<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                              ------------------
                                   FORM 10-K

                                  (Mark One)
X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-        EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the transition period from ______ to ______.

                        Commission file number 1-10726

                         WINSTAR COMMUNICATIONS, INC.
            (Exact name of registrant as specified in its charter)


                  DELAWARE                                13-3585278
(State or other jurisdiction of incorporation          (I.R.S. Employer 
              or organization)                         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
                         principal executive offices)

       Securities registered pursuant to Section 12(b) of the Act: None

         Securities registered pursuant to Section 12(g) of the Act:
                                 Common Stock
                  Rights to Purchase Series B Preferred Stock

                  Indicate by check mark whether the registrant (1) has filed
         all reports required to be filed by Section 13 or 15(d) of the
         Securities Exchange Act of 1934 during the preceding 12 months (or for
         such shorter period that the registrant was required to file such
         reports), and (2) has been subject to such filing requirements for the
         past 90 days. Yes  X   No ___ 
                           ---
                  Indicate by check mark if disclosure of delinquent filers
         pursuant to Item 405 of Regulation S-K is not contained herein, and
         will not be contained, to the best of registrant's knowledge, in
         definitive proxy or information statements incorporated by reference in
         Part III of this Form 10-K or any amendment to this Form 10-K.

                  State the aggregate market value of the voting and
         non-voting common equity held by non-affiliates computed by reference
         to the price at which the common equity was sold, or the average bid
         and asked price of such, as of a specified date within the past 60
         days: As of March 25, 1999, the aggregate market value of such stock
         was approximately $1,539.2 million.

                  Indicate the number of shares outstanding of each of the
         registrant's classes of common stock, as of the latest practicable
         date. As of March 25, 1999, the number of shares of common stock
         outstanding was 46,661,356.

                      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 July 1, 1999, which will be filed by the registrant within
         120 days after the close of its fiscal year.


<PAGE>

     ITEM 1.      BUSINESS

     General

              WinStar is a facilities-based provider of telecommunications
     services primarily to businesses in a growing number of major markets
     throughout the United States. Through our local broadband (i.e.,
     high-capacity) networks, we offer our customers a variety of individual
     and bundled services, including local and long distance voice services,
     high-speed data transport, Internet access and other enhanced
     communications services. We also provide Internet-based information
     content and services, such as online business resources. We provide our
     services with a high degree of customer care and at competitive prices,
     which affords our customers an attractive alternative to the Incumbent
     Local Exchange Carrier ("ILECs") and other service providers. As of
     December 31, 1998, we had more than 319,000 installed lines serving over
     15,000 business customers. We currently provide service in more than 30
     major U.S. markets including Atlanta, Boston, Chicago, Dallas, Los
     Angeles, New York City, San Diego, San Francisco and Washington, D.C.
     Revenues from our core telecommunications services for the year ended
     December 31, 1998 were $141.5 million compared to $22.7 million for the
     year ended December 31, 1997. See "Management's Discussion and Analysis
     of Financial Condition and Results of Operations" for a discussion of our
     revenues and other financial results.

              In order to take advantage of the benefits derived from early
     market entry, we recently announced a plan to accelerate the growth of
     our business by expanding into 60 U.S. markets by the end of 2000, rather
     than the 40 U.S. markets previously announced. Additionally, we plan to
     expand internationally by entering up to 50 foreign markets with a
     capital efficient broadband data focus by the end of 2004. We intend to
     serve each of these markets primarily with our local broadband network
     and to interconnect these networks with our fiber network.

     The WinStar Broadband Network

              The Need for a Broadband Network Solution

              Local telephone service has historically been carried by the
     ILECs across their "legacy" networks. The portion of these legacy
     networks that ultimately connects to customer buildings, called the "last
     mile," is typically copper wire. The rapid growth of bandwidth-intensive
     communications services, such as Internet access and data transport, has
     created a shortage of capacity across the last mile. We believe that this
     shortage will become more acute as the use of bandwidth-intensive
     applications continues to grow.

              There are more than 750,000 commercial buildings in the United
     States. Only a very small percentage of these buildings have broadband
     connections. These broadband connections are typically made using fiber.
     Construction of last mile fiber connections has slowed substantially in
     the last few years as fiber-based carriers are determining that the
     extension of fiber to many of the buildings in any given local market may
     not be justifiable because of the significant cost and time required to
     deploy fiber. The overwhelming percentage of total construction costs for
     last mile fiber is attributable to labor, with only a small percentage of
     such total costs attributable to technology. Since labor costs tend to
     increase over time, we believe that it will become increasingly more
     expensive to connect the majority of commercial buildings with last mile
     fiber.

              Local Broadband Networks

              We believe our local broadband networks offer a solution to the
     increasing need for bandwidth to a larger addressable market than fiber
     or copper-based connections. We are able to bring broadband last mile
     connections to the substantial majority of buildings in each of our
     markets, and focus on those that do not have last mile fiber or which do
     not justify the cost of last mile fiber.

              An integral part of our local broadband networks is our Wireless
     Fiber sm service, which uses the 38 GHz, 28 GHz and other portions of the
     radio spectrum to carry voice, data and video transmissions. Our Wireless
     Fiber services can provide fiber-quality transmission at speeds more than
     350 times faster than ISDN, the fastest service currently in general use
     on legacy networks.

--------
(Service Mark) Wireless Fiber is a service mark of WinStar.


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              We believe that in order to effectively use wireless spectrum
     for the commercial provision of broadband communications services, a
     provider must have access to a large amount of spectrum in each of the
     markets where it operates. We hold licenses that provide us with the
     largest amount of 38 GHz radio spectrum in the country, as well as a
     large amount of 28 GHz spectrum and other various spectrum rights. Our
     spectrum holdings cover markets encompassing more than 200 million people
     and more than 80% of the business market in the United States.

              We use our Wireless Fiber service to establish connections
     between buildings in which our customers are located and our hub site
     buildings. Transmissions are carried between these locations using
     wireless connections between antennas placed on the roof of each building
     and then through the internal building telecommunications wire to the
     ultimate customer. Accordingly, securing building access rights is a
     crucial step in the construction or expansion of our local broadband
     networks. Currently, we have access rights to more than 4,200 buildings.
     We select hub site buildings to maximize the number of customer buildings
     which will have line of sight to the hub. Connections between our hub
     sites and our switching facilities are made using fiber or, in some
     instances, a second wireless link. Our switches seamlessly deliver voice,
     data and video traffic to customers directly connected to our network,
     the public switched telephone network or the Internet.

              Wireless Fiber. Our Wireless Fiber capacity is an integral
     component of our local broadband networks for the origination and
     termination of voice and data traffic and the interconnection of hub and
     switching sites. Each point-to-point Wireless Fiber link at 38 GHz
     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). Our
     deployment of point-to-multipoint facilities will allow a Wireless Fiber
     link to support up to four DS3s of capacity (equivalent to approximately
     2,700 voice lines). There have been significant increases in capacity over
     the last five years and we believe that there will be additional increases
     in the capacity of Wireless Fiber service over time as technology
     advances. Wireless Fiber service meets or exceeds general telephone
     industry standards and provides transmission quality equivalent to that
     produced by commercially deployed fiber facilities.

              Each 38 GHz Wireless Fiber path consists of paired antennas
     generally placed at a distance of less than three miles from one another
     within a direct, unobstructed line of sight. The antennas are
     approximately 12 to 15 inches in diameter and are typically installed on
     rooftops, towers or windows. Point-to-multipoint technology allows a
     single hub site antenna to be used to form multiple Wireless Fiber paths
     with antennas located on numerous customer buildings. Each of these hubs
     will typically be able to address all of the buildings in line of sight
     with that hub using as few as four hub site antennas.

              Significant features of Wireless Fiber services include: (1)
     digital millimeter wave transmissions having narrow beam width, reducing
     the potential for channel interference and allowing dense deployment and
     channel re-use; (2) a large amount of bandwidth in each channel, allowing
     for the simultaneous use of multiple voice and data applications; (3) a
     range of up to five miles between transmission links (although we
     generally maintain link distances of less than three miles or shorter
     distances in certain areas to meet our internally established performance
     standards); (4) performance engineered to provide up to 99.999%
     reliability, as tested; (5) transmission accuracy engineered to provide
     bit error rates of 10-13 (unfaded); and (6) 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.

              The cost of constructing a Wireless Fiber last mile connection
     is significantly less than the cost of creating the same connection using
     fiber. Further, the substantial majority of construction costs for 
     Wireless Fiber service is attributable to equipment, whereas only a small
     percentage is attributable to labor. Accordingly, in line with Moore's
     Law, (i.e., the proposition that the processing or transmission capabiliity
     of equipment will double every 18 months as a result of technological
     innovation), our cost of establishing broadband last mile connections to
     buildings using Wireless Fiber service is improving as an increasing number
     of vendors are manufacturing wireless radio equipment and as more
     advances are being made in radio technology. We expect these trends to
     continue resulting in an expansion of our addressable market. Our
     recently initiated deployment of point-to-multipoint technology allows
     for transmissions between a single hub site antenna and multiple customer
     antennas, thereby allowing us to apportion the cost among our customers 
     and reduce our capital expenditures. This 


                                      3
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     deployment also allows us to allocate and share network capacity on an
     as-needed basis and supply customers with bandwidth on demand to address
     their changing capacity requirements.

              Building Access Rights. We must obtain roof rights on each
     building where a transceiver will be placed. Our plan is to negotiate,
     prior to receipt of actual service orders (i.e., prequalification), roof
     and other access rights for the installation of Wireless Fiber links on
     buildings in the metropolitan areas covered by our wireless licenses.
     This includes hub site buildings which give direct line of sight to a
     number of other buildings we target and buildings that can provide
     interconnection access to other carriers' points of presence, switch
     locations and local access nodes. These prequalification activities may
     include the payment of option fees or rent to the owners of the
     buildings.

              Historically, we have negotiated roof rights on a
     building-by-building basis. We recently began to negotiate for roof
     rights with owners of portfolios of buildings. For example:

               o    In December 1998, we acquired roof rights to a portfolio
                    of more than 600 buildings owned or controlled by Spieker
                    Properties, one of the largest publicly traded real estate
                    investment trusts in the United States.

               o    In October 1998, we acquired roof rights to a portfolio of
                    more than 400 buildings through an agreement with DEVNET,
                    LLC., a firm which manages the telecommunications needs
                    for commercial buildings throughout the United States.

               o    In May 1998, we acquired roof rights to a portfolio of 96
                    commercial buildings owned or managed by CIGNA
                    Investments, Inc., an investment subsidiary of CIGNA
                    Corporation, a major insurance company.

              In connection with obtaining roof rights, we must secure related
     building access rights, including interior equipment space, access to
     conduits from the roof and inside the building, common space and internal
     wiring, from the owners of each building or other structures on which we
     propose to install our equipment. Additionally, we are occasionally
     required to obtain construction, zoning, franchise or other governmental
     permits.

              Wireless Licenses. We hold licenses for our Wireless Fiber
     spectrum in each of the 60 markets in the United States in which we
     currently operate or in which we intend to operate by the end of 2000.
     These licenses provide us with an average of more than 750 MHz of
     capacity in these markets. In addition to these markets, we have an
     average of 230 MHz of capacity in 118 additional markets in the United
     States. Internationally, we currently hold a nationwide license for 400
     MHz of 38 GHz point-to-multipoint spectrum in Argentina, individual
     point-to-point licenses and an experimental point-to-multipoint license
     in Amsterdam, The Netherlands and a nationwide "preferred allocation" for
     38 GHz point-to-point spectrum in the United Kingdom. In addition, our
     Japanese affiliate, of which we own 35%, was recently awarded 38 GHz
     spectrum rights covering certain major Japanese markets, including Tokyo
     and Osaka. We are continuing to pursue spectrum opportunities in a number
     of other foreign markets.

              The following chart indicates the amount of combined spectrum at
     38 GHz and 28 GHz we hold in each of the 30 markets we currently provide
     service (indicated by an asterisk (*)) and in each of the 30 additional
     domestic markets that we have targeted:

<TABLE>
<CAPTION>

       Metropolitan Area                          Total        Metropolitan Area                              Total
       -----------------                     Capacity (MHz)    -----------------                         Capacity (MHz)
                                             --------------                                              --------------
<S>                                           <C>              <C>                                       <C>
       Atlanta*..........................          900         Minneapolis*.........................            700
       Austin............................          300         Modesto, CA..........................          1,150
       Baltimore*........................          600         Nashville............................            400
       Bergen-Passaic, NJ................          600         New Orleans..........................          1,450
       Boston*...........................          600         New York City*.......................          1,750
       Buffalo...........................          800         Newark*..............................            600
       Charlotte.........................          300         Norfolk..............................          1,350
       Chicago*..........................          700         Oakbrook, IL*........................            700
</TABLE>

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<TABLE>
<CAPTION>

       Metropolitan Area                          Total        Metropolitan Area                              Total
       -----------------                     Capacity (MHz)    -----------------                         Capacity (MHz)
                                             --------------                                              --------------
<S>                                           <C>              <C>                                       <C>
       Cincinnati........................           900        Oakland*.............................          1,650
       Cleveland*........................           500        Orange County, CA*...................            600
       Columbus*.........................           200        Orlando..............................          1,450
       Dallas*...........................           800        Philadelphia*........................            600
       Denver*...........................           700        Phoenix*.............................            700
       Detroit*..........................           600        Pittsburgh...........................            600
       Fort Worth*.......................           900        Portland, OR.........................            300
       Ft. Lauderdale....................         1,000        Riverside/San Bernardino.............            500
       Fresno............................         1,250        Sacramento...........................            250
       Greensboro........................         1,350        Salt Lake City.......................          1,250
       Houston*..........................           900        San Antonio..........................            400
       Indianapolis......................           500        San Diego*...........................            400
       Jacksonville......................           400        San Francisco*.......................          1,650
       Jersey City, NJ...................           600        San Jose.............................          1,250
       Kansas City*......................           600        Seattle*.............................            800
       Las Vegas.........................           500        St. Louis*...........................            900
       Long Island, NY...................           500        St. Paul.............................            700
       Los Angeles*......................           600        Stamford*............................            400
       Louisville........................           500        Tampa-St. Petersburg*................          1,000
       Memphis...........................           600        Washington, DC*......................            500
       Miami*............................         1,000        West Palm Beach, FL..................            300
       Milwaukee*........................           600        White Plains, NY.....................          1,150
</TABLE>


              We also hold licenses for a limited amount of spectrum in the 6
     GHz, 10 GHz, 18 GHz, 23 GHz and 31 GHz portions of the radio spectrum. We
     use and will continue to use these licenses to support and enhance the
     coverage of our core spectrum holdings.

              In February 1998, the FCC granted us 29 additional 38 GHz
     channels in 11 markets. Competing applicants have filed petitions with
     the FCC contesting these grants, which we are opposing. This matter is
     still pending before the FCC. We cannot assure you that the petitions
     will not result in such grants being rescinded. However, we do not
     believe that the loss of this spectrum would adversely affect our
     operations.

              In November 1998, we acquired 850 MHz of 28 GHz capacity
     covering the New York City area. We acquired this spectrum from
     CellularVision USA, Inc. for $32.5 million in cash. Recently, certain
     parties filed suit against CellularVision seeking to void this sale, but
     we believe that this suit will not have any impact on our possession or
     use of the acquired spectrum.

              Wireless Fiber Capacity Sale to Williams Communications, Inc.
     ("Williams")

              Our large spectrum license portfolio enables us to create very
     high capacity local broadband networks. This capacity allows us to not
     only provide broadband services to our customers, but to also provide
     valuable broadband last mile connectivity to other select service
     providers, without compromising our ability to grow our end user
     business. We believe that such capacity sales will allow us to fully
     realize the value of our local broadband networks. To this end, in
     December 1998, we sold Williams a 25-year IRU for up to 2% of our current
     and future local Wireless Fiber network in the United States, subject to
     certain limitations for any single building or sector (the "Wireless
     Fiber IRU"). Williams will pay us $400.0 million for this IRU, with
     payments due ratably as we construct up to 270 hub sites. As of December
     31, 1998, we have delivered, and Williams has accepted, 57 hub sites, for
     which Williams paid us $84.0 million in February 1999. We expect to
     complete construction of at least 270 hub sites over the next three
     years. In addition, Williams will pay us at least $45.6 million over a 
     ten-year period for network maintenance services that we will provide 
     over the term of the IRU.

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              End-to-End Broadband Network

              We recently announced a plan to interconnect our local broadband
     networks in the United States with long-haul fiber to create a national
     end-to-end broadband network. This seamless national network will operate
     as a true broadband alternative to the existing public telephone networks
     that are owned and controlled by the incumbent service providers. Our
     national broadband network will enable us to carry a substantial portion
     of our customers' voice, data and video transmissions, from point of
     origination to point of termination. Since this network will reduce our
     reliance on the facilities of other providers, we will be able to
     substantially reduce our costs and have greater control over the quality
     of service we provide.

              In furtherance of our plan to create such a national broadband
     network, in December 1998 and July 1998, we entered into agreements to
     purchase fiber capacity from Williams and MFN, respectively. These
     agreements provide us with:

               o    the intercity fiber necessary to interconnect 57 of our 60
                    existing and planned local broadband networks;

               o    a large amount of intracity fiber in six major cities in
                    the United States, which we will use to interconnect our
                    hub and switch facilities in such cities;

               o    available capacity for our future growth; and

               o    reduced costs related to the transmission of our long-haul
                    traffic.

         Under our agreement with Williams, we purchased a 25-year IRU to four
fiber strands, each on a national route encompassing 14,684 route miles
(58,736 fiber miles), and a seven-year capacity option (the "Capacity Option")
to purchase two additional strands over the same routes (29,368 fiber miles).
This fiber capacity is being delivered as routes are built and is expected to
be completely available by the end of 2001. The Company anticipates that the
Williams Agreement will fulfill substantially all of our long-haul transport
requirements. We will pay Williams $640.0 million over the next seven years
for the IRU, the Capacity Option, certain long-haul transport and other
network assets. We can exercise the Capacity Option for approximately $51.0
million.

         Under our agreement with MFN, we purchased a 25-year IRU to fiber
rings consisting of multiple fiber strands in six U.S. cities and multiple
strands of intercity fiber connecting major cities in the northeastern United
States for approximately $43.6 million. As of December 31, 1998, we have
pre-paid approximately $6.7 million of this amount, with additional payments
dueas additional portions of these facilities are completed. We will use the
intracity fiber rings to connect our hub sites and switching facilities in
Chicago, New York City, Oakland, Philadelphia, San Francisco, San Jose and
Washington, D.C., which are some of our most important markets. The intercity
fiber will connect our central offices in the northeastern United States. This
intracity and intercity fiber capacity is being delivered as routes are built
and is expected to be completely available by the second quarter of 2000.

         We are also integrating our existing national ATM backbone, our
national network of frame relay data switches and our Tier 1 Internet services
into this developing broadband network.

         Strategic Relationship with Lucent

         In October 1998, we entered into a long-term strategic supply and
financing relationship with Lucent Technologies, Inc. ("Lucent"). We have
agreed to purchase Lucent equipment for a significant portion of the
components needed for our network, to the extent this equipment represents the
"best-of-breed" in the marketplace (i.e. the best and most cost-effective with
regard to the particular requirements of the network). If Lucent's equipment
is not the best-of-breed, we may, subject to certain limitations, purchase
network components from other vendors through Lucent or directly from such
vendors. Under our direction, a team of dedicated Lucent professionals will
provide us with design, engineering, deployment, construction and other
services in connection with the buildout of our network domestically and
abroad. Lucent will also provide us with other assets and services such as
access rights to buildings it controls and certain services of its Bell Labs
testing facilities. Lucent has also made financing available for the purchase
of up to $2.0 billion of best-of-breed equipment and related services
necessary for the buildout of our network 


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($500.0 million of which was made immediately available). At December 31,
1998, we had borrowed approximately $77.5 million under this financing
arrangement.

         At WinStar's request, Lucent will provide building access rights
(including roof, interior space and conduit rights) in buildings for which
Lucent has or can obtain such rights pursuant to industry standard terms, and
will assist WinStar in obtaining similar rights in any other buildings leased
or occupied by Lucent. Lucent and WinStar will provide marketing support to
each other in a variety of areas relating to telecommunications services and
equipment and other associated business opportunities, including mutual
assistance obtaining Federal government business.

Service Offerings

         We utilize our expanding local networks to provide our customers a
full range of voice and broadband services, including local and long distance
voice services, high-speed data transport, Internet access and other enhanced
communications services.

         We make our services attractive to potential customers by (1)
offering a broad range of telecommunications services that specifically
address targeted customers' needs, while providing levels of customer
satisfaction that we believe exceed those provided by larger competitors, and
(2) exploiting our 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 Voice Services

         We provide customers with local, regional and long distance voice
services. Our services in these areas include the following:

         Basic and Enhanced Voice Transmission Services. We offer analog and
digital telephone lines to customers. Our high-speed digital switches which
can serve several primary and adjacent markets simultaneously, allow us to
customize network configurations and solutions to meet the individual needs of
customers. We also offer our customers a wide range of enhanced 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 ILEC's Centrex service, or as an
addition to customer-owned PBX.

         PBX Services. Our PBX services provide businesses with access to the
local, regional and long distance telephone public networks. Our PBX services
allow customers to use either WinStar-assigned or ILEC-assigned telephone
numbers. Connection between the customer's PBX port and our network is made
through Wireless Fiber or digital facilities leased from other service
providers.

         Integrated Long Distance Services. We also offer long distance
services to our business customers. Currently, we primarily resell long
distance service through agreements with major long distance companies. These
agreements provide us access to the long distance networks of these carriers
at discounted rates, which vary with the level of monthly traffic. As a result
of our recent agreements with Williams and MFN, we will begin to provide our
own long distance service between our local markets. Under our agreement with
Williams, they will arrange for most of our long-haul transport needs until
the fiber facilities we have purchased from them have been constructed. When
Williams and MFN complete construction of their fiber networks, a substantial
majority of our long distance traffic will be carried over fiber provided to
us pursuant to these IRUs.

         Enhanced Services - Data

         The proliferation of local area networks ("LANs") and wide area
networks ("WANs"), Internet services and video enhanced services is causing
data flow to become an increasingly larger portion of overall
telecommunications traffic. The ability to access and distribute data and
other information quickly is critical to business, education and government
entities. By utilizing our broadband local networks and national data
transport backbone, we are able to deliver broadband data services to
businesses and other high-capacity users. WinStar offers its customers a wide
range of data telecommunications services including:


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<PAGE>

         Internet Access Services. We offer dedicated and dial-up Internet
access services, as well as web hosting and collocation services. A large
portion of our Internet access business is as a National Services Provider,
providing Internet access to other Internet service providers ("ISPs") through
our national Internet backbone. WinStar is one of the largest Internet
backbone providers in the United States. In addition to other ISPs, our
Internet customers include small, medium and large businesses, educational
institutions, large landlords, ILECs, cable television operators, value-added
resellers and a mix of dial-up customers. Currently, over one million people
reach the internet utilizing WinStar services.

         We also provide schools and libraries with high-speed Internet access
and specialized software with educational content. We are currently working
with the "Lattice" consortium in Washington, D.C., to develop cost-effective,
high-capacity Internet connectivity to schools and to nearby subsidized urban
housing. Our application suite provides educators with tools to integrate the
educational resources of the Internet 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.

         Other Data Transport Services. We utilize our ATM backbone to provide
WAN data transport services which allow customers to interconnect LANs
maintained at different sites at speeds that match the transmission speeds of
their networks (i.e. native speeds), thereby enabling the connection of
workstations and personal computers on one or more LANs. Our WAN services
provide customers with transmission capacity for various protocol speeds. Our
native-speed WAN services avoid bottleneck problems that are frequently
encountered with customary DS-1 connections. Our ATM backbone network supports
evolving high-speed applications, such as multimedia, desktop video
conferencing and medical imaging. Our WAN services are offered at a variety of
capacities to allow customers to choose the level which meets their specific
needs.

         We also offer frame relay services that provide customers with
high-performance, cost-efficient global interconnection of multiple LANs or
legacy systems. Our 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.

         Interactive Video Applications. Wireless Fiber service also offers
substantial opportunities for broadband interactive video applications, such
as video conferencing, and is suitable for highly customized commercial and
institutional demands. The narrow-beam characteristics of Wireless Fiber
service, allowing for frequency re-use 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.

         Dedicated Services

         We market our Wireless Fiber services to businesses, government
agencies and institutions with multiple locations within our markets 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.
Our 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.

         Wireless Fiber dedicated services provide our customers with:

         o        high bandwidth telecommunications connections between their
                  buildings on a cost-effective basis;

         o        an alternative to the ILEC's network, generally allowing for
                  faster, more reliable data transmissions;

         o        greater control over local telecommunications traffic and
                  costs;

         o        diverse routing and thus higher reliability against outage;
                  and

         o        greater security because of the private line nature of these
                  connections.


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<PAGE>



         Professional Services

         As part of our strategy to provide a full suite of complementary data
services, we provide systems integration and other similar services. Until
recently, we have primarily marketed these services to the legal and financial
communities in major cities in the United States. Our specialties include
network infrastructure design, implementation, network and desktop operating
systems, web-site design and management, document management systems,
groupware applications, Internet and intranet solutions, and flexible support
of LAN, WAN, and public networks. Additionally, we have developed numerous
strategic relationships with prominent technology providers such as Microsoft,
Novell, PC DOCS, Lotus, Bay Networks, Cisco and Compaq.

         Enhanced Services - Information

         We market and distribute information and entertainment content and
services both in traditional media (such as television, video, cable and
radio) and through new media channels such as the Internet. We believe that
the ability to package information, entertainment and other content and
services as enhanced telecommunications services will become an increasingly
important factor in the business customer's decision to select or retain a
telecommunications provider. We also believe that such enhanced services will
increase the marketability of our telecommunications services.

         We have established our operations primarily by offering traditional
media products and services which address the demand for niche and
special-interest content. By focusing on traditional media, we have been able
to generate revenues and profits which have contributed to the development of
our core assets, which include interactive content, distribution channels,
industry and advertiser relationships and experienced management. While we
will continue to operate in traditional media, we are aggressively expanding
our new media content and distribution capabilities through a variety of
acquisitions and internal initiatives. We also make investments in support of
these activities. We are currently organized into two primary operating units:
one of which focuses on developing and utilizing online business information
services and products and interactive advertising sales, and the other which
concentrates on television and home video production, distribution and
licensing and radio program production, syndication and sales of advertising
inventory.

         Our interactive media unit provides online business information
services primarily to small and medium-sized businesses through WinStar Telebase
("Telebase") and Office.com(Trademark), each a Web-based business information
service. We are also a leading advertising sales representative for branded Web
properties and interactive media content. We also seek to produce and acquire
business content that can be commercially distributed through traditional media
channels to our target business customers.

         We provide customers with single-point access to business information
from more than 1,100 brand-name sources, including Dun & Bradstreet, TRW,
LEXIS-NEXIS, Standard & Poor's and Moody's and are an integrated private-label
service for a number of online networks, including America Online, CompuServe
and Prodigy. We also recently launched the "WinStar Business
Infocenter(Trademark)," a private label version of this service that
is customized for our telecommunications customers and offered through our
telecommunications sales force.

         Office.com(Trademark), WinStar's Business Internet(TM) , is a branded
commercial Web-based business information service designed to be the
definitive destination internet site for the small- and medium-sized business
market. The initial phase of Office.com's debut in Summer 1998 included a
co-branded presence on Yahoo!. The commercial online launch is scheduled for
Summer 1999 when the site will offer consumers a broad range of user-friendly
services, e-commerce and communications capabilities.

         Our traditional media division produces and distributes programming
for the worldwide television and domestic home video markets, with an emphasis
on foreign and "art" titles, as well as nonfiction and cultural films. We are
also engaged in the retail sale of holistic, spiritual and wellness videos,
which we distribute over the internet as well We seek to exploit the
increasing worldwide demand for niche programming as the number of
distribution channels increases to accommodate specialized interests, a trend
which we believe will only be accelerated by the internet. Our library
currently includes rights to more than 1,500 hours of television and video
programming, including more than 300 film titles and 80 hours of our
own-produced documentaries.
                                      9
<PAGE>


         In addition, we are one of the largest independent national
syndicated radio advertising sales representatives in the United States,
representing both our own and third-party content. We provide related
production and affiliate distribution services. We produce more than 100 hours
of syndicated sports talk programming each week, all or a portion of which is
broadcast on more than 350 radio stations nationwide. We believe this
represents one of the widest distributions of any syndicator of sports talk
radio programming. Our original sports talk radio programming currently
features well-known personalities such as John Madden, James Brown and Keith
Olbermann. We provide national advertising sales representation for
programming produced by ourselves and others, such as MetroTraffic Report and
SW Networks, as well as national distribution services for certain of such
programming. We speak under a number of well known brand names that we own in
the information area under Telebase, SportsFans Radio, Wellspring and others.

         Government Services

         In September 1998, we won a federal court case which opens
telecommunications contracts worth hundreds of millions of dollars to bidding
by us and other competitive carriers. The U.S. Court of Federal Claims
rejected the federal government's decision to limit multimillion-dollar
federal telecommunications contracts to a single awardee, opening federal
telecommunications markets in dozens of U.S. cities to more than one service
provider. The Court made this decision in response to a protest filed by us
relating to a contract to be awarded by the U.S. General Services
Administration ("GSA") under its Metropolitan Area Acquisition ("MAA")
program. GSA originally announced that it would award only one contract to
serve federal agencies in the New York City area for up to eight years. In
sustaining our protest, the Court found that the government failed to follow a
statutory mandate to give preference to multiple-award contracts. As a result,
we recently became the first non-Bell operating company to be placed on the
GSA list of qualified vendors for these contracts.

         The MAA program provides the basis for the purchase of local
telecommunications services by federal agencies in more than 40 major markets
across the United States. The first MAA contracts will be for local
telecommunications service in the Chicago, New York City and San Francisco
areas with an estimated value of up to $600.0 million. We have bid on all
three contracts and are presently participating in pricing meetings and
awaiting a final award decision by GSA. In addition, we have made a bid for
the Washington Interagency Telecommunications System ("WITS") contract, under
which the winning bidder will provide telecommunications services to the U.S.
government between and among all Washington, D.C.-area federal government
offices and facilities. This contract covers services to be provided in the
year 2001. We believe we are uniquely positioned to compete for a portion of
these and other federal government contracts because of the flexibility and
broadband capacity provided by Wireless Fiber service.

Network and Customer Support

         We are currently using customer-centric operations support systems
which are being designed to allow us to track orders, provisioning, billing,
servicing and other information for each customer from a central point of
access.

         Our local broadband networks are monitored 24 hours a day, seven days a
week through our network operations center located in Tysons Corner, Virginia.
This center provides us with points of contact for network monitoring,
troubleshooting and dispatching repair personnel in each market. The center
provides a wide range of network surveillance functions for each local broadband
network, providing us with the ability to remotely receive data regarding the
diagnostics, status and performance of our networks. Continuous monitoring of
system components by the center focuses on avoiding problems as well as reacting
to known problems. We believe that we provide network service reliability equal
to or exceeding that provided by the ILECs and other competitors. We also
maintain a separate, smaller network operations center in Seattle, Washington to
monitor our frame relay network.

         We maintain a 36,000 square-foot national customer satisfaction
center in Dublin, Ohio. The facility serves our customers 24 hours a day, seven
days a week. The customer satisfaction center enhances our customer care
efforts by centralizing these operations. As we expand our operations and our
customers subscribe for a wider variety of broadband services, our customer
care center will ensure that our high standards are met at every level. Our
customer care representatives are equipped to handle the majority of customer
inquiries, thereby ensuring prompt resolution of 


                                      10
<PAGE>

customer issues. All representatives must graduate from an intensive
seven-week training course, where they are schooled in our products, services
and systems. We also maintain a separate customer assistance center in
Indianapolis, Indiana to service our dial-up Internet access customers.

Marketing

         We attract customers by offering them focused individual attention,
high quality customer care and attractive pricing. We market our services on a
city-by-city basis. We utilize a variety of building-based local and other
marketing programs to reinforce our message in these buildings primarily
through our direct sales efforts. We concentrate our marketing efforts on the
telecommunications decision-makers in On-Net buildings, which are viewed as
"vertical villages" for our sales force to penetrate.

         In the past, we entered a new market by reselling the services of the
incumbent providers to our customers, in order to transfer these customers to
our local broadband network once deployed. Due to our growing size and scale,
we recently decided to intensify the focus of our sales and marketing efforts
on customers located in On-Net buildings. We believe these efforts will result
in greater profitability as our local broadband networks continue to expand
and a greater percentage of our customers are located in On-Net buildings. As
part of this objective, we use unique marketing strategies to expand our
customer base. One such program is "Project Millennium," which was offered to 
businesses located in approximately 1,000 buildings in 13 of our existing
markets. Under Project Millennium, first-time customers who signed term
contracts prior to January 31, 1999, received up to one year of free local phone
service.

Competition

         The telecommunications market is intensely competitive and currently
is dominated by the ILECs and the large, established long distance companies.
We have not obtained significant market share in any of the areas where we
offer our services, nor do we expect to, given the size of the
telecommunications services market, the intense competition and the diversity
of customer requirements. The ILECs and the large, established long distance
companies have long-standing relationships with their customers and have the
potential to subsidize competitive services with revenues from a variety of
business services (to the extent lawful). While legislative and regulatory
changes have provided us and other competitive providers with increased
business opportunities, these changes have also given the incumbent providers
flexibility in the pricing of their services. This may allow the ILECs and the
large, established long distance companies to offer special discounts to
potential customers. Further, as competition increases in the
telecommunications market, we expect general pricing competition and pressures
to increase significantly. In addition, the Telecommunications Act of 1996
(the "Telecommunications Act") establishes procedures under which an RBOC may
compete in the long distance business in its region. These procedures include
compliance with a 14-point competitive checklist designed to open the RBOC's
local market to competition. Once an RBOC is authorized to compete in the long
distance business in its region, it may be an even more significant
competitor.

         In addition to competition from the incumbent providers, we also face
competition from a growing number of other companies. There is at least one
other competitor in each metropolitan area covered by our wireless licenses,
including, in many such areas, companies such as MCI WorldCom, AT&T/Teleport
and Time Warner. We also face competition from other entities which offer, or
are licensed to offer, fixed wireless services, such as Teligent Corp.,
Advanced Radio Telecommunications, Inc., NEXTLINK Communications, Inc. (which
has announced an agreement to acquire LMDS license holder WNP Communications
and the 50% interest in LMDS license holder NEXTBAND that it does not already
own), NextWave and other LMDS (28 GHz) licensees. We also face competition in
certain aspects of our existing and proposed businesses from a number of
competitors providing wireless television services and wireless access on a
licensed and unlicensed basis. In some instances, these service providers hold
38 GHz and/or 28 GHz licenses or licenses for other frequencies in geographic
areas which encompass or overlap our market areas. Additionally, some of these
entities may have greater spectrum resources in a particular market or enjoy
the substantial backing of, or include among their stockholders, major
telecommunications companies. Due to the relative ease and speed of deployment
of many wireless-based technologies, we could face significant competition
from these and other wireless-based service providers.

         We 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 


                                      11
<PAGE>

great majority of these entities provide transmission services primarily over
fiber, copper-based and/or microwave networks which, relative to our Wireless
Fiber services, enjoy substantially greater market acceptance for the carriage
of telecommunications traffic. Moreover, the consolidation of
telecommunications companies and the formation of strategic alliances within
the telecommunications industry, which are expected to accelerate, could give
rise to significant new or stronger competitors.

         We believe that the principal competitive factors affecting our market
share are (i) direct customer contact; (ii) customer service; (iii) pricing;
(iv) quality of service; (v) On Net provisioning; and (vi) variety of offered
services. Our ability to compete effectively will depend also upon our ability
to continue to provide a broad range of high capacity telecommunications
services at attractive prices.

WinStar International

         We believe that the rapidly growing demand for high-speed
communications capabilities is a global phenomenon. Even more so than in the
United States, a large majority of commercial office buildings in major cities
abroad are not directly connected to fiber or any other broadband alternative.
Many countries are just beginning to open up their telecommunications markets
to competition and to auction or otherwise make available spectrum rights.
Therefore, we believe there is a significant first to market advantage for us
to obtain spectrum rights and to sell our broadband communications services
abroad. We believe that we can use our domestic experience in building and
operating fixed wireless broadband networks to successfully compete in
numerous overseas markets. For these reasons, we plan to build Wireless
Fiber-based local networks and to sell communications services in six overseas
markets by the end of 1999 and 50 overseas markets by the end of 2004. These
50 markets are located primarily in Western Europe, the Asia/Pacific region
and the Americas. Our initial six target markets include Amsterdam, Buenos
Aires and Tokyo.

         We have selected and prioritized these 50 markets based on numerous
factors, including:

         o        availability of appropriate spectrum rights;

         o        demand for telecommunications and data services;

         o        availability of building access rights;

         o        availability of competitive backbone fiber; and

         o        generally pro-competitive regulatory environment.

         Strategy

         Initially, we intend to establish a direct sales force to sell data
transport services, Internet access and nonswitched voice services to large
commercial customers in our targeted overseas markets. We will explore
opportunities to sell other voice services and, in individual markets, we may
accelerate deployment of switched voice services. We intend to sell most of
our services to customers in On-Net buildings. We believe that our foreign
market strategy is advantageous for several reasons:

         o        Since data switching equipment is significantly less
                  expensive than that used for voice traffic, the capital
                  requirements for starting a data transport business are less
                  than for a voice telephone business.

         o        By marketing our services to a relatively smaller number of
                  large businesses, we use fewer sales and service employees,
                  thereby limiting our initial costs to enter a market.

         o        By selling primarily to customers in On-Net buildings, we
                  increase our gross margin potential and further limit the
                  amount of our upfront losses.

         o        The current prices and profit margins on sales of data
                  services in our target international markets are
                  substantially higher than those in the United States.
                  Although we anticipate that prices will decrease as


                                      12
<PAGE>

                  competition further develops in these markets, the current
                  pricing structure is advantageous to new market entrants
                  since it substantially offsets the expense of initially
                  entering a market.

         For these reasons, we believe that on a city-by-city basis our target
international markets could become profitable more quickly than our U.S.
markets.

         Regulatory and Other Considerations Relating to Initial Market Entry

         Our ability to achieve our plans in each of our targeted overseas
markets depends in part upon our ability to obtain (i) licenses, permits and
other authorizations from the local regulators necessary to build facilities,
provide services and use spectrum, (ii) rights-of-way and rights to access
rooftops, conduit, aerial pole space and radio antenna tower space from the
owners/managers of such facilities, and (iii) cost-based and nondiscriminatory
interconnection, including, in some markets, unbundled local loops. In
addition, we will need to enter into interconnection agreements with other
local carriers (especially the local incumbent providers) so that traffic can
be delivered to its ultimate destination where such destination is not an
On-Net building. Many of the governments in our targeted markets lack the
United States's experience with regulation of a competitive telecommunications
market. This factor, combined with continued government ownership of the
incumbent PTT in some countries, could slow or even undermine the development
of competitive telecommunications markets. National and local laws and
regulations governing the provision of telecommunications services differ
significantly among the countries in which we intend to operate. The
interpretation and enforcement of such laws and regulations varies and could
limit our ability to provide certain telecommunications services in certain
markets. These considerations are a key factor in our decision to attempt to
enter a market.

         Once we have decided that it makes sense to enter a particular
market, spectrum rights may be acquired in a number of ways, including:

         o        grants or sales of rights directly by the local government;

         o        purchases from third parties;

         o        acquisitions of or partnerships with entities that hold
                  spectrum rights; or

         o        public spectrum auctions.

         Many foreign jurisdictions do not currently have clearly defined
policies or programs in place with regard to making spectrum rights available.
In these markets, it may be more difficult or take more time for us to
accomplish our initial objectives and to begin selling our services, all of
which could hinder our international expansion. Once we have acquired the
necessary spectrum in a targeted market, we intend to leverage our strategic
supply and financing relationship with Lucent as well as the capabilities and
resources of any joint venture partners we may have in that market to quickly
and cost-effectively build out a Wireless Fiber-based local broadband network.
We believe that Lucent has the international presence, state-of-the-art
equipment and expertise necessary to effectively assist us in this regard. We
also plan to interconnect these markets to each other and to our U.S. markets
using fiber, thereby creating an end-to-end owned broadband network.

         Current Activities

         We conduct a number of activities prior to entering targeted overseas
markets, including:

         o        extensive market research;

         o        legal and regulatory analysis;

         o        review of initial staffing needs, including use of
                  non-employee consultants and advisors prior to obtaining
                  spectrum rights and building a local network;

         o        preparation of a business and network buildout plan,
                  including revenue and capital expenditure projections;


                                      13
<PAGE>

         o        assessment of financing needs, including discussions with
                  Lucent regarding our recent financing arrangement and their
                  expertise in certain markets abroad; and

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

         Western Europe

         We currently have 27 employees in Europe, including 14 in Amsterdam, 
where we are currently deploying network infrastructure, one in Brussels and
three in Geneva. Included in this group is a senior manager and engineers, as
well as legal, finance, sales and other support personnel. We intend to locate
our European corporate headquarters in Geneva, while maintaining our regulatory
offices in Brussels and establishing additional offices for specific areas of
operations (e.g. technical and engineering) where we believe suitable talent is
most available. We have obtained licenses in the Netherlands and a "preferred
allocation" of 38 GHz point-to-point spectrum in the United Kingdom and have
applied for spectrum rights and other licenses in Germany and France.

         Asia/Pacific

         We have entered into an agreement with KDD Corporation and Sumitomo
Corporation to establish a new joint venture company of which we own 35%. This
entity recently received a grant of 38 GHz spectrum covering certain major
Japanese markets, including Tokyo and Osaka, and intends to use this spectrum
to compete as a new fixed wireless broadband telecommunications carrier in
Japan, beginning with Tokyo in 1999.

         The Americas

         We have purchased a 95% equity interest in an Argentinean company
that holds a nationwide license for 400 MHz of 38 GHz point-to-multipoint
spectrum for $5.5 million in cash and 36,000 shares of our common stock. We
intend to initiate service in Buenos Aires in the second half of 1999.

Government Regulation

         Our telecommunications services are regulated extensively by federal,
state and local governments, and to the extent that we will operate in foreign
countries, by those governments. The federal government, through the FCC,
regulates our interstate and international telecommunications services and our
Wireless Licenses in the United States. In addition, Congress has begun to
impose regulations on certain aspects of Internet-related operation and
services. State governments regulate our intrastate telecommunications
services, generally through each state's public utility commission or public
service commission ("PUC"). Municipalities regulate limited aspects of our
telecommunications business by imposing zoning requirements, permit or
right-of-way procedures or franchise fees among other regulations. The
governments of foreign countries in which we intend to roll out our
telecommunications business will regulate such services as well as the use of
spectrum in those countries. We believe that we operate our business in
compliance with applicable laws and regulations of the various jurisdictions
in which we operate or hold licenses and that we possess the approvals
necessary to conduct our current operations.

         Regulation of Our Telecommunications Services

         Federal. The Telecommunications Act was intended to remove some of
the barriers between the long distance and local telecommunications markets,
allowing service providers from each of these sectors (as well as cable
television operators and others) to compete in all communications markets. The
FCC must issue regulations to address various requirements of the
Telecommunications Act. For instance, the Telecommunications Act generally
requires ILECs to (1) allow competitors such as us to interconnect with the
ILECs' networks and (2) give competitors nondiscriminatory access to the
ILECs' networks on more favorable terms than have been available in the past.
In August 1996, the FCC adopted regulations intended to detail the
requirements of the Telecommunications Act relating to interconnection (the
"Interconnection Order"). The Interconnection Order includes detailed
provisions regarding the interconnection of ILEC networks with those of new
competitors such as WinStar, as well as requirements that the ILECs make
certain of their network elements and services available to competitors.
However, in most cases, we still must negotiate the specifics of each
interconnection arrangement with the ILEC. This process is time consuming and
may not necessarily 


                                      14
<PAGE>

result in interconnection terms that are acceptable to us. In such instances,
we may petition the proper regulatory agency to arbitrate disputed issues, but
we cannot be assured that the results will be favorable. We have generally
been successful thus far in negotiating acceptable interconnection agreements
with the ILECs.

         In October 1996, portions of the Interconnection Order were stayed by
the United States Court of Appeals for the Eighth Circuit. This court later
invalidated certain of those provisions, including ones in which the FCC
asserted jurisdiction over the pricing of interconnection elements and the
"pick-and-choose" provisions which allow carriers to adopt select provisions
of other carriers' interconnection agreements.

         The FCC appealed this decision to the United States Supreme Court. In
January 1999, the Supreme Court reversed a majority of the Eighth Circuit's
decision, upholding in many respects the FCC's local competition rules as set
out in the Interconnection Order. Some of the key elements of the Supreme
Court's decision are:

         o        The Court upheld the FCC's pricing authority with regard to
                  interconnection, resale of ILEC services and competitors'
                  use of unbundled network elements (i.e., individual
                  elements, features and functions of an ILEC's network
                  infrastructure such as access lines, transport lines,
                  operator service and switching features);

         o        The Court upheld the FCC's "pick and choose" rules (allowing
                  requesting carriers to select from among individual
                  provisions of interconnection agreements approved by state
                  commissions);

         o        The Court upheld the FCC's jurisdiction to require all local
                  phone companies to implement intra LATA presubscription, the
                  process by which local telephone customers preselect
                  interexchange carriers for short-haul long distance calls;
                  and

         o        The Court remanded for further consideration the FCC's rule
                  that defines those network elements which, under the
                  Telecommunications Act, must be unbundled by the ILECs and
                  made available to competitors. The Court found here that the
                  FCC did not impose the limiting standard required by the
                  Telecommunications Act, which mandates a determination as to
                  whether those elements are necessary for competitors or the
                  failure to obtain access to them would impair competitors'
                  ability to provide service.

         The Supreme Court's decision has added uncertainty to the regulatory
landscape in which we and other CLECs operate. For example, the FCC is
commencing a new and potentially lengthy rulemaking proceeding to determine
which unbundled network elements the ILECs must make available to competitors.
This uncertainty may adversely impact CLECs which rely in part on the
facilities of the ILECs to deliver their telecommunications services. We
currently utilize certain unbundled ILEC network elements to service some of
our current customers. However, in light of our focused On-Net strategy, a
majority of our future customers will be serviced through our own broadband
networks, with only limited reliance on ILEC facilities. Therefore, we do not
believe this uncertainty or the ultimate resolution of this issue will have a
material impact on our business.

         The FCC recently issued an order addressing the manner in which
dial-up calls to ISPs are to be treated for both jurisdictional and reciprocal
compensation purposes. The FCC ruled that dial-up calls to ISPs constitute a
single call that is interstate in nature and subject to FCC jurisdiction. The
FCC stated, however, that its decision was not intended to impact previous
decisions by state regulators that had declared inter-carrier reciprocal
compensation applicable to these calls. This order has been appealed to the
FCC and several ILECs have requested that state regulators reverse their prior
rulings and hold that dial-up ISP traffic is not subject to reciprocal
compensation under extant interconnection agreements. It is unclear at this
time how such proceedings will conclude. However, in light of the limited
amount of revenues we have generated from reciprocal compensation for ISP
traffic, we do not expect the resolution of this issue to have a material
impact on our ongoing operations in most markets.

         The FCC also recently issued an order (the "Collocation Order")
expanding the options available to competitive providers for collocation and
access to unbundled loops from the ILECs. In the Collocation Order, the FCC
significantly expanded the rights of competitive carriers to collocate with
ILECs through a variety of methods, including cageless and shared space
collocation. As a result, the FCC has expanded the manner in which unbundled
local loops could be accessed from the ILECs.


                                      15
<PAGE>

         The FCC has also issued orders under the Telecommunications Act
reforming LEC access charges and universal service requirements. Under the
access reform order, ILECs that are subject to price cap regulation are
required to reduce the rates they charge long distance service providers for
interstate switched local access. In October 1998, AT&T filed a petition with
the FCC seeking a ruling that long distance carriers may elect not to purchase
switched access services offered under tariff by CLECs. This could also cause
increased FCC scrutiny and regulation of CLEC interstate access rates. The
petition is pending. Under the FCC's universal service order, all
telecommunications service providers are required to pay for universal service
support based on a percentage of their end user telecommunications revenues to
be established quarterly by the FCC.

         The FCC also regulates radio frequency (RF) emissions by us and other
wireless telecommunications providers. Under current regulations, if the total
RF emissions in any given area exceed the FCC's standards, then any FCC
licensee whose emissions in that area exceed 5% of the total must notify the
FCC and obtain a waiver to operate. The wireless equipment we use is designed
to operate at RF emission levels well below the FCC's standard. However, if we
operate in an area where other higher RF emitters are operating our emissions
could exceed 5% of the total and we could be required to notify the FCC and
request a waiver.

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

         The FCC also oversees the administration and assigning of local
telephone numbers. It has designated Lockheed Martin as the numbering plan
administrator. Extensive regulations have been adopted governing telephone
numbering, area code designation, dialing procedures that may be imposed by
the ILECs and the imposition of related fees by the ILECs. In addition,
carriers are required to contribute to the cost of numbering administration
through a formula based on their revenues. In 1996, the FCC permitted
businesses and residential customers to keep their numbers when changing local
phone companies (referred to as number portability). The availability of
number portability is important to competitive carriers like us since
customers, especially businesses, may be less likely to switch to a
competitive carrier if they cannot retain their existing telephone
numbers. The FCC has been working with industry groups and companies,
including WinStar, to address potential problems stemming from the depletion
in certain markets of the pool of telephone numbers which telecommunications
companies can make available to their customers. If a sufficient amount of
telephone numbers are not available to us in the market, our operations in
that market may be adversely affected or we may be unable to enter that market
until sufficient numbers become available.

         State. Some of our services are classified as intrastate and
therefore are subjected to state regulation, generally administered by the
state's PUC. The nature of these regulations varies from state to state and in
some cases may be more extensive than FCC regulations. In most instances, we
are required to obtain certification from a state PUC before providing
services in that state. We are certified to provide intrastate non-switched
service in 43 states and the District of Columbia. We are certified to offer
switched local (i.e., CLEC) services in 36 states and the District of Columbia
and intrastate long distance service in more than 45 states. We expect that as
our business and product lines expand and as more pro-competitive regulation
of the local telecommunications industry is implemented, we will offer
additional intrastate services. Interstate and intrastate regulatory
requirements are changing rapidly and will continue to change.

         Local. The Telecommunications Act gives local governments the
authority to regulate certain aspects of our telecommunications
infrastructure, including in some cases imposing franchise fees for the use of
certain public property, laying of cable and management of certain rights of
way and joining regulations related to the siting of radio antennas and
towers. These regulations vary greatly among local governments. The scope of
local authority under the Telecommunications Act has been the subject of a
number of disputes between carriers and local authorities and we anticipate
the administrative proceedings and litigation relating to these disputes will
continue.


                                      16
<PAGE>

         Foreign. In order to provide services in each of our targeted
overseas markets, we need to obtain the required approvals and licenses. These
typically include a license to operate as a telecommunications carrier and, in
our case, the right to use appropriate radio spectrum. In addition, we will
need to enter into interconnection agreements with other local carriers
(especially the local incumbent providers) so that traffic can be delivered to
its ultimate destination where such destination is not an On-Net building.
Many foreign jurisdictions do not currently have clearly defined policies or
programs in place with regard to making spectrum rights available or mandating
cost-effective interconnection arrangements. In these markets, it may be more
difficult or take more time for us to accomplish the objectives described
above and to begin selling our services, all of which could hinder our
international expansion.

         Regulation of Our Spectrum

         The grant, renewal and administration of spectrum licenses is
extensively regulated by the FCC. Our 38 GHz wireless licenses expire in
February 2001 and our 28 GHz LMDS licenses expire in August 2008. In order to
have its licenses renewed, a licensee must typically demonstrate compliance
with its regulatory obligations during the initial license period. One such
obligation is a substantial service buildout requirement. Although the FCC has
not instituted specific buildout criteria for 38 GHz licenses, it has
suggested that the buildout of four wireless point-to-point links per million
population would constitute a substantial service. Based upon our regulatory
compliance and the FCC's practice of granting an expectation of renewal to
licensees that comply with their regulatory obligations, we believe our 38 GHz
licenses will be renewed; however, such renewal is not guaranteed.

         In November 1997, the FCC issued a Report and Order and Second Notice
of Proposed Rule Making ("38 GHz Order") which addressed service rules and a
procedure for auctioning unlicensed 38 GHz spectrum. The FCC adopted many of
the major positions advocated by us in the rulemaking proceeding, including:
(1) flexible use of licenses, including multipoint and mobile operations; (2)
no quantitative restrictions on the accumulation of 38 GHz spectrum; (3)
rejection of commercial satellite industry positions that 39.5 to 40.0 GHz
should be shared with commercial satellite operations; and (4) auction of
unlicensed areas of the 38 GHz band.

         In January 1997, the FCC released an order addressing some
application processing matters. The FCC decided to process amendments of right
filed between November 13, 1995 and December 15, 1995. Other amendments filed
on or after November 13, 1995 would continue to be subject to the freeze which
had been imposed by the FCC in 1995. 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, 1996.
Amendments to reduce existing license areas or delete frequency blocks on
licenses would be permitted.

         The FCC is currently processing all pending license applications.
Those with defects or which were encumbered by mutually exclusive competing
applications will be dismissed. Pending petitions at the FCC seeking to
protect certain 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.

         The FCC has also announced its intention to auction unlicensed 38 GHz
channels in 493 markets. The exact timing of the 38 GHz auction has not been
specified.

         In March 1998, petitions were filed with the FCC challenging a number
of the findings set forth in the 38 GHz Order. Among other things, these
petitions state or request that: the FCC's application processing procedures
are in violation of the Communications Act of 1934, as amended; certain
frequency coordination procedures should be modified; and the FCC
inappropriately granted 29 of our single channel 38 GHz license applications.
We filed our own petition as well as comments on certain petitions; all
petitions remain pending. Until administrative and judicial remedies are
exhausted, the actual effect of the new rules adopted in the 38 GHz Order
remain uncertain.

         Pursuant to an international agreement to which the United States is
a signatory, the 38.6-40.0 GHz band is allocated on a co-primary basis to the
Fixed Satellite Services and the 39.5-40.5 GHz band is allocated on a
co-primary basis to the Mobile Satellite Services. The FCC has not proposed
rules to allow commercial satellite systems to operate within the allocation,
although comments and a petition for rulemaking have been filed with the FCC
by Motorola and other satellite companies requesting that such rules be
considered in order to allow satellite systems and wireless systems to
co-exist on a co-primary basis in the 38.6 to 40.0 GHz band. If the FCC were
to allow transmissions from space to earth as proposed by such applicants,
such transmissions could possibly adversely affect our existing or future


                                      17
<PAGE>

operations by creating interference or causing the FCC to institute power and
other limitations upon our transmissions. On December 17, 1998, the FCC
adopted a spectrum plan for the 36-51.4 GHz band ("V-Band Order"), in which it
segmented the entire band, generally providing for exclusive, non-sharing,
primary designations for wireless and satellite services. In the plan, the FCC
reaffirmed its position that the 38.6-40.0 GHz band is to be exclusively
utilized domestically by fixed terrestrial wireless services only and
specified that although the band remains allocated to non-government satellite
and fixed services on a co-primary basis, it was designating exclusive primary
non-government use to fixed services. Government satellite operations,
pursuant to NATO treaty, remain authorized at 39.5-40.0 GHz. The FCC also
reserved additional spectrum for future allocation to terrestrial fixed
wireless services. Separately, they indicated that satellite applicants should
modify their applications to conform to the FCC's new band plan. In March
1999, three Petitions for Reconsideration were published in the Federal
Register attacking the V-Band Order. Two of these petitions specifically
request use of 38 GHz spectrum for commercial satellite operation. We will
oppose these petitions and we believe, based on prior FCC precedent, that
commercial satellite operators will not be permitted they will not be able to
interfere with our use of 38 GHz spectrum.


                                      18
<PAGE>

         Regulation of Internet Service Providers

         During 1998, Congress passed a number of laws that concern the
Internet, including the Digital Millennium Copyright Act, the Children's
Online Privacy Protection Act, the Children's Online Protection Act and the
Protection of Children from Sexual Predators Act of 1998. Generally, these
laws provide liability limitations for Internet service providers that do not
knowingly engage in unlawful activity. We are putting guidelines into place to
comply with this new legislation and do not anticipate that compliance with
these laws will have an adverse impact on us.


Employees

         At December 31, 1998, we had over 2,800 employees. We are not a party
to any collective bargaining agreements and have never experienced a strike or
work stoppage. We consider our relations with our employees to be
satisfactory.


ITEM 2.  PROPERTIES

         WinStar's corporate headquarters are currently located at 230 Park
Avenue in New York City. In November 1998, we signed a 15-year lease for
approximately 200,000 square feet of office space (with options to lease
approximately 57,000 additional square feet) at 685 Third Avenue in New York
City. We intend to move our corporate headquarters and consolidate certain
other New York City-based operations to this new facility during 1999. Many of
our telecommunications operations are located in approximately 230,000 square
feet of space in several buildings in northern Virginia. In December 1998, we
signed a ten-year lease for approximately 200,000 square feet of additional
space (with a right of first refusal on substantial additional space in a
building currently under construction) located in Herndon, Virginia. We intend
to consolidate some of our northern Virginia operations in these new
facilities during the second and third quarters of 1999. We also lease
numerous other facilities throughout the United States and in certain markets
abroad, including sales offices, switch and hub locations, building roof
rights, collocation facilities and our 36,000 square foot customer-care
facility located in Dublin, Ohio.


ITEM 3.  LEGAL PROCEEDINGS

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


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

         None.



                                      19
<PAGE>

                                    PART II

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

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

         The following table sets forth, for the fiscal periods indicated, the
high and low 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.


Period Ending                                            High          Low
-------------                                            ----          ---

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
March 31, 1998.......................................... 44 13/16      24 5/8
June 30, 1998........................................... 47 3/8        36 5/8
September 30, 1998...................................... 41 3/4        18 1/4
December 31, 1998....................................... 39            13
January 1, 1999 through March 25, 1999.................. 44 7/16       29 3/4


         The last sale price of the Common Stock on March 25, 1999 was $33.75
per share. As of March 25, 1999, the Company had 46,661,356 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 1998:

<TABLE>
<CAPTION>
                                                                                  Terms of
                                                               Exemption        Conversion or
   Securities Sold       Purchasers       Consideration         Claimed           Exercise        Use of Proceeds
   ---------------       ----------       -------------        ---------          --------        ---------------
<S>                    <C>              <C>                    <C>             <C>                <C>
299,128 shares of      Various          Shares issued as          4(2)         Not Applicable     The Company did
Common Stock           individuals      consideration in                                          not receive cash
(various dates from                     various                                                   proceeds for
10/1/98 - 12/31/98)                     acquisitions                                              these shares.

</TABLE>



                                      20
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                             Year Ended       Ten Months              Year Ended December 31,
                                            February 28,    Ended December 31,  --------------------------------------              
                                                1995             1995            1996           1997           1998
                                           ---------------------------------------------------------------------------
                                                         (Dollars in Thousands, Except Per Share Data)
<S>                                          <C>             <C>            <C>            <C>             <C>
Statement of Operations Data:
Operating revenues:
    Telecommunications services:
        Core..........................        $      --       $     --        $      604    $    22,653     $   141,466
        Other.........................               125            130            3,883          7,143          49,643
                                              ----------      ---------       ----------    -----------     -----------
    Total telecommunications                         
      services                                       125            130            4,487         29,796         191,109
        Information services..........               473          2,648           14,650         41,354          53,338
                                              ----------      ---------       ----------    -----------     -----------

    Total operating revenues..........               598          2,778           19,137         71,150         244,447
                                              ----------      ---------       ----------    -----------     -----------

    Operating income (loss):
      Telecommunications services.....            (1,306)        (4,456)         (40,731)      (147,134)       (231,017)
      Information services............              (157)           217           (1,409)        (4,092)        (10,167)
      General corporate...............              (944)        (3,861)         (11,373)       (27,312)        (57,225)
                                              ----------      ---------       ----------    -----------     -----------
    Total operating loss..............            (2,407)        (8,100)         (53,513)      (178,538)       (298,409)

Interest expense......................              (375)        (7,186)         (36,748)       (77,257)       (156,599)
Interest income.......................               343          2,890           10,515         17,577          29,758
Other (expenses) income, net (a)......            (1,109)          (866)             --           4,719           5,500
                                              ----------      ---------       ----------    -----------     -----------
Loss from continuing operations.......            (3,548)       (13,262)         (79,746)      (233,499)       (419,750)
Loss from discontinued operations.....            (3,682)        (2,595)          (3,977)       (15,985)        (24,974)
                                              ----------      ---------       ----------    -----------     -----------
Net loss..............................            (7,230)       (15,857)         (83,723)      (249,484)       (444,724)
Preferred stock dividends.............               --             --              --           (5,879)        (42,968)
                                              ----------      ---------       ----------    -----------     -----------
Net loss applicable to common 
stockholders                                  $   (7,230)     $ (15,857)      $  (83,723)   $  (255,363)    $  (487,692)
                                              ==========      =========       ==========    ===========     ===========
Basic and diluted loss per share:          
Loss per common share from continuing
  operations..........................        $    (0.21)     $   (0.58)      $    (2.86)   $     (7.20)    $    (11.96)
Loss per common share from                 
  discontinued operations.............             (0.21)         (0.12)           (0.14)         (0.48)          (0.65)
                                              ----------      ---------       ----------    -----------     -----------
Loss per share outstanding............        $    (0.42)     $   (0.70)      $    (3.00)   $     (7.68)    $    (12.61)
                                              ==========      =========       ==========    ===========     ===========

Weighted average common shares                 
outstanding (000's)...................            17,122         22,770           27,911         33,249          38,681
</TABLE>

                                      21
<PAGE>

<TABLE>
<CAPTION>
                                         February 28,                           December 31,
                                                         ------------------------------------------------------------
                                             1995            1995           1996            1997           1998
                                        -----------------------------------------------------------------------------
                                                                   (Dollars In Thousands)
<S>                                     <C>              <C>            <C>             <C>            <C>
Balance Sheet Data:
Cash, cash equivalents and 
  short-term investments..............   $     2,874     $  211,583     $  122,638      $  419,462     $   313,030

Property and equipment, net...........           250         13,053         59,983         284,835         639,673

Total assets..........................        19,803        268,964        273,012         973,834       1,663,182

Current portion of long-term debt    
  and capital lease obligations.......            28         1,839          21,121           7,127          65,508

Long-term debt and capital lease     
  obligations, less current portion...            17        239,957        275,513         789,861       1,445,989

Convertible redeemable preferred     
  stock...............................         --              --             --              --           200,000
Exchangeable redeemable preferred    
  stock...............................         --              --             --           175,553         201,478
Common and preferred stock and           
  additional paid-in capital(b).......       43,518         104,823         75,726         256,126         404,568
Stockholders' equity (deficit)........       18,280          21,752        (49,671)       (118,392)       (449,492)
</TABLE>

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

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

(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

General

         We operate the following lines of business: (1) telecommunications
services consisting of (a) core services, which include local and long
distance voice and data telecommunications services provided to business
customers and (b) other telecommunications services which consist principally of
long distance operations which we acquired in January 1998 from Midcom
Communications, Inc. ("Midcom"), and (2) information services, which include the
provision of information products and services to our telecommunications
customers as well as the creation and distribution of information and
entertainment products and services through a variety of media outlets such as
radio, television and the Internet.

         The following discussion does not include the results of operations
of Global Products or Gateway, both of which have been reclassified as
discontinued operations.

Revenues

         Several factors drive our revenues, including:

         Core Telecommunications Services

         Revenues from local and long distance services 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.
Professional services such as network design, network integration and
maintenance are billed on a project basis. Revenue growth depends upon our
addition of new customers in existing markets, our sale of bundled services,
our expansion into new markets and our introduction of new services, such as
broadband data transmission, or video conferencing. Revenues from core
telecommunications services were approximately $55.6 million in the quarter
ended December 31, 1998 versus $37.2 million in the quarter ended September
30, 1998, $30.0 million in the quarter ended June 30, 1998, $18.7 million in
the quarter ended March 31, 1998 and $10.1 million in the quarter ended
December 31, 1997. We expect our core services to generate increasing revenues
as we expand our network and as network utilization increases.

                                      22
<PAGE>

         Other Telecommunications Services

         Other telecommunications services consist principally of long
distance services provided to customers acquired from Midcom in January 1998
who are not located in markets where we currently market or expect to market
our telecommunications services in the near term. We expect these revenues to
decline over time through normal churn of this customer base.

         Information Services

         Information services revenues are generated principally by: (1) sales
to cable networks and radio stations; (2) sales to new media distribution
channels, such as on-line services; (3) advertising sales and (4) the bundling
of content as an enhanced telecommunication service. Revenues are driven
by the amount and quality of our available program rights during each quarter
and some seasonality of sales, which affect quarter-to-quarter comparability.
We expect information services revenues to increase as we expand our
information service offerings and sell these services to core customers.

Costs

         Factors relating to costs are as follows:

         Core Telecommunications Services

         Costs associated with our core telecommunications services business
include significant up-front capital expenditures for development of the
infrastructure required to provide facilities-based local exchange, long
distance and data services, including expenditures relating to the purchase
and installation of switching equipment, radios, customer premise equipment
and related site acquisition and installation costs along with intercity and
intracity backbone facilities. In addition, we are incurring start-up costs
related to our telecommunications services 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 we commence operations in a city,
our cost of revenue percentage is greater as fixed costs are spread over less
traffic. Margins on core services revenues are improved as: (1) traffic
increases and our fixed network costs are spread over a larger traffic base
and (2) we increase the total percentage of traffic carried on our networks
because this On-Net traffic results in higher operating margins than traffic
carried on the facilities of other companies.

         Other Telecommunications Services

         Costs associated with other telecommunications services are currently
incurred through the resale of other carriers' long distance facilities. To
the extent that this traffic is migrated to our own long distance network when
available, gross margins will increase.

         Information Services

         Our 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 expensed as productions are completed and distributed. Overhead
costs in the production division are also capitalized, allocated to films in
progress and 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 are expensed
as incurred.



                                      23
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                 ----------------------------------------------

                                                                         1996           1997            1998
                                                                         ----           ----            ----
<S>                                                                 <C>            <C>             <C>
 Telecommunications services
 ---------------------------------------------------------------
     Core.....................................................      $       0.6    $       22.7    $     141.5
     Other....................................................              3.9             7.1           49.6
                                                                    ------------   -------------   ------------
                                                                            4.5            29.8          191.1
 Information services                                                      14.6            41.3           53.3
                                                                    ------------   -------------   ------------

     Total operating revenues.................................      $      19.1    $       71.1    $     244.4
                                                                    ===========    ============    ===========
</TABLE>


Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         Revenues increased by $173.3 million, or 243.6%, to $244.4 million
for the year ended December 31, 1998, from $71.1 million for the year ended
December 31, 1997. This increase was primarily attributable to the growth in
revenues generated by our telecommunications operations.

         Revenues from core services, increased by $118.8 million, or 524.5%,
to $141.5 million for the year ended December 31, 1998, from $22.7 million for
the year ended December 31, 1997. The revenue growth was primarily
attributable to our existing customer base, continued national sales and
installation of local, long distance and Internet services to small and medium
size business customers, the geographic and other expansion of sales, network
and business operations, along with the rapidly expanding broadband and large
accounts business units and certain acquisitions such as Goodnet, Pac-Net and
LANSystems. Based on revenues generated in December 1998, Core service
revenues reached an annual run rate in excess of $209.0 million compared with
approximately $46.2 million based on revenues generated in December 1997.
Through December 31, 1998, cumulative lines installed were more than 319,000
as compared with approximately 81,500 lines at December 31, 1997.

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

         Revenues from information services increased by $12.0 million, or
29.0%, to $53.3 million for the year ended December 31, 1998, from $41.3
million, for the year ended December 31, 1997, due primarily to strong
Internet and other advertising revenues.

         Cost of services and products increased by $130.8 million, or 177.1%,
to $204.7 million for the year ended December 31, 1998, from $73.9 million for
the year ended December 31, 1997. As a percentage of revenues, cost of services
and products for the year ended December 31, 1998 was 83.8% compared to 103.9%
for the year ended December 31, 1997. This decrease in the cost of revenue
percentage is the result of increased sales volumes, larger percentages of
traffic being provisioned over our network, substantial supplier cost
adjustments and/or credits for volume or performance and control over internal
costs. While our gross profit margin should continue to gradually improve as
increased volumes and larger percentages of traffic are provisioned over our own
network facilities, the rate of improvement will be slower during periods when
we expand into new markets, but will accelerate as these markets mature.

         Selling, general and administrative expense increased by $112.5
million, or 74.6% to $263.2 million for the year ended December 31, 1998, from
$150.7 million for the year ended December 31, 1997. As a percentage of
revenues, selling, general and administrative expenses declined from 211.8%
for the year ended December 31, 1997 


                                      24
<PAGE>

to 107.7% for the year ended December 31, 1998. We continued to hire sales,
marketing and related support personnel in connection with the expansion of
our target markets. We had approximately 1,479 employees at December 31, 1997
and approximately 2,800 at December 31, 1998. With our continued expansion, we
expect selling, general and administrative expenses to continue to grow in
absolute dollars, but to be a declining percentage of revenues.

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

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

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

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

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

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

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

         Revenues increased by $52.0 million, or 272.3%, to $71.1 million for
the year ended December 31, 1997, from $19.1 million for the year ended
December 31, 1996. This increase was attributable to increased revenues
generated by our core services, other telecommunications services and
information services businesses.

         Revenues from core telecommunications services, which include all
commercial end user customer telecommunication revenues, were $22.7 million
for the year ended December 31, 1997, and were minimal for the year ended
December 31, 1996, as the telecommunications business commenced operations in
the second quarter of 1996. Based on revenues generated in December 1997,
annualized revenues for the core business were approximately $46.2 million. As
of December 31, 1997, the core business had installed approximately 81,500
lines, up from approximately 51,400 lines at September 30, 1997 and 4,400
lines at December 31, 1996.

         Revenues from other telecommunications services increased $3.2
million, or 82.1%, to $7.1 million for the year ended December 31, 1997, from
$3.9 million for the year ended December 31, 1996. This increase resulted from
the growing number of billed circuits, along with installation revenues and
equipment sales related to contract services provided.

         Revenues from information services increased by $26.7 million, or
182.9%, to $41.3 million for the year ended December 31, 1997, from $14.6
million for 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 $52.5 million, or 245.3%,
to $73.9 million for the year ended December 31, 1997, from $21.4 million for
the year ended December 31, 1996. As a percentage of revenues, cost of
services and products for the year ended December 31, 1997 was 103.9% compared
to 111.8% in the year ended 


                                      25
<PAGE>

December 31, 1996, as a result of increasing network costs from the continued
expansion of our local telecommunications business.

         Selling, general and administrative expense increased by $103.2
million, or 217.3%, to $150.7 million for the year ended December 31, 1997,
from $47.5 million for the year ended December 31, 1996. As a percentage of
revenues, selling, general and administrative expenses declined from 248.0%
for the year ended December 31, 1996 to 211.8% for the year ended December 31,
1997. We continued to hire sales, marketing and related support personnel in
connection with the accelerated rollout of our Core operations, which had only
500 employees at December 31, 1996 and approximately 1,200 employees at
December 31, 1997. In addition, we increased spending on related advertising
and marketing of our Core services.

         Depreciation and amortization expense increased by $21.3 million, or
560.5%, to $25.1 million for the year ended December 31, 1997, from $3.8
million for the year ended December 31, 1996, principally resulting from our
acquisition and deployment of switches, radios and other equipment in
connection with our telecommunications network buildout.

         For the reasons noted above, the operating loss for the year ended
December 31, 1997 was $178.5 million, compared with an operating loss of $53.5
million for the year ended December 31, 1996.

         Interest expense increased by $40.5 million, or 110.4%, to $77.3
million for the year ended December 31, 1997, from $36.7 million for the year
ended December 31, 1996. The increase was principally attributable to our
issuance of debt in 1997. Of the $77.3 million interest expense for the year,
$21.1 million is payable in cash.

         Interest income increased by $7.1 million, or 67.6%, to $17.6 million
for the year ended December 31, 1997, from $10.5 million for year ended
December 31, 1996. The increase resulted from the additional interest income
earned on the proceeds from our issuance of debt and equity securities in
1997.

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

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

Liquidity and Capital Resources

         In February 1999, we sold 4,200,000 shares of our Common Stock, at
$41.75 per share and received net proceeds of $166.6 million.

         In December 1998, we sold Williams a Wireless Fiber IRU, for which
they will pay us $400.0 million ratably as we construct up to 270 hub sites
during the next three years. As of December 31, 1998, we have delivered, and
Williams has accepted, 57 hub sites, for which Williams paid us $84.0 million
in February 1999. In addition, Williams will pay us at least $45.6 million
over a ten-year period for network maintenance services that we will provide
over the term of the Wireless Fiber IRU.

         In October 1998, we entered into an expanded long-term strategic
supply and financing relationship with Lucent. In connection with that
agreement, Lucent has made financing available for the purchase of up to $2.0
billion of equipment and related services necessary for the buildout of our
network ($500.0 million of which was made immediately available). At December
31, 1998, we had borrowed $77.5 million under this financing arrangement.

         In March 1998, we sold 4,000,000 shares of our Series D Preferred
Stock for which we realized net proceeds of approximately $191.9 million.
Additionally, in March 1998, we sold an aggregate of $450.0 million principal
amount of notes ($200.0 million of which pay interest and $250.0 million of
which defer interest), for which we realized net proceeds of approximately
$437.4 million.



                                      26
<PAGE>

         We have incurred significant operating and net losses, due in large
part to the development of our telecommunications services business, and we
anticipate that such losses will continue over the near term as we execute our
growth strategy. We are building direct sales forces, having opened sales
offices currently serving the 30 major markets in which we offer our core
telecommunications services, and we are expanding into other metropolitan
areas. We are in the process of ordering and installing switches and other
network equipment to be placed in our key markets. Historically, we have
funded our operating losses and capital expenditures through public and
private offerings of debt and equity securities and from credit and lease
facilities. Negative EBITDA for the year ended December 31, 1998 was
approximately $223.5 million, and cash used to fund purchases of property and
equipment during the year ended December 31, 1998 was approximately $372.7
million. At December 31, 1998, working capital was $193.1 million (including
cash, cash equivalents and short-term investments of $313.0 million), as
compared to $365.7 million at December 31, 1997 (including cash, cash
equivalents and short-term investments of $419.5 million).

         Other than our 1997 equipment notes, our 1998 cash-pay notes, and
certain of our capital lease obligations, which require periodic cash interest
payments, and the indebtedness incurred under the Lucent financing
arrangements, portions of which require cash payment of interest commencing in
December 1999, our principal indebtedness does not require us to pay cash
interest until 2001.

         In July 1998, we purchased from MFN an IRU to dark fiber in and
between a number of major markets at an aggregate cost of $43.6 million.
Amounts will become payable over the next eighteen months as portions of the
fiber network are fully constructed and become available to us. To date we
have prepaid $6.7 million of this amount.

         In November 1998, we signed a 15-year lease for approximately 200,000
square feet of office space (with options to lease approximately 57,000
additional square feet) in New York City. Future minimum lease payments under
this lease commitment are approximately $157.7 million, which is comparable to
what we would have paid for existing facilities and anticipated additions over
the same 15-year period. We will consolidate certain of our existing New York
City offices in the new space, including the headquarters for our corporate
offices, WinStar for Buildings, WinStar Broadband Services, WinStar Large
Accounts and operating offices for WinStar General Business and WinStar
Network Services. We expect to sublease many of our existing offices in New
York City.

         In December 1998, we signed a ten-year lease for approximately
200,000 square feet of office space (with a right of first refusal on
substantial additional space in a building currently under construction)
located in Herndon, Virginia. Future minimum lease payments under this lease
commitment are approximately $43.2 million.

         In December 1998, we purchased from Williams an IRU to intercity
fiber and an option to additional intercity capacity. In connection with this
purchase, Williams will supply a substantial portion of our long-haul
transport until such time as construction of their facilities is completed. We
will pay Williams an aggregate of approximately $640.0 million over the next
seven years for the fiber, option, long-haul transport services and other
network assets. We can exercise the capacity option for approximately $51.0
million.

         We have the ability to moderate our capital spending and EBITDA
losses by varying the number of markets in which we build network and offer
services. In the event that we slow the speed or narrow the focus of our
business plan, we will reduce our capital requirements and EBITDA losses.
Under our current plan to expand to 45 major domestic and six international
markets by the end of 1999, we plan to spend between $500.0 and $600.0 million
in 1999 for capital equipment, which we expect to finance principally through
the Lucent credit agreement and other vendor financing arrangements which we
believe are available to us.

         We anticipate, based on our business plan and related assumptions
(including an assumption of full availability of the $2.0 billion under our
Lucent financing arrangement), that our existing financial resources and
accounts receivable and additional equipment financings that we intend to
seek, will be sufficient to fund our operations for approximately 12 to 18
months, and to fund our capital requirements for the next several years. We
may be required to seek additional sources of capital sooner than we
anticipate if our operating assumptions change or prove to be inaccurate; less
than $2.0 billion becomes available under the Lucent credit agreement; we fail
to secure additional equipment and accounts receivable financing; we
consummate any acquisitions of significant businesses or assets (including
spectrum licenses); or we further accelerate our plan and enter markets more
rapidly.



                                      27
<PAGE>

         We continually evaluate the financing alternatives available to us
and may decide to seek a variety of forms of additional debt and/or equity
financing in the near future.

Year 2000 Compliance

         We are continuing to address the issue of whether or to what extent
our systems will be vulnerable to potential errors and failures as a result of
the "Year 2000" problem, which is the result of certain computer programs
being written using two digits, rather than four digits, to define the
applicable year. Any computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, or not
recognize the date at all. This could result in major system failures or
miscalculations. We believe that our exposure to this issue, based on our
internal systems, is somewhat limited by the fact that substantially all of
our existing systems have been purchased or replaced since 1996 or currently
remain under development. Notwithstanding this belief, we have developed a
plan and we are aggressively working to identify and remediate potential Year
2000 problems in all of our new and existing mission-critical and
business-critical systems and applications, including those supplied by third
party vendors.

         Our first priority is to protect customer-sensitive operations from
service interruptions or billing discrepancies that could occur as a result of
the Year 2000 transition. Customer-sensitive mission-critical operations
include our telecommunications network, traffic data, customer order
processing and provisioning systems, customer billing and invoicing, and data
interfaces to and from these systems. Our second priority is business-critical
operations including systems, applications and operations which do not
directly impact the customer, but are essential to internal communications and
our ability to run the business day-to-day. Finally, we are addressing areas
where failure might cause inconvenience and delay for our employees, but would
not directly impact customers, service or routine business operations.

         We have developed Year 2000 compliance standards that follow industry
requirements. In order to implement these standards, we have formed a Year
2000 Program Office to manage the Year 2000 project plan enterprise-wide. The
project team is comprised of management and technical representatives from our
major operational areas, together with experienced Year 2000 consultants.

         Key activities in our Year 2000 program include: planning and program
definition, inventory and prioritization of date-sensitive systems (including
computer and electrical systems, equipment and the systems of companies
acquired or to be acquired by us), risk assessment, remediation, testing,
audit and certification, contingency planning, implementation and
post-implementation monitoring.

         We have completed the planning and inventory/assessment phases of
this project which entailed, among other things, identification of the several
hundred systems we use in the operation of our business, and review all of our
hardware and software systems for date related code issues. The results of
this review are guiding our remediation, testing and contingency planning
efforts which are underway. We have been undertaking certain Year 2000 testing
and remediation of non-compliant systems which will continue through 1999.

         We recognize the need to remediate and test our mission-critical and
business-critical systems to ensure that individually the systems are Year
2000 functional and that collectively they inter-operate in such a manner as
to insure that we are Year 2000 functional. We expect to complete the
individual testing of mission-critical and business-critical systems prior to
June 30, 1999. We expect to start inter-operability testing prior to June 30,
1999 and to complete that phase prior to August 31, 1999. This project will
necessarily be a continuing one as remediated systems are monitored for
compliance and as further modifications are warranted to cover systems changes
and to support the growth of the network.

         We have, where deemed necessary, required suppliers and third-party
vendors to provide statements of Year 2000 compliance in their contracts with
us. In addition, and as part of our Year 2000 project, we are contacting our
vendors and suppliers, including other telecommunications providers, equipment
manufacturers and software vendors, to obtain a statement regarding their Year
2000 compliance. We currently require our outside vendors and suppliers to
provide reasonable assurances that their hardware and/or software is Year 2000
ready. In the event that a vendor or supplier is not able to provide such
assurance, we will monitor the vendor's progress in this area and, if
appropriate may arrange to have available an alternate vendor or supplier who
can give such assurances.



                                      28
<PAGE>

         The total cost associated with our Year 2000 compliance project is
not expected to be material to our financial position. The estimated total
cost of the project is $4.0 million to $8.0 million. The total amount expended
through the date hereof was approximately $1.2 million. As additional systems
are reviewed and tested and the scope of any Year 2000 issues is further
defined, we will make appropriate adjustments to the estimated costs of
completing this project.

         Our failure to make our key systems Year 2000 compliant could
adversely impact our ability to service our telecommunications and other
customers and otherwise carry on our business. Such problems could include
interruptions in the operation of our telecommunications network, traffic
data, customer order processing and provisioning systems, customer billing and
invoicing, and data interfaces to and from these systems. Although we expect
that we will have identified and remediated any Year 2000 problems in our
internal systems prior to the end of 1999, if any significant Year 2000
problems in our systems are not uncovered or are not remediated in a timely
manner, significant failures of these functions could occur and could have
material adverse consequences for our operations.

         While we are working to test our own mission-critical systems for
Year 2000 problems, we do not control the systems of our suppliers. As
discussed above, we are seeking assurances from our suppliers regarding the
Year 2000 readiness of their systems. We also plan to conduct interoperability
testing to determine whether our mission critical suppliers' systems will
accurately provide our systems with date, data and telecommunications
functionality into and beyond the new millennium. Notwithstanding these
measures, there is some risk that the interoperation of our systems with those
of our suppliers may be impacted by the Year 2000 date change. In addition, in
light of the vast interconnection and interoperability of telecommunications
networks worldwide, the ability of any telecommunications provider, including
WinStar, to provide services to its customers (e.g., to complete calls and
transport data) and to bill for such services is dependent, to some extent, on
the networks and systems of other carriers. To the extent the networks and
systems of those carriers are adversely impacted by Year 2000 problems, our
ability to service our customers may be adversely impacted as well. Any such
impact could have a material adverse effect on our operations.

         We also may consummate acquisitions prior to the end of 1999. The
extent of the Year 2000 problems associated with any acquired company and the
cost and timing of remediation will be evaluated during and after completion
of the acquisition process. However, we cannot be certain that the systems of
any acquired company will be fully Year 2000 compliant when acquired or will
be capable of timely remediation.

         Having identified our mission-critical and business-critical systems
and our key suppliers, and the associated risks of failure of those systems to
be Year 2000 ready, we are in the process of devising contingency plans which
will be ready for implementation by the third quarter of 1999 in the event we
determine that any of those systems will not be made Year 2000 compliant in a
timely manner.

Effects of Recently Issued Accounting Pronouncements

         The American Institute of Certified Public Accountant's Accounting
Standards Executive Committee recently issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires that costs of start-up activities, including organization costs, be
expensed as incurred. Start-up activities are broadly defined and include
one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, commencing some new operation and organizing a new
entity. SOP 98-5 is generally effective for financial statements for fiscal
years beginning after December 15, 1998, with initial application reported as
the cumulative effect of a change in accounting principle. We are currently
evaluating the impact that SOP 98-5 will have on our consolidated financial
statements and disclosures.



                                      29
<PAGE>

         In June 1998, The Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which requires entities to recognize all derivatives in their financial
statements as either assets or liabilities measured at fair value. SFAS 133
also specifies new methods of accounting for hedging transactions, prescribes
the items and transactions that may be hedged and specifies detailed criteria
to be met to qualify for hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. We are currently evaluating the impact
that SFAS 133 will have on our consolidated financial statements and
disclosures. However, hedging is prohibited under the Company's indentures.


                          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 our financial condition, results of operations and business. The words
"anticipate," "believe," "estimate," "expect," "plan," "intend" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. We
cannot assure you that any of our expectations will be realized. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, without limitation: (1) our ability to
service our debt or to obtain financing for the buildout of our domestic and
international telecommunications networks; (2) our ability to attract and
retain a sufficient revenue-generating customer base; (3) competitive
pressures in the telecommunications and technology industries; and (4) general
economic conditions.


                                      30
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE

Interest Rate Risk

         Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio, redeemable preferred stock and
long-term debt obligations. We do not use derivative instruments in our
investment portfolio. We place our investments with high credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
We have no cash flow exposure due to rate changes for long-term debt
obligations. We primarily enter into debt obligations to support the
construction of our network and working capital needs.

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

<TABLE>
<CAPTION>
                                                                                                           Fair Value
                                                                                                           at December
                                 1999       2000      2001     2002      2003    Thereafter     Total       31, 1998
                              -------------------------------------------------------------------------------------------
<S>                             <C>         <C>      <C>      <C>       <C>      <C>          <C>          <C>
ASSETS
                                                          (In Thousands)
Cash equivalents
  Fixed rate                     $160,100      $ --   $ --     $ --      $ --       $ --       $ 160,100       $ 160,100
  Average interest rate              4.8%                                                           4.8%

Short-term investments
  Fixed rate                      104,773        --     --       --       --         --          104,773         104,773
  Average interest rate              5.4%                                                           5.4%

Total investment securities       264,873        --     --       --        --         --         264,873         264,873
  Average interest rate              5.0%                                                           5.0%

Long-Term Debt
  Fixed Rate                          --         --       --        --      --    1,316,642    1,316,642       1,233,897
  Average interest rate                                                                            12.6%

  Variable Rate                     6,487     1,060      927       492   4,844       72,670       86,480          86,480
  Average interest rate              8.5%      8.5%     8.5%      8.5%     8.5%         8.6%        8.5%

Redeemable Preferred Stock
  Fixed Rate                          --         --       --        --      --      401,478      401,478         346,422
  Average Coupon Rate                                                                  10.6%        10.6%


</TABLE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


                                      31
<PAGE>

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

         Not applicable.

                                   PART III

         The information required by Items 10, 11,12 and 13 of Form 10-K is
incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders anticipated to be held on July 1, 1999.

                                    PART IV

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

                  (a)      Exhibits

<TABLE>
<CAPTION>

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

       3.2        Amendment to Certificate of Incorporation of the Company
                  effecting name change from "Robern Apparel, Inc." to "Robern
                  Industries, Inc." (Incorporated by reference to Exhibit 3.
                  l(b) to the Company's Registration Statement on Form S-4
                  (No. 33-52716))

       3.3        Second Amendment to Certificate of Incorporation of the
                  Company effecting name change from "Robern Industries, Inc."
                  to "WinStar Communications, Inc." (Incorporated by reference
                  to Exhibit 3. l(b) to the Company's Registration Statement
                  on Form S-1 (No. 33-43915))

       3.4        Certificate of Designations, Preferences and Rights of
                  Series A Preferred Stock (Incorporated by reference to
                  Exhibit 3.7 to the Company's Current Report on Form 8-K
                  filed February 14, 1997)

       3.5        Certificate of Designations, Preferences and Rights of
                  Series B Preferred Stock (Incorporated by reference to
                  Exhibit 4 to the Company's Current Report on Form 8-K filed
                  July 2, 1997)

       3.6        Certificate of Designations, Preferences and Rights of
                  Series C Preferred Stock (Incorporated by reference to
                  Exhibit 10.3 to the Company's Current Report on Form 8-K
                  filed December 24, 1997)

       3.7        Certificate of Designations, Preferences and Rights of
                  Series D Preferred Stock (Incorporated by reference to
                  Exhibit 4.2 to the Company's Current Report on Form 8-K
                  filed March 30, 1998)

       3.8        Certificate of Designations, Preferences and Rights of
                  Series E Preferred Stock (filed herewith) 3.9 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))

       4.1        Cash-Pay Notes Indenture, including form of Cash-Pay Note
                  (Incorporated by reference to Exhibit 4.6 to the Company's
                  Current Report on Form 8-K filed March 30, 1998)

       4.2        Deferred Interest Notes Indenture, including form of
                  Deferred Interest Note (Incorporated by reference to Exhibit
                  4.7 to the Company's Current Report on Form 8-K filed March
                  30, 1998)

       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))


                                      32
<PAGE>

       10.2       1995 Performance Equity Plan (Incorporated by reference from
                  Exhibit 4.1 to the Company's Registration Statement on Form
                  S-8 (No. 333-31057))

       10.3       Qualified Employee Stock Purchase Plan (Incorporated by
                  reference to Exhibit A to the Company's Definitive Proxy
                  Statement dated May 8, 1998)

       10.4       Employment Agreement between the Company and William J.
                  Rouhana, Jr. (Incorporated by reference to the Company's
                  Annual Report on Form 10-K filed March 31, 1998)

       10.5       Form of Executive Severance Agreement entered into between
                  the Company and certain officers and other senior executives
                  (Incorporated by reference to Exhibit 10.1 to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended March
                  31, 1998)

       10.6       Credit Agreement, dated as of October 21, 1998, among
                  WinStar Network Expansion, LLC, the Company, the Lenders,
                  State Street Bank and Trust Company, and Lucent
                  Technologies, Inc. (Incorporated by reference to Exhibit 1
                  to the Company's Current Report on Form 8-K, filed November
                  16, 1998, as amended by the Company's Current Report on Form
                  8-K/A filed February 3, 1999)

       10.7       Supply Agreement, dated as of October 21, 1998, between the
                  Company and Lucent Technologies, Inc. (Incorporated by
                  reference to Exhibit 4 to the Company's Current Report on
                  Form 8-K, filed November 16, 1998, as amended by the Company's
                  Current Report on Form 8-K/A filed February 3, 1999)

       10.8       IRU Agreement between WinStar Wireless, Inc. and Williams
                  Communications, Inc., dated December 17, 1998 (long haul)
                  (Incorporated by reference to Exhibit 10.1 to the Company's
                  Current Report on Form 8-K filed January 11, 1999, as amended
                  by the Company's Current Report on Form 8-K/A filed February
                  3, 1999).

       10.9       Wireless Fiber IRU Agreement by and between WinStar
                  Wireless, Inc. and Williams Communications, Inc. effective
                  as of December 17, 1998 (Incorporated by reference to
                  Exhibit 10.2 to the Company's Current Report on Form 8-K
                  filed January 11, 1999, as amended by the Company's Current
                  Report on Form 8-K/A filed February 3, 1999).

      10.10       Employment Agreement between the Company and Nathan Kantor
                  (filed herewith)

       21.1       List of Subsidiaries (filed herewith).

       23.1       Consent of Grant Thornton LLP (filed herewith).

        27        Financial Data Schedule (filed electronically only)

                  (b)      Reports on Form 8-K
                           Current Report on Form 8-K, dated October 21, 1998,
                           filed on November 16, 1998 (reporting items 5 and
                           7(c)) and amendments thereto on Form 8-K/A filed on
                           February 2, 1999 and February 3, 1999.

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

                  (d)      Financial Statement Schedules

                           Schedule II      Valuation and Qualifying Accounts




                                      33
<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 31st day of March, 1999.

                         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>
<TABLE>
<CAPTION>

                 Signature                                     Title                               Date
<S>                                          <C>                                              <C>

 /s/ William J. Rouhana, Jr.                 Chairman of the Board of Directors,              March 31, 1999
----------------------------------           Chief Executive Officer and Director
William J. Rouhana, Jr.                      (principal executive officer)       


 /s/ Nathan Kantor                           President, Chief Operating Officer and           March 31, 1999
----------------------------------           Director
Nathan Kantor


 /s/ Timothy R. Graham                       Executive Vice President, Secretary and          March 31, 1999
----------------------------------           Director
Timothy R. Graham                            


 /s/ Steven B. Magyar                        Director                                         March 31, 1999
----------------------------------
Steven B. Magyar


 /s/ William J. vanden Heuvel                Director                                         March 31, 1999
----------------------------------
William J. vanden Heuvel


 /s/ Bert Wasserman                          Director                                         March 31, 1999
----------------------------------
Bert Wasserman


 /s/ James I. Cash                           Director                                         March 31, 1999
----------------------------------
James I. Cash

                                             
 /s/ Charles T. Dickson                      Executive Vice President and Chief                             
----------------------------------           Financial Officer (principal financial           March 31, 1999
Charles T. Dickson                           officer)


 /s/ Joseph P. Dwyer                         Vice President-Finance (principal                March 31, 1999
----------------------------------           accounting officer)
Joseph P. Dwyer                              


</TABLE>


<PAGE>

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
                                                                           Page
                                                                           ----
Report of Independent Certified Public Accountants.....................     F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998...........     F-3
Consolidated Statements of Operations,                                 
    Years Ended December 31, 1996, 1997 and 1998.......................     F-4
Consolidated Statements of Stockholders' Equity (Deficit),             
    Years Ended December 31, 1996, 1997 and 1998.......................     F-5
Consolidated Statements of Cash Flows,                                 
    Years Ended December 31, 1996, 1997 and 1998.......................     F-8
Notes to Consolidated Financial Statements.............................     F-9
Report of Independent Certified Public Accountants on Schedule.........    F-38
Schedule II--Valuation and Qualifying Accounts,                        
    Years Ended December 31, 1996, 1997 and 1998.......................    F-39

                                      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, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1997 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.


GRANT THORNTON LLP

New York, New York
March 25, 1999

                                      F-2
<PAGE>

                  WinStar Communications, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                       December 31,      
                                                                                       ------------      
                                                                                    1997         1998
                                                                                  ---------    ---------
                                     Assets
<S>                                                                              <C>         <C>        
Current assets
    Cash and cash equivalents.................................................   $  402,559  $   208,257
    Short term investments....................................................       16,903      104,773
                                                                                 ----------  -----------
          Cash, cash equivalents and short term investments...................      419,462      313,030
    Accounts receivable, net of allowance for doubtful accounts of
          $2,814 and $12,869, respectively....................................       28,728       70,939
    Inventories...............................................................       10,296       14,880
    Prepaid expenses and other current assets.................................        8,834       28,402
    Net assets of discontinued operations.....................................        1,145
                                                                                 ----------  -----------
          Total current assets................................................      468,465      427,251
Investments in marketable equity securities...................................                    26,400
Property and equipment, net...................................................      284,835      639,673
Licenses, net.................................................................      174,763      310,649
Other intangible assets, net..................................................       14,293      178,050
Deferred financing costs, net.................................................       27,463       53,308
Other assets..................................................................        4,015       27,851
                                                                                 ----------  -----------
          Total assets........................................................   $  973,834 $  1,663,182
                                                                                 ========== ============


                      Liabilities and Stockholders' Deficit
Current liabilities
    Current portion of long-term debt.........................................  $       386 $      6,487
    Current portion of capitalized lease obligations..........................        6,741       59,021
    Accounts payable and accrued expenses.....................................       95,685      159,252
    Deferred revenues.........................................................           __        2,105
    Net liabilities of discontinued operations................................           __        7,254
                                                                                -----------  -----------
          Total current liabilities...........................................      102,812      234,119
Capitalized lease obligations, less current portion...........................       21,392       49,354
Long-term debt, less current portion..........................................      768,469    1,396,635
Other liabilities.............................................................                    12,588
Deferred income taxes.........................................................       24,000       18,500
                                                                                -----------  -----------
          Total liabilities...................................................      916,673    1,711,196
                                                                                -----------  -----------

Series C cumulative exchangeable redeemable preferred stock, liquidation
    preference of $201,478 including accumulated dividends....................      175,553      201,478
Series D senior cumulative convertible redeemable preferred
    stock, liquidation preference of $200,000.................................           __      200,000
Commitments and contingencies
Stockholders' equity (deficit)
    Series A preferred stock 3,910 shares and 4,150 shares issued
           and outstanding, respectively......................................           39           41
    Series E preferred stock, liquidation preference of $4,501,
           no shares and 75 shares issued and outstanding, respectively.......           __            1
    Common stock, par value $.01; authorized 200,000 shares, issued
          and outstanding  34,611 and 41,403, respectively....................          346          414
    Additional paid-in-capital................................................      255,741      404,112
    Accumulated deficit.......................................................     (374,518)    (819,242)
    Accumulated other comprehensive loss......................................           --      (34,818)
                                                                                -----------  -----------
          Total stockholders' deficit.........................................     (118,392)    (449,492)
                                                                                -----------  -----------
          Total liabilities, redeemable preferred stock and
              stockholders' deficit...........................................    $ 973,834  $ 1,663,182
                                                                                ===========  ===========
</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 Year Ended
                                                                               December 31,
                                                                  --------------------------------------
                                                                    1996           1997           1998
                                                                  --------       --------       --------
<S>                                                             <C>           <C>               <C>     
Operating revenues
    Telecommunications services
          Core..............................................    $      604    $    22,653       $141,466
          Other.............................................         3,883          7,143         49,643
                                                                ----------    -----------    -----------
          Total telecommunications services.................         4,487         29,796        191,109
    Information services....................................        14,650         41,354         53,338
                                                                ----------    -----------    -----------
Total operating revenues....................................        19,137         71,150        244,447
                                                                ----------    -----------    -----------

Operating expenses
    Cost of services and products...........................        21,389         73,898        204,748
    Selling, general and administrative expenses............        47,497        150,688        263,155
    Depreciation and amortization...........................         3,764         25,102         74,953
                                                                ----------    -----------    -----------
Total operating expenses....................................        72,650        249,688        542,856
                                                                ----------    -----------    -----------

Operating loss..............................................       (53,513)      (178,538)     (298,409)
Other (expense) income
    Interest expense........................................       (36,748)       (77,257)     (156,599)
    Interest income.........................................        10,515         17,577        29,758
    Other income............................................            --          2,219            --
                                                                ----------    -----------    -----------
Loss from continuing operations before income tax benefit...       (79,746)      (235,999)     (425,250)
Income tax benefit..........................................            --          2,500          5,500
                                                                ----------    -----------    -----------
Loss from continuing operations.............................       (79,746)      (233,499)     (419,750)
                                                                ----------    -----------    -----------

Discontinued operations
    Loss from operations....................................        (3,977)        (9,985)       (2,702)
    Estimated loss on disposal (including a provision
        of $4,183 in 1998 for operating losses during
        the phase out period)...............................            --         (6,000)      (22,272)
                                                                ----------    -----------    -----------
Loss from discontinued operations...........................        (3,977)       (15,985)      (24,974)
                                                                ----------    -----------    -----------

Net loss....................................................       (83,723)      (249,484)     (444,724)
Preferred stock dividends...................................            --         (5,879)      (42,968)
                                                                ----------    -----------    -----------
Net loss applicable to common stockholders..................     $ (83,723)     $(255,363)    $(487,692)
                                                                ==========    ===========    ===========
Basic and diluted loss per share:
    From continuing operations..............................    $    (2.86)  $      (7.20)   $   (11.96)
    From discontinued operations............................         (0.14)         (0.48)        (0.65)
                                                                ----------    -----------    -----------
Net loss per share..........................................    $    (3.00)  $      (7.68)   $   (12.61)
                                                                ==========    ===========    ===========
Weighted average shares outstanding.........................        27,911         33,249         38,681
                                                                ==========    ===========    ===========

</TABLE>
                 See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

                  WinStar Communications, Inc. And Subsidiaries
            Consolidated Statements of Stockholders' Equity (Deficit)
                      For the Year Ended December 31, 1996
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                  Treasury Stock 
                                                                                     ------------------------------------- 
                             Preferred B       Common Stock    Additional               Common Stock     Preferred Stock B          
                          ----------------   ----------------   Paid-In  Accumulated -----------------   ----------------- 
                          Shares    Amount   Shares    Amount   Capital    Deficit   Shares     Amount    Shares   Amount  
                          ------    ------   ------    ------   -------    -------   ------     ------   -------   ------  
<S>                        <C>     <C>       <C>      <C>      <C>        <C>       <C>        <C>        <C>     <C>      
Balances at
  December 31, 1995...     0.69    $  689    29,708   $  297   $103,837   $(41,311) (2,507)    $(36,348)  (0.69)  $(3,330)  
Issuances of
  common stock........                        1,383       14      9,619                                                     

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

Retirement of
  treasury shares.....    (0.69)     (689)   (2,657)     (27)   (42,018)             2,657       39,404    0.69     3,330   

Amortization of
  deferred compensation                                                                                                     

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

Fair value of stock
  options granted to
  non-employees and
   other, net.........                                              120                                                     

Comprehensive loss:
Net loss..............                                                     (83,723)                                         

Unrealized gain on
  investments in marketable
  equity securities...                                                                                                      

Total comprehensive loss                                                                                                    
                          -----   -------    ------   ------   --------  ---------  ------     --------  ------   -------   
Balances at
  December 31, 1996...       --    $   --    28,989   $  290   $ 75,436  $(125,034)     --     $     --      --   $    --   
                          =====   =======    ======   ======   ========  =========  ======     ========  ======   =======   

<CAPTION>
                                                        Accumulated      Total
                                                           Other      Stockholders' 
                                            Deferred   Comprehensive     Equity     
                                          Compensation Income (Loss)   (Deficit)    
                                          ------------ -------------  ------------  
                                            <C>           <C>          <C>          
                                             
Balances at                
  December 31, 1995...                      $  (1,100)    $    (982)   $ 21,752       
Issuances of                                                                          
  common stock........                                                    9,633       
                                                                                      
Acquisition of                                                                        
  treasury shares.....                                                   (3,056)      
                                                                                      
Retirement of                                                                         
  treasury shares.....                                                       --       
                                                                                      
Amortization of                                                                       
  deferred compensation                         1,100                     1,100                  
                                                                                      
Conversion of                                                                         
  long-term debt......                                                    3,884       
                                                                                      
Fair value of stock                                                                   
  options granted to                                                                  
  non-employees and                                                                   
   other, net.........                                                      120       
                                                                                      
Comprehensive loss:                                                                   
Net loss..............                                                  (83,723)      
                                                                                      
Unrealized gain on                                                                    
  investments in marketable                                                           
  equity securities...                                          619         619       
                                                                       --------       
                                                                                      
Total comprehensive loss                                                (83,104)      
                                            ---------     =========    ========       
Balances at                                                                           
  December 31, 1996...                      $      --     $    (363)   $(49,671)      
                                            =========     =========    ========       
</TABLE>
                 See Notes to Consolidated Financial Statements

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                                   WinStar Communications, Inc. and Subsidiaries
                             Consolidated Statement of Stockholders' Equity (Deficit)

                                       For the Year Ended December 31, 1997
                                                   (In thousands)

                                                                                    
                                                  Preferred                                                       
                                                      A                      Common Stock         Additional   
                                             ---------------------       --------------------      Paid-In    
                                             Shares         Amount       Shares        Amount      Capital    
                                             ------        -------       ------       -------     ----------  
<S>                                                      <C>             <C>       <C>          <C>           
Balances at December 31, 1996.........           --      $     --        28,989    $     290    $  75,436    
Issuances of common stock for
  option exercises and other..........                                    1,218           12        8,769    
Issuances of common stock for
  acquisitions and licenses...........                                    3,984           40       83,311    
Issuance of preferred stock Series A..        4,000            40                                  95,960    
Dividends declared on Series A
  preferred stock.....................                                                             (5,326)   
Issuances of Series A preferred
  stock as dividends in kind..........          213             2                                   5,324    
Dividends on Series C preferred stock.                                                               (553)   
Conversion of Series A preferred
  stock to common stock...............         (303)           (3)          420            4           (1)
Series C preferred stock issuance
  costs and other, net................                                                             (7,179)   
Comprehensive loss:
Net loss..............................                                                                       
Unrealized gain on investments in
  marketable equity securities........                                                                       

Total comprehensive loss                                                                                     
                                          ---------     ---------     ---------    ---------    ---------    
Balances at December 31, 1997.........        3,910     $      39        34,611    $     346    $ 255,741    
                                          =========     =========     =========    =========    =========    
                                   
(RESTUBBED TABLE)
                                                                         Accumulated     Total     
                                                                            Other     Stockholders'
                                                           Accumulated  Comprehensive    Equity    
                                                             Deficit    Income (Loss)  (Deficit)   
                                                           -----------  -------------   -------    
                                                          <C>           <C>           <C>          
                                                          


Balances at December 31, 1996.........                     $(125,034)    $    (363)    $ (49,671)  
Issuances of common stock for                                                                      
  option exercises and other..........                                                     8,781   
Issuances of common stock for                                                                      
  acquisitions and licenses...........                                                    83,351   
Issuance of preferred stock Series A..                                                    96,000   
Dividends declared on Series A                                                                     
  preferred stock.....................                                                    (5,326)  
Issuances of Series A preferred                                                                    
  stock as dividends in kind..........                                                     5,326   
Dividends on Series C preferred stock.                                                      (553)  
Conversion of Series A preferred                                                                   
  stock to common stock...............                                                             
Series C preferred stock issuance                                                                  
  costs and other, net................                                                    (7,179)  
Comprehensive loss:                                                                                
Net loss..............................                      (249,484)                   (249,484)  
Unrealized gain on investments in                                                                  
  marketable equity securities........                                         363           363   
                                                                                      ----------   
Total comprehensive loss                                                                (249,121)  
                                                          ----------     ---------    ==========   
Balances at December 31, 1997.........                     $(374,518)     $     --     $(118,392)  
                                                          ==========     =========    ==========   
</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, 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                                          
                                                                                                             Additional   
                                                    Preferred A         Preferred E        Common Stock       Paid in     
                                                  Shares    Amount   Shares    Amount    Shares     Amount    Capital     
                                                  ------    ------   ------    ------    ------     ------    -------     
<S>                                                 <C>        <C>                 <C>     <C>         <C>     <C>        
Balances at December 31, 1997..............         3,910      $ 39        -       $ -     34,611      $346    $255,741   
Isssuance of common stock..................
    For stock option exercises and other...                                                 1,814        18      20,556   
    For acquisitions and licenses..........                                                 3,025        31      99,850   
    For investment in marketable equity                                                     1,525        15      60,329   
securities.................................
Dividends declared on Series A preferred 
    stock..................................                                                                      (6,000)  
Dividends on Series C preferred stock......                                                                     (25,925)  
Dividends on Series D preferred stock......                                                                     (11,043)  
Issuance of Series E preferred stock.......                               75         1                            2,477   
Issuance of Series A preferred stock as             
    dividends-in-Kind......................           240         2                                               5,998   
Issuance of common stock as dividends on   
    Series D preferred stock...............                                                   428         4      10,456  
Preferred stock issuance costs and other, 
    net....................................                                                                      (8,327)  
Comprehensive Loss:........................
    Net loss...............................                                                                               
    Unrealized loss on investments in
       marketable equity Securities........
Total comprehensive loss...................                                                                               
                                                ---------    ------   ------    ------    -------    ------   ---------
Balances at December 31, 1998..............         4,150      $ 41       75       $ 1     41,403      $414    $404,112   
                                                =========    ======   ======    ======    =======    ======   =========
(RESTUBBED TABLE)
                                                                       Accumulated       Total      
                                                                          Other       Stockholder's 
                                                        Accumulated   Comprehensive      Equity     
                                                          Deficit          Loss        (Deficit)    
                                                          -------          ----        ---------    
                                                         <C>                   <C>     <C>          
Balances at December 31, 1997..............              $  (374,518)     $      -    $ (118,392)   
Isssuance of common stock..................                                                         
    For stock option exercises and other...                                               20,574    
    For acquisitions and licenses..........                                               99,881    
    For investment in marketable equity                                                   60,344    
securities.................................                                                         
Dividends declared on Series A preferred 
    stock..................................                                               (6,000)   
Dividends on Series C preferred stock......                                              (25,925)   
Dividends on Series D preferred stock......                                              (11,043)   
Issuance of Series E preferred stock.......                                                2,478    
Issuance of Series A preferred stock as                                                    6,000    
dividends-in-Kind..........................                                                        
Issuance of common stock as dividends on                                       
   Series D preferred stock................                                               10,460                                    
Preferred stock issuance costs and other,
   net.....................................                                               (8,327)   
Comprehensive Loss:........................                                                         
   Net loss................................                 (444,724)                   (444,724)   
   Unrealized loss on investments in                                                                
     marketable equity Securities..........                                (34,818)      (34,818)                                   
                                                                                      ----------
Total comprehensive loss...................                                             (479,542)   
                                                         -----------     ---------    ==========
Balances at December 31, 1998..............              $  (819,242)     $(34,818)   $ (449,492)  
                                                         ===========     =========    ========== 
</TABLE>
                 See Notes to Consolidated Financial Statements

                                      F-7
<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                      For the Year Ended December 31,
                                                                ----------------------------------------
                                                                   1996            1997           1998
                                                                   ----            ----           ----
<S>                                                             <C>            <C>            <C>        
    Net loss..............................................      $ (83,723)     $(249,484)     $ (444,724)
    Adjustments to reconcile net loss to net cash
          used in operating activities:
          Net loss from discontinued operations...........          3,977         15,985          24,974
          Depreciation and amortization...................          3,764         25,102          74,953
          Deferred income tax benefit.....................             --         (2,500)         (5,500)
          Provision for doubtful accounts.................            327          3,964          22,692
          Non cash interest expense.......................         36,520         56,166         111,530
          Decrease (increase) in operating assets:
              Accounts receivable.........................         (5,325)       (23,392)       (39,655)
              Inventories.................................         (1,897)        (9,217)        (2,732)
              Prepaid expenses and other current assets...        (14,164)           441        (16,083)
              Other assets................................         (1,904)          (199)       (23,814)
          Increase in accounts payable and accrued expenses        11,755         51,670          34,661
          Net assets used in discontinued operations......         (4,813)       (11,568)       (16,576)
          Other, net......................................            186             --             --
                                                                 --------       --------      ---------
Net cash used in operating activities.....................        (55,297)      (143,032)      (280,274)
                                                                 --------       --------      ---------
Cash flows from investing activities:
    Decrease (increase) in short-term investments, net....         46,597         10,094        (87,870)
    Decrease (increase) in other investments, net.........          6,447             --             --
    Purchase of property and equipment, net...............        (46,651)      (213,252)      (372,660)
    Proceeds from sale of equipment.......................             --             --         22,333
    Acquisitions, net of cash acquired, including
       licenses...........................................         (2,121)       (40,190)      (216,501)
    Other, net............................................         (1,619)         2,494             --
                                                                 --------       --------      ---------
Net cash (used in) provided by investing activities.......          2,653       (240,854)      (654,698)
                                                                 --------       --------      ---------
Cash flows from financing activities:
    Proceeds from (repayments) of long-term debt, net.....         (1,069)       412,029        484,952
    Net proceeds from redeemable preferred stock..........             --        168,138        191,914
    Net proceeds from equity transactions.................          6,295        104,781         20,574
    Net proceeds from sale of minority equity interest
       in subsidiary......................................             --             --          9,900
    Proceeds from equipment lease financing...............          8,345          9,912         42,880
    Payment of capital lease obligations..................         (2,264)        (3,740)        (6,770)
    Other, net............................................         (1,010)          (316)        (2,780)
                                                                 --------       --------      ---------
Net cash provided by financing activities.................         10,297        690,804        740,670
                                                                 --------       --------      ---------
Net increase (decrease) in cash and cash equivalents......        (42,347)       306,918       (194,302)
Cash and cash equivalents at beginning of period..........        137,988         95,641        402,559
                                                                 --------       --------      ---------
Cash and cash equivalents at end of period................         95,641        402,559        208,257
Short-term investments at end of period...................         26,997         16,903        104,773
                                                                 --------       --------      ---------
Cash, cash equivalents and short-term investments
    at end of period......................................       $122,638       $419,462       $313,030
                                                                 ========       ========      =========
</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. The accompanying consolidated financial statements
reflect the Company's former merchandising subsidiary, WinStar Global Products,
Inc. ("Global Products") and the Company's residential long distance subsidiary
WinStar Gateway Network, Inc. ("Gateway") as discontinued operations (reference
is made to Note 21).

Nature of Business

     The Company is a facilities-based provider of telecommunications services
primarily to business in a growing number of major markets throughout the United
States. Through its local broadband (i.e. high capacity) networks, the Company
offers its customers a variety of individual and bundled services, including
local and long distance voice services, high-speed data transport, Internet
access and other enhanced communications services. Additionally, the Company
markets and distributes information content and services both in traditional
markets (such as television, video, cable and radio) and through the bundling of
content as an enhanced telecommunications service. 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 to 60
U.S. markets by the end of 2000 and up to 50 foreign markets by the end of 2004.
This expansion 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 obtain
sufficient amounts of capital on acceptable terms.

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, U.S. Government or Government Agency Securities and commercial paper.
Exclusive of cash in banks, cash equivalents at December 31, 1997 and 1998 were
approximately $395.3 million and approximately $160.1 million, respectively,
which approximates fair value.

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

Short-term Investments

     Short-term investments are widely diversified and principally consist of
certificates of deposit, money market deposits, U.S. Government or Government
agency securities, commercial paper rated "A-1/P-1" or higher, and municipal
securities rated "A" or higher with an original maturity of greater than three
months and less than twelve months. Short-term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1997 and 1998, cash, cash equivalents and short-term
investments totaled approximately $419.5 million and approximately $313.0
million, respectively.

                                      F-9
<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 1--Summary of Significant Accounting Policies (Continued)

Inventories

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

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 salaries of certain employees, are capitalized. Such costs
amounted to approximately $6.1 million and $31.2 million for the years ended
December 31, 1997 and 1998, respectively, and were insignificant in prior years.

     Costs incurred during the application development stage for internal use
software are capitalized as incurred in accordance with AICPA Statement of
Position No. 98-1 "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use". Such costs amounted to approximately $7.1 million
and $8.9 million for the years ended December 31, 1997 and 1998, 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. Interest capitalized amounted to approximately $0.3 million, $4.2
million and $1.7 million for the years ended December 31, 1996, 1997 and 1998,
respectively.

Spectrum Licenses and Other Intangible Assets

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

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

                                      F-10

<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 1--Summary of Significant Accounting Policies (Continued)

Income Taxes

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

Revenue Recognition

     Telecommunications services revenues are recorded upon placing of calls or
as a monthly recurring usage charge. The Company entered into a 25 year
Indefeasible Right of Use ("IRU") to provide local Wireless Fiber capacity to
another telecommunications company. Revenues from this transaction will be
recognized ratably over the life of the agreement (See Note 10). Professional
services revenues are recognized under the percentage of completion method.
Information services revenues from film productions are recognized when a
program is accepted by the licensee and is available for broadcast. Revenues
from the licensing of film productions are recognized when the license period
begins and the film is available for broadcast. Revenues from advertising sales
are recognized when the related advertising is broadcast.

Basic and Diluted Loss Per Share

     Basic and diluted loss per share is calculated by dividing the net loss,
after consideration of preferred stock accretion and dividends, by the weighted
average number of shares of common stock outstanding during each period. Stock
options and warrants have been excluded from the calculation of diluted loss per
share as their effect would have been antidilutive. (See Notes 13, 14 and 15.)

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.

                                      F-11

<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 2--Acquisitions

    1996 Acquisitions

    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 include multiple 38GHz licenses in the New York metropolitan
area. The purchase price for such assets was $17.5 million, and was paid in the
form of promissory notes which were paid in full in 1997. The acquisition was
treated as a purchase for accounting purposes, with the majority of the purchase
price allocated to licenses, which are being 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.

   1997 Acquisitions

     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 $115.7 million ($40.7
million in cash and 3.6 million shares of the Company's common stock, which had
an aggregate market value of $75.0 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 are being 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.

     During 1997, the Company acquired certain other telecommunications and
enhanced information services companies which were treated as purchases for
accounting purposes and were not material.

     Unaudited pro forma results of operations for acquisitions consummated
during 1997 have not been included because they are not material to the
consolidated statement of operations of the Company.

   Acquisition of Assets

     In October 1997, a subsidiary of the Company purchased certain
telecommunications assets from US ONE Communications Corp., US ONE
Communications Services, Corp. and US ONE Communications of New York, Inc. which
were entities in bankruptcy under chapter 11 of the United States Bankruptcy
Code. The aggregate purchase price was approximately $81.3 million, which was
paid in cash. Included in fixed assets are certain equipment which the Company
plans to sell within the near term.

   Acquisition of Additional Licenses

     During 1997, the Company acquired licenses for a total cost of
$10.4 million, $7.5 million of which was paid in common stock.

   1998 Acquisitions

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

                                      F-12
<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 2--Acquisitions (Continued)

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

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

     Unaudited pro forma results of operations (in thousands, except per share
data), which reflect the combined operations of the Company and Midcom as if the
acquisition was consummated at the beginning of the earliest period presented,
are as follows:
<TABLE>
<CAPTION>
                                              For the Year Ended         For the Year Ended
                                               December 31, 1997         December 31, 1998
                                               -----------------         -----------------
<S>                                                <C>                       <C>     
       Operating revenues                          $169,433                  $248,219

       Net loss applicable to
          Common stockholders                      (348,200)                $(488,094)

       Basic and diluted loss per share            $ (10.47)                  $(12.62)
</TABLE>

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

     During 1998, the Company acquired a number of small companies engaged in
professional services, systems integration, and Internet-related services,
primarily to supplement its existing broadband service offerings. The accounts
of the acquired companies have been consolidated with the Company's financial
statements as of the effective date of the acquisitions. These acquisitions were
treated as purchases for accounting purposes. The aggregate consideration for
the acquisitions was approximately $85.8 million, consisting of $46.0 million in
cash, 319,362 shares of the Company's common stock valued at $37.3 million and
75,100 shares of the Company's Series E preferred Stock valued at $2.5 million.
(See Note 12).

     Unaudited pro forma results of operations for acquisitions consummated
through 1998, other than Midcom, have not been included because they are not
material to the consolidated statement of operations of the Company.

     Acquisition of Additional Licenses

     During 1998, the Company won 15 LMDS licenses in an auction conducted by
the FCC for a net bid of $43.6 million. These LMDS licenses enable the Company
to utilize the 28 GHz spectrum, along with its existing bandwidth in the 38GHz
part of the spectrum. The Company additionally acquired 850 MHz of 28 GHz
capacity covering the New York City area for $32.6 million in cash. The Company
acquired certain other licenses from third parties for approximately $64.8
million which was principally paid for with common stock of the Company. As of
December 31, 1998, the Company had commitments to acquire additional licenses
for a purchase price of $1.9 million, payable in shares of common stock of the
Company or in certain instances, at the Company's election, cash

                                      F-13
<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 3--Investments in Marketable Equity Securities

     In June , 1998, the Company purchased approximately 3,314,000 shares of
Advanced Radio Telecom Corp. ("ART"), which represented approximately 14.9% of
the then outstanding common stock of ART, and certain other equity securities of
other issuers, from private investors. The Company issued one share of its
common stock in exchange for every 2.2 shares of ART purchased. The conversion
ratio resulted in a purchase price of approximately $17.90 per ART share based
on the Company's closing stock price on the date the transaction was closed. The
Company issued approximately 1,525,000 restricted common shares in connection
with the transaction and received the ART shares and certain other unrelated
assets. The marketable securities acquired are accounted for as "Available for
Sale Securities". The Company has recorded an "other comprehensive loss"
(representing unrealized losses on these securities) of $34.8 million in the
Statement of Shareholders' Equity (Deficit). As of March 25, 1999, the other
comprehensive loss would have been reduced to $22.8 million.

Note 4--Inventories
<TABLE>
<CAPTION>
     Inventories consist of the following:
                                                              December 31,      December 31,
                                                                 1997              1998
                                                                 ----              ----
                                                                     (In Thousands)
<S>                                                             <C>                <C>    
       Film inventories                                         $10,296            $13,010
       Computer equipment inventories                                 -              1,870
                                                                -------           --------
                                                                $10,296           $ 14,880
                                                                =======           ========
</TABLE>
Note 5--Property and Equipment

     Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                              December 31,       December 31,         Estimated
                                                                  1997               1998            Useful Life
                                                                  ----               ----            -----------
                                                                       (In Thousands)
<S>                                                              <C>                <C>           <C>    
      Telecommunications equipment
        and software..................................           $271,466           $566,331      5 to 10 years
      Furniture, fixtures and other...................             12,090             25,773      4 to 5 years
      Leasehold improvements..........................             22,940             18,234      Lesser of life of
                                                                ---------         ----------      lease or life of 
                                                                  306,496            610,338      the asset        
      Less: accumulated depreciation and amortization.            (40,461)           (98,100)
                                                                ---------         ----------
                                                                  266,035            512,238                                
      Network construction in progress................             18,800            127,435
                                                                ---------         ----------
                                                                 $284,835           $639,673
                                                                =========         ==========
</TABLE>
                                      F-14
<PAGE>
                  WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 6--Other Intangible Assets and Licenses

     Other intangible assets consist of the following:
<TABLE>
<CAPTION>
                                                              December 31,       December 31,         Estimated
                                                                  1997               1998            Useful Life
                                                                  ----               ----            -----------
                                                                       (In Thousands)
<S>                                                               <C>              <C>              <C>    
       Goodwill.......................................            $15,569          $158,368         5 to 30 years
       Purchased customer lists.......................                 --            29,758         5 to 25 years
       Covenants not to compete and other.............                  4             1,881         5 to 10 years
                                                                 --------        ----------
                                                                   15,573           190,007
       Less accumulated amortization..................             (1,280)          (11,957)
                                                                 --------        ----------
                                                                  $14,293          $178,050
                                                                 ========        ==========         
</TABLE>
     The Company's 38GHz licenses and 28GHz LMDS licenses are subject to
renewal by the FCC in February 2001 and August 2008, respectively. As of
December 31, 1997 and 1998, the carrying value of licenses was $174.8 million
and $310.6 million, net of accumulated amortization of $4.9 million and $11.3
million, respectively. (See Note 2).

Note 7--Long-Term Debt

     Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                              December 31,    December 31,
                                                                                  1997            1998
                                                                                ---------       ---------
                                                                                     (In Thousands)
<S>                                                                              <C>             <C>     
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC...................         $200,000        $200,000
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC II................           50,000          50,000
14% Senior Discount Notes Due 2005......................................          201,843         231,051
14 1/2% Senior Deferred Interest Notes Due 2005.........................          111,691         128,474
15% Senior Subordinated Deferred Interest Notes Due 2007................          103,542         119,695
14% Convertible Senior Subordinated Discount Notes
    Due 2005............................................................          100,922         115,525
10% Senior Subordinated Notes Due 2008..................................                -         200,000
11% Senior Subordinated Deferred Interest Notes Due 2008................                -         271,897
Lucent Debt.............................................................                -          77,514
Other Notes Payable.....................................................              857           8,966
                                                                                 --------      ----------
    Total...............................................................          768,855       1,403,122
Less Current Portion....................................................              386           6,487
                                                                                 --------      ----------
Total Long Term Debt....................................................         $768,469      $1,396,635
                                                                                 ========      ==========
</TABLE>
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

                                      F-15
<PAGE>
                 WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 7--Long-Term Debt (Continued)

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. Subsequent to December 31, 1998, the Company
utilized the entire remaining proceeds to fund Designated Equipment.

     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-16

<PAGE>
                 WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


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 and 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.

     In accordance with the terms of the WEC Notes, WEC II Notes, October 1997
Notes and the 1997 Senior Notes (collectively, the "1997 Notes"), the Company
consummated exchange offers whereby the 1997 Notes were exchanged for new notes
which were identical in every respect to the original 1997 Notes except that 
the new Notes were registered under the Securities Act of 1933.

1998 Debt Placements

     In March 1998, the Company issued $200.0 million in aggregate principal
amount of its 10% Senior Subordinated Notes Due 2008 (the "1998 Cash-Pay Notes")
and $250.0 million in aggregate principal amount of its 11% Senior Subordinated
Deferred Interest Notes Due 2008 (the "1998 Deferred Interest Notes" and,
together with the 1998 Cash-Pay Notes, the "1998 Notes"). The 1998 Notes are
unsecured, senior subordinated obligations, rank pari passu in right of payment
with the Convertible Notes and the 1997 Senior Subordinated Notes, and are
junior in right of payment to all of our existing and future senior
indebtedness.

     The 1998 Cash-Pay Notes bear interest at a rate of 10%, payable on March 15
and September 15, commencing September 15, 1998. The 1998 Cash-Pay Notes will
mature on March 15, 2008 and are redeemable on or after March 15, 2003, at the
Company's option, in whole or in part, at specified prices, plus accrued
interest, if any, to the date of redemption. Subsequent to December 31, 1998,
the Company utilized the entire remaining proceeds to fund Designated Equipment.

     The 1998 Deferred Interest Notes bear interest at a rate of 11%, payable on
March 15 and September 15, commencing September 15, 2003, interest on the 1998
Deferred Interest Notes will accrue and be compounded semiannually, but will not
be payable in cash. Interest on the Accumulated Amount (as defined in the
indenture governing the 1998 Deferred Interest Notes) of the 1998 Deferred
Interest Notes as of March 15, 2003 will be payable semiannually commencing
September 15, 2003. The 1998 Deferred Interest Notes will mature on March 15,
2008 and are redeemable on or after March 15, 2003, at the Company's option, in
whole or in part, at specified prices, plus accrued and unpaid interest, if any,
to the date of redemption.

     In accordance with the terms of the 1998 Notes, the Company consummated an
exchange offer whereby these Notes were exchanged for new notes which were
identical in every respect to the original 1998 Notes except that the new notes
were registered under the Securities Act of 1933.

                                      F-17

<PAGE>
                 WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 7--Long-Term Debt (Continued)

Lucent Credit Agreement

     In October 1998, the Company, one of its wholly-owned subsidiaries and
Lucent Technologies, Inc. ("Lucent") entered into a supply agreement to
facilitate the Company's purchase of equipment and related services from Lucent.
Additionally, the Company, one of its wholly-owned subsidiaries, Lucent, as
administrative agent and lender, and State Street Bank and Trust Company, as
collateral agent ("State Street Bank"), entered into a credit agreement which
sets forth the terms and conditions under which Lucent (or its assignee lenders)
will provide the Company with purchase money financing (the "Credit
Commitments") for purchases made under the Supply Agreement in an aggregate
amount of up to $2.0 billion in connection with the buildout of our domestic and
international broadband network. The Credit Commitments may be drawn by the
Company as and when needed during the buildout of the network. The credit
agreement allows for aggregate borrowings of up to $2.0 billion; provided,
however, that Lucent is not required to have outstanding at any one time
aggregate loans and commitments in excess of $500.0 million. As of December 31,
1998, the Company had borrowed $77.5 million under the credit agreement and had
$422.5 million available under this agreement. Additional amounts of the Credit
Commitments become available on a dollar-for-dollar basis as and if the loans or
unfunded commitments are syndicated by Lucent to other lenders. The Company may
draw against the available Credit Commitments until they have been fully drawn
or, if earlier, the fifth anniversary of the credit agreement. The credit
agreement provides that borrowings will fall into one of five annual tranches
("Tranches"). The Tranche under which a loan is drawn will determine when such
loan is to be repaid.

     Interest on each loan made under the Credit Commitments will accrue at a
floating rate equal to, at the Company's election, either a base rate
(determined in relation to the then current prime rate) or an adjusted
Eurodollar rate ("LIBOR"), in each case plus a margin which may vary over the
life of the facility. Interest will be payable quarterly in arrears for base
rate advances and at the end of each interest period (which can be one, three or
six months in length, at the Company's election) for LIBOR advances; provided,
however, that interest on loans accruing during the first year of the Tranche of
which such loan is a part may, at the Borrower's election, be deferred and the
deferred interest shall accrue interest at the same rates as the principal of
the loans.

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

      Loans made under the credit agreement are also subject to mandatory
prepayment upon the occurrence of certain events, including (1) receipt by the
Company or  its Restricted Subsidiaries (as defined in the credit agreement) of
proceeds of certain asset sales or casualty events which are  not reinvested in
the Company's business and (2) the generation of Excess Cash Flow (as defined in
the credit agreement), if any, by us. The Company will also be entitled to
prepay the loans at its option at any time.

      Loans made under the credit agreement will be secured by a purchase money
security interest in the equipment comprising the network, to the extent the
purchase of such equipment is financed under the credit agreement. Additionally,
the obligations under the credit agreement are guaranteed by the Company and
certain of the Company's subsidiaries.

                                      F-18
<PAGE>
                 WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 7--Long-Term Debt (Continued)

      In connection with the arranging and making of the Credit Commitments, the
Company is required to pay various arrangement, commitment and other fees to
Lucent and its assignee lenders in amounts customary for facilities of this
type.

     The terms of the Indentures relating to the 1995, 1997 and 1998 Debt
Placements, the Lucent Credit Agreement and the Certificates of Designation
relating to certain of the Company's Preferred Stock agreements (see Notes 12,
13 and 14) 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, as well as the requirements to meet certain financial
ratios.

     Maturities of long-term debt at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
                                                                                            (In Thousands)
                                                                                            --------------
<S>                                                                                         <C>   
1999.....................................................................                          $6,487
2000.....................................................................                           1,060
2001.....................................................................                             927
2002.....................................................................                             492
2003.....................................................................                           4,844
Thereafter...............................................................                      $1,389,312
                                                                                               ----------
                                                                                               $1,403,122
                                                                                               ==========
</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 receivable, and accounts payable and accrued expenses
approximate carrying value, principally because of the short maturity of these
items. Investment in marketable equity securities are carried at quoted market
value.

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

     Estimated fair values of the Company's Long Term Notes Payable, Convertible
Notes Payable, Exchangeable Redeemable Preferred Stock and Cumulative
Convertible Redeemable Preferred Stock which were calculated based upon quoted
market prices, are as follows:
<TABLE>
<CAPTION>
                                                                 December 31, 1997      December 31, 1998
                                                                --------------------  --------------------
                                                                Carrying              Carrying
                                                                 Amount   Fair Value   Amount   Fair Value
                                                                 ------   ----------  --------  ----------
                                                                              (In Thousands)
<S>                                                             <C>        <C>        <C>       <C>     
14% Senior Discount Notes Due 2005...........................   $201,843   $233,000   $231,051   $169,000
14% Convertible Senior Subordinated Discount Notes Due 2005..   $100,922   $216,000   $115,525   $179,000
14 1/2% Senior Deferred Interest Notes Due 2005..............   $111,691   $132,000   $128,474   $148,000
15% Senior Subordinated Deferred Interest Notes Due 2007.....   $103,542   $123,000   $119,695   $111,000
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC........   $200,000   $225,000   $200,000   $204,000
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC II.....   $ 50,000   $ 56,000   $ 50,000   $ 50,000
10% Senior Subordinated Notes Due 2008.......................          -          -   $200,000   $168,000
11% Senior Subordinated Deferred Interest Notes Due 2008.....          -          -   $271,897   $204,000
Lucent Debt..................................................          -          -   $ 77,514   $ 78,000
14 1/4% Series C Senior Cumulative Exchangeable Redeemable
    Preferred Stock Due 2007.................................   $175,553   $178,000   $201,478   $161,000
7% Series D Senior Cumulative Convertible Redeemable
    Preferred Shares Due 2010................................          -          -   $200,000   $185,000
</TABLE>

                                      F-19
<PAGE>
                 WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 9--Capital Lease Obligations

     In December 1998, the Company purchased an IRU from Williams
Communications, Inc. ("Williams") to four strands of dark fiber optic cable on a
national route of approximately 14,684 route miles (58,736 fiber miles) and a
seven year option to purchase two additional strands of fiber optic cable on the
same route ("Capacity Option"). For the Williams IRU, the Capacity Option and
certain long-haul transport and other services, the Company will pay Williams
approximately $643.0 million over the next seven years in monthly installments
of $7.7 million. The Capacity Option is exercisable for a payment to Williams of
approximately $51.0 million. In December 1998, the Company accepted delivery on 
1,522 route miles, for which a capitalized lease obligation of $44.6 million has
been recorded.

     Additionally, the Company leases telecommunications and other equipment
through various other equipment lease financing facilities. Such leases have
also been accounted for as capital leases.

     Future minimum lease payments on these capital leases, including $44.6
million for the Williams IRU, are as follows:
<TABLE>
<CAPTION>

Year Ending December 31,                                                                     (In Thousands)
-----------------------                                                                      -------------
<S>                                                                                          <C>    
1999...........................................................................                  $61,974
2000...........................................................................                   18,791
2001...........................................................................                   13,669
2002...........................................................................                    9,873
2003...........................................................................                   13,064

Thereafter.....................................................................                    2,872
                                                                                             -----------
Total payments.................................................................                  120,243
Less amount representing interest..............................................                  (11,868)
                                                                                             -----------
Present value of minimum lease payments.......................................                  $108,375
                                                                                             ===========
</TABLE>
     The carrying value of assets under capital leases was $28.0 million and
$103.7 million at December 31, 1997 and 1998 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

     In November 1998, the Company signed a 15-year lease for approximately
200,000 square feet of office space (with options to lease approximately 57,000
additional square feet) in New York City. The Company intends to move its
corporate headquarters and consolidate certain other New York City-based
operations to this new facility during the first half of 1999. The Company's
telecommunications operations are located in approximately 230,000 square feet
of space in several buildings in northern Virginia. In December 1998, The
Company signed a ten-year lease for approximately 200,000 square feet of
additional space (with a right of first refusal on substantial additional space
in a building currently under construction) located in Herndon, Virginia. The
Company intends to consolidate some of its northern Virginia operations in these
new facilities during the second and third quarters of 1999.

     The Company's offices, switching facilities and warehousing facilities,
along with various equipment and roof access rights, are leased under operating
leases expiring in 1999 through 2015. Certain leases contain escalation clauses
based upon increases in the consumer price index.

                                      F-20
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 10--Commitments and Contingencies (Continued)

     Future minimum lease payments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31,                                                                      (In Thousands)
-----------------------                                                                         -----------
<S>                                                                                              <C>    
1999.....................................................................                         $31,700
2000.....................................................................                          38,000
2001.....................................................................                          38,600
2002.....................................................................                          37,700
2003.....................................................................                          34,600
Thereafter...............................................................                         232,300
                                                                                                 --------
                                                                                                 $412,900
                                                                                                 ========
</TABLE>
     Rent expense for the years ended December 31, 1996, 1997 and 1998 was $3.6
million, $11.6 million, and $29.8 million, respectively.

b.  Employment Contracts

     Amounts due under employment contracts are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,                                                                        (In Thousands)
------------------------                                                                         ------------
<S>                                                                                                <C>   
1999.....................................................................                          $3,996
2000.....................................................................                           2,004
2001.....................................................................                             585
2002.....................................................................                             150
                                                                                                   ------
                                                                                                   $6,735
                                                                                                   ======
</TABLE>
c.  Litigation

     In February 1998, the FCC granted the Company 29 additional 38 GHz channels
in eleven markets. Competing applicants have filed petitions with the FCC
contesting these grants, which the Company is opposing. This matter is still
pending before the FCC. The Company cannot be sure that the petitions will not
result in such grants being rescinded. However, the Company does not believe
that the loss of this spectrum would adversely effect its operations.

     In November 1998, the Company acquired 850 MHz of 28 GHz capacity covering
the New York City area. The Company acquired this spectrum from Cellular Vision
USA, Inc. for $32.5 million in cash. Recently, certain parties  filed suit
against Cellular Vision seeking to have this sale ruled void. The Company
believes that this suit will not have any impact on its possession or use of
this 28 GHz spectrum.

     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.

                                      F-21
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 10--Commitments and Contingencies (Continued)

d.   Sale of Wireless Fiber Capacity

     In December 1998, the Company sold Williams a 25 year IRU for up to 2% of
its current and future local Wireless Fiber capacity (up to a defined maximum
number of circuits) in the United States. Under the terms of the contract,
Williams will pay the Company $400.0 million with payments due ratably as the
Company constructs 270 hub sites. The Company delivered 57 hub sites in December
1998 and was paid approximately $84.0 million by Williams in February 1999,
which was recorded in February 1999 as deferred revenue. The Company will also
provide certain maintenance services to Williams over the next 25 years for
total consideration of approximately $45.6 million which will be paid over a 
ten year period.

Note 11--Income Taxes

     Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
                                                                        December 31,         December 31,
                                                                            1997                1998
                                                                          ---------           --------
                                                                                  (In Thousands)
<S>                                                                       <C>                   <C>     
Deferred tax assets:
    Net operating loss carryforward..........................             $134,550              $310,454
    Deferred interest expense................................               21,636                51,403
    Allowance for doubtful accounts..........................                1,140                 3,906
    Deferred compensation....................................                  748                 2,468
    Other....................................................                2,291                   146
                                                                         ---------            ----------
    Gross deferred tax assets................................              160,365               368,377
    Valuation allowance......................................             (119,874)             (280,681)
                                                                         ---------            ----------
    Deferred tax asset net of allowance......................               40,491                87,696
                                                                         ---------            ----------
Deferred tax liabilities:
    Depreciation.............................................               (5,998)              (21,861)
    Amortization.............................................              (58,493)              (64,340)
    Investment in marketable equity securities...............                                    (19,995)
                                                                         ---------            ----------
    Gross deferred tax liabilities...........................              (64,491)             (106,196)
                                                                         ---------            ----------
Net deferred tax liability...................................             $(24,000)            $ (18,500)
                                                                         =========            ==========
</TABLE>
     The federal net operating loss carryforward at December 31, 1998 is
approximately $782.0 million. If not utilized, the net operating loss
carryforward will expire in various amounts through the year 2018.

     Some of these losses are subject to utilization limitations under Section
382 of the Internal Revenue Code. However, the Company believes that
substantially all of such losses will be available to offset future income.

     A valuation allowance against deferred tax assets is required, if, based on
the weight of available evidence, it is more likely than not that some or all of
the deferred tax assets may not be realized. The valuation allowances at
December 31, 1997 and December 31, 1998, primarily pertain to uncertainties with
respect to future utilization of net operating loss carryforwards.

     On January 2, 1997, a net deferred tax liability of $26.5 million was
recorded in connection with 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.

                                      F-22
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 11--Income Iaxes (Continued)

     During 1997 and 1998, respectively, the Company recognized deferred income
tax benefits of $2.5 million and $5.5 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 capital stock of WinStar includes 200.0 million shares of
common stock, $.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 the
indentures and other instruments governing its indebtedness and Series C
preferred stock), 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 the Company,
holders of the common stock are entitled to share ratably in all assets
remaining after payment of all liabilities and the liquidation preferences of
preferred shares. 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 15.0 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 Preferred Stock

     In February 1997, the Company sold 4.0 million shares of its 6% Series A
cumulative convertible preferred stock, par value $0.01, and 1.6 million
warrants to purchase common stock of the Company for aggregate proceeds of
$100.0 million. The warrants entitle the holders thereof to purchase an
aggregate 1.6 million shares of common stock at $25 per share. 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.

                                      F-23

<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 12--Stockholders' Equity (Continued)

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 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 connection with an acquisition, the Company issued 75,100 shares of its
Series E $0.01 par value Preferred Stock ("Series E"). The Series E is
non-voting, non-redeemable junior convertible preferred stock which does not
earn dividends. The holders of the Stock may convert all, but not less than all
into shares of the Company's common stock on a one-for-one basis anytime after
August 1, 1999. Each share of Class E Preferred Stock has a liquidation
preference of $59.93 per share. (See Note 2).

Note 13--Series C Exchangeable Redeemable Preferred Stock

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

     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 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 

                                      F-24
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 13--Series C Exchangeable Redeemable Preferred Stock (Continued)

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. For the years
ended December 31, 1997 and 1998 dividends totaling approximately $0.6 million
and $25.9 million, respectively, 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 and
Series E 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 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--Series D Convertible Redeemable Preferred Stock

     In March 1998, the Company sold in a private placement 4,000,000 shares of
Series D 7% Senior Cumulative Convertible Preferred Stock Due 2010 (the "Series
D Preferred Stock") for an aggregate purchase price of $200.0 million.

     Dividends are payable at the rate of 7% per annum on the Series D Preferred
Stock and are cumulative from the date of issuance and are payable quarterly in
arrears on each March 15, June 15, September 15 and December 15, commencing
September 15, 1998, out of funds legally available therefor. Dividends shall be,
at the Company's option, payable (1) in cash or (2) through the issuance of
shares of the Company's common stock. The Series D Preferred Stock is
convertible at any time after the issue date, at the option of the holders
thereof, into shares of our common stock at a rate (subject to adjustment in
certain events) of $1.0079 shares of our common stock for each share of Series D
Preferred Stock, equivalent to a conversion price of $49.61 for each share of
the Company's common stock. As of December 31, 1998 dividends of approximately 
$11.0 million have been recorded.

                                      F-25
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 14--Series D Convertible Redeemable Preferred Stock (Continued)

     The Series D Preferred Stock ranks (1) senior to all existing and future
Junior Stock (as defined in the certificate of designations governing the Series
D Preferred Stock), including the Series A Preferred Stock and Series E
Preferred Stock; (2) pari passu with all existing and future Parity Stock (as
defined in the certificate of designations governing the Series D Preferred
Stock), including the Series C Preferred Stock; and (3) junior to all future
Senior Stock (as defined). In addition, the Series D Preferred Stock will rank
junior in right of payment to all of the Company's indebtedness and that of the
Company's subsidiaries

     The Series D Preferred Stock is not redeemable prior to March 20, 2001. On
or after such date, the Series D Preferred Stock will be redeemable at the
Company's option, in whole or in part, at any time or from time to time, at
specified redemption prices plus accrued and unpaid dividends, if any. The
Series D Preferred Stock is subject to mandatory redemption on March 15, 2010,
at a redemption on March 15, 2010, at a redemption price of $50.0 per share plus
accrued and unpaid dividends, if any. Upon the occurrence of a Change in Control
(as defined in the Certificate of Designations governing the Series D Preferred
Stock), the Company will be obligated to adjust the conversion price as provided
in the Certificate of Designations relating to the Series D Preferred Stock.

Note 15--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, as amended, authorizes the granting of awards of up to 10.0 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 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.

                                      F-26

<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 15--Stock Options and Stock Purchase Warrants (Continued)

     The following table summarizes option activity for the years ended 
December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
                                                                                         Weighted Average
                                                                 Number of Options        Exercise Price
                                                                 ----------------          -------------
                                                                   (In Thousands)
<S>                                                                     <C>                  <C>    
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
    Granted..................................................           6,951                 $34.06
    Exercised................................................          (1,801)                $11.22
    Canceled.................................................          (1,183)                $24.91
                                                                       ------
Balance, December 31, 1998...................................          15,618                 $21.83
                                                                       ======
</TABLE>
     As of December 31, 1998, options outstanding for 6.3 million shares were
exercisable at prices ranging from $1.94 to $52.00, and the weighted remaining
contractual life was 5.29 years.

     The following table summarizes option data as of December 31, 1998:
<TABLE>
<CAPTION>
                                         Number                                   Number
                                      Outstanding     Weighted       Weighted  Exercisable     Weighted
                                         as of        Average        Average      as of         Average
      Range of                          12/31/98      Remaining      Exercise    12/31/98      Exercise
Exercise Prices                     (In Thousands) Contractual Life    Price  (In Thousands)     Price
----------                          -------------  ----------------  --------  ------------    --------
<S>                                      <C>            <C>         <C>            <C>          <C>    
$1.94-$12.00                             4,265          3.60        $  7.93        3,200        $  6.86
$12.13-$18.50                            3,337          4.75         $16.12        1,685         $16.24
$18.56-$27.00                            3,531          5.61         $23.36        1,237         $23.04
$27.13-$35.63                            1,866          7.24         $32.14          148         $29.93
$35.83-$52.00                            2,619          6.94         $42.32            1         $42.47
                                       -------                                  --------
$ 1.94-$52.00                           15,618          5.29         $21.83        6,271         $13.12
                                       =======                                  ========
</TABLE>
     Compensation cost charged to operations, which the Company records for
options granted to non-employees, was immaterial for the years ended December
31, 1996, 1997 and 1998.

     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 years ended December 31, 1996, 1997 or 1998. The fair

                                      F-27

<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 15--Stock Options and Stock Purchase Warrants (Continued)

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>
                                                            1996            1997                1998
                                                            ----            ----                ----
<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>
                                                               Year             Year              Year
                                                              Ended            Ended              Ended
                                                           December 31,     December 31,      December 31,
                                                               1996             1997              1998
                                                            ----------        ---------         ---------
                                                                           (In Thousands)
<S>                                                          <C>             <C>              <C>       
Net Loss Applicable to Common Stockholders:
    As reported.....................................         $(83,723)       $(255,363)       $(487,692)
    Pro forma for FASB No. 123......................         $(98,765)       $(272,497)       $(538,740)
Loss Per Share--Basic and Diluted:
    As reported.....................................           $(3.00)          $(7.68)         $(12.61)
    Pro forma for FASB No. 123......................           $(3.54)          $(8.20)         $(13.93)
</TABLE>
     The weighted average fair value of options granted during the years ended
December 31, 1996, 1997 and 1998 was $18.78, $15.63 and $16.05 per share,
respectively.

     Warrants to purchase the Company's common stock were issued as follows
(warrants in thousands):
<TABLE>
<CAPTION>
                                  Year Ended               Year Ended                   Year Ended
                              December 31, 1996         December 31, 1997            December 31, 1998
                            ----------------------     ---------------------      ----------------------
                            Warrants     Price/Share   Warrants     Price/Share   Warrants     Price/Share
                             ------       --------      ------       --------      -------      --------
<S>                             <C>   <C>    <C>           <C>    <C>    <C>       <C>      <C>    <C>   
Beginning Balance.......        400   $12.00-$13.00        400    $12.00-$13.00    2,000    $12.00-$25.00
Warrants
    Issued..............         --        --            1,600       $25.00
Warrants Exercised......         --        --               --         --
Warrants
    Expired.............         --        --               --         --
                              -----                      -----                     -----
Ending
    Balance.............        400   $12.00-$13.00      2,000    $12.00-$25.00    2,000    $12.00-$25.00
                              =====                      =====                     =====
</TABLE>
Note 16--Related Party Transactions

Services Agreements

     In connection with the Company's merger with Milliwave (See Note 2), the
Company entered into a Services Agreement in June 1996. Under the Services
Agreement, a subsidiary of the Company installed

                                      F-28
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 16--Related Party Transactions (Continued)

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 (See
Note 2), 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.

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

Note 17--Supplemental Cash Flow Information

     Cash paid for interest during the years ended December 31, 1996, 1997 and
1998 was approximately $0.2 million, $21.1 million and $45.1 million,
respectively.

     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 and accrued dividends
on Series C preferred stock of $0.6 million; (ii) the acquisition of $8.9
million in property and equipment through various capitalized leases; (iii) the
issuance 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.

     During the year ended December 31, 1998, the Company completed the
following material noncash transactions: (i) dividends-in-kind on the Series A
Preferred Stock for an aggregate amount of $6.0 million, accrued dividends on
Series C preferred stock and Series D preferred stock of $25.9 million and $11.0
million, respectively; (ii) the acquisitions of $45.9 million in property and
equipment through a capital lease; (iii) issued 3.0 million shares of the
Company's common stock, with a value of $99.9 million, in connection with the
acquisition of several companies, as well as spectrum licenses; (iv) issued
75,100 shares of the Company's Series E preferred stock, with a value of $2.5
million, in connection with the acquisition of a company; (v) issued 1.5 million
shares of the Company's common stock, with a value of $60.3 million, in
connection with the purchase of certain marketable equity securities.

                                      F-29

<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 18--Advertising Costs

     Advertising costs are charged to operations when the advertising first
takes place. Advertising expense for the years ended December 31, 1996, 1997 and
1998 was approximately $4.3 million, $11.0 million and $15.1 million,
respectively.

Note 19--Business Segments

     The Company is an integrated communications provider, and as such has two
reportable operating segments. The telecommunications services segment derives
its revenues by offering its customers a variety of individual and bundled
services, including local and long distance voice services, high speed data
transport, Internet access and other enhanced communications services. The
information services segment derives its revenues by marketing and distributing
information content and services in traditional markets (such as television,
video, cable and radio) and through bundling of content as enhanced
telecommunications services. Substantially all of the Company's revenue is
attributable to customers in the United States, and all assets are predominately
located in the United States. No one customer of the Company comprises more than
10% of consolidated revenues. International activities, including joint
ventures, as of December 31, 1998 were not material.
<TABLE>
<CAPTION>
                                           Telecommunications      Information
                                                Services             Services              Total
                                                --------             --------              -----
<S>                                        <C>                     <C>                 <C>       
For the year ended December 31, 1996
  External revenue...............          $   4,487               $14,650             $   19,137
  Segment operating loss.........            (40,731)               (1,409)               (42,140)
  Interest expense...............             (1,281)                  (20)                (1,301)
  Depreciation and amortization..              3,093                   469                  3,562
  EBITDA (1).....................            (37,638)                 (940)               (38,578)
  Segment Assets.................             94,065                30,133                124,198
  Capital expenditures...........             45,441                   701                 46,142

For the year ended December 31, 1997
  External revenue...............          $  29,796              $ 41,354             $   71,150
  Segment operating loss.........           (147,134)               (4,092)              (151,226)
  Interest expense...............             (2,038)                  (49)                (2,087)
  Depreciation and amortization..             23,405                 1,306                 24,711
  EBITDA (1).....................           (123,729)               (2,786)              (126,515)
  Segment assets.................            394,002                30,376                424,378
  Capital  expenditures..........            219,875                   612                220,487

For the year ended December 31, 1998
  External revenue...............          $ 191,109                53,338               $244,447
  Segment operating loss.........           (231,017)              (10,167)              (241,184)
  Interest expense...............               (687)               (1,054)                (1,741)
  Depreciation and amortization..             72,655                 1,844                 74,499
  EBITDA (1).....................           (158,362)               (8,323)              (166,685)
  Segment assets.................            912,612                63,240                975,852
  Capital expenditures...........            401,278                   777                402,055
</TABLE>
-------------------
(1) EBITDA represents losses before interest, income taxes, depreciation and
amortization, other income (expense) and discontinued operations.

                                      F-30
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 19--Business Segments (Continued)

Following are reconciliations to corresponding totals in the accompanying
consolidated financial statements:
<TABLE>
<CAPTION>
                                        For the Year Ended   For The Year Ended  For the Year Ended
                                         December 31, 1996   December 31, 1997   December 31, 1998
                                         -----------------   -----------------   -----------------
<S>                                       <C>                  <C>                <C>        
Operating loss:
   Total for reportable segments.            $ (42,140)           $ (151,226)        $ (241,184)
   Corporate expenses............              (11,373)              (27,312)           (57,225)
                                           -----------          ------------        -----------
 Total...........................            $ (53,513)           $ (178,538)        $ (298,409)
                                           ===========          ============        ===========
 Interest expense:
   Total for reportable segments.            $  (1,301)           $  ( 2,087)        $   (1,741)
   Corporate interest expense....              (34,976)              (74,740)          (154,858)
   Discontinued operations.......                 (471)                 (430)
                                           -----------          ------------        -----------
 Total...........................            $ (36,748)           $  (77,257)        $ (156,599)
                                           ===========          ============        ===========

 Depreciation and amortization:
   Total for reportable segments.            $   3,562            $   24,711         $   74,499
   Corporate depreciation and
      amortization expense.......                  202                   391                454
                                           -----------          ------------        -----------
 Total...........................            $   3,764            $   25,102         $   74,953
                                           ===========          ============        ===========

EBITDA:
   Total for reportable segments.            $ (38,578)           $ (126,515)        $ (166,685)
   Corporate EBITDA..............              (11,171)              (26,921)           (56,771)
                                           -----------          ------------        -----------
 Total...........................            $ (49,749)           $ (153,436)        $ (223,456)
                                           ===========          ============        ===========

Identifiable assets:
   Total for reportable segments.            $ 124,198            $  424,378         $  975,852
   Corporate assets..............              143,462               548,311            687,330
   Discontinued operations.......                5,352                 1,145
                                           -----------          ------------        -----------
 Total...........................            $ 273,012            $  973,834         $1,663,182
                                           ===========          ============        ===========

Capital  expenditures:
   Total for reportable segments.           $   46,142            $  220,487         $  402,055
   Corporate expenditures........                  509                 1,709                151
                                           -----------          ------------        -----------
 Total...........................           $   46,651            $  222,196         $  402,206
                                           ===========          ============        ===========
</TABLE>
                                      F-31
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

Note 20--Quarterly Results of Operations (Unaudited)

     The unaudited quarterly financial data for 1997 and 1998 for the Company is
as follows:
<TABLE>
<CAPTION>
                                                                 Quarter Ended 1997 (Unaudited)
                                                         --------------------------------------------------
                                                         March 31      June 30    September 30  December 31
                                                         --------      ------     ------------  -----------
                                                                           (In Thousands)
<S>                                                    <C>          <C>           <C>           <C>     
Operating revenues
    Telecommunications services....................    $   4,455    $   5,326     $   7,429     $ 12,586
    Information services...........................        6,014        8,662        11,017       15,661
                                                       ---------    ---------     ---------     --------
Total operating revenues...........................       10,469       13,988        18,446       28,247
                                                       ---------    ---------     ---------     --------
Operating expenses
    Cost of services and products..................       11,210       14,165        18,407       30,116
    Selling, general and administrative expenses...       28,068       37,555        39,862       45,203
    Depreciation and amortization..................        3,227        4,622         6,802       10,451
                                                       ---------    ---------     ---------     --------
Total operating expenses...........................       42,505       56,342        65,071       85,770
                                                       ---------    ---------     ---------     --------
Operating loss.....................................      (32,036)     (42,354)      (46,625)     (57,523)
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........................................      (40,599)     (57,458)      (62,761)     (75,181)
Income tax benefit.................................           --           --            --        2,500
                                                       ---------    ---------     ---------     --------

Loss from continuing operations....................      (40,599)     (57,458)      (62,761)     (72,681)
Loss from discontinued operations..................       (1,377)      (1,338)       (2,522)     (10,748)
                                                       ---------    ---------     ---------     --------
Net loss...........................................     $(41,976)    $(58,796)     $(65,283)    $(83,429)
                                                       =========    =========     =========     ========
Basic and diluted loss per share:
From continuing operations.........................     $  (1.25)    $  (1.81)     $  (1.94)    $  (2.18)
From discontinued operations.......................        (0.04)       (0.04)        (0.07)       (0.32)
                                                       ---------    ---------     ---------     --------
Net loss per share.................................     $  (1.29)    $  (1.85)     $  (2.01)    $  (2.50)
                                                       =========    =========     =========     ========
</TABLE>
                                      F-32
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 20--Quarterly Results of Operations (Unaudited) (Continued)
<TABLE>
<CAPTION>
                                                                   Quarter Ended 1998 (Unaudited)
                                                      -----------------------------------------------------
                                                      March 31        June 30    September 30   December 31
                                                      --------        ------     -----------    -----------
                                                                        (In Thousands)
<S>                                                    <C>           <C>           <C>           <C>    
Operating revenues
    Telecommunications services.................       $34,029       $43,709       $48,396       $64,975
    Information services........................        11,949        12,521        12,750        16,118
                                                     ---------     ---------     ---------     ---------
Total operating revenues........................        45,978        56,230        61,146        81,093
                                                     ---------     ---------     ---------     ---------
Operating expenses
    Cost of services and products...............        41,252        45,225        45,722        72,549
    Selling, general and administrative
          expenses..............................        52,492        59,139        63,764        87,760
    Depreciation and amortization...............        11,399        16,895        20,372        26,287
                                                     ---------     ---------     ---------     ---------
          Total operating expenses..............       105,143       121,259       129,858       186,596
                                                     ---------     ---------     ---------     ---------
Operating loss..................................       (59,165)      (65,029)      (68,712)     (105,503)
Other (expense) income
    Interest expense............................       (28,613)      (40,492)      (42,599)      (44,895)
    Interest income.............................         4,885        10,300         8,801         5,772
                                                     ---------     ---------     ---------     ---------
Loss from continuing operations
  Before income tax benefit.....................       (82,893)      (95,221)     (102,510)     (144,626)

Income tax benefit..............................         1,100         1,400         1,500         1,500
                                                     ---------     ---------     ---------     ---------

Loss from continuing operations.................       (81,793)      (93,821)     (101,010)     (143,126)

Loss from discontinued operations...............        (3,166)         (477)      (21,331)           --
                                                     ---------     ---------     ---------     ---------
Net loss........................................      $(84,959)     $(94,298)    $(122,341)    $(143,126)
                                                     =========     =========     =========     =========
Basic and diluted loss per share:
  from continuing operations....................      $  (2.51)     $  (2.76)    $   (2.83)    $   (3.80)
From discontinued operations....................         (0.09)        (0.01)        (0.53)           --
                                                     ---------     ---------     ---------     ---------
Net loss per share..............................      $  (2.60)     $  (2.77)    $   (3.36)    $   (3.80)
                                                     =========     =========     =========     =========
</TABLE>
     The financial data presented above has been reclassified to reflect the
operations of Global Products and Gateway as discontinued operations.

                                      F-33
<PAGE>
                WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 21--Discontinued Operations

a.   WinStar Global Products

     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.
The disposal of Global Products was accounted for as a discontinued operation
and, accordingly, was carried at its estimated net realizable value. In November
1998, the Company entered into an asset purchase agreement and sold the
remaining assets of Global Products. Under the agreement, the Company received
certain assets recorded at a nominal value. Accordingly, the Company recorded an
additional loss on the disposition of Global Products of $16.8 million.

     Information relating to the discontinued operations of Global Products is
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
                                                           For the Year      For the Year      For the Year
                                                              Ended             Ended              Ended
                                                           December 31,      December 31,      December 31,
                                                               1996              1997              1998
                                                             ---------         ---------         ---------
<S>                                                       <C>              <C>                 <C>   
Operating revenues................................           $19,429          $ 15,665            $7,056
                                                           ---------         ---------         ---------
Cost of services and products.....................            13,903            17,534             7,196
Selling, general & administrative.................             5,323             8,393             3,331
Depreciation and amortization.....................               245               464               219
                                                           ---------         ---------         ---------
Total operating expenses..........................            19,471            26,391            10,746
                                                           ---------         ---------         ---------
Operating loss....................................               (42)          (10,726)          (3,690)
Interest expense, net.............................              (968)             (854)            (544)
                                                           ---------         ---------         ---------
Net loss..........................................          $ (1,010)         $(11,580)         $(4,234)
                                                           =========         =========         =========
</TABLE>
<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                        -------------------------------
                                                                            1997              1998
                                                                            ----              ----
<S>                                                                     <C>                   <C>     
Assets:
Accounts receivable, net..................................               $ 4,383               $     --

Inventories...............................................                  4,663                    --
Other assets..............................................                  1,268                    --
                                                                         --------              --------
    Total assets..........................................                 10,314                    --
                                                                         ========              ========

Liabilities:
Current liabilities.......................................                  3,570                    --
Other liabilities.........................................                  9,951                    --
                                                                         --------              --------
    Total liabilities.....................................                 13,521                    --
                                                                         --------              --------
    Net deficit...........................................                $(3,207)             $     --
                                                                         ========              ========
                                                                          
</TABLE>
                                      F-34
<PAGE>
               WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 21--Discontinued Operations (Continued)

b.  WinStar Gateway Network

     In November 1998, a formal plan of disposal for Gateway, was approved by
management of the Company, and it is anticipated that the disposal will be
completed within the next 12 months. The Company expects to incur additional
operating losses of approximately $4.2 million during the phase out of this
business, as well as, a disposal loss of approximately $1.3 million. The
disposal of Gateway has been accounted for as a discontinued operation and
accordingly, its net liabilities have been segregated from the net assets of
continuing operations in the accompanying consolidated balance sheets and its
operating results are segregated from continuing operations and are reported as
discontinued operations in the accompanying consolidated statements of
operations and cash flows. Information relating to the discontinued operations
of Gateway is as follows (in thousands of dollars).
<TABLE>
<CAPTION>
                                                           For the Year      For the Year      For the Year
                                                              Ended             Ended              Ended
                                                           December 31,      December 31,      December 31,
                                                               1996              1997              1998
                                                            ----------        ----------        ----------
<S>                                                          <C>              <C>                 <C>   
Operating revenues................................           $29,482           $ 8,481            $4,033
                                                             -------           -------           -------
Cost of revenue...................................            16,843             7,119             4,777
Selling, general & administrative.................            14,869             6,271             3,549
Depreciation and amortization.....................               737             4,599
                                                             -------           -------           -------
Total operating expenses..........................            32,449            17,989             8,326
                                                             -------           -------           -------
Net loss..........................................           $(2,967)          $(9,508)          $(4,293)
                                                             =======           =======           =======
</TABLE>

     Net liabilities of the discontinued operations of Gateway at December 31,
1997 and 1998 are composed of the following (in thousands of dollars):
<TABLE>
<CAPTION>
                                                                        December 31,           December 31,
                                                                            1997                   1998
                                                                          --------               ---------
<S>                                                                        <C>                 <C>
Accounts receivable, net..................................                 $1,600                 $   --
Other assets..............................................                    206                    472
                                                                           ------                 ------
Total assets..............................................                  1,806                    472

Current liabilities.......................................                  2,335                  1,140
Other liabilities.........................................                    431                    166
                                                                           ------                 ------
Total liabilities.........................................                  2,766                  1,306
                                                                           ------                 ------
Net liabilities...........................................                  $(960)                $(834)
                                                                           ======                 ======
</TABLE>
Note 22-- 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

                                      F-35

<PAGE>
               WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 22-- Condensed Financial Information of WinStar Equipment Corp.  
     and WinStar Equipment II Corp. (Continued)

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):

     Balance sheet information at:
<TABLE>
<CAPTION>
                                              WEC                              WEC II
                                              ---                              ------
                                     1997              1998              1997            1998
                                     ----              ----              ----            ----
<S>                               <C>                <C>               <C>             <C>   
Current assets                    $144,004           $ 40,533          $48,394          $1,025
Long-term assets                    77,595            186,939            4,322          50,891
Current liabilities                (25,601)            (9,388)          (2,432)         (5,941)
Long-term debt                    (200,000)          (200,000)         (50,000)        (50,000)
Due to parent                       (7,071)           (45,130)          (1,769)         (1,900)
                                  ---------          ---------         --------        --------
Stockholders' deficit             $(11,073)          $(27,046)         $(1,485)        $(5,925)
                                  =========          =========         ========        ========
</TABLE>
     Statements of operations information for WEC for the period from its
inception through December 31, 1997 and the year ended December 31, 1998, and
for WEC II for the period from its inception through December 31, 1997 and the
year ended December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
                                                       WEC                                      WEC II
                                      --------------------------------------     -------------------------------------
                                          Period from                                Period from
                                         March 13, 1997       Year Ended           August 8, 1997       Year Ended
                                         (Inception) to      December 31,          (Inception) to      December 31,
                                       December 31, 1997         1998             December 31, 1997        1998
                                       -----------------         ----             -----------------        ----
<S>                                       <C>                <C>                    <C>                  <C>    
Rental revenues from other
   WinStar subsidiaries                     $    854          $  2,667              $    --              $    --
Interest income from other
   WinStar subsidiaries                        1,207             6,538                   --                   --
Interest income - investments                  7,765             3,213                1,105                2,068
Selling, general and
   Administrative expenses                    (1,470)           (3,976)                  --                  (24)
Interest expense                             (19,429)          (24,415)              (2,590)              (6,484)
                                          ----------         ---------             --------            ---------
Net loss                                    $(11,073)         $(15,973)             $(1,485)             $(4,440)
                                          ==========         =========             ========            =========
                                             
</TABLE>

                                      F-36
<PAGE>
               WinStar Communications, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


Note 22-- Condensed Financial Information of WinStar Equipment Corp.  
     and WinStar Equipment II Corp. (Continued)

     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
consolidated financial statements of the Company.

Note 23--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.

     In June 1998, the Company's shareholders approved the adoption of the
Company's Qualified Employee Stock Purchase Plan ("ESPP") which covers 750,000
shares of the Company's common stock. The ESPP permits employees and certain
officers ("Qualified Employees") of the Company to acquire shares of common
stock at a discount of up to 15% below the then current market value of the
common stock. The ESPP commenced on October 12 1998. 

Note 24--New Accounting Pronouncements

         In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires entities to recognize all derivatives in their financial
statements as either assets or liabilities measured at fair value. SFAS 133 also
specifies new methods of accounting for hedging transactions, prescribes the
items and transaction that may be hedged and specifies detailed criteria to be
met to qualify for hedge accounting. SFAS is effective for fiscal years
beginning after June 15, 1999. The Company is currently evaluating the impact
that SFAS 133 will have on its consolidated financial statements and
disclosures, however, hedging is prohibited under the Company's indentures.

         The American Institute of Certified Public Account's Accounting
Standards Executive Committee recently issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires
that costs of start-up activities, including organization costs, be expensed as
incurred. Start-up activities are broadly defined and include one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or beneficiary, initiating a new process in an existing
facility, commencing some new operation and organizing a new entity. SOP 98-5 is
generally effective for financial statements for fiscal years beginning after
December 15, 1998, with initial application reported as the cumulative effect of
a change in accounting principle. We are currently evaluating the impact that
SOP 98-5 will have on our consolidated financial statements and disclosures.

Note 25--Subsequent Events

a.  Common Stock Offering

     In February 1998 the Company issued 4.2 million shares of its common stock
(the "Offering") pursuant to which it received net proceeds of approximately
$166.6 million.
                                      F-37

<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 March 25,
1999, which is included in this Annual Report on Form 10-K, we have also audited
Schedule II for the years ended December 31, 1996, 1997 and 1998.

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
March 25, 1999


                                      F-38
<PAGE>

                  Winstar Communications, Inc. and Subsidiaries

                 Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>

                   Column A                           Column B       Column C          Column D          Column E
    -----------------------------------------         --------       --------          --------          --------     
                                                                     Additions
                                                     Balance at       Charged
                                                     Beginning      to Costs and                      Balance at End
                  Description                        of Period   Expenses and Other   Deductions        of Period
                  -----------                        ----------  ------------------   ----------      --------------
<S>                                                 <C>          <C>                <C>                <C>        
Reserves deducted from assets to which they apply:
Year ended December 31, 1998
    Allowance for doubtful accounts(a)...........   $2,813,691   $22,692,184        $12,636,785(b)     $12,869,090
                                                    ==========   ===========        ===========        ===========

Year ended December 31, 1997
    Allowance for doubtful accounts(a)...........   $  428,326   $ 3,963,612        $ 1,578,247(b)    $ 2,813,691
                                                    ==========   ===========        ===========        ===========

Year ended December 31, 1996
    Allowance for doubtful accounts(a)...........   $    5,608   $   584,212        $   161,494(b)     $   428,326
                                                    ==========   ===========        ===========        ===========
</TABLE>
------------------
(a) Deducted from accounts receivable (excludes amounts relating to discontinued
    operations)

(b) Uncollectible accounts receivable charged against allowance

                                      F-39