations..............        --          --          0.01         (0.04)       (0.19)
                                             -------    --------    ------------    --------    ---------
Net loss per common share outstanding.....   $ (1.06)   $  (0.42)     $  (0.70)     $  (3.00)   $   (7.68)
                                             -------    --------    ------------    --------    ---------
                                             -------    --------    ------------    --------    ---------
Weighted average common shares
  outstanding.............................     7,719      17,122        22,770        27,911       33,249
</TABLE>

<TABLE>
<CAPTION>
                                                        FEBRUARY 28,                    DECEMBER 31,
                                                   ----------------------    -----------------------------------
                                                     1994         1995         1995         1996         1997
                                                   ---------    ---------    ---------    ---------    ---------
                                                                                 (IN THOUSANDS)
<S>                                                <C>          <C>          <C>          <C>          <C>

Balance Sheet Data:
  Cash, cash equivalents and short-term
     investments................................   $     646    $   2,895    $ 211,602    $ 122,487    $ 419,262
  Property and equipment, net...................   $     951    $   2,190    $  15,063    $  65,572    $ 284,835
       Total assets.............................   $  12,713    $  25,338    $ 278,226    $ 278,789    $ 976,401
Current portion of long-term debt and capital
  lease obligations.............................   $   1,790    $     285    $   5,275    $  23,011    $   7,234
Long-term debt and capital lease obligations,
  less current portion..........................   $   3,084    $   2,389    $ 240,428    $ 276,007    $ 790,292
Exchangeable Redeemable Preferred Stock ........   $      --    $      --    $      --    $      --    $ 175,553
Common and preferred stock and additional
  paid-in capital(b)............................   $  22,665    $  43,518    $ 104,823    $  75,726    $ 256,126
Stockholders' equity (deficit)..................   $   3,547    $  17,206    $  21,752    $ (49,671)   $(118,392)
</TABLE>

                                                        (Footnotes on next page)

                                       23

<PAGE>

(Footnotes from previous page)
------------------

(a) For the year ended February 28, 1994, principally represents non-cash
    expense of $5.3 million, consisting of the difference between the exercise
    prices of certain options granted in connection with the Company's initial
    public offering in April 1991 and the market value of the underlying shares
    of Common Stock on the date such options became exercisable. The year ended
    December 31, 1997 includes a deferred income tax benefit of $2.5 million.

(b) The Company did not declare or pay any dividends on its Common Stock during
    the periods covered hereby.

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

COMPANY OVERVIEW

     The Company operates the following lines of business: (i) CLEC Services,
including local and long distance voice and data telecommunications services to
business customers, (ii) Carrier Services, including wireless broadband local
access and dedicated network services to other telecommunications providers, and
(iii) Information Services, including the provision of information products and
services to the Company's telecommunications customers as well as the creation
and distribution of information and entertainment products and services through
a variety of traditional and new media outlets such as radio, television and the
Internet. Residential Long Distance includes the resale of long distance
services to residential customers. As part of its CLEC service offerings,
however, the Company is focusing on the sale of long distance services to
businesses and no longer markets Residential Long Distance services.

REVENUES


     Revenues generated by the Company's telecommunications businesses represent
an increasing percentage of the Company's consolidated revenues as the Company
expands its full range of voice and data telecommunications services into new
markets. Factors driving the mix of revenues are as follows:

  CLEC Services

     Revenues from local and long distance products are driven primarily by the
number of customer lines installed and in service. Customers generally are
billed a flat monthly fee and/or a per-minute usage charge. Data services
revenues generally are billed as a flat monthly charge for capacity ordered.
Revenue growth depends upon the addition of new customers in existing markets,
the sale of bundled services such as long distance, the expansion of markets
served by the Company, and the introduction of new services, such as broadband
data transmission and video conferencing services. Revenues from CLEC Services
were approximately $10.2 million in the quarter ended December 31, 1997, versus
$6.5 million in the quarter ended September 30, 1997, $4.0 million in the
quarter ended June 30, 1997 and $2.0 million in the quarter ended March 31,
1997. The Company expects its CLEC Services revenues, including voice and data
telecommunications services, to continue to increase as it expands its network
and network utilization increases.

  Carrier Services

     Carrier Services revenues are driven primarily by the number and capacity
(i.e., T-1s or DS-3s) of Wireless Fiber links in service and sold to the
Company's wholesale customers. The Company currently is focusing its wholesale
selling activities on a select number of large carriers.

  Residential Long Distance

     The Company markets its long distance services as a part of its integrated
telecommunications offerings, focusing on sales to business customers. As a
result, the Company has allowed revenues from its Residential Long Distance
service to decline through attrition as it focuses on its core business market
and it expects this decline to continue.

                                       24

<PAGE>

  Information Services

     Information Services revenues are generated principally by: (i) sales of
content and related services to traditional customers, such as cable networks
and radio stations; (ii) sales to new media distribution channels, such as
on-line services; (iii) advertising sales; and (iv) the bundling of content with
the Company's telecommunications services. Revenues also are driven by the
amount and quality of the Company's available program rights during each quarter
and some seasonality of sales, which affect quarter-to-quarter comparability.
The Company expects Information Services revenues to increase as the Company
expands its information service offerings and increases cross-sales of such
services to CLEC customers.


COSTS

     Factors relating to costs are as follows:

  CLEC Services

     Costs associated with the Company's CLEC business include significant
up-front capital expenditures for development of the infrastructure required to
provide facilities-based local exchange and data services, including
expenditures relating to purchases and installation of switching equipment,
radios, customer premise equipment and related site acquisition and installation
costs. In addition, the Company is incurring start-up costs related to its CLEC
business that will not be capitalized, including some costs of engineering,
sales office and service personnel, marketing, administrative and other
personnel, certain of whom will be needed in advance of related revenues. As the
Company commences operations in a city, its cost of revenue percentage is
greater as fixed costs are spread over less traffic. Margins on CLEC Services
revenues are improved as traffic increases, and the fixed network costs are
spread over a larger traffic base. Although the Company strives to carry all of
its traffic over its own facilities, the Company will continue to carry certain
amounts of its traffic over leased or resold facilities at lower margins. The
resale of CLEC Services typically will result in lower operating margins than
the provision of services over the Company's own facilities.

  Carrier Services

     The Company's Carrier Services business utilizes the same fixed wireless
network which the Company is building for its CLEC Services business.
Accordingly, as network utilization increases, the related cost of Carrier
Services as a percentage of revenue decreases.

  Residential Long Distance

     Costs associated with the Company's residential long distance business
include expenses related to minutes purchased from major carriers for resale,
and accordingly fluctuate with revenue. Typically, reductions of such costs are
achieved through negotiated volume rebates and competitive contract pricing.

  Information Services

     The Company's Information Services businesses have production, distribution
and administrative costs. Film production costs include those related to
producing original products and licensing third-party products and are
capitalized as incurred and are expensed as productions are completed and
distributed. Overhead costs in the production division are also capitalized and
allocated to films in progress, and are subsequently expensed as such films are
completed and distributed. Other media production costs are expensed as
incurred. 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 which are expensed as incurred.

                                       25

<PAGE>

RESULTS OF OPERATIONS

     Revenues of the Company's operating business lines are as follows (in
millions):

<TABLE>
<CAPTION>
                                                                    TEN MONTHS ENDED
                                                                    DECEMBER 31,(a)      YEAR ENDED DECEMBER 31,
                                                                    ----------------    --------------------------
                                                                     1994      1995      1995      1996      1997
<S>                                                                 <C>       <C>       <C>       <C>       <C>
Telecommunications Services:
  CLEC Services..................................................   $   --    $   --    $   --    $  0.5    $ 22.7
  Carrier Services...............................................       --       0.1       0.1       3.9       7.1
  Residential Long Distance......................................     13.4      13.0      14.5      29.5       8.5
                                                                    ------    ------    ------    ------    ------
                                                                      13.4      13.1      14.6      33.9      38.3
Information Services.............................................      0.2       2.6       2.9      14.6      41.3
                                                                    ------    ------    ------    ------    ------
  Total Revenues from Continuing Operations......................   $ 13.6    $ 15.7    $ 17.5    $ 48.6    $ 79.6
                                                                    ------    ------    ------    ------    ------
                                                                    ------    ------    ------    ------    ------
</TABLE>

------------------
(a) The Company changed its fiscal year to December 31 from February 28
    effective January 1, 1996.

     The following discussion of results of operations does not include the
results of operations of Global Products, which has been reclassified as a
discontinued operation.

     YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     Revenues from continuing operations increased by $31.0 million, or 64%, for
the year ended December 31, 1997, to $79.6 million, from $48.6 million for the
year ended December 31, 1996. This increase was attributable to increased
revenues generated by the Company's CLEC, carrier services and information
services businesses, partially offset by a decrease in residential long distance
revenues.

     Revenues from CLEC services, which include all commercial end user customer
telecommunication revenues, were $22.7 million in the year ended December 31,
1997, and were minimal in the year ended December 31, 1996, as the CLEC business
commenced operations in the second quarter of 1996. As of December 31, 1997, the
CLEC business had installed 82,000 lines, up from 51,000 lines at September 30,
1997 and 4,400 at December 31, 1996. The annualized revenues from December 1997
for the CLEC business were approximately $46.2 million.

     Revenues from carrier services increased $3.2 million to $7.1 million in
the year ended December 31, 1997, as compared to $3.9 million in the year ended

December 31, 1996. This increase resulted from the growing number of billed
circuits, along with installation revenue and equipment sales related to
contract services provided.

     WinStar's residential long distance revenues decreased $21.0 million to
$8.5 million in the year ended December 31, 1997, compared to $29.5 million in
the year ended December 31, 1996. Such a decrease was expected and was the
result of WinStar's focus on its core business of selling communications
services to business customers and to other carriers.

     Revenues from information services increased by $26.7 million, or 182%, in
the year ended December 31, 1997, to $41.3 million, from $14.7 million in the
year ended December 31, 1996, due to continued internal growth and acquisitions,
including the Telebase online business service acquired earlier in 1997.

     Cost of services and products increased by $42.8 million, or 112%, for the
year ended December 31, 1997, to $81.0 million, from $38.2 million for the year
ended December 31, 1996. As a percentage of sales, cost of services and products
in the year ended December 31, 1997 was 102% compared with 79% in the year ended
December 31, 1996, as a result of increasing network costs from the continued
expansion of the Company's local telecommunications business.

     Selling, general and administrative expense increased by $94.6 million to
$157.0 million for the year ended December 31, 1997, from $62.4 million for the
year ended December 31, 1996. The Company continued to hire sales, marketing and
related support personnel in connection with the accelerated rollout of its CLEC
operations, which had only 500 employees at December 31, 1996 and approximately
1,200 employees at December 31, 1997. In addition, the Company increased
spending on related advertising and marketing of its CLEC services.

     Depreciation and amortization expense increased by $25.2 million for the
year ended December 31, 1997, to $29.7 million, from $4.5 million for the year
ended December 31, 1996. This growth in expense resulted

                                       26

<PAGE>

principally from the Company's acquisition and deployment of switches, radios
and other equipment in connection with its telecommunications network buildout.

     For the reasons noted above, the operating loss for the year ended December
31, 1997 was $188.0 million, compared with an operating loss of $56.5 million
for the year ended December 31, 1996.

     Interest expense increased by $40.5 million, or 110%, for the year ended
December 31, 1997, to $77.3 million, from $36.7 million for the year ended
December 31, 1996. The increase was principally attributable to the Company's
issuance of debt in 1997. Of the $77.3 million interest expense for the year,
$53.5 million is not payable in cash until after 1999.

     Interest income increased by $7.1 million, or 67%, for the year ended
December 31, 1997, to $17.6 million, from $10.5 million for year ended December
31, 1996. The increase resulted from the additional interest income earned on

the proceeds from the Company's issuance of debt and equity securities in 1997.

     In 1997, the Company recognized dividends of $5.9 million on its placement
of Series A and Series C Preferred Stock, which were paid in kind.

     For the reasons noted above, the Company reported a net loss applicable to
Common Stock of $255.4 million for the year ended December 31, 1997, compared to
a net loss of $83.7 million for the year ended December 31, 1996.

     YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Revenues from continuing operations increased by $31.1 million, or 178%,
for the year ended December 31, 1996, to $48.6 million, from $17.5 million from
the year ended December 31, 1995. This increase was primarily attributable to
increased revenues generated by the Company's telecommunications and information
services segments.

     The Company's telecommunications services revenues increased by $19.3
million, or 132%, for the year ended December 31, 1996, to $33.9 million, from
$14.6 million for the year ended December 31, 1995, principally resulting from
an increase in revenues from residential long distance telephone services.
Revenues from the information and entertainment services segment increased by
$11.8 million, or 407%, for the year ended December 31, 1996, to $14.7 million,
from $2.9 million for the year ended December 31, 1995, due to continued growth
of this segment internally and through acquisitions. The revenue increase in
1996 was generated primarily from increased production and distribution of
entertainment content, including documentaries, foreign films and multimedia
sports programming.

     Cost of services and products increased by $23.6 million, or 161%, for the
year ended December 31, 1996, to $38.2 million, from $14.6 million for the year
ended December 31, 1995. As a percentage of sales, cost of services and products
in 1996 was 78%, compared with 83% in 1995, due in part to increased start-up
costs for facilities in connection with the rollout of the Company's
telecommunications network.

     Selling, general and administrative expense increased by $47.6 million to
$62.4 million for the year ended December 31. 1996, or 128% of revenues, from
$14.8 million, or 85% of revenues, for the year ended December 31, 1995.
Selling, general and administrative expense increased predominantly in the
telecommunications segment as the Company continued to hire sales, marketing and
related support personnel in connection with the accelerated rollout of its CLEC
operations, and increased spending on related advertising and marketing of
services in new and existing cities where the Company offered its services.

     Depreciation and amortization expense increased by $3.5 million, or
approximately 350%, for the year ended December 31, 1996, to $4.5 million, from
$1.0 million for the year ended December 31, 1995, principally resulting from
the Company's acquisition of switches, radios and other telecommunications
equipment.

     For the reasons noted above, the operating loss for the year ended December
31, 1996, was $56.5 million, compared to an operating loss of $12.9 million for
the year ended December 31, 1995.


     Interest expense increased by $29.5 million, or approximately 410%, for the
year ended December 31, 1996, to $36.7 million, from $7.2 million for the year
ended December 31, 1995. The increase was primarily attributable to $33.5
million in interest accrued on the 1995 Notes issued in the 1995 Debt Placement,
which is not payable in cash until after 1999.

     Interest income increased by $7.6 million, or approximately 262%, for the
year ended December 31, 1996, to $10.5 million, from $2.9 million for the year
ended December 31, 1995. The increase is attributable to short-term investment
earnings on the proceeds of the 1995 Debt Placement.

                                       27

<PAGE>

     For the reasons noted above, the Company reported a net loss of $83.7
million for the year ended December 31, 1996, compared to a net loss of $18.2
million for the year ended December 31, 1995.

     TEN MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THE TEN MONTHS ENDED
DECEMBER 31, 1994

     Revenues from continuing operations for the ten months ended December 31,
1995 increased by $2.2 million, or 16%, to $15.8 million, from $13.6 million in
the comparable period of the prior year. This increase was attributable to
increased revenues in the Company's information services line of business.
During the ten months ended December 31, 1995, the Carrier Services business had
only nominal revenues. The information services line of business, which reported
nominal revenues in the prior year, had revenues of approximately $2.6 million
for the ten months ended December 31, 1995, related primarily to the completion
of certain documentary television products.

     Cost of services and products for the ten months ended December 31, 1995
increased by $2.7 million, to $12.1 million, from $9.4 million for the ten
months ended December 31, 1994. The increase was principally attributable to the
growth in the Company's information services line of business, along with
initial expenses incurred in connection with the Company's telecommunications
network.

     Selling, general and administrative expenses increased by $5.7 million to
$13.6 million, or 86% of revenues, for the ten months ended December 31, 1995,
from $7.9 million, or 58% of revenues, in the comparable period of the prior
year. Factors contributing to the increase were: the acquisition of Avant-Garde
Telecommunications, Inc. ('Avant-Garde,' the original holder of many of the
Wireless Licenses) and the consolidation of that entity's results of operations
into the Company's financial statements from July 17, 1995 onward; the hiring of
additional personnel; and the expansion of the Company's infrastructure to
manage future growth in its telecommunications business.

     For the reasons noted above, the operating loss for the ten months ended
December 31, 1995, was $10.9 million, compared to an operating loss of $3.9
million in the comparable period of the prior year.


     Interest expense increased by $6.9 million to $7.2 million for the ten
months ended December 31, 1995, from $0.3 million for the ten months ended
December 31, 1994, reflecting principally the non-cash accretion of interest on
certain indebtedness issued in the 1995 Debt Placement.

     Interest income for the ten months ended December 31, 1995 increased by
$2.6 million, to $2.9 million, compared with $0.3 million for the same period
during the prior year. The increase was attributable to earnings on the 1995
Debt Placement, which raised net proceeds of $214.5 million.

     For the reasons noted above, the Company reported a net loss of $15.9
million for the ten months ended December 31, 1995, compared to a net loss of
$4.6 million in the comparable period of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

     In February 1997, the Company and a subsidiary sold 4,000,000 shares of its
6% Series A Cumulative Convertible Preferred Stock and warrants to purchase
1,600,000 shares of Common Stock in a private placement, pursuant to which they
realized aggregate net proceeds of approximately $96.0 million.

     In March 1997, the Company sold $100.0 million principal amount of 14 1/2%
Senior Deferred Interest Notes Due 2005 and a subsidiary, WinStar Equipment
Corp. ('WEC') sold $200.0 million principal amount of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 ('WEC Notes') in a private placement, pursuant to which
they realized net proceeds of approximately $290.5 million. In August 1997,
another subsidiary, WinStar Equipment II Corp. ('WEC II') sold $50.0 million
principal amount of 12 1/2% Guaranteed Senior Secured Notes Due 2004 ('WEC II
Notes,' and, together with the WEC Notes, the 'Equipment Notes') in a private
placement, generating net proceeds of approximately $48.5 million. In October
1997, the Company sold $100.0 million principal amount of 15% Senior
Subordinated Deferred Interest Notes Due 2007 in a private placement, realizing
net proceeds of approximately $94.0 million. Under the terms of the Equipment
Notes, the principal amount thereof must be utilized by March 18, 1999 and
August 8, 1999, respectively, to purchase designated equipment or for the
redemption of the Equipment Notes. See Note 21 of the Consolidated Financial
Statements included elsewhere in this Report for a description of the operations
of WEC and WEC II.

     In December 1997, the Company and one of its subsidiaries sold 175,000
shares of the Company's 14 1/4% Senior Cumulative Exchangeable Preferred Stock
Due 2007, pursuant to which they realized net proceeds of approximately $168.0
million.

                                       28

<PAGE>

     At December 31, 1997, the Company had approximately $419.3 million in cash,
cash equivalents and short-term investments, of which approximately $183.0
million is to be used to finance equipment purchases and related costs in
connection with the Company's rollout of its telecommunications infrastructure
in accordance with the terms of the Equipment Notes and $92.0 million was used
in January 1998 for the purchase of assets of Midcom.


     In March 1998, (i) the Company and a subsidiary consummated a private
placement of $200.0 million of the Company's 7% Senior Cumulative Convertible
Series D Preferred Stock, (ii) the Company consummated private placements of
$200.0 million of its 10% Senior Subordinated Notes Due 2008 (the 'Cash Pay
Notes') and $250.0 million of its 11% Senior Subordinated Deferred Interest
Notes Due 2008, and (iii) a subsidiary of the Company consummated a sale
leaseback of certain telecommunications switches acquired by the Company from US
One in October 1997, which is expected to generate net proceeds of
approximately $42.0 million.

     The Company has incurred significant operating and net losses, due in large
part to the development of its telecommunications services business, and
anticipates that such losses will continue over the near term as the Company
executes its growth strategy. A significant portion of the Company's capital
requirements will result from the rollout of the Company's CLEC business. The
Company is building a direct sales force, having opened sales offices serving
each of the markets in which it offers CLEC services, and is in the process of
expanding into other metropolitan areas. Additionally, the Company is in the
process of ordering and installing switching and other network equipment to be
placed in its key markets. Historically, the Company has funded its operating
losses and capital expenditures through public and private offerings of debt and
equity securities and from credit and lease facilities. Cash used to fund
negative EBITDA during the year ended December 31, 1997 was approximately $158.0
million, and purchases of property and equipment during the year ended December
31, 1997 was approximately $222.3 million. At December 31, 1997, the Company's
working capital totaled $366.0 million and its cash, cash equivalents and
short-term investments were $419.3 million, as compared to working capital of
$108.7 million and cash, cash equivalents and short-term investments of $122.5
million at December 31, 1996.

     Other than the Equipment Notes and the Cash-Pay Notes and certain
capitalized lease obligations, each of which requires periodic cash interest or
equivalent payments, the Company's principal indebtedness does not require the
Company to pay cash interest until 2001.

     The Company has the ability to moderate its capital spending and EBITDA
losses by varying the number of markets in which it builds network and offers
service. In the event that the Company slows the speed or narrows the focus of
its business plan, the Company will reduce its capital requirements and EBITDA
losses. Under its current plans to expand to 40 major metropolitan markets on a
switched basis by the end of 1999, the Company plans to spend approximately
$300.0 million in each of 1998 and 1999 for capital equipment, which may require
the Company to seek additional capital from financial institutions, equipment
vendors or in the financial markets. The Company anticipates, based on current
plans and assumptions relating to its operations, that existing financial
resources, together with additional equipment and accounts receivable financing
arrangements that the Company intends to seek, will be sufficient to fund the
Company's operations and capital requirements for approximately 18 to 30 months
from the date of this Report. The Company believes that it will be able to
obtain sufficient capital to execute its business plan. In the event that the
Company's assumptions change or prove to be inaccurate, the Company consummates
any acquisitions of significant businesses or assets (including spectrum
licenses other than those being acquired by the Company in the recently
completed auction of LMDS Licenses, by auction or otherwise), the Company

accelerates its plan and enters markets more rapidly, or the Company fails to
secure additional equipment financing arrangements, the Company may be required
to seek additional sources of capital sooner than currently anticipated.

     In addition to binding commitments to purchase $31.0 million of
telecommunications capital equipment, the Company had commitments to pay
approximately $55.0 million in Common Stock, or at the Company's election, cash,
in connection with the acquisition of additional spectrum licenses, of which
shares having a value of approximately $28.5 million were issued in March 1998.
Additionally, the Company was the highest bidder on certain LMDS Licenses in the
LMDS Auction and has committed to pay approximately $30.0 million in connection
therewith (in addition to the Company's $13.0 million initial downpayment in
such auction).

                                       29

<PAGE>

YEAR 2000 COMPLIANCE

     The Company has completed a review of its computer systems and operations
to determine the extent to which its systems will be vulnerable to potential
errors and failures as a result of the 'Year 2000' problem. The Year 2000
problem is the result of prior computer programs being written using two digits,
rather than four digits, to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using '00' as
the year 1900 rather than the year 2000. This could result in major system
failure or miscalculations.

     The Company has concluded that its significant computer programs and
operations will not be affected by the Year 2000 problem and that the programs
that will be affected can and will be properly modified or replaced by the end
of 1999 at a cost which will not be significant to the Company.

     However, to the extent that other telecommunications carriers in the
national telecommunications infrastructure, including carriers whose services
are resold by the Company or to which the Company's network is interconnected
directly or indirectly, are not Year 2000 compliant, there can be no assurance
that such resulting problems will not have a material adverse effect on the
Company.

EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 130, 'Reporting Comprehensive Income' (SFAS No. 130),
governing the reporting and display of comprehensive income and its components,
and Statement of Financial Accounting Standards No. 131, 'Disclosures About
Segments of an Enterprise and Related Information' (SFAS No. 131), requiring
that all public businesses report financial and descriptive information about
their reportable operating segments. The Company will implement SFAS 130 and
SFAS 131 as required in 1998. The impact of adopting SFAS No. 130 is not
expected to be material to the consolidated financial statements or notes to
consolidated financial statements. Management is currently evaluating the effect
of SFAS No. 131 on consolidated financial statement disclosures.

FORWARD-LOOKING STATEMENTS

     This Report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations and business of the Company. These
forward-looking statements involve certain risks and uncertainties. Such
forward-looking statements are contained in the sections 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business-Business Strategy,' among others. In addition, in those and other
portions of this Report, the words 'anticipate,' 'believe,' 'estimate,'
'expect,' 'plan,' 'intend' and similar expressions, as they relate to the
Company, are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions. No assurance can be
given that any of such expectations will be realized. Factors that may cause
actual results to differ materially from those contemplated by such
forwardlooking statements include, without limitation: (a) the Company's ability
to service its debt or to obtain financing for the buildout of its
telecommunications network; (b) the Company's ability to attract and retain a
sufficient revenue-generating customer base; (c) competitive pressures in the
telecommunications industry; and (d) general economic conditions.

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.

                                       30

<PAGE>
                                    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 anticipated to be held on June 10, 1998.

                                       31

<PAGE>

ITEM 14. EXHIBITS, LIST AND REPORTS

     (a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION
------   -----------------------------------------------------------------------------------------------------------
<S>      <C>   <C>
  3.1     --   Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit to the
               Company's Registration Statement on Form S-18 (No. 33-37024))

  3.2     --   Amendment to Restated 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 Restated 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 2 to the Company's Current Report on Form 8-K filed March 30, 1998)

  3.8     --   By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's Registration
               Statement on Form S-18 (No. 33-37024))

 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 to Exhibit 4.1 to the Company's Registration
               Statement on Form S-8 (No. 333-31057))

 10.3     --   Employment Agreement between the Company and William J. Rouhana, Jr. (filed herewith)


 23.1     --   Consent of Grant Thornton LLP to Incorporate Financial Statements included in this Report on Form
               10-K into the Company's Registration Statements on Forms S-3, Form S-4 and Forms S-8 (filed
               herewith).

  (b)     --   Reports on Form 8-K
               (1)  Current Report on Form 8-K filed October 29, 1997;
               (2)  Current Report on Form 8-K filed October 31, 1997; and
               (3)  Current Report on Form 8-K filed December 24, 1997.
</TABLE>

     Copies of the exhibits listed above will be made available by the Company
to any stockholder upon written request of the stockholder addressed to WinStar
Communications, Inc., 230 Park Avenue, Suite 2700, New York, New York 10169,
Attention: Investor Relations. Any stockholder requesting a copy of any such
exhibit will be charged a copying fee of $.25 per page.

                                       32

<PAGE>
                                   SIGNATURES

     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 30TH DAY OF MARCH, 1998.

                                          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 of Directors, Chief          March 30, 1998
------------------------------------------  Executive Officer and Director
         William J. Rouhana, Jr.

           /s/ STEVEN G. CHRUST             Vice Chairman and Director                         March 30, 1998
------------------------------------------
             Steven G. Chrust

            /s/ NATHAN KANTOR               President, Chief Operating Officer and             March 30, 1998
------------------------------------------  Director
              Nathan Kantor

           /s/ STEVEN B. MAGYAR             Director                                           March 30, 1998
------------------------------------------
             Steven B. Magyar

       /s/ WILLIAM J. VANDEN HEUVEL         Director                                           March 30, 1998
------------------------------------------
         William J. vanden Heuvel

            /s/ BERT WASSERMAN              Director                                           March 30, 1998
------------------------------------------
              Bert Wasserman

            /s/ JAMES I. CASH               Director                                           March 30, 1998
------------------------------------------
              James I. Cash



          /s/ CHARLES T. DICKSON            Executive Vice President and Chief                 March 30, 1998
------------------------------------------  Financial Officer (principal financial

            Charles T. Dickson              officer)

           /s/ JOSEPH P. DWYER              Vice President-Finance (principal                  March 30, 1998
------------------------------------------  accounting officer)
             Joseph P. Dwyer
</TABLE>

                                       33

<PAGE>

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                           <C>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
  CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants.........................................................    F-2

Consolidated Balance Sheets as of December 31, 1996 and 1997...............................................    F-3

Consolidated Statements of Operations, Ten Months Ended December 31, 1995 and the Years Ended December 31,
  1996 and 1997............................................................................................    F-4

Consolidated Statements of Stockholders' Equity (Deficit), Ten Months Ended December 31, 1995, and the
  Years Ended December 31, 1996 and 1997...................................................................    F-5

Consolidated Statements of Cash Flows, Ten Months Ended December 31, 1995, and the Years Ended December 31,
  1996 and 1997............................................................................................    F-8

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

Report of Independent Certified Public Accountants on Schedule.............................................   F-32

Schedule II--Valuation and Qualifying Accounts, Ten Months Ended December 31, 1995, and the Years Ended
  December 31, 1996 and 1997...............................................................................   F-33
</TABLE>

                                      F-1

<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
WinStar Communications, Inc.

We have audited the accompanying consolidated balance sheets of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the ten months ended December 31, 1995 and the years ended
December 31, 1996 and 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1996 and 1997 and the
consolidated results of their operations and their consolidated cash flows for
the ten months ended December 31, 1995 and the years ended December 31, 1996 and
1997, in conformity with generally accepted accounting principles.

GRANT THORNTON LLP

New York, New York
February 12, 1998

                                      F-2

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,    DECEMBER 31,
                                                                                            1996            1997
                                                                                        ------------    ------------
<S>                                                                                     <C>             <C>
                                       ASSETS
Current assets
  Cash and cash equivalents..........................................................    $   95,490      $  402,359
  Short term investments.............................................................        26,997          16,903
                                                                                        ------------    ------------
     Cash, cash equivalents and short term investments...............................       122,487         419,262
  Investments in equity securities...................................................           688              --
  Accounts receivable, net of allowance for doubtful accounts of $852 and $3,819,
     respectively....................................................................        13,150          30,328
  Inventories........................................................................         5,009          10,296
  Prepaid expenses and other current assets..........................................        15,969           8,985
  Net assets of discontinued operations..............................................         3,814           2,105
                                                                                        ------------    ------------
     Total current assets............................................................       161,117         470,976
Property and equipment, net..........................................................        62,572         284,835
Licenses, net........................................................................        27,434         174,763
Intangible assets, net...............................................................        12,955          14,293
Deferred financing costs, net........................................................        10,535          27,463
Other assets.........................................................................         4,176           4,071
                                                                                        ------------    ------------
          Total assets...............................................................    $  278,789      $  976,401
                                                                                        ------------    ------------
                                                                                        ------------    ------------
                        LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
  Current portion of long-term debt..................................................    $   19,901      $      386
  Accounts payable and accrued expenses..............................................        29,442          97,714
  Current portion of capitalized lease obligations...................................         3,110           6,848
                                                                                        ------------    ------------
          Total current liabilities..................................................        52,453         104,948
Capitalized lease obligations, less current portion..................................        10,846          21,823
Long-term debt, less current portion.................................................       265,161         768,469
Deferred income taxes................................................................            --          24,000
                                                                                        ------------    ------------
          Total liabilities..........................................................       328,460         919,240
                                                                                        ------------    ------------
Series C exchangeable redeemable preferred stock, liquidation preference of $175,000
  plus accumulated dividends.........................................................            --         175,553
Commitments and contingencies
Stockholders' equity (deficit)
  Series A preferred stock issued and outstanding 3,910 shares at December 31,
     1997............................................................................            --              39

  Common stock, par value $.01; authorized 200,000 shares, issued and outstanding
     28,989 and 34,610, respectively.................................................           290             346
  Additional paid-in-capital.........................................................        75,436         255,741
  Accumulated deficit................................................................      (125,034)       (374,518)
                                                                                        ------------    ------------
                                                                                            (49,308)       (118,392)
Unrealized loss on investments.......................................................          (363)             --
                                                                                        ------------    ------------
     Total stockholders' deficit.....................................................       (49,671)       (118,392)
                                                                                        ------------    ------------
          Total liabilities, exchangeable redeemable preferred stock and
            stockholders' deficit....................................................    $  278,789      $  976,401
                                                                                        ------------    ------------
                                                                                        ------------    ------------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     FOR THE TEN         FOR THE YEAR ENDED
                                                                     MONTHS ENDED           DECEMBER 31,
                                                                     DECEMBER 31,      -----------------------
                                                                         1995            1996          1997
                                                                     ------------      --------      ---------
<S>                                                                  <C>               <C>           <C>
Operating revenues
  Telecommunications services -- commercial.....................       $    130        $  4,487      $  29,796
  Telecommunications services -- residential....................         13,007          29,482          8,481
  Information services..........................................          2,648          14,650         41,354
                                                                     ------------      --------      ---------
Total operating revenues........................................         15,785          48,619         79,631
                                                                     ------------      --------      ---------
Operating expenses
  Cost of services and products.................................         12,073          38,233         81,017
  Selling, general and administrative expenses..................         13,617          62,365        156,959
  Depreciation and amortization.................................          1,027           4,501         29,701
                                                                     ------------      --------      ---------
Total operating expenses........................................         26,717         105,099        267,677
                                                                     ------------      --------      ---------
Operating loss..................................................        (10,932)        (56,480)      (188,046)
Other (expense) income
  Interest expense..............................................         (7,186)        (36,748)       (77,257)
  Interest income...............................................          2,890          10,515         17,577
  Other (expense) income........................................           (866)             --          2,219
                                                                     ------------      --------      ---------
Loss from continuing operations before income tax benefit.......        (16,094)        (82,713)      (245,507)
Income tax benefit..............................................             --              --          2,500
                                                                     ------------      --------      ---------
Loss from continuing operations.................................        (16,094)        (82,713)      (243,007)
Income (loss) from discontinued operations......................            237          (1,010)        (6,477)
                                                                     ------------      --------      ---------
Net loss........................................................        (15,857)        (83,723)      (249,484)
Preferred stock dividends.......................................             --              --         (5,879)
                                                                     ------------      --------      ---------
Net loss applicable to common stockholders......................       $(15,857)       $(83,723)     $(255,363)
                                                                     ============      ========      =========


Basic and diluted income (loss) per share:
  From continuing operations....................................       $  (0.71)       $  (2.96)     $   (7.49)
  From discontinued operations..................................           0.01           (0.04)         (0.19)
                                                                     ------------      --------      ---------
Net loss per share..............................................       $  (0.70)       $  (3.00)     $   (7.68)
                                                                     ============      ========      =========
Weighted average shares outstanding.............................         22,770          27,911         33,249
                                                                     ============      ========      =========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-4

<PAGE>

                 WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                   FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                        PREFERRED STOCK
                                               ----------------------------------
                                                      B                 E            COMMON STOCK     ADDITIONAL
                                               ---------------   ----------------   ---------------    PAID-IN     ACCUMULATED
                                               SHARES   AMOUNT   SHARES   AMOUNT    SHARES   AMOUNT    CAPITAL       DEFICIT
                                               ------   ------   ------   -------   ------   ------   ----------   -----------
<S>                                            <C>      <C>      <C>      <C>       <C>      <C>      <C>          <C>           <C>
Balances at February 28, 1995...............    0.73    $ 733       --    $   --    20,147    $201     $ 42,583     $ (25,238)
Issuances of common stock...................                                         4,447      45       10,639
Issuance of preferred stock.................                       932     6,000                           (360)
Conversions of preferred stock..............   (0.15 )   (147 )   (932)   (6,000 )     684       7        6,140
Warrants and common stock equivalents issued
 in connection with long-term debt and lease
 financing..................................                                                                981
Conversion of long-term debt................                                           539       5        3,410
Preferred stock dividends...................    0.11      103                                                            (216)
Issuance of restricted stock................                                           150       2        1,236
Amortization of deferred compensation.......
WinStar Private Exchange transaction........                                         3,741      37       39,641
Unrealized loss on investments in marketable
 equity securities..........................
Other, net..................................                                                               (433)
Net loss....................................                                                                          (15,857)
                                               ------   ------   ------   -------   ------   ------   ----------   -----------
Balances at December 31, 1995...............    0.69    $ 689       --    $   --    29,708    $297     $103,837     $ (41,311)
                                               ------   ------   ------   -------   ------   ------   ----------   -----------
                                               ------   ------   ------   -------   ------   ------   ----------   -----------

<CAPTION>

                                                         TREASURY STOCK
                                              ------------------------------------
                                                                  PREFERRED STOCK
                                                COMMON STOCK             B                                                TOTAL

                                              -----------------   ----------------     DEFERRED     UNREALIZED LOSS   STOCKHOLDERS'

                                              SHARES    AMOUNT    SHARES   AMOUNT    COMPENSATION   ON INVESTMENTS       EQUITY

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

<S>                                           <C>      <C>        <C>      <C>       <C>            <C>               <C>
Balances at February 28, 1995...............     --    $     --      --    $   --      $     --          $  --          $  18,279

Issuances of common stock...................                                                                               10,684


Issuance of preferred stock.................                                                                                5,640

Conversions of preferred stock..............                                                                                   --

Warrants and common stock equivalents issued
 in connection with long-term debt and lease
 financing..................................                                                                                  981

Conversion of long-term debt................                                                                                3,415

Preferred stock dividends...................                                                                                 (113)

Issuance of restricted stock................                                             (1,238)                               --

Amortization of deferred compensation.......                                                138                               138

WinStar Private Exchange transaction........  (2,507)   (36,348)  (0.69 )  (3,330 )                                            --

Unrealized loss on investments in marketable
 equity securities..........................                                                              (982)              (982)

Other, net..................................                                                                                 (433)

Net loss....................................                                                                              (15,857)

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

Balances at December 31, 1995...............  (2,507)  $(36,348)  (0.69 )  $(3,330)    $ (1,100)         $(982)         $  21,752

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

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

</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-5

<PAGE>

                 WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                      FOR THE YEAR ENDED DECEMBER 31, 1996
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                        PREFERRED
                                         STOCK B           COMMON STOCK      ADDITIONAL
                                     ----------------    ----------------     PAID-IN      ACCUMULATED
                                     SHARES    AMOUNT    SHARES    AMOUNT     CAPITAL        DEFICIT
                                     ------    ------    ------    ------    ----------    -----------

<S>                                  <C>       <C>       <C>       <C>       <C>           <C>
Balances at
  December 31, 1995...............    0.69     $ 689     29,708     $297      $ 103,837     $ (41,311)

Issuances of common stock.........                        1,383       14          9,619

Acquisition of treasury shares....

Retirement of treasury shares.....   (0.69 )    (689 )   (2,657)     (27)       (42,018)

Amortization of deferred
  compensation....................

Conversion of long-term debt......                          555        6          3,878

Fair value of stock options
  granted to nonemployees and
  other, net......................                                                  120

Unrealized gain on investments in
  marketable equity securities....

Net loss..........................                                                            (83,723)
                                     ------    ------    ------    ------    ----------    -----------

Balances at
  December 31, 1996...............      --     $  --     28,989     $290      $  75,436     $(125,034)
                                     ======    ======    ======     ======    ==========    ==========
<CAPTION>
                                                 TREASURY STOCK
                                     ---------------------------------------
                                                               PREFERRED                                             TOTAL
                                        COMMON STOCK            STOCK B                           UNREALIZED      STOCKHOLDERS
                                     ------------------    -----------------      DEFERRED       GAIN/(LOSS)         EQUITY
                                      SHARES     AMOUNT     SHARES    AMOUNT     COMPENSATION    ON INVESTMENTS     (DEFICIT)
                                      -------   --------    ------    -------    ------------    --------------    ------------
 <S>                                  <C>       <C>         <C>       <C>        <C>             <C>               <C>
Balances at
  December 31, 1995...............    (2,507)  $(36,348)   (0.69 )   $(3,330)     $ (1,100)         $ (982)         $ 21,752


Issuances of common stock.........                                                                                     9,633

Acquisition of treasury shares....      (150)    (3,056)                                                              (3,056)

Retirement of treasury shares.....     2,657     39,404     0.69       3,330                                              --

Amortization of deferred
  compensation....................                                                   1,100                             1,100

Conversion of long-term debt......                                                                                     3,884

Fair value of stock options
  granted to nonemployees and
  other, net......................                                                                                       120

Unrealized gain on investments in
  marketable equity securities....                                                                     619               619

Net loss..........................                                                                                   (83,723)
                                      -------   --------    ------    -------    ------------         -----        ------------
 Balances at
  December 31, 1996...............        --   $     --       --     $    --      $     --          $ (363)         $(49,671)
                                      =======   ========    ======    =======    ============         =====        ============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-6

<PAGE>

                 WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                      PREFERRED                                                                  TOTAL
                                       STOCK A       COMMON STOCK   ADDITIONAL                 UNREALIZED    STOCKHOLDERS'
                                    --------------  --------------   PAID-IN    ACCUMULATED   GAIN/ (LOSS)      EQUITY
                                    SHARES  AMOUNT  SHARES  AMOUNT   CAPITAL      DEFICIT    ON INVESTMENTS    (DEFICIT)
                                    ------  ------  ------  ------  ----------  -----------  --------------  -------------
<S>                                 <C>     <C>     <C>     <C>     <C>         <C>          <C>             <C>
Balances at December 31, 1996.....     --    $ --   28,989   $290    $  75,436   $(125,034)      $ (363)       $ (49,671)
Issuances of common stock.........     --      --    1,218     12        8,769          --           --            8,781
Issuances of common stock for
  acquisitions....................     --      --    3,984     40       83,311          --           --           83,351
Issuance of preferred stock Series
  A...............................  4,000      40       --     --       95,960          --           --           96,000
Dividends declared on Series A
  preferred stock.................     --      --       --     --       (5,326)         --           --           (5,326)
Issuances of Series A preferred
  stock as dividends in kind .....    213       2       --     --        5,324          --           --            5,326
Dividends on Series C preferred
  stock...........................     --      --       --     --         (553)         --           --             (553)
Conversion of Series A preferred
  stock to common stock...........   (303)     (3)     420      4           (1)         --           --               --
Series C preferred stock
  issuance costs and other,
  net ............................     --      --       --     --       (7,179)         --           --           (7,179)
Unrealized gain on investments in
  marketable equity securities ...     --      --       --     --           --          --          363              363
Net loss..........................     --      --       --     --           --    (249,484)          --         (249,484)
                                    ------  ------  ------  ------  ----------  -----------      ------      -------------
Balances at
  December 31, 1997...............  3,910    $ 39   34,610   $346    $ 255,741   $(374,518)      $   --        $(118,392)
                                    ======  ======  ======  ======   ==========  ==========      =======      ============

</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-7

<PAGE>

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

<TABLE>
<CAPTION>
                                                                         FOR THE TEN MONTH     FOR THE YEAR ENDED
                                                                           PERIOD ENDED           DECEMBER 31,
                                                                           DECEMBER 31,       ---------------------
                                                                               1995             1996        1997
                                                                         -----------------    --------    ---------
<S>                                                                      <C>                  <C>         <C>
Cash flows from operating activities:
  Net loss............................................................       $ (15,857)       $(83,723)   $(249,484)
  Adjustments to reconcile net loss to net cash
     used in operating activities:
     Net (income) loss from discontinued operations...................            (237)          1,010        6,477
     Depreciation and amortization....................................           1,117           5,977       32,360
     Deferred income tax benefit......................................              --              --       (2,500)
     Provision for doubtful accounts..................................             855           1,562        5,674
     Equity in unconsolidated results of AGT..........................             866              --           --
     Non cash interest expense........................................           6,151          35,040       53,506
     Decrease (increase) in operating assets:
       Accounts receivable............................................          (4,216)         (3,838)     (24,026)
       Inventories....................................................            (991)         (1,897)      (9,217)
       Prepaid expenses and other current assets......................          (2,342)        (13,442)         510
       Other assets...................................................            (865)         (1,940)        (178)
     Increase in accounts payable and accrued expenses................           4,911           9,795       50,306
     Net assets provided by (used in) discontinued operations.........              90          (1,481)      (4,559)
     Other, net.......................................................             179             186           --
                                                                         -----------------    --------    ---------
Net cash used in operating activities.................................         (10,339)        (52,751)    (141,131)
                                                                         -----------------    --------    ---------
Cash flows from investing activities:
  Investments in and advances to AGT..................................          (5,704)             --           --
  Decrease (increase) in short-term investments, net..................         (73,594)         46,597       10,094
  Decrease (increase) in other investments, net.......................          (7,497)          6,447           --
  Purchase of property and equipment, net.............................          (8,138)        (47,842)    (213,356)
  Acquisitions of licenses and other..................................              --          (2,121)     (40,190)
  Other, net..........................................................            (499)         (1,619)       2,494
                                                                         -----------------    --------    ---------
Net cash (used in) provided by investing activities...................         (95,432)          1,462     (240,958)
                                                                         -----------------    --------    ---------
Cash flows from financing activities:
  Proceeds from (repayments) of long-term debt, net...................         224,200          (2,778)     410,585
  Net proceeds from redeemable preferred stock........................              --              --      168,138
  Net proceeds from equity transactions...............................          11,259           6,295      104,781
  Proceeds from equipment lease financing.............................           6,998           8,345        9,912
  Payment of capital lease obligations................................            (676)         (2,080)      (4,141)
  Other, net..........................................................            (898)         (1,010)        (317)
                                                                         -----------------    --------    ---------
Net cash provided by financing activities.............................         240,883           8,772      688,958

                                                                         -----------------    --------    ---------
Net increase (decrease) in cash and cash equivalents..................         135,112         (42,517)     306,869
Cash and cash equivalents at beginning of period......................           2,895         138,007       95,490
                                                                         -----------------    --------    ---------
Cash and cash equivalents at end of period............................         138,007          95,490      402,359
Short-term investments at end of period...............................          73,595          26,997       16,903
                                                                         -----------------    --------    ---------
Cash, cash equivalents and short-term investments at end of period....       $ 211,602        $122,487    $ 419,262
                                                                         -----------------    --------    ---------
                                                                         -----------------    --------    ---------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-8

<PAGE>

                 WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

     The consolidated financial statements include the accounts of WinStar
Communications, Inc. and its subsidiaries (collectively, 'WinStar' or the
'Company'). All material intercompany transactions and accounts have been
eliminated in consolidation.

NATURE OF BUSINESS

     The Company provides facilities-based voice and data telecommunications
services to businesses and other customers in major metropolitan areas
throughout the United States. WinStar's licenses provide the Company with the
largest amount of 38 GHz radio spectrum in the country, which allows the Company
to create a nationwide network on a cost effective basis using its fiber-quality
digital capacity in the 38 GHz band to provide its customers with a broad range
of attractively priced services, and an alternative to the incumbent local
exchange carriers, other competitive local exchange carriers and the
interexchange carriers. Additionally, the Company produces, aggregates and
distributes information and entertainment content, some of which is distributed
as part of its telecommunications service offerings to different services in the
market place, as well as through traditional and new media outlets, including
television, video, cable, radio and the Internet. The Company's
telecommunications services are subject to varying degrees of federal, state and
local regulation.

     To capitalize on opportunities in the telecommunications industry, the
Company is pursuing a rapid expansion of its telecommunications services, which
will require significant amounts of capital to finance capital expenditures and
anticipated operating losses. The Company may elect to slow the speed or narrow
the focus of this expansion in the event it is unable to raise sufficient
amounts of capital on acceptable terms.

FISCAL YEAR

     The Company changed its fiscal year end from February 28 to December 31,
effective January 1, 1996. Accordingly, these financial statements present the
ten-month transition period ended December 31, 1995, and the years ended
December 31, 1996 and 1997.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments, short-term certificates of
deposit, and commercial paper. Exclusive of cash in banks, cash equivalents at
December 31, 1996 and 1997 were $84.5 million and $395.3 million, respectively,
which approximate fair value.


SHORT-TERM INVESTMENTS

     Short-term investments are widely diversified and principally consist of
certificates of deposit and 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 with an original maturity of greater than three
months and less than six months. Short-term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1996 and 1997, cash, cash equivalents and short-term
investments totaled $122.5 million and $419.3 million, respectively.

INVENTORIES

     Inventories are composed of film inventories that 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 the individual film forecast
method. Management's 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.

                                      F-9

<PAGE>

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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

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.

     The Company constructs certain of its own network systems and related
facilities. Certain internal costs directly related to the construction of such
facilities, including interest and salaries of certain employees, are
capitalized. Such costs amounted to approximately $4.1 million for the year
ended December 31, 1997, and were insignificant in prior years.

     Costs incurred to develop software for internal use are capitalized as
incurred. Such costs amounted to $452,000, and $7,091,000 for the years ended
December 31, 1996 and 1997, respectively, and were insignificant in prior years.

     The Company follows the policy of capitalizing interest expense as a
component of the cost of its telecommunications equipment constructed for its
own use.

LICENSES AND INTANGIBLE ASSETS

     Licenses and intangible assets are being amortized by the straight-line

method over their estimated useful lives.

     Goodwill represents the excess of cost over the fair value of assets
acquired. The Company's policy is to measure goodwill 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 is determined on a case-by-case
basis for each acquisition from which goodwill arises based on a review of the
nature of the business acquired as well as the factors cited above (see Note 6).

INCOME TAXES

     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes' ('SFAS
109'). Pursuant to SFAS 109, 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

     In the telecommunications segment, revenues are recorded upon placing of
calls or rendering of other related services. In the information services
segment, 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. The
adoption of Statement of Financial Accounting Standard No. 128, 'Earnings Per
Share' had no material impact on the presentation of loss per share for the
periods presented. Stock options and warrants have

                                      F-10

<PAGE>

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

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)


been excluded from the calculation of diluted loss per share as their effect
would have been antidilutive. (See Notes 13 and 14.)

CONCENTRATION OF CREDIT RISK

     Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas. The Company
routinely addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is limited. The
Company's 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.

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

     In preparing financial statements in conformity with generally accepted
accounting principles, management is 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.

RECLASSIFICATIONS

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

NOTE 2--ACQUISITIONS

  ACQUISITIONS OF BUSINESSES

MILLIWAVE LIMITED PARTNERSHIP

     On January 2, 1997, a subsidiary of the Company merged with the corporate
shareholders of Milliwave Limited Partnership ('Milliwave'), a large holder of
38 GHz licenses in the United States, covering 160 million people in more than
80 major markets. The merger consideration paid by the Company to the
shareholders of the corporate partners of Milliwave was $116.0 million ($40.7
million in cash and 3.6 million shares of the Company's common stock, which had
an aggregate market value of $75 million). The merger was treated as a
'purchase' for accounting purposes with the purchase price principally allocated
to licenses. In addition, approximately $26.5 million of deferred tax
liabilities were recorded in connection with the acquisition, with a
corresponding allocation to licenses, which will be amortized on a straight-line
basis over 40 years. Milliwave had minimal operations prior to its merger into
the Company. The accounts of Milliwave have been consolidated into the Company's
financial statements as of the date of acquisition.

     Unaudited pro forma results of operations (in thousands, except per share
data), which reflect the combined operations of the Company and Milliwave as if
the merger occurred as of January 1, 1996, are as follows:


<TABLE>
<CAPTION>
                                                                                FOR THE YEAR
                                                                               ENDED DECEMBER
                                                                                  31, 1996
                                                                              -----------------
<S>                                                                           <C>
Operating Revenues.........................................................       $  47,131
Net Loss...................................................................       $ (91,898)
Net Loss Per Share.........................................................       $   (2.92)
</TABLE>

                                      F-11

<PAGE>

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

NOTE 2--ACQUISITIONS--(CONTINUED)

LOCAL AREA TELECOMMUNICATIONS, INC.

     In October 1996, a subsidiary of the Company acquired certain assets of
Local Area Telecommunications, Inc. ('Locate'), comprising its business as a
competitive access provider of local digital microwave distribution services and
facilities to large corporations and to interexchange and other common carriers.
The assets acquired included multiple 38 GHz licenses in the New York
metropolitan area. The purchase price for such assets was $17.5 million, which
was paid in the form of promissory notes, which were paid in 1997 (see Note 7).
The acquisition has been accounted for as a 'purchase' for accounting purposes,
with the majority of the purchase price allocated to licenses, which will be
amortized on a straight-line basis over 40 years. The accounts of Locate have
been consolidated into the Company's financial statements as of the date of the
acquisition.

AVANT-GARDE TELECOMMUNICATIONS, INC.

     Avant-Garde Telecommunications, Inc. ('Avant-Garde' or 'AGT') was a
privately held company which held 38 GHz radio licenses granted by the FCC in
September 1993. Through July 17, 1995, the Company owned 49% of Avant-Garde,
which it acquired for $4.9 million, and accounted for its investment in
Avant-Garde under the equity method. For the period from March 1, 1995 to July
17, 1995, Avant-Garde had net losses of $1.8 million. On July 17, 1995, pursuant
to the terms of a merger agreement, the Company exchanged 1,275,000 restricted
shares of its common stock valued at $5.1 million for the 51% of Avant-Garde
that it did not already own. The acquisition of Avant-Garde has been treated as
a 'purchase' for accounting purposes, with $12.6 million allocated to the
licenses acquired, which are being amortized on a straight-line basis over 40
years. The accounts of Avant-Garde have been consolidated into the Company's
financial statements as of the date of the acquisition.

OTHER ACQUISITIONS OF BUSINESSES


     During 1997, the Company acquired certain other telecommunications and
information services companies which were not material.

     Unaudited results of operations for acquisitions consummated through
December 31, 1997 other than Milliwave have not been included because they are
not material to the consolidated statement of operations of the Company.

     During 1996, a subsidiary of the Company acquired 100% ownership or a
controlling interest in a number of companies engaged in the production and
distribution of entertainment content. These acquisitions were treated as
'purchases' for accounting purposes. The aggregate consideration for the
acquisitions was approximately $6.4 million, consisting of $4.1 million in cash,
$800,000 in notes payable and 100,605 shares of the Company's common stock or
share equivalents, valued at $1.5 million. The accounts of the acquired
companies have been consolidated with the Company's financial statements as of
the date of acquisitions.

  ACQUISITION OF ASSETS

     In October 1997, a subsidiary of the Company purchased certain
telecommunication assets from US ONE Communications Corp., US ONE Communications
Services, Corp. and US ONE Communications of New York, Inc. (collectively, the
'Sellers') which were entities in bankruptcy under chapter 11 of the United
States Bankruptcy code. The aggregate purchase price was approximately $81.3
million, of which approximately $61.3 million was paid in cash at the closing
and $20.0 million is payable by WinStar in cash and/or shares of the common
stock of WinStar, at WinStar's discretion, on the effective date of the Sellers
confirmed plan of reorganization. Included in fixed assets are certain equipment
which the Company plans to sell within the near term.

                                      F-12

<PAGE>

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

NOTE 2--ACQUISITIONS--(CONTINUED)

  ACQUISITION OF ADDITIONAL LICENSES

     During 1997, the Company executed agreements to acquire additional 38 GHz
licenses, subject to FCC approval. The total purchase price for the licenses
will be $55.0 million, payable in shares of common stock of the Company or in
certain instances, at the Company's election, cash, which will be payable at the
time of closing. During 1997, licenses acquired amounted to $10.4 million of
which $7.5 million was paid in common stock at the closing. The remaining
license acquisitions are expected to close within the next 12 months.

     In connection with the acquisition of additional licenses, the Company
entered into service agreements whereby the Company supplied and installed
telecommunications equipment and provided related consulting services. Total
revenues recorded under such agreements were $4.2 million in 1997.


  ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997

GOODNET

     On January 12, 1998, pursuant to an agreement between the Company and
Telesoft Corp., the Company acquired Telesoft's Internet services subsidiary,
('GoodNet'), for a purchase price of approximately $22.0 million, consisting of
$3.5 million cash and 732,784 shares of common stock of the Company valued at
$18.5 million. GoodNet is a national provider of Internet services, offering
high-capacity data communication services.

MIDCOM COMMUNICATIONS, INC.

     Effective January 21, 1998 (the 'Closing Date'), pursuant to an agreement
between the Company and MIDCOM Communications Inc. and its subsidiaries
(collectively, 'Midcom'), the Company acquired substantially all of Midcom's
assets and businesses for a purchase price of approximately $92.0 million in
cash. On December 23, 1997, $9.2 million of the purchase price was placed in
escrow. On the Closing Date, $48.5 million of the purchase price was paid in
cash to Midcom and its designees and $10.8 million of the purchase price was
placed in escrow along with the initial deposit of $9.2 million to secure
Midcom's obligations to indemnify the Company in certain circumstances. In
addition, $23.5 million of the purchase price was placed in escrow on the
Closing Date to secure Midcom's obligation to refund a portion of the purchase
price in the event of a post-closing adjustment of the purchase price under the
purchase agreement. Midcom is an entity in bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code.

     Midcom is a provider of long distance voice and 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.

NOTE 3--INVESTMENTS IN MARKETABLE EQUITY SECURITIES

     The Company treats its investments in marketable securities as available
for sale securities. As such, they are carried at market value, with the
difference between the historical cost (which is determined on a FIFO basis) and
the market value reflected in unrealized gains or losses on marketable equity
securities, a component of stockholders' equity. During the year ended December
31, 1996, proceeds of $6,400,000 were realized on the sale of marketable
securities, which were sold at carrying value. During the year ended December
31, 1997, all such investments were sold, generating proceeds of approximately
$1,024,000 and a loss of approximately $27,000, which was recognized in
operations. At December 31, 1996 and 1997, unrealized losses of $363,000 and $0
were carried in stockholders' equity.

NOTE 4--INVENTORIES

     Inventory is comprised of film inventories of $5,009,000 and $10,296,000 at
December 31, 1996 and 1997, respectively.

                                      F-13


<PAGE>

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

NOTE 5--PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                         DECEMBER 31,    DECEMBER 31,       ESTIMATED
                                                             1996            1997          USEFUL LIFE
                                                         ------------    ------------   ------------------
                                                                (IN THOUSANDS)
<S>                                                      <C>             <C>            <C>
Telecommunications equipment and software.............     $ 58,788        $293,728     5 to 10 years
Furniture, fixtures and other.........................        3,354          12,504     4 to 5 years
Leasehold improvements................................        4,845          23,162     Lesser of life of
                                                                                        the lease or life
                                                                                        of the asset
                                                         ------------    ------------
                                                             66,987         329,394
Less accumulated depreciation and amortization........       (4,415)        (44,559)
                                                         ------------    ------------
                                                           $ 62,572        $284,835
                                                         ------------    ------------
                                                         ------------    ------------
</TABLE>

NOTE 6--INTANGIBLE ASSETS

     Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                         DECEMBER 31,    DECEMBER 31,       ESTIMATED
                                                             1996            1997          USEFUL LIFE
                                                         ------------    ------------   ------------------
                                                                (IN THOUSANDS)
<S>                                                      <C>             <C>            <C>
Goodwill..............................................     $ 13,726        $ 17,865     5 to 20 years
Covenants not to compete and other....................           37              26     5 to 10 years
                                                         ------------    ------------
                                                             13,763          17,891
Less accumulated amortization.........................         (808)         (3,598)
                                                         ------------    ------------
                                                           $ 12,955        $ 14,293
                                                         ------------    ------------
                                                         ------------    ------------
</TABLE>

     Licenses, which are subject to renewal through February 2001, are amortized

over a 40-year period, in accordance with industry practice. As of December 31,
1996 and 1997, the value of licenses was $27.4 million and $174.8 million, net
of accumulated amortization of $820,000 and $4.9 million, respectively.

NOTE 7--LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,    DECEMBER 31,
                                                                                  1996            1997
                                                                              ------------    ------------
                                                                                     (IN THOUSANDS)
<S>                                                                           <C>             <C>
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC......................     $     --        $200,000
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC II...................           --          50,000
14% Senior Discount Notes Due 2005.........................................      176,328         201,843
14 1/2% Senior Deferred Interest Notes Due 2005............................           --         111,691
15% Senior Subordinated Deferred Interest Notes Due 2007...................           --         103,542
14% Convertible Senior Subordinated Discount Notes Due 2005................       88,164         100,922
Other Notes Payable........................................................       20,570             857
                                                                              ------------    ------------
  Total....................................................................      285,062         768,855
Less Current Portion.......................................................       19,901             386
                                                                              ------------    ------------
Total Long Term Debt.......................................................     $265,161        $768,469
                                                                              ------------    ------------
                                                                              ------------    ------------
</TABLE>

                                      F-14

<PAGE>

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

NOTE 7--LONG-TERM DEBT--(CONTINUED)

1995 DEBT PLACEMENT

     In October 1995, the Company completed a $225.0 million private placement
of debt securities with institutional investors (the '1995 Debt Placement'). The
transaction was structured as a units offering with two components, $150.0
million of Senior Discount Notes Due 2005 (the 'Senior Discount Notes'), and $75
million of Convertible Senior Subordinated Discount Notes Due 2005 (the '1995
Convertible Notes'), convertible at $20.625 (subject to adjustment), a 10%
premium over the closing price on October 18, 1995, the day of pricing. Both
securities 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, both securities require the payment of interest only, in
cash, until maturity. In addition, the 1995 Convertible Notes, including
accretion thereon, will be automatically converted during the initial five-year

period if the market price of the Company's common stock exceeds certain levels
for thirty consecutive trading days, ranging from $37.50 per share in the first
year to $44.00 per share in the fifth year.

     In accordance with the terms of the 1995 Debt Placement, the Company
consummated an exchange offer in 1996 with respect to the Senior Discount Notes,
whereby these notes were exchanged for new notes which were identical in every
respect to the original Senior Discount Notes except that the new notes were
registered under the Securities Act of 1933.

1997 DEBT PLACEMENTS

     In March 1997, the Company and WinStar Equipment Corp. ('WEC') issued an
aggregate of $300.0 million of notes in the March 1997 Debt Placement,
consisting of (i) $100.0 million of the 1997 Senior Deferred Interest Notes Due
2005 (the '1997 Senior Notes'), ranking pari passu with the 1995 Senior Discount
Notes, and (ii) $200.0 million of 1997 Guaranteed Senior Secured Notes Due 2004
(the 'WEC Notes'). The Company also obtained a $150.0 million facility
('Facility') from affiliates of certain of the initial purchasers of the Notes.
In August 1997, WinStar Equipment II Corp. ('WEC II') issued, pursuant to the
Facility, $50.0 million of 1997 Guaranteed Senior Secured Notes Due 2004 (the
'WEC II Notes') and in October 1997, the Company utilized the remaining $100.0
million available under the Facility, issuing an aggregate of $100.0 million
principal amount of 1997 Senior Subordinated Deferred Interest Notes Due 2007
(the 'October 1997 Notes').

     The obligations of WEC and WEC II under the WEC Notes and the WEC II Notes
are unconditionally guaranteed by the Company 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.

     The WEC 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 Notes will
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at certain specified prices.
Additionally, in the event that by March 18, 1999, the Company has not applied
the $200.0 million of proceeds from the sale of the WEC Notes to fund the
acquisition costs of Designated Equipment (as defined), the Company is required
to redeem the WEC Notes in an aggregate principal amount equal to such shortfall
at a redemption price of 112.5% of such principal amount, plus accrued interest,
if any, to the date of redemption.

     The 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 II Notes
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at certain specified prices.
Additionally, in the event that by August 8, 1999, the Company has not applied
the $50.0 million of proceeds from the sale of the WEC Notes to fund the
acquisition costs of Designated Equipment, the Company is required to redeem the
WEC II Notes in an aggregate principal amount equal to such shortfall at a
redemption price of 112.5% of such principal amount, plus accrued interest, if
any, to the date of redemption.

                                      F-15


<PAGE>

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

NOTE 7--LONG-TERM DEBT--(CONTINUED)

     The 1997 Senior Notes are unsecured, senior indebtedness of the Company,
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company, and are senior in right of payment to all existing
and future subordinated indebtedness of the Company. The 1997 Senior Notes bear
interest at a rate of 14 1/2%. Until October 15, 2000, interest on the 1997
Senior Notes will accrue and compound semiannually, but will not be payable in
cash. Interest on the Accumulated Amount (as defined in the 1997 Senior Notes
Indenture) of the 1997 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 1997 Senior Notes mature on October 15, 2005 and are redeemable on
or after October 15, 2000, at the option of the Company, in whole or in part, at
certain specified prices.

     The October 1997 Notes are unsecured, senior subordinated obligations of
the Company, rank pari passu in right of payment with the 1995 Convertible Notes
and are junior in right of payment to all existing future senior indebtedness of
the Company. The October 1997 Notes bear interest at a rate of 15% per annum,
and are payable on March 1 and September 1, commencing September 1, 2002. Until
March 1, 2002, interest on the Notes will accrue and be compounded semiannually
on each Semi Annual Interest Accrual Date (as defined in the Indenture relating
to the October 1997 Notes), but will not be payable in cash. Interest on the
Accumulated Amount (as defined in the Indenture relating to the October 1997
Notes) 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 the option of the Company, in whole or in part, at
certain specified prices.

     The terms of the Indentures relating to the 1995 and 1997 Debt Placements
and the Certificates of Designation relating to certain of the Company's
Preferred Stock agreements (see Notes 12 and 13) contain covenants placing
certain restrictions on the ability of the Company to pay dividends or make
other restricted payments, incur additional indebtedness, issue guarantees, sell
assets, or enter into certain other specified transactions.

OTHER

     On October 8, 1996, in connection with the purchase of Locate (see Note 2),
the Company issued two promissory notes in the aggregate principal amount of
$17.5 million (the 'Locate Notes') bearing interest at an annual rate of 8%.
Interest on the Locate Notes was payable on a quarterly basis. The Notes were
due on the earlier of April 8, 1997, or the day after the date on which the
shares into which the Notes may be converted have been registered pursuant to an
effective registration statement. During 1997, the Locate Notes including
accrued interest were paid in full. At December 31, 1996, the aggregate amount
of the Locate Notes, including accrued interest thereon, was $17.8 million.


     In May 1995, a subsidiary of the Company issued $7.5 million of five year
collateralized convertible notes bearing interest at a rate of 7%, payable
semiannually, with all principal due and payable on May 24, 2000. On December
28, 1995, the note holders converted $3.75 million of the convertible notes and
accrued interest thereon into 539,255 shares of common stock of the Company, and
on November 24, 1996, converted the remaining outstanding notes of $3.75 million
principal amount plus accrued interest thereon into 554,880 shares of common
stock of the Company.

                                      F-16

<PAGE>

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

NOTE 7--LONG-TERM DEBT--(CONTINUED)

     Maturities of long-term debt at December 31, 1997, are as follows:

<TABLE>
<CAPTION>
                                                                                  (IN THOUSANDS)
                                                                                  --------------
<S>                                                                               <C>
1998...........................................................................      $    386
1999...........................................................................           277
2000...........................................................................           194
2001...........................................................................            --
2002...........................................................................            --
Thereafter.....................................................................       767,998
                                                                                  --------------
                                                                                     $768,855
                                                                                  --------------
                                                                                  --------------
</TABLE>

NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of the Company's financial instruments classified as current
assets or liabilities, including cash and cash equivalents, short-term
investments, accounts and notes receivable, and accounts payable and accrued
expenses approximate carrying value, principally because of the short maturity
of these items. Marketable equity securities are stated at quoted market value.

     The carrying amounts of the long-term debt payable to financial
institutions issued pursuant to two of the Company's subsidiaries' asset-based
lending agreements approximate fair value because the interest rates on these
agreements change with market interest rates.

     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, and Exchangeable Redeemable Preferred Stock which were calculated
based upon quoted market prices, are as follows:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31, 1996         DECEMBER 31, 1997
                                                                    ----------------------    ----------------------
                                                                    CARRYING                  CARRYING
                                                                     AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                                                    --------    ----------    --------    ----------
                                                                                     (IN THOUSANDS)
<S>                                                                 <C>         <C>           <C>         <C>
14% Senior Discount Notes Due 2005...............................   $176,328     $ 179,455    $201,843     $ 233,144
14% Convertible Senior Subordinated Discount Notes Due 2005......   $ 88,164     $  94,141    $100,922     $ 216,228
14 1/2% Senior Deferred Interest Notes Due 2005..................         --            --    $111,691     $ 132,000
15% Senior Subordinated Deferred Interest Notes Due 2007 ........         --            --    $103,542     $ 122,500
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC............         --            --    $200,000     $ 224,500
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC II ........         --            --    $ 50,000     $  55,750
14 1/2% Series C Senior Cumulative Exchangeable Redeemable
  Preferred Stock................................................         --            --    $175,553     $ 177,675
</TABLE>

NOTE 9--CAPITAL LEASE OBLIGATIONS

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

                                      F-17

<PAGE>

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

NOTE 9--CAPITAL LEASE OBLIGATIONS--(CONTINUED)

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                                           (IN THOUSANDS)
-------------------------------------------------------------------------------   --------------
<S>                                                                               <C>
1998...........................................................................      $  9,941
1999...........................................................................         9,758
2000...........................................................................         8,321
2001...........................................................................         5,313
2002...........................................................................         1,834
Thereafter.....................................................................           194
                                                                                  --------------
Total payments.................................................................        35,361
Less amount representing interest..............................................        (6,690)
                                                                                  --------------

Present value of minimum lease payments........................................      $ 28,671
                                                                                  --------------
                                                                                  --------------
</TABLE>

     The carrying value of assets under capital leases was $15.9 million and
$28.0 million at December 31, 1996 and 1997 respectively, and is included in
property and equipment. Amortization of these assets is included in depreciation
expense.

NOTE 10--COMMITMENTS AND CONTINGENCIES

A. OPERATING LEASES

     The Company's offices, manufacturing and warehousing facilities, along with
various equipment and roof access rights, are leased under operating leases
expiring in 1998 through 2012. Certain leases contain escalation clauses based
upon increases in the consumer price index.

     Future minimum lease payments on noncancellable operating leases are as
follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                                           (IN THOUSANDS)
-------------------------------------------------------------------------------   --------------
<S>                                                                               <C>
1998...........................................................................      $ 13,800
1999...........................................................................        13,600
2000...........................................................................        13,200
2001...........................................................................        12,800
2002...........................................................................        12,400
Thereafter.....................................................................        80,500
                                                                                  --------------
                                                                                     $146,300
                                                                                  --------------
                                                                                  --------------
</TABLE>

     Rent expense for the ten month period ended December 31, 1995 and the years
ended December 31, 1996 and 1997 were $1.0 million, $4.4 million and $11.6
million, respectively.

B. EMPLOYMENT CONTRACTS

     Amounts due under employment contracts are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                                           (IN THOUSANDS)
-------------------------------------------------------------------------------   --------------
<S>                                                                               <C>
1998...........................................................................       $2,485
1999...........................................................................        1,728

2000...........................................................................          479
                                                                                     -------
                                                                                      $4,692
                                                                                     -------
                                                                                     -------
</TABLE>

                                      F-18

<PAGE>

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

NOTE 10--COMMITMENTS AND CONTINGENCIES--(CONTINUED)

C. LITIGATION

     The Company's residential long distance subsidiary, WinStar Gateway
Network, Inc., occasionally receives inquiries from state authorities arising
with respect to consumer complaints concerning the provision of
telecommunications services, including allegations of unauthorized switching of
long distance carriers and misleading marketing. The Company believes such
inquiries are common in the long distance industry and addresses such inquiries
in the ordinary course of business. In December 1996, the Federal Communications
Commission ('FCC') and WinStar Gateway Network, Inc. ('WGN') entered into a
consent decree which terminated an inquiry by the FCC into any alleged
violations of unauthorized carrier conversions through the use of contest
programs by certain of WGN's agents. The FCC cited WGN's efforts in identifying
the problems caused by these agents and its proactive response in implementing
self-directed remedial actions on its own as significant factors leading to the
consent decree in lieu of initiating a formal investigation. The Company entered
into assurances of voluntary compliance with the attorneys general of a number
of states and has also initiated negotiations with other state authorities to
resolve any claims by such authorities arising from the contest programs. The
Company does not believe that the resolution of these issues will have a
material adverse effect on the Company, its financial condition, or its results
of operations.

     In June 1996, the Company commenced an action for declaratory judgment
against a former officer of WGN, who had notified the Company of his belief that
he was entitled to the issuance of certain shares of common stock of the Company
(or payment of the cash value thereof) under the terms of stock options granted
to him during his employment with WGN. He has based his beliefs on standard
antidilution language contained in his stock option agreement. Such language was
designed and intended to adjust the number of shares purchasable thereunder in
the event of a merger, capital restructuring or other similar event of the
Company. As WinStar Communications, Inc. has never been subject to a merger or
capital restructuring, the former officer was immediately notified of the
Company's belief that his claim was without merit in law or fact. To expedite
resolution of these issues, the Company currently is seeking declaratory
judgment that it has no obligation to the former officer.

     In January 1998, a stockholder suit, purported to be a class action, was

commenced against the Company, its directors (and certain former directors) and
one non-director officer in the Delaware Chancery Court seeking among other
things, to invalidate certain portions of the Company's Stockholder Rights Plan,
adopted in July 1997 (the 'Rights Plan') (see Note 12), and to recover
unspecified damages and attorneys' fees. The complaint alleges that certain
provisions of the Rights Plan, particularly the so-called 'Continuing Directors'
provision, are not permitted under the Delaware General Corporation Law and the
Company's Certificate of Incorporation. The Company believes strongly that these
allegations are without merit and that the Rights Plan was properly adopted and
is valid in its entirety. The Company is reviewing its available alternatives
with regard to responding to this action.

     The Company is also involved in miscellaneous claims, inquiries and
litigation arising in the ordinary course of business. The Company believes that
these matters, taken individually or in the aggregate, would not have a material
adverse impact on the Company's financial position or results of operations.

D. OTHER

     In connection with the purchase of telecommunications equipment including
switches and radios, the Company enters into agreements with the suppliers of
such equipment. As of December 31, 1997, the Company's noncancellable purchase
commitments under these agreements were approximately $31 million. In addition,
the Company has guaranteed $3.0 million of debt of Global Products.

                                      F-19

<PAGE>

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

NOTE 11--INCOME TAXES

     SFAS No. 109 requires the use of the liability method in accounting for
income taxes. Temporary differences and carryforwards that give rise to deferred
tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        1996            1997
                                                                    ------------    ------------
                                                                           (IN THOUSANDS)
<S>                                                                 <C>             <C>
Deferred tax assets:
  Net operating loss carryforward................................    $   48,218      $  134,550
  Deferred interest expense......................................        10,417          21,636
  Allowance for doubtful accounts................................           433           1,140
  Deferred compensation..........................................            --             748
  Other..........................................................           961           2,291
                                                                    ------------    ------------
  Gross deferred tax assets......................................        60,029         160,365
  Valuation allowance............................................       (58,586)       (119,874)

                                                                    ------------    ------------
  Deferred tax asset net of allowance............................         1,443          40,491
                                                                    ------------    ------------
Deferred tax liabilities:
  Depreciation...................................................        (1,354)         (5,998)
  Amortization...................................................           (89)        (58,493)
                                                                    ------------    ------------
  Gross deferred tax liabilities.................................        (1,443)        (64,491)
                                                                    ------------    ------------
Net deferred tax asset (liability)...............................    $       --      $  (24,000)
                                                                    ------------    ------------
                                                                    ------------    ------------
</TABLE>

     The federal net operating loss carryforward at December 31, 1997 is
approximately $345.0 million. If not utilized, the net operating loss
carryforward will expire in various amounts through the year 2012.

     Some of these losses are subject to utilization limitation 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.

     SFAS No. 109 requires a valuation allowance against deferred tax assets 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, 1996 and December 31, 1997, 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 the acquisition of Milliwave (see Note 2). 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 Milliwave acquisition.

     During 1997, the Company recognized a deferred income tax benefit of $2.5
million relating to the Company's net loss carryforwards. The Company recognizes
income tax benefits to the extent of future reversals of existing temporary
differences.

NOTE 12--STOCKHOLDERS' EQUITY

COMMON STOCK

     The authorized common stock of WinStar was increased during 1997 from 75.0
million shares to 200.0 million shares, $.01 par value. The holders of common
stock of WinStar are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Although the Company has no present
intention of paying any cash dividends (and is currently restricted from doing
so under its indentures), holders of the common stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation or dissolution of
WinStar, holders of the common stock are entitled to share ratably in all assets

remaining after payment of all liabilities and the liquidation

                                      F-20

<PAGE>

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

NOTE 12--STOCKHOLDERS' EQUITY--(CONTINUED)

preferences of preferred shares. Holders of common stock have no preemptive
rights and have no rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock.

PREFERRED STOCK

     The authorized capital stock of the Company includes 15 million shares of
'Blank Check' preferred stock, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. The Board of
Directors, without further approval of the stockholders, is authorized 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

     On February 11, 1997, the Company sold 4.0 million shares of 6% Series A
cumulative convertible preferred stock, par value $0.01, and 1.6 million
warrants to purchase common stock of the Company, par value $0.01, for gross
proceeds of $100.0 million. The preferred stock earns a 6% annual dividend,
payable quarterly in kind, and matures on February 11, 2002.

     Two million shares of preferred stock became convertible beginning on
August 11, 1997, and certain of these shares were converted at prices ranging
from $16.75 per share to $18.86 per share, while the remainder became
convertible on February 11, 1998. All remaining outstanding shares are
convertible at $25 per share. On February 11, 2002, any preferred stock still
outstanding will be automatically converted into shares of the Company's common
stock, unless the Company elects to pay, in lieu of conversion, the equivalent
value in cash.

     The warrants are exerciseable at $25 per share, and expire on February 11,
2002. The Company has the right to call the warrants after February 11, 2000, if
the Company's common stock price has exceeded $40 on each of the previous twenty
trading days.

RIGHTS TO PURCHASE SERIES B PREFERRED STOCK

     Under a Rights Agreement dated as of July 2, 1997, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent, which was adopted
by the Board of Directors of the Company on July 2, 1997, holders of Common
Stock of the Company received, as a dividend, preferred stock purchase rights

(the 'Rights') at the rate of one Right for each share of Common Stock held as
of the close of business on July 14, 1997. One Right will also attach to each
share of Common Stock issued thereafter. Currently the Rights are not separate
from the Common Stock and are not exercisable, and the Rights will only separate
from the Common Stock and become exercisable if a person or group acquires 10%
or more of the Company's outstanding Common Stock (an 'Acquiring Person') or
launches a tender or exchange offer that would result in ownership of 10% or
more the Company's 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 (a 'Unit') of Series B Preferred Stock which will be issued by the
Company. If any person becomes an Acquiring Person, or if an Acquiring Person
engages in certain transactions involving conflicts of interest or in a business
combination in which the Company's Common Stock remains outstanding, then the
Rights Plan provides that each Right, other than any Right held by the Acquiring
Person, entitles the holder to purchase, for $70, Units with a market value of
$140. However, if the Company is involved in a business combination in which the
Company itself is not the survivor, or if the Company sells 50% or more of its
assets or earning power to another person, then the Rights Plan provides that
each Right entitled the holder to purchase, for $70, shares of the common stock
of the Acquiring Person's ultimate parent having a market value of $140.

     At any time until ten days following the date on which a person acquires
10% or more of the Company's Common Stock the Company 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 be junior, with respect to dividends
and liquidation

                                      F-21

<PAGE>

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

NOTE 12--STOCKHOLDERS' EQUITY--(CONTINUED)

rights, to any other series of preferred stock of the Company. the Series B
Preferred Stock has dividend and liquidation preferences over the Common Stock
of the Company.

SERIES E PREFERRED STOCK

     In April 1995, the Company completed a private placement of 932,040 shares
of Series E Convertible Preferred Stock ('Preferred Stock E') at a price of
$6.4375 per share, for gross proceeds of $6 million. Preferred Stock E holders
were entitled to dividends at the rate of 9% per annum, payable quarterly
beginning on June 30, 1995. During the ten month period ended December 31, 1995,
the entire 932,040 shares of Preferred Stock E were converted into 634,228
shares of common stock.

NOTE 13--REDEEMABLE SERIES C PREFERRED STOCK

     On December 22, 1997, the Company issued 175,000 shares of Series C Senior
Cumulative Exchangeable Preferred Stock Due 2007 ('Series C Exchangeable

Preferred Stock'), for gross proceeds of $175.0 million. The Company agreed to
exchange the preferred stock for new preferred stock identical in every respect
except that it would be registered under the Securities Act of 1933. During
February 1998, the new preferred stock was registered.

     Each share of Series C Exchangeable Preferred Stock has a liquidation
preference of $1,000 ('Liquidation Preference'). Dividends on the Series C
Exchangeable Preferred Stock accrue from December 22, 1997 at the rate per share
of 14 1/4% of the Accumulated Amount (as defined) per annum, 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 June 15 or
December 15 (each a 'Dividend Payment Date') which is at least six months after
the later of December 15, 2002, and the Specified Debt Satisfaction Date (as
defined) (the 'Cash Payment Date'), dividends on the Series C Exchangeable
Preferred Stock will be payable in cash as a rate per annum equal to 14 1/4% of
the Accumulated Amount as of the Dividend Payment Date preceding such date. 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
Exchangeable 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. As of December 31, 1997 dividends totaling
approximately $553,000 have been accrued.

     The Series C Exchangeable Preferred Stock is not redeemable prior to
December 15, 2002. On or after December 15, 2002, the Series C Exchangeable
Preferred Stock is redeemable at the option of the Company, in whole or in part,
at specified redemption prices plus accumulated and unpaid dividends, if any, to
the date of redemption. The Company is required to redeem the Series C
Exchangeable 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 Exchangeable Preferred Stock ranks (i) senior to all existing
and future Junior Stock (as defined) including the Series A Preferred Stock;
(ii) on a Parity basis with all existing and future Parity Stock; and (iii)
junior to all Senior Stock (as defined). In addition the Series C Exchangeable
Preferred Stock is junior in right of payment to all indebtedness of the Company
and its subsidiaries.

     On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at is option, exchange all but not less than
all of the share of Series C Exchangeable Preferred Stock then outstanding for
14 1/4% Senior Subordinated Deferred Interest Notes Due 2007 ('Exchange
Debentures') in an aggregate Accumulated Amount equal to the aggregate
Accumulated Amount of the shares of Series C Exchangeable Preferred Stock
outstanding at the time of such exchange, plus accumulated and unpaid dividends
to the date of exchange. The issuance of the Exchange Debentures upon each
exchange will be registered under the Securities Act pursuant to a Registration
Statement. Until the Cash Payment Date, 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
(each an 'Interest Payment Date') but will not be

                                      F-22


<PAGE>

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

NOTE 13--REDEEMABLE SERIES C PREFERRED STOCK--(CONTINUED)

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 (as
defined) 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 of the Company, subordinated in right of payment to all Senior
Indebtedness (as defined) of the Company and to all indebtedness and other
liabilities (including trade payables) of the Company's subsidiaries, and will
rank pari passu with the Company's existing 1997 Senior Subordinated Notes and
the Company's Convertible Notes.

NOTE 14--STOCK OPTIONS AND STOCK PURCHASE WARRANTS

     The Company has 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, as
amended, pursuant to which options to purchase an aggregate of 150,000 shares of
common stock may be granted to key employees of the Company 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
1.5 million shares of common stock to the Company's 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 10,000 stock options annually to each director on January
13, at the fair market value at that date, subject to availability. The 1995
Plan authorizes the granting of awards of up to 7.5 million shares of the
Company's common stock to the Company's 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 annual director grants. The Company
has also granted options to certain individuals outside the three plans. The
options are exercisable over a period ranging from immediately to five years,
depending on option terms.

     The following table summarizes option activity for the ten months ended
December 31, 1995 and the years ended December 31, 1996 and 1997:

<TABLE>
<CAPTION>
                                                                                          WEIGHTED AVERAGE
                                                                     NUMBER OF OPTIONS     EXERCISE PRICE
                                                                     -----------------    ----------------
                                                                      (IN THOUSANDS)
<S>                                                                  <C>                  <C>

Balance, February 28, 1995........................................          6,149              $ 3.85
  Granted.........................................................          3,896              $ 9.13
  Exercised.......................................................         (2,092)             $ 2.35
  Canceled........................................................           (708)             $ 3.21
                                                                          -------
Balance, December 31, 1995........................................          7,245              $ 6.90
  Granted.........................................................          4,057              $18.55
  Exercised.......................................................           (921)             $ 6.00
  Canceled........................................................           (669)             $12.72
                                                                          -------
Balance, December 31, 1996........................................          9,712              $11.43
  Granted.........................................................          3,905              $15.62
  Exercised.......................................................         (1,214)             $ 7.14
  Canceled........................................................           (752)             $16.18
                                                                          -------
Balance, December 31, 1997........................................         11,651              $13.27
                                                                          =======
</TABLE>

     As of December 31, 1997, options outstanding for 5.2 million shares were
exercisable at prices ranging from $1.50 to $31.13, and the weighted remaining
contractual life was 4.9 years.

                                      F-23

<PAGE>

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

NOTE 14--STOCK OPTIONS AND STOCK PURCHASE WARRANTS--(CONTINUED)

     The following table summarizes option data as of December 31, 1997:

<TABLE>
<CAPTION>
                                 NUMBER                                                  NUMBER
                              OUTSTANDING          WEIGHTED           WEIGHTED        EXERCISABLE         WEIGHTED
                                 AS OF             AVERAGE            AVERAGE            AS OF            AVERAGE
                                12/31/97          REMAINING           EXERCISE          12/31/97          EXERCISE
 RANGE OF EXERCISE PRICES    (IN THOUSANDS)    CONTRACTUAL LIFE        PRICE         (IN THOUSANDS)        PRICE
--------------------------   --------------    ----------------    --------------    --------------    --------------
<S>                          <C>               <C>                 <C>               <C>               <C>
      $ 1.50-$ 7.00               2,541              2.83              $ 4.75             2,490            $ 4.72
      $ 7.31-$12.00               2,759              5.46              $ 9.88               950            $ 8.14
      $12.13-$16.81               2,481              5.21              $15.15               721            $15.02
      $16.88-$20.38               2,571              5.95              $18.33               663            $18.40
      $20.38-$31.13               1,299              5.17              $23.55               384            $22.24
                                -------                                                  ------
      $ 1.50-$31.13              11,651              4.91              $13.27             5,208            $ 9.81
                                =======                                                  ======
</TABLE>

     Compensation cost charged to operations, which the Company records for

options granted to non-employees, was $0, $150,000 and $0 in the ten months
ended December 31, 1995 and the years ended December 31, 1996 and 1997,
respectively.

     The Company measures compensation in accordance with the provisions of APB
Opinion No. 25 in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recorded for options granted to employees or
directors in the ten months ended December 31, 1995 or the years ended December
31, 1996 or 1997. The fair value of each option 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>
                                                                       1995         1996         1997
                                                                     ---------    ---------    ---------
<S>                                                                  <C>          <C>          <C>
Dividend Yield....................................................          0%           0%           0%
Risk-Free Interest Rate...........................................        6.0%         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>
                                                                TEN MONTHS         YEAR            YEAR
                                                                  ENDED           ENDED           ENDED
                                                               DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                   1995            1996            1997
                                                               ------------    ------------    ------------
                                                                              (IN THOUSANDS)
<S>                                                            <C>             <C>             <C>
Net Loss Applicable to Common Stockholders:
  As reported...............................................     $(15,857)       $(83,723)      $ (255,363)
  Pro forma for FASB No. 123................................     $(21,795)       $(98,765)      $ (272,497)
Loss Per Share--Basic and Diluted:
  As reported...............................................     $  (0.70)       $  (3.00)      $    (7.68)
  Pro forma for FASB No. 123................................     $  (0.96)       $  (3.54)      $    (8.20)
</TABLE>

     The weighted average fair value of options granted during the years ended
December 31, 1996 and 1997 was $18.78 and $15.63 per share, respectively.

     During the initial phase-in period of FASB Statement No. 123, such
compensation expense may not be representative of the future effects of applying
this statement.

                                      F-24


<PAGE>

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

NOTE 14--STOCK OPTIONS AND STOCK PURCHASE WARRANTS--(CONTINUED)

     Warrants to purchase the Company's common stock were issued as follows
(warrants in thousands):

<TABLE>
<CAPTION>
                           10 MONTHS ENDED                  YEAR ENDED                    YEAR ENDED
                          DECEMBER 31, 1995             DECEMBER 31, 1996             DECEMBER 31, 1997
                      --------------------------    --------------------------    --------------------------
                      WARRANTS     PRICE/SHARE      WARRANTS     PRICE/SHARE      WARRANTS     PRICE/SHARE
                      --------    --------------    --------    --------------    --------    --------------
<S>                   <C>         <C>               <C>         <C>               <C>         <C>
Beginning
  Balance..........     --              --           400        $12.00-$13.00         400     $12.00-$13.00
Warrants Issued....    400        $12.00-$13.00       --              --            1,600     $   25.00
Warrants
  Exercised........     --              --            --              --               --           --
Warrants Expired...     --              --            --              --               --           --
                       ---                           ---                          --------
Ending Balance.....    400        $12.00-$13.00      400        $12.00-$13.00       2,000     $12.00-$25.00
                       ---                           ---                          --------
                       ---                           ---                          --------
</TABLE>

NOTE 15--RELATED PARTY TRANSACTIONS

SERVICES AGREEMENTS

     In connection with the Company's merger with Milliwave, the Company entered
into a Services Agreement with Milliwave in June 1996. Under the Services
Agreement, a subsidiary of the Company installed radio links and managed
Milliwave's communications network. Total fees under the Services Agreement and
equipment sales paid by Milliwave to the Company were $1.5 million through
December 31, 1996.

     In connection with the Company' purchase of certain assets of Locate, the
Company entered into a Services Agreement with Locate in April 1996. Under the
Agreement, the Company provided consulting services to Locate regarding the
operation of Locate's business. During the year ended December 31, 1996, Locate
paid the Company approximately $352,000 under the Services Agreement.

PRIVATE EXCHANGE TRANSACTION

     On November 29, 1995, the Company acquired, in exchange for the issuance of
3,741,224 shares of its common stock ('Private Exchange'), substantially all of
the assets of WinStar Companies, whose assets consisted of (i) all the
outstanding capital stock of WinStar Services and WinStar Venture, two wholly
owned subsidiaries of WinStar Companies, and (ii) 389,580 shares of the

Company's common stock owned by WinStar Companies. The sole assets of WinStar
Services and WinStar Venture were 2,117,183 shares of the Company's common stock
and other securities of the Company that were exercisable or convertible into
1,429,633 shares of the Company's common stock. Accordingly, the Company issued
3,741,224 shares of the Company's common stock and, in exchange, acquired
3,936,396 shares of common stock and common stock equivalents. All of the
Company's common stock and certain of the common stock equivalents received in
the Private Exchange were included in Treasury Stock at December 31, 1995 and
were retired in 1996. WinStar Companies, WinStar Services and WinStar Venture
had no liabilities at the time of the closing of the Private Exchange other than
a liability previously assumed by the Company or liabilities for which the
Company is being indemnified. No claims for any liabilities have been received
by the Company.

     The new shares of the Company's common stock issued in the Private Exchange
represented that number of shares which had an aggregate market value based upon
the average of the closing sale price of the Company's common stock on the 30
trading days preceding November 15, 1995, the date as of which the exchange
agreement regarding the above-described transaction was executed, equal to the
market value of the Company's common stock (i) transferred by WinStar Companies
to the Company, (ii) owned by WinStar Services and WinStar Venture and (iii)
underlying certain other securities of the Company owned by WinStar Services and
WinStar Venture which were convertible into or exercisable for shares of the
Company's common stock, less the aggregate exercise price of such latter
securities.

                                      F-25

<PAGE>

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

NOTE 15--RELATED PARTY TRANSACTIONS--(CONTINUED)

     The stockholders of WinStar Companies included several of the Company's
current executive officers one of whom is also a director. Simultaneously with
the Private Exchange, WinStar Companies was dissolved and the new shares issued
in the Private Exchange were issued directly to the stockholders of WinStar
Companies in proportion to their equity ownership of WinStar Companies.

     The Private Exchange was considered and approved by a special committee of
independent and disinterested directors of the Company and an opinion from an
independent investment banking firm that the Private Exchange was fair to the
Company and its stockholders was obtained in connection with the Private
Exchange.

AGREEMENT WITH ITC GROUP, INC.

     In May 1994, the Company, WinStar Wireless, Inc. ('WWI') and ITC Group,
Inc. ('ITC'), a telecommunications consulting firm, entered into a two-year
agreement pursuant to which ITC advised the Company on the operations of its
telecommunications business. ITC, together with the management and employees of
WWI, developed and implemented a two-year operating plan for the Company's

wireless telecommunications business. Pursuant to the terms of the consulting
agreement, ITC made its consultants available to the Company and its
subsidiaries. The Company paid ITC an annual base consulting fee of $700,000 for
the services of a core management team, as well as supplemental fees at agreed
upon rates for additional consulting services rendered by ITC as necessary from
time to time. Under the terms of the agreement, ITC provided up to 12
consultants at any given time. From March 1995 through September 1995, ITC was
paid $1 million in fees and expenses in connection with the consulting
agreement, and the Company granted options to purchase an aggregate of 500,000
shares of its common stock for $4.41 per share to certain consultants of ITC.

     Effective September 5, 1995, ITC's President became President and Chief
Operating Officer of the Company and certain core management personnel
previously provided by ITC also became employees. Concurrently, ITC ceased
providing services to the Company under the consulting agreement, and the
Company's obligation to pay any future compensation to ITC under such agreement
was terminated.

NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest during the ten months ended December 31, 1995, and
the years ended December 31, 1996 and 1997 was $1.3 million, $2.1 million and
$26.0 million, respectively. During the years ended December 31, 1996 and 1997,
the Company capitalized $300,000 and $4.2 million of interest incurred in
connection with the buildout of its telecommunications network respectively. No
interest was capitalized in the ten months ended December 31, 1995.

     During the ten months ended December 31, 1995, the Company completed the
following material noncash transactions: (i) the conversion of $3.75 million of
convertible notes plus accrued interest thereon; (ii) the conversion of all
shares of Preferred Stock Series E; (iii) the acquisition of approximately $7.5
million in property and equipment through various capitalized leases; (iv) the
Private Exchange transaction (see Note 14); (v) the settlement of the Company's
placement expenses from the gross proceeds of the Debt Placement; and (vi) the
acquisition of Avant-Garde.

     During the year ended December 31, 1996, the Company completed the
following material noncash transactions: (i) the conversion of $3.75 million of
convertible notes plus accrued interest; (ii) the acquisition of $8.6 million in
property and equipment through various capitalized leases; (iii) the issuance of
100,605 shares and share equivalents, with a value of $1.5 million, and $800,000
in notes payable in connection with certain acquisitions (see Note 2); (iv) the
issuance of $17.5 million in notes payable for the acquisition of Locate; and
(v) the acceptance of 150,000 shares of the Company's common stock for payment
of stock options exercised. Depreciation and amortization includes amortization
of deferred compensation.

     During the year ended December 31, 1997, the Company completed the
following material noncash transactions: (i) dividends-in-kind on the Series A
Preferred Stock for the aggregate amount of $5.3 million; (ii) the acquisition
of $8.9 million in property and equipment through various capitalized leases;
(iii) the issuance

                                      F-26


<PAGE>

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

NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)

of 337,648 shares of common stock with a value of $7.5 million in connection
with the acquisition of licenses; (iv) The issuance of 3,594,620 shares of
Common Stock with a value of approximately $75 million in connection with the
acquisition of Milliwave Limited Partnership.

NOTE 17--ADVERTISING COSTS

     Advertising costs are charged to operations when the advertising first
takes place. Advertising expense for the ten months ended December 31, 1995, and
the years ended December 31, 1996 and 1997 was approximately $500,000, $4.3
million and $11.0 million, respectively.

NOTE 18--BUSINESS SEGMENTS

The Company's continuing business segments are telecommunications and
information services. The following table is a summary of the ten months ended
December 31, 1995 and the years ended December 31, 1996 and 1997:

<TABLE>
<CAPTION>
                                                                  TOTAL
                                                                CONTINUING                 CONSOLIDATED    DISCONTINUED
                                TELECOMMUNI-     INFORMATION     BUSINESS      GENERAL      CONTINUING     OPERATION--
                                   CATIONS        SERVICES       SEGMENTS     CORPORATE     OPERATIONS     MERCHANDISING
                                -------------    -----------    ----------    ---------    ------------    -------------
                                                                     (IN THOUSANDS)
<S>                             <C>              <C>            <C>           <C>          <C>             <C>
FOR THE TEN MONTHS ENDED
  DECEMBER 31, 1995
  Net sales..................     $  13,137        $ 2,648      $   15,785    $      --     $   15,785
  Operating income (loss)....     $  (7,288)       $   217      $   (7,071)   $  (3,861)    $  (10,932)       $   237
  EBITDA.....................     $  (6,358)       $   241      $   (6,117)   $  (3,758)    $   (9,875)
  Depreciation and
     amortization............     $     930        $    24      $      954    $     104     $    1,058
  Capital expenditures.......     $   7,458        $    14      $    7,472    $     651     $    8,123
Identifiable assets at
  December 31, 1995..........     $  36,998        $20,195      $   57,193    $ 217,711     $  274,904        $ 3,321
FOR THE YEAR ENDED DECEMBER
  31, 1996
  Net sales..................     $  33,969        $14,650      $   48,619    $      --     $   48,619
  Operating loss.............     $ (43,698)       $(1,409)     $  (45,107)   $ (11,373)    $  (56,480)       $(1,010)
  EBITDA.....................     $ (39,206)       $  (890)     $  (40,096)   $  (9,796)    $  (49,892)
  Depreciation and
     amortization............     $   3,831        $   469      $    4,300    $     202     $    4,502
  Capital expenditures.......     $  46,632        $   701      $   47,333    $     509     $   47,842
Identifiable assets at

  December 31, 1996..........     $ 101,380        $30,133      $  131,513    $ 143,462     $  274,975        $ 3,814
FOR THE YEAR ENDED DECEMBER
  31, 1997
  Net sales..................     $  38,277        $41,354      $   79,631           --     $   79,631
  Operating loss.............     $(153,139)       $(4,092)     $ (157,231)   $ (30,815)    $ (188,046)       $(6,477)
  EBITDA.....................     $(128,637)       $(2,786)     $ (131,423)   $ (26,922)    $ (158,345)
  Depreciation and
     amortization............     $  24,502        $ 1,306      $   25,808    $   3,893     $   29,701
  Capital expenditures.......     $ 219,979        $   612      $  220,591    $   1,709     $  222,300
Identifiable assets at
  December 31, 1997..........     $ 399,111        $30,376      $  429,487    $ 544,809     $  974,296        $ 2,105
</TABLE>

------------------
EBITDA represents operating income (loss) plus interest, taxes, depreciation and
amortization.

                                      F-27

<PAGE>

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

NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The unaudited quarterly financial data for 1996 and 1997 for the Company is
as follows:

<TABLE>
<CAPTION>
                                                                QUARTER ENDED 1996 (UNAUDITED)
                                                     -----------------------------------------------------
                                                     MARCH 31      JUNE 30     SEPTEMBER 30    DECEMBER 31
                                                     ---------    ---------    ------------    -----------
                                                                        (IN THOUSANDS)
<S>                                                  <C>          <C>          <C>             <C>
Operating revenues
  Telecommunications services.....................   $  10,217    $  10,356     $    7,384      $   6,012
  Information services............................         771        2,652          4,056          7,171
                                                     ---------    ---------    ------------    -----------
Total operating revenues..........................      10,988       13,008         11,440         13,183
                                                     ---------    ---------    ------------    -----------
Operating expenses
  Cost of services and products...................       6,678        9,175          9,250         13,130
  Selling, general and administrative expenses....       8,845       14,401         15,816         23,303
  Depreciation and amortization...................         492          679          1,158          2,172
                                                     ---------    ---------    ------------    -----------
     Total operating expenses.....................      16,015       24,255         26,244         38,605
                                                     ---------    ---------    ------------    -----------
Operating loss....................................      (5,027)     (11,247)       (14,784)       (25,422)
Other (expense) income
  Interest expense................................      (8,643)      (9,007)        (9,045)       (10,053)
  Interest income.................................       3,108        2,664          2,570          2,173

                                                     ---------    ---------    ------------    -----------
Loss from continuing operations...................     (10,562)     (17,590)       (21,259)       (33,302)
Discontinued operations...........................        (137)        (526)            47           (394)
                                                     ---------    ---------    ------------    -----------
Net loss..........................................   $ (10,699)   $ (18,116)    $  (21,212)     $ (33,696)
                                                     ---------    ---------    ------------    -----------
                                                     ---------    ---------    ------------    -----------
Basic and diluted net income (loss) per share:
From continuing operations........................   $   (0.39)   $   (0.63)    $    (0.76)     $   (1.17)
From discontinued operations......................       (0.00)       (0.02)          0.01          (0.01)
                                                     ---------    ---------    ------------    -----------
Net loss per share................................   $   (0.39)   $   (0.65)    $    (0.75)     $   (1.18)
                                                     ---------    ---------    ------------    -----------
                                                     ---------    ---------    ------------    -----------
</TABLE>

                                      F-28

<PAGE>

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

NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--(CONTINUED)

<TABLE>
<CAPTION>
                                                                QUARTER ENDED 1996 (UNAUDITED)
                                                     -----------------------------------------------------
                                                     MARCH 31      JUNE 30     SEPTEMBER 30    DECEMBER 31
                                                     ---------    ---------    ------------    -----------
                                                                        (IN THOUSANDS)
Operating revenues
<S>                                                  <C>          <C>          <C>             <C>
  Telecommunications services.....................   $   7,763    $   7,678     $    9,169      $  14,367
  Information services............................       6,014        8,662         11,017         15,661
                                                     ---------    ---------    ------------    -----------
Total operating revenues..........................      13,077       16,340         20,186         30,028
                                                     ---------    ---------    ------------    -----------
Operating expenses
  Cost of services and products...................      12,959       15,908         19,621         32,529
  Selling, general and administrative expenses....      29,553       39,228         41,135         47,043
  Depreciation and amortization...................       3,501        4,896          7,077         14,227
                                                     ---------    ---------    ------------    -----------
Total operating expenses..........................      46,013       60,032         67,833         93,799
                                                     ---------    ---------    ------------    -----------
Operating loss....................................     (32,936)     (43,692)       (47,647)       (63,771)
Other (expense) income
  Interest (expense)..............................     (10,798)     (20,194)       (22,082)       (24,183)
  Interest income.................................       2,235        5,090          3,727          6,525
Other income......................................          --           --          2,219             --
                                                     ---------    ---------    ------------    -----------
Loss from continuing operations before income tax
  benefit.........................................     (41,499)     (58,796)       (63,783)       (81,429)

Income tax benefit................................          --           --             --          2,500
                                                     ---------    ---------    ------------    -----------
Loss from continuing operations...................     (41,499)     (58,796)       (63,783)       (78,929)
Loss from discontinued operations.................        (477)          --         (1,500)        (4,500)
                                                     ---------    ---------    ------------    -----------
Net loss..........................................   $ (41,976)   $ (58,796)    $  (65,283)       (83,429)
                                                     ---------    ---------    ------------    -----------
                                                     ---------    ---------    ------------    -----------
Basic and diluted net loss per share
From continuing operations........................   $   (1.27)   $   (1.85)    $    (1.97)     $   (2.37)
From discontinued operations......................       (0.02)          --          (0.04)         (0.13)
                                                     ---------    ---------    ------------    -----------
Net loss per share................................   $   (1.29)   $   (1.85)    $    (2.01)     $   (2.50)
                                                     ---------    ---------    ------------    -----------
                                                     ---------    ---------    ------------    -----------
</TABLE>

     The financial data presented above reflects certain reclassifications from
the amounts presented in the Company's filings on form 10-Q for the periods
ending March 31, June 30 and September 30, 1996. The reclassifications
principally relate to the breakout of revenues by operating segment and the
reclassification of certain telecommunication network costs from the selling,
general and administrative caption to the cost of services and products caption.

NOTE 20--DISCONTINUED OPERATION--WINSTAR GLOBAL PRODUCTS, INC.

     On May 13, 1997, a formal plan of disposal for the Company's consumer
products subsidiary, Global Products, was approved by the Board of Directors,
and it is anticipated that the disposal will be completed within the next 12
months. The disposal of Global Products has been accounted for as a discontinued
operation and, accordingly, its net assets have been segregated from continuing
operations in the accompanying consolidated balance sheets, and its operating
results are segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows.

                                      F-29

<PAGE>

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

NOTE 20--DISCONTINUED OPERATION--WINSTAR GLOBAL PRODUCTS, INC.--(CONTINUED)

     Information relating to the discontinued operations of Global Products is
as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                              FOR THE TEN     FOR THE YEAR    FOR THE YEAR
                                                              MONTHS ENDED       ENDED           ENDED
                                                              DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                                  1995            1996            1997
                                                              ------------    ------------    ------------

<S>                                                           <C>             <C>             <C>
Operating revenues.........................................     $ 13,986        $ 19,429        $ 15,665
                                                              ------------    ------------    ------------
Cost of services and products..............................        8,833          13,903          17,534
Selling, general & administrative..........................        4,289           5,323           8,393
Depreciation and amortization..............................          183             245             464
                                                              ------------    ------------    ------------
Total operating expenses...................................     $ 13,305        $ 19,471        $ 26,391
                                                              ------------    ------------    ------------
Operating income (loss)....................................          681             (42)        (10,726)
Interest expense, net......................................         (444)           (968)           (854)
                                                              ------------    ------------    ------------
Net income (loss)..........................................     $    237        $ (1,010)       $(11,580)
                                                              ------------    ------------    ------------
                                                              ------------    ------------    ------------

<CAPTION>

                                                                              DECEMBER 31,    DECEMBER 31,
                                                                                  1996            1997
                                                                              ------------    ------------
<S>                                                           <C>             <C>             <C>
Assets:
Accounts receivable, net..................................................      $  4,499        $  4,383
Inventories...............................................................         8,606           4,663
Other assets..............................................................         2,143           1,268
                                                                              ------------    ------------
  Total Assets............................................................        15,248          10,314
                                                                              ------------    ------------
Liabilities:
Current liabilities.......................................................         3,102           3,570
Other liabilities.........................................................         8,332           9,951
                                                                              ------------    ------------
  Total liabilities.......................................................        11,434          13,521
                                                                              ------------    ------------
  Net assets (deficit)....................................................      $  3,814        $ (3,207)
                                                                              ------------    ------------
                                                                              ------------    ------------
</TABLE>

     During the year ended December 31, 1997, the Company reduced the carrying
amount of its investment to $2,105,000 and recorded a loss on discontinued
operations of $6,477,000.

NOTE 21-- CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP.
          AND WINSTAR EQUIPMENT II CORP.

     The Company's 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 ('Designated
Equipment'), received $200.0 million and $50.0 million in gross proceeds,
respectively, from the issuance and sale of 12.5% Guaranteed Senior Secured
Notes in placements of debt in March and August of 1997, respectively (see Note
7). The use of the proceeds of the Guaranteed Senior Secured Notes are to be

used to purchase designated equipment and, if such equipment is not purchased
within a specified period, WEC and WEC II must apply unused proceeds thereof to
redeem the WEC and WEC II Notes, respectively. Both the interest and principal
of the WEC Notes are guaranteed by the Company.

     WEC and WEC II have no independent operations other than to purchase
designated equipment to lease same to the Company's 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 the
consolidated financial statements of the Company, are as follows (in thousands):

                                      F-30

<PAGE>

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

NOTE 21-- CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP.
           AND WINSTAR EQUIPMENT II CORP.--(CONTINUED)

     Balance sheet information at December 31, 1997:

<TABLE>
<CAPTION>
                                                                           WEC        WEC II
                                                                        ---------    --------
<S>                                                                     <C>          <C>
Current assets.......................................................   $ 144,004    $ 48,394
Long-term assets.....................................................      71,424       2,660
Current liabilities..................................................     (25,601)     (2,432)
Long-term liabilities................................................    (200,000)    (50,000)
                                                                        ---------    --------
Stockholders' deficit................................................   $ (10,173)   $ (1,378)
                                                                        ---------    --------
                                                                        ---------    --------
</TABLE>

     Statements of operations information for WEC for the period from its
inception through December 31, 1997, and for WEC II for the period from its
inception through December 31, 1997, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 WEC                WEC II
                                                             PERIOD FROM          PERIOD FROM
                                                           MARCH 13, 1997       AUGUST 8, 1997
                                                           (INCEPTION) TO       (INCEPTION) TO
                                                          DECEMBER 31, 1997    DECEMBER 31, 1997
                                                          -----------------    -----------------

<S>                                                       <C>                  <C>
Rental revenues from other WinStar subsidiaries........       $     854             $    --
Interest income from other WinStar subsidiaries........           1,207                  --
Interest income--investments...........................           7,765               1,105
Selling, general and administrative expenses...........          (1,470)                 --
Interest expense.......................................         (18,529)             (2,483)
                                                          -----------------        --------
Net loss...............................................       $ (10,173)            $(1,378)
                                                          -----------------        --------
                                                          -----------------        --------
</TABLE>

     Separate financial statements concerning WEC or WEC II are not presented
because management of the Company has determined that such information would not
provide any material information that is not already presented in the condensed
consolidated financial statements of the Company.

NOTE 22--EMPLOYEE BENEFIT PROGRAMS

     The Company has a defined contribution 401K Plan for substantially all full
time employees. The Company makes a 25% matching contribution up to 6% of
participant's compensation, subject to certain limitations. The Company
contribution vests over a five year period. Company contributions to date have
not been significant.

NOTE 23--NEW ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 130, 'Reporting Comprehensive Income' (SFAS No. 130),
governing the reporting and display of comprehensive income and its components,
and Statement of Financial Accounting Standards No. 131, 'Disclosures About
Segments of an Enterprise and Related Information' (SFAS No. 131), requiring
that all public businesses report financial and descriptive information about
their reportable operating segments. The Company will implement SFAS 130 and
SFAS 131 as required in 1998. The impact of adopting SFAS No. 130 is not
expected to be material to the consolidated financial statements or notes to
consolidated financial statements. Management is currently evaluating the effect
of SFAS No. 131 on consolidated financial statement disclosures.

NOTE 24--SUBSEQUENT EVENT (UNAUDITED)

     In March 1998 the company issued an aggregate of $650.0 million of notes
and preferred stock consisting of $200.0 million of 10% Senior subordinated
Notes Due 2008, $250.0 million of 11% Senior Subordinated Deferred Interest
Notes Due 2008 and $200.0 million of Series D 7% Senior Cumulative Convertible
Preferred Stock Due 2010.

                                      F-31


<PAGE>

                        REPORT OF INDEPENDENT CERTIFIED
                         PUBLIC ACCOUNTANTS ON SCHEDULE

Board of Directors
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
12, 1998, which is included in this Annual Report on Form 10-K, we have also
audited Schedule II for the ten months ended December 31, 1995 and the years
ended December 31, 1996 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 12, 1998

                                      F-32

<PAGE>

                 WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                            COLUMN C
                                                             COLUMN B     ------------
                                                            ----------     ADDITIONS                       COLUMN E
                        COLUMN A                            BALANCE AT      CHARGED        COLUMN D     --------------
---------------------------------------------------------   BEGINNING     TO COSTS AND    ----------    BALANCE AT END
                       DESCRIPTION                          OF PERIOD       EXPENSES      DEDUCTIONS      OF PERIOD
---------------------------------------------------------   ----------    ------------    ----------    --------------
<S>                                                         <C>           <C>             <C>           <C>
Reserves deducted from assets to which they apply:
Year ended December 31, 1997
  Allowance for doubtful accounts(a).....................    $ 851,512     $ 5,674,018    $2,706,274(b)   $3,819,256
                                                            ----------    ------------    ----------    --------------
                                                            ----------    ------------    ----------    --------------
Year ended December 31, 1996
  Allowance for doubtful accounts(a).....................    $ 684,355     $ 1,818,521    $1,651,364(b)   $  851,512
                                                            ----------    ------------    ----------    --------------
                                                            ----------    ------------    ----------    --------------
Ten months ended December 31, 1995
  Allowance for doubtful accounts(a).....................    $ 740,688     $   852,425    $  908,758(b)   $  684,355
                                                            ----------    ------------    ----------    --------------
                                                            ----------    ------------    ----------    --------------
</TABLE>
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(a) Deducted from accounts receivable
(b) Uncollectible accounts receivable charged against allowance

                                      F-33