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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
(MARK ONE)
       /X/       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                            SECURITIES EXCHANGE ACT OF 1934

                      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                          OR
       / /       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                          THE SECURITIES EXCHANGE ACT OF 1934

                            COMMISSION FILE NUMBER 0-28262

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

<TABLE>
<S>                               <C>
            DELAWARE                         39-1706857
--------------------------------  --------------------------------
(State or other jurisdiction of     (IRS Employer Identification
 incorporation or organization)                 No.)
</TABLE>

        8410 WEST BRYN MAWR AVENUE, SUITE 1100, CHICAGO, ILLINOIS 60631
              (Address of principal executive offices) (Zip Code)

                 REGISTRANT'S TELEPHONE NUMBER: (773) 399-4200

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

          Securities registered pursuant to Section 12(g) of the Act:

                              Title of each class
                          ---------------------------
                          Common Shares, $1 par value
                              -------------------

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

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

    As of February 27, 1998, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $104 million (based upon the
closing price of the Common Shares on February 27, 1998, of $8 1/2, as reported
by the NASDAQ).

    The number of shares outstanding of each of the registrant's classes of
common stock, as of February 27, 1998, is 31,626,997 Common Shares, $1 par
value, and 40,000,000 Series A Common Shares, $1 par value.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Those sections or portions of the registrant's 1997 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 11,
1998, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.

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<PAGE>
                             CROSS REFERENCE SHEET
                                      AND
                               TABLE OF CONTENTS

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                                                                   PAGE NUMBER
                                                                 OR REFERENCE(1)
                                                                 ---------------
 Item 1.  Business.............................................         3
 Item 2.  Properties...........................................        13
 Item 3.  Legal Proceedings....................................        13
 Item 4.  Submission of Matters to a Vote of Security
            Holders............................................        13
 Item 5.  Market for Registrant's Common Equity and Related
            Stockholder Matters................................        14(2)
 Item 6.  Selected Financial Data..............................        14(3)
 Item 7.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations................        14(4)
Item 7A.  Quantitative and Qualitative Disclosure About Market
            Risk...............................................        14
 Item 8.  Financial Statements and Supplementary Data..........        14(5)
 Item 9.  Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure................        14
Item 10.  Directors and Executive Officers of the Registrant...        15(6)
Item 11.  Executive Compensation...............................        15(7)
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management.........................................        15(8)
Item 13.  Certain Relationships and Related Transactions.......        15(9)
Item 14.  Exhibits, Financial Statement Schedules and Reports
            on Form 8-K........................................        16

---------

(1) Parenthetical references are to information incorporated by reference from
    the registrant's Exhibit 13, which includes portions of its Annual Report to
    Shareholders for the year ended December 31, 1997 ("Annual Report") and from
    the registrant's Notice of Annual Meeting of Shareholders and Proxy
    Statement for its Annual Meeting of Shareholders to be held on May 11, 1998
    ("Proxy Statement").

(2) Annual Report section entitled "Aerial Stock and Dividend Information" and
    "Market Price Per Common Share by Quarter."

(3) Annual Report section entitled "Selected Consolidated Financial Data."

(4) Annual Report section entitled "Management's Discussion and Analysis of
    Financial Condition and Results of Operations."

(5) Annual Report sections entitled "Consolidated Statements of Operations,"
    "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
    "Consolidated Statements of Changes in Shareholders' Equity," "Notes to
    Consolidated Financial Statements," and "Report of Independent Public
    Accountants."

(6) Proxy Statement section entitled "Election of Directors" and "Executive
    Officers."

(7) Proxy Statement section entitled "Executive Compensation" except for the
    information specified in Item 402 (a) (8) of Regulation S-K under the
    Securities Exchange Act of 1934, as amended.

(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
    Owners and Management."

(9) Proxy Statement section entitled "Certain Relationships and Related
    Transactions."

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<PAGE>
--------------------------------------------------------------------------------

                                                                [LOGO]
AERIAL COMMUNICATIONS, INC.
8410 WEST BRYN MAWR AVENUE - SUITE 1100 - CHICAGO, IL 60631
TELEPHONE (773) 399-4200

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                                     PART I
--------------------------------------------------------------------------------

ITEM 1. BUSINESS

COMPANY

    Aerial Communications, Inc. (NASDAQ symbol "AERL" or the "Company" or
"Aerial"), together with its subsidiaries, is a provider of Personal
Communications Services ("PCS") in the Minneapolis, Tampa-St.
Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus Major Trading
Areas ("MTAs") (collectively, the "PCS Markets"). The PCS Markets include
approximately 27.6 million population equivalents ("POPs"). The Company has
constructed networks for its PCS Markets using Global System for Mobile
Communication ("GSM") technology. The Company has commenced service in all its
markets. By year end 1997, the Company had expanded its system coverage to total
approximately 80% of the six MTAs' total population.

    The Company was formed in 1991 under Delaware law as a wholly-owned
subsidiary of Telephone and Data Systems, Inc. [AMEX: TDS] and was formerly
named American Portable Telecom, Inc. In November 1996 the Company changed its
name to Aerial Communications, Inc. TDS owned 59,086,000 shares of Common Stock
of the Company at December 31, 1997, representing 82.5% of the combined total of
the Company's outstanding Common and Series A Common Shares and 98.0% of the
voting power.

    The Company sold in 1996 its licenses covering the Guam and Alaska Major
Trading Areas for an aggregate pretax gain of $2.6 million.

    PCS is the term used to describe the wireless telecommunications services
that are offered by those companies that acquired licenses for radio spectrum
(frequency range 1850-1990 MHz) in the Federal Communications Commission ("FCC")
auctions and are the newest entrants in the wireless telecommunications market.
PCS competes directly with existing cellular telephone, paging and specialized
mobile radio services. The Company believes that PCS providers will be the first
in most markets to offer mass market all-digital mobile networks. In addition,
PCS providers may be among the first to be able to offer mass market wireless
local loop applications, in competition with switched and direct access local
telecommunications services.

    The Company's strategic goal is to take full advantage of the potential of
wireless telecommunications. The Company sees an opportunity for significant
growth in the wireless telecommunications market through the shift of existing
wireless usage patterns from applications focused on business use, special
occasions and emergencies to much broader applications for everyday use. The
Company is structured to meet the increasingly competitive challenges of the
wireless telecommunications marketplace, and has a marketing-oriented approach
focused on serving its customers and their needs. Since 1983, the demand for
wireless telecommunications services has grown dramatically as cellular, paging
and other emerging wireless personal communications services have become widely
available and increasingly affordable. Since its introduction in 1983, the
number of

                                                                               3
<PAGE>
domestic cellular telephone subscribers, both analog and digital, has grown from
approximately 91,600 in 1984 to an estimated 57 million at March 31, 1998, which
represents U.S. market penetration of approximately 21%.

    During 1996 and early 1997, the Company contracted for network equipment,
billing systems, support software and the equipment and services necessary to
launch service. Additionally during this period, the Company completed the
design for its PCS networks, acquired and built out the switching centers
serving each market, leased and built out a National Operations Center, leased
or purchased the cell sites required to launch and commenced zoning and building
the sites. The Columbus MTA launched service on March 27, 1997. The Company's
five remaining MTAs launched service during the second quarter of 1997. Across
all six markets, the Company launched with approximately 600 cell sites in
service. The Company had more than 1,000 cell sites in service by the end of
1997. The coverage of the Company's PCS networks includes the major metropolitan
areas within the PCS Markets, as well as portions of the major highway corridors
extending out from those areas. All of the senior management positions and other
key management positions have been staffed. Key operating and marketing staff
have been put in place in each of the PCS Markets.

    In November 1996, the Company entered into a Member Control Agreement
("Agreement") forming a joint venture with Rural Cellular Corporation ("RCC") to
build out certain rural areas covering approximately 530,000 POPs in the
Minneapolis MTA. In 1997 RCC exercised its option in the Agreement to add an
additional 156,000 POPs to the joint venture. The Company has contributed 20 MHz
of its Minneapolis MTA license covering certain territories as defined in the
Agreement in return for a 49% equity interest in the joint venture. RCC will be
responsible for building out the network and for the ongoing operations. It is
anticipated that the joint venture will purchase services such as network
switching from the Company. The network will use GSM technology. The Company
expects to benefit from the joint venture by extending the GSM footprint without
the capital investment required to build out the network.

PROPOSED TDS CORPORATE RESTRUCTURING

    In December 1997, Aerial received a proposal from TDS to acquire all of the
issued and outstanding Common Shares of Aerial not already owned by TDS (the
"Aerial Merger"). The offer was made in connection with, and is subject to TDS
shareholder approval of and the effectiveness of, TDS's proposed corporate
restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a
proposal which, if approved by shareholders and implemented by the TDS Board,
would authorize the TDS Board to issue three new classes of common stock and
change the state of incorporation of TDS from Iowa to Delaware (the "Tracking
Stock Proposal"). The three new classes of stock are intended to separately
reflect the performance of TDS's cellular telephone, landline telephone and
personal communications services businesses ("Tracking Stocks").

    Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as Aerial Communications Group Common
Shares (the "Aerial Group Shares"). The Aerial Group Shares, when issued, are
intended to reflect the separate performance of the Aerial Communications Group
(the "Aerial Group"), which includes TDS's interest in Aerial Communications,
Inc.

    Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
intends to, among other things, issue Aerial Group Shares in exchange for all of
the Common Shares of Aerial which are not currently owned by TDS, subject to
approval by Aerial's Board of Directors and shareholders.

    In January 1998, Aerial's Board of Directors created a special committee of
the Board (the "Special Committee") to review the proposal from TDS. The Special
Committee, consisting of two independent directors of Aerial, has engaged a
financial advisor and legal advisor to assist in reviewing the proposal. The
Special Committee will consider how Aerial should respond to the TDS proposal,
take the steps it deems appropriate to respond to the TDS proposal and, at such
time as it considers it appropriate, report its recommendations to Aerial's
Board of Directors.

    Subsequent to shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and Aerial.
Thereafter, some or all of the relationships between TDS and Aerial would be
determined solely by methods that management believes to be

4
<PAGE>
reasonable. Many of such policies would continue the arrangements which
presently exist between TDS and Aerial pursuant to the intercompany agreements,
but TDS would have no contractual obligation to continue such policies after the
intercompany agreements have been terminated. The TDS Board currently intends to
retain future earnings, if any, for the development of the business of the
Aerial Group and does not anticipate paying dividends on the Aerial Group Shares
in the foreseeable future.

    On January 5, 1998, an individual who claims to be a holder of Aerial Common
Shares, filed a putative class action complaint on behalf of common stockholders
of the Company in the Court of Chancery of the State of Delaware in New Castle
County. The complaint names as defendants, TDS, the Company and the directors of
TDS and the Company. The complaint alleges a breach of fiduciary duties by the
defendants and seeks to have the Aerial Merger enjoined or, if it is
consummated, to have it rescinded and to recover unspecified damages, fees and
expenses. A virtually identical complaint has been filed by a second individual.
None of the defendants have been served with this complaint. The Company intends
to vigorously defend itself against these lawsuits.

WIRELESS TELECOMMUNICATIONS INDUSTRY

    OVERVIEW.  Wireless service is currently available using analog or digital
technology. Most wireless services currently transmit voice and data signals
over analog-based networks by varying the amplitude or frequency of one
continuous electronic signal transmitted over a single radio channel. Analog
technology currently has several limitations, including inconsistent service
quality, lack of privacy, limited capacity and less reliability in transferring
data without errors. The Company has chosen GSM, which utilizes a digital
technology, for use in the PCS Markets. Digital systems convert voice or data
signals into a stream of digits that is compressed before transmission, enabling
a single radio channel to carry multiple simultaneous signal transmissions. This
additional capacity, along with improvements in digital protocols, allows
digital-based wireless technologies to offer new and enhanced services, such as
greater call privacy and more robust data transmission features, such as "mobile
office" applications (including facsimile, electronic mail and wireless
connections to computer/data networks, including the Internet).

    While digital technology serves generally to reduce transmission
interference relative to analog technology, capacity limitations in the 8 Kb
vocoder cellular digital handsets now deployed by several digital wireless
operators using TDMA technology also cause a perceptible decline in voice
quality. This gap in voice quality has proven to be a significant barrier to
cellular operators attempting to switch their customers from analog to digital
service. Manufacturers have developed enhanced 13 Kb vocoder digital handsets
for both PCS and digital cellular networks using GSM or CDMA technology. These
new handsets are expected to offer digital voice transmission comparable to
wireline quality.

    PCS spectrum differs from existing cellular and specialized mobile radio
("SMR") spectrum in three basic ways: frequency, spectrum and geographic
division. PCS networks will operate in a higher frequency range (1850-1990 MHz)
compared to the cellular and SMR frequency (800-900 MHz). PCS is comprised of 30
or 10 MHz spectrum versus 25 MHz spectrum for cellular networks. As a result of
the improved capacity of the infrastructure and large allocation of spectrum in
the A, B and C PCS frequency Blocks, PCS will have more capacity for new
wireless services such as data and video transmission. Finally, the geographic
areas for PCS licenses are divided differently than for cellular licenses. PCS
is segmented among 51 MTAs and 493 Basic Trading Areas ("BTAs") as opposed to
cellular's 306 Metropolitan Statistical Areas ("MSAs") and 428 Rural Service
Areas ("RSAs"). An MTA license generally covers a much larger geographic area
than a BTA, MSA or RSA license.

    OPERATION OF WIRELESS NETWORKS.  Wireless service areas are divided into
smaller geographic areas called "cells", each of which contains an antenna and a
base transceiver station ("BTS") consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected
by microwave, fiber optic cable or telephone wires to a switching office
("mobile switching center" or "MSC"). The MSC controls the operation of the
wireless telephone network for its entire service area, performing inter-BTS
hand-offs, managing call delivery to handsets, allocating calls among the cells
within the network and connecting calls to local landline telephone systems or
to long-distance telephone carriers. Wireless service providers have
interconnection

                                                                               5
<PAGE>
agreements with various local exchange carriers and interexchange carriers,
thereby integrating the wireless telephone network with landline
telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long-distance networks,
customers can receive and originate both local and long-distance calls from
their wireless telephones.

    The signal strength of a transmission between a handset and a BTS antenna
declines as the handset moves away from the BTS antenna. The MSC and the BTSs
monitor the signal strength of calls in process. When the signal strength of a
call declines to a predetermined level, the MSC may "hand off" the call to
another BTS that can establish a stronger signal with the handset. If a handset
leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is established to hand
off the call to an adjacent service provider's system.

    Operators of wireless networks frequently agree to provide service to
customers from other compatible networks who are temporarily located or
traveling through the operator's service area. Such customers are called
"roamers." Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless customers are preregistered in certain
networks outside their home service area and receive service automatically while
they are roaming. Other roaming features permit calls to a customer to follow
the customer into different networks, so that the customer will continue to
receive calls in a different network just as if the customer were within his or
her service area.

    Wireless customers generally are charged separately for monthly access, air
time, long-distance calls and custom-calling features (although custom-calling
features may be included in monthly access charges in certain pricing plans).
Wireless network operators pay fees to local exchange and long-distance
telephone companies for access to their networks and toll charges based on
standard or negotiated rates. When wireless operators provide service to roamers
from other networks, they generally charge roamer air-time usage rates, which
usually are higher than standard air-time usage rates for their own customers,
and additionally may charge daily access fees. Special, discounted rate roaming
arrangements, often between neighboring operators who wish to stimulate usage in
their respective territories, provide for reduced roaming fees and no daily
access fees.

TECHNOLOGY

    With GSM technology, the Company offers easy-to-use, interactive menu-driven
phones, and advanced features such as caller identification and a smart card, as
well as more complex features such as text messaging, which allows the GSM
handset to function as a two-way messaging device. In the future, the Company
intends to increasingly emphasize services which are expected to increase the
size and scope of the wireless market, such as wireless data and information
services as well as wireless local loop services. The Company anticipates that
PCS will ultimately offer a competitive alternative to wireline telephone
service as PCS networks are constructed and PCS operators form strategic
alliances.

    GSM is not compatible with other PCS or cellular technologies. However,
compatibility can be achieved through the use of handsets that support multiple
technologies. The Company expects that compatibility between GSM and the
existing analog cellular systems will be achieved with the use of dual-mode
handsets. Dual-mode handsets are expected to be available in 1998. Because
analog cellular service is available nationwide, the Company expects that PCS
customers will be able to roam into service areas served by analog cellular
providers.

    To date, fifteen North American PCS companies are providing commercial GSM
service. GSM committed providers in the U.S. have licenses to cover
approximately 260 million POPs (representing approximately 98% of the population
of the United States) and approximately 25 million POPs in Canada, although
their can be no assurance that all the licensees will build-out their licensed
territory. GSM systems are currently in commercial operation in over 700 North
American cities with more than 1.5 million customers. The Company anticipates
that its customers will be able to roam substantially throughout the United
States, either on other GSM-based PCS networks or by using dual-mode handsets
that can also be used on existing cellular networks.

    The Company is a member of the North American GSM Alliance LLC ("GSM
Alliance"), an all-digital wireless PCS network of U.S. and Canadian carriers.
The GSM Alliance was established to create a national network and develop
seamless wireless communications for customers, whether at home,

6
<PAGE>
away or abroad. The GSM Alliance's collaborative efforts focus on serving the
wireless customer efficiently by addressing the areas of roaming, customer care,
national distribution and data communications. The Company is also a part of the
GSM North America consortium, which is the North American interest group for the
GSM MoU Association. Formed in 1995, GSM North America brings together service
providers and equipment manufacturers to identify and resolve issues related to
making GSM the premier PCS digital technology.

SOURCES OF EQUIPMENT

    The Company does not manufacture any of the GSM network equipment, handsets
or accessories ("equipment") used or anticipated to be used in its operations.
The equipment the Company uses or anticipates to use is available from multiple
sources, and the Company anticipates such equipment will continue to be
available to the Company in the foreseeable future, consistent with normal
manufacturing and delivery lead times. As GSM uses an open system architecture,
and due to the fact that GSM has well-developed features, software systems and
equipment that are available "off the shelf", the Company is able to design its
GSM networks and systems without being dependent upon any single manufacturing
source. Nokia Telecommunications Inc. has been the Company's sole supplier of
digital radio channel and switching infrastructure equipment during the initial
build-out of its PCS networks. The Company's current handset vendors are Nokia
Mobile Phones, Inc., Ericsson Inc., and Mitsubishi Wireless Communications, Inc.

PRODUCTS AND SERVICES

    The Company offers coverage in those areas of the PCS Markets where most of
the population lives and works. Subsequent construction of its PCS networks will
provide coverage which, in combination with roaming services as described above,
is competitive with that of current cellular operators. The Company provides
roaming capabilities through agreements with other GSM and cellular operators.

    The Company's two primary sources of revenues are similar to those available
to other cellular system providers. Service revenue primarily consists of
charges for access, airtime and value-added services provided to the Company's
retail customers who use the network operated by the Company, and charges for
long-distance calls made on the Company's systems. Equipment sales revenue
consists of the sale of handsets and related accessories to retailers,
independent agents and end user customers. At December 31, 1997, the Company had
125,000 customers. Service revenues and equipment sales revenues totaled $32.3
million and $23.6 million, respectively, for the year ended December 31, 1997.

    The Company provides the following services and features:

    THE SMART CARD.  GSM technology employs a Smart Card which contains a
microchip containing detailed information about a customer's service profile.
The Smart Card allows the Company to initiate services or change a customer's
service package from a remote location. The Smart Card also allows customers to
roam onto other participating GSM-based networks by using their cards in
handsets compatible with the local network.

    FEATURE-RICH HANDSETS.  As part of its basic service package, the Company
provides easy-to-use, interactive menu-driven phones that enable customers to
utilize the features available in a GSM network. These handsets primarily use
words and easy-to-use menus rather than numeric codes to operate handset
functions such as call-forwarding, call-waiting and text messaging.

    SHORT TEXT MESSAGING.  GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows the Company to offer a quicker and less expensive form of
wireless communication when a full conversation is not necessary.

    ENHANCED SECURITY.  The Company's service provides greater security from
eavesdropping and cloning than existing wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM handsets require the use of a Smart
Card with a sophisticated authentication scheme, the replication of which is
virtually impossible.

                                                                               7
<PAGE>
    As the market for wireless telecommunications services continues to develop,
the Company expects to offer advanced wireless applications such as mobile data
services, wireless private branch exchange applications, wireless local loop
services and other individually customized wireless products and services.

MARKETING AND DISTRIBUTION

    The Company's marketing objective is to create demand for its PCS service by
clearly differentiating its service offerings. The Company believes the strength
of its marketing efforts will be a key contributor to its success. The Company
has developed overall marketing strategies as well as certain, specific local
marketing strategies for each PCS Market.

    The Company's mass marketing efforts emphasize the value of the Company's
high-quality, innovative services and are supported by heavily promoting the
Aerial brand name. This is supported by a substantial advertising program.

    The Company offers its services and products through traditional cellular
sales channels as well as through new, lower cost channels which increase the
quality of the typical sale. The Company utilizes traditional sales channels
which include mass merchandisers and retail outlets, company retail stores,
sales agents and a direct sales force. National distributors include Best Buy,
Circuit City, Office Depot, Office Max and Radio Shack. The Company currently
also distributes its services and products through over 50 company retail
locations (mall stores, strip mall stores and kiosks). Based in part upon the
remote activation feature of the GSM Smart Card, the Company also intends to
develop distribution innovations such as simplified retail sales processes and
lower-cost channels which include inbound telesales, affinity marketing
programs, and via the Internet.

THE COMPANY'S PCS MARKETS

    The PCS Markets cover large areas with attractive demographic
characteristics including growing populations, high population densities,
favorable commuting patterns, high median household incomes and favorable
business climates. The Company believes the geographic diversity of the PCS
Markets mitigates adverse consequences which may result from an economic
slowdown in one particular region.

COMPETITION

    The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog cellular networks, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. Accordingly, the Company expects competition in
the wireless telecommunications business to be dynamic and intense as a result
of the entrance of new competitors and the development of new technologies,
products and services.

    The Company will compete directly with up to five other PCS providers in
each of its PCS Markets. The other successful bidders in the FCC's broadband
Block A and Block B PCS auction in each of the six PCS Markets were PCS PrimeCo
(Houston and Tampa-St. Petersburg-Orlando), Sprint Spectrum (Minneapolis,
Pittsburgh and Kansas City) and AT&T Wireless Services, Inc. (Columbus). The
Company also expects that existing cellular providers in the PCS Markets, most
of which have an infrastructure in place and have been operational for a number
of years, will upgrade their networks to provide comparable services in
competition with the Company. Principal cellular providers in the PCS Markets
are AT&T Wireless Services, Inc., BellSouth Mobility, Inc., GTE Mobile
Communications Corporation, AirTouch Communications, Inc., Southwestern Bell,
Bell Atlantic-NYNEX Mobile and Ameritech Cellular. Additionally, the Company
competes with specialized mobile radio service ("SMRS") provider Nextel
Communications, Inc. in each of its six PCS Markets.

    The Company also expects to compete with other communications technologies
that now exist, such as paging, enhanced specialized mobile radio service
("ESMRS") and global satellite networks, and expects to compete with cellular
and PCS resellers. In the future, cellular service and PCS also will compete
more directly with traditional landline telephone service providers and with
cable operators who expand into the offering of traditional communications
services over their cable systems. In addition, the Company may face competition
from technologies that may be introduced in the future.

8
<PAGE>
    All of such competition is expected to be intense. There can be no assurance
that the Company will be able to compete successfully in this environment or
that new technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. In addition, many of
the Company's competitors have substantially greater financial, technical,
marketing, sales and distribution resources than those of the Company and have
significantly greater experience than the Company in testing new or improved
telecommunications products and services and obtaining regulatory approvals.
Some competitors are expected to market other services, such as cable television
access, with their wireless telecommunications service offerings. Several of the
Company's competitors are operating, or planning to operate, through joint
ventures and affiliation arrangements, wireless telecommunications networks that
cover most of the United States.

    Handsets used for GSM-based PCS networks ordinarily will not be compatible
with cellular systems, and vice versa. The Company expects dual-mode handsets to
be available in 1998, which will permit its customers to roam by using the
existing cellular wireless network in markets where GSM service is not
available. Until then, this lack of interoperability may impede the Company's
ability to attract current cellular customers or potential new wireless
communication customers who desire the ability to access wireless service where
GSM service is not available.

    The Company anticipates that market prices for two-way wireless services
generally will decline in the future based on increased competition. The Company
will compete to attract and retain customers principally on the basis of
services and enhancements, its customer service, the size and location of its
service areas and pricing. The Company's ability to compete successfully also
will depend, in part, on its ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors, which could adversely
affect the Company's operating margins.

REGULATION

    REGULATORY ENVIRONMENT.  The FCC regulates the licensing and, to lesser
degrees, the construction, operation and acquisition of wireless
telecommunications systems in the United States pursuant to the Communications
Act of 1934, as amended, and the rules and policies promulgated by the FCC
thereunder (the "Communications Act"). Under the Communications Act, the FCC is
authorized to establish regulations governing the interconnection of PCS
networks with wireline and other wireless carriers, to grant or deny license
renewals and applications for transfer of control or assignment of PCS licenses,
and to impose fines and forfeitures for any violations of the Communications
Act.

    In addition, the Telecommunications Act of 1996 (the "1996 Act"), which
amended the Communications Act, mandates significant changes in existing
telecommunications rules and policies and, with respect to wireless services, to
promote competition, to ensure the availability of wireless services in all
parts of the nation and to streamline regulations of the wireless
telecommunications industry to remove regulatory burdens as competition
develops. The FCC promulgated and continues to promulgate rules governing the
operation of wireless operators, licensing (including renewal of licenses) and
technical standards for the provision of PCS services under the Communications
Act, and is implementing the legislative objectives of the 1996 Act, as
discussed below.

    PCS LICENSING.  The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.

    The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed
for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the
493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of
the 493 BTAs. A PCS license has been awarded for each MTA and BTA in every
block, for a total of more than 2,000 licenses. This means that in any PCS
service area as many as six licensees could be operating separate PCS networks.
Under

                                                                               9
<PAGE>
the FCC's rules, a broadband PCS licensee may own combinations of licenses with
total aggregate spectrum coverage of up to 45 MHz in a single geographic area.
The FCC adopted comprehensive rules that outlined the bidding process, described
the bidding application and payment process, established penalties for certain
bid withdrawals, default or disqualification and established regulatory
safeguards. Several auction winners have filed for bankruptcy.

    On November 9, 1995, in CINCINNATI BELL TELEPHONE CO. V. FCC (Case No.
94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted
two petitions for review of an FCC order that had barred certain common
ownership of cellular and PCS interests in the same market, and remanded the
case to the FCC for further proceedings. Neither of the two petitioners had been
barred by cross interests from applying for any of the authorizations the FCC
later granted to the Company. The Company is watching the FCC proceedings
closely.

    The grants of licenses to the Company were conditioned upon timely
compliance with the FCC's build-out requirements, I.E., coverage of one-third of
the population of a PCS market within five years of initial license grant and
coverage of two-thirds of that population within ten years. As noted elsewhere
in this document, the Company is in compliance with this requirement as of the
present time in each of its markets.

    The FCC also imposes a requirement that all licensees register and obtain
FCC registration numbers for all of its antenna towers in areas which require
prior Federal Aviation Administration ("FAA") clearance. The Company has
complied with and continues to comply with registration requirements.

    The FCC licenses granted to the Company are issued for a ten-year period
expiring June 23, 2005, and may be renewed. In the event challengers file
competing applications in response to any of the Company's renewal filings, the
FCC has rules and policies providing that the application of the licensee
seeking renewal will be granted and the application of the challenger will not
be considered in the event that the broadband PCS licensee involved has (a)
provided "substantial" performance, which is defined as "sound, favorable and
substantially above a level of mediocre service just minimally justifying
renewal" and (b) substantially complied with FCC rules, policies and the
Communications Act. Although the Company is unaware of any circumstances which
would prevent the approval of any future renewal applications, there can be no
assurance that the Company's licenses will be renewed by the FCC in the future.
Moreover, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the FCC has the authority to restrict the
operation of licensed facilities or revoke or modify licenses.

    The FCC has proceedings in process which could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no assurance
that such proceedings will not result in additional wireless competition.

    In addition, there are citizenship requirements, assignment requirements and
other federal rules and policies which may affect the business of the Company.

    RECENT EVENTS.  There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the broadband PCS industry.

    In one proceeding, the FCC has imposed new "enhanced 911" regulations in
broadband PCS systems to determine the precise location of the person making the
emergency call. The new rules require broadband PCS providers to work with local
public safety officials to process 911 calls, including those made from mobile
telephones not registered with the broadband PCS provider, and to meet phased
deadlines for implementing these capabilities.

    The FCC is expected to give the telecommunications industry guidance as to
the implementation of the Communications Assistance for Law Enforcement Act
("CALEA"). Due to late development of standards and law enforcement
requirements, there is risk that the industry, as a whole, and the Company, in
particular, may not be able to meet statutory implementation deadlines with the
possibility of financial penalties. The Company is working with law enforcement
agencies through industry trade associations to extend the implementation
deadlines in order to reach closure with law enforcement representatives on
technical and reimbursement issues.

10
<PAGE>
    The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though the subscribers involved have no pre-existing service relationship with
that carrier. Under these new policies, broadband PCS providers may offer their
subscribers handsets which are capable of operating over broadband PCS and
cellular networks so that when their subscribers are out of range of broadband
PCS networks, they will be able to obtain non-automatic access to cellular
networks. The FCC expects that implementation of these roaming capabilities will
promote competition between broadband PCS and cellular service providers.

    The FCC has adopted requirements which will make it possible for subscribers
to retain their existing telephone numbers when they switch from one service
provider to another. This numbering portability will include switching between
local exchange carrier ("LEC") and other wireline providers, between wireless
service providers and between LEC/wireline and wireless providers. LECs have
implementation deadlines by the end of 1998. Broadband PCS, cellular and certain
other wireless providers have phased implementation deadlines in 1998 and 1999.

    Beginning in October 1997, broadband PCS systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" ("RF") radiation requirements,
were made subject to those requirements. After October 1997, all new broadband
PCS facilities must be in compliance when they are brought into service.

    The FCC has been implementing the requirements of the 1996 Act. The 1996 Act
provides that implementing its legislative objectives will be the task of the
FCC, the state public utilities commissions and a Federal-State Joint Board.
Much of this implementation has been proceeding in numerous, concurrent
proceedings with aggressive deadlines. Several of these proceedings have been
appealed to courts of review. The Company cannot predict the full extent and
nature of developments of the 1996 Act , which will depend, in part, upon
interrelationships among state and federal regulators.

    The primary purpose and effect of the new law is to open all
telecommunications markets to competition--including local telephone service.
The 1996 Act makes most direct or indirect state and local barriers to
competition unlawful. It directs the FCC to preempt all inconsistent state and
local laws and regulations, after notice and comment proceedings. It also
enables electric and other utilities to engage in telecommunications service
through qualifying subsidiaries.

    Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices of state and local carriers.

    Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that broadband PCS and
certain other wireless providers that are entitled to reciprocal compensation
from LECs for exchange of traffic may not be charged for LEC-originated traffic
or for code opening/per-number fees, and may obtain LEC interconnection subject
to the terms of the 1996 Act. Appeals were taken to the United States Court of
Appeals for the Eighth Circuit from certain positions of these FCC orders by
numerous parties alleging that the FCC has exceeded its statutory mandate, among
other matters. On July 18, 1997, the Eighth Circuit vacated the FCC's rules
prescribing interim rates for reciprocal compensation because it has held that
the 1996 Act requires that rate issues are to be decided by the states. It
upheld the preemptive authority of the FCC to order LECs to interconnect with
broadband PCS and other wireless providers and to issue rules relating to
certain terms of interconnection between LECs and such providers.

    The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. In a series of orders adopted in 1997, the FCC
established universal service support mechanisms

                                                                              11
<PAGE>
which require telecommunications providers, including all wireless carriers, to
contribute. The Company has made the required Universal Service Worksheet
filings and expects to make the required periodic payments starting in the first
quarter of 1998.

    STATE AND LOCAL REGULATION.  The scope of state and local regulatory
authorities covers such matters as the terms and conditions of interconnection
between LECs and wireless carriers with respect to intrastate services, customer
billing information and practices, billing disputes, other consumer protection
matters, facilities construction issues and transfers of control, among other
matters. In these areas, particularly the terms and conditions of
interconnection between LECs and wireless providers, the FCC and state
regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively. Of concern is the trend of
certain state and local regulatory authorities to expand their scope of
regulation and to increase taxes, fees, assessments and service mandates on
wireless operators. The direct and indirect burden of these trends will have an
impact on the Company's operating costs. The Company is challenging all such
regulatory developments, of significance, either directly or through trade
associations.

    The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting pre-emption of moratoria imposed by
state and local governments on siting of telecommunications facilities, the
imposition of state taxes on the gross receipts of Commercial Mobile Radio
Service ("CMRS") providers and other proposed state taxes based on the asset
value of CMRS licenses awarded by the FCC. The Company has been actively
involved in educating state and local regulatory and zoning authorities as to
the prohibitions in the 1996 Act against the creation of unreasonable and
discriminatory zoning, taxation or other barriers to new wireless providers.
Several lawsuits have been filed on behalf of the Company to protect its rights
under the 1996 Act for zoning of antenna siting.

    The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.

    The Company has been and intends to remain an active participant in
proceedings before the FCC and before state regulatory and zoning authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have significant impacts on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. The Company is unable to predict the scope, pace,
or financial impact of policy changes which could be adopted in these
proceedings.

SEASONALITY

    Management believes there exists within the wireless telecommunications
industry a seasonality in both revenues, which tend to be greater in the fourth
quarter due to customer growth, and operating expenses, which tend to be higher
in the fourth quarter due to increased marketing activities and customer growth,
which may cause operating income (loss) to vary from quarter to quarter.

EMPLOYEES

    As of December 31, 1997, the Company had a total of 1,414 employees. None of
the Company's employees is represented by a labor union. The Company considers
its relations with its employees to be good.

12
<PAGE>
                  PRIVATE SECURITIES LITIGATION REFORM ACT OF
                     1995 SAFE HARBOR CAUTIONARY STATEMENT

    THIS FORM 10-K CONTAINS "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL
FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN POTENTIAL RISKS AND
UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

    IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN THE COMPANY'S MARKETS; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY; CHANGES IN
THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE LITIGATION;
AVAILABILITY OF FUTURE FINANCING; AND UNANTICIPATED CHANGES IN GROWTH IN PCS
CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES
OFFERED IN THE COMPANY'S MARKETS. READERS SHOULD EVALUATE ANY STATEMENTS IN
LIGHT OF THESE IMPORTANT FACTORS.

ITEM 2. PROPERTIES

    The Company currently leases office and warehouse space in each of its PCS
Markets as well as office space for its corporate headquarters in Chicago and
National Operations Center in Tampa. The Company also has leases for its retail
store locations and leases certain cell sites for its digital radio channel (or
"BTS") equipment on land, buildings and other fixed structures at various
rentals for various terms. As of December 31, 1997, the Company had 1,044 cell
sites in service across all its PCS markets. The leases provide for monthly
rentals at market rates and expire, subject to renewal options, on various dates
through 2021. The Company owns all five of its switch site buildings serving
each of the PCS Markets (the Pittsburgh switch also serves the Columbus market).

ITEM 3. LEGAL PROCEEDINGS

    In addition to litigation discussed above under Item 1. Business -- Proposed
TDS Corporate Restructuring, the Company is involved from time to time in
routine legal and regulatory proceedings incidental to its business. The Company
does not believe that such proceedings will have, individually or in the
aggregate, a material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matter was submitted to a vote of securities holders during the fourth
quarter of fiscal year 1997.

                                                                              13
<PAGE>
--------------------------------------------------------------------------------
                                    PART II
--------------------------------------------------------------------------------

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

    Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Aerial Stock and Dividend Information" and "Market Price Per Common
Share By Quarter."

ITEM 6. SELECTED FINANCIAL DATA

    Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Selected Consolidated Financial Data."

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

    Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Not applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Incorporated herein by reference from Exhibit 13, Annual Report sections
entitled "Consolidated Statements of Operations," "Consolidated Statements of
Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes
in Shareholders' Equity," "Notes to Consolidated Financial Statements" and
"Report of Independent Public Accountants."

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

    None.

14
<PAGE>
--------------------------------------------------------------------------------
                                    PART III
--------------------------------------------------------------------------------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Incorporated herein by reference from Proxy Statement sections entitled
"Election of Directors" and "Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

    Incorporated herein by reference from Proxy Statement section entitled
"Executive Compensation" except for the information specified in item 402 (a)
(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Incorporated herein by reference from Proxy Statement section entitled
"Security Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Incorporated herein by reference from Proxy Statement section entitled
"Certain Relationships and Related Transactions."

                                                                              15
<PAGE>
--------------------------------------------------------------------------------
                                    PART IV
--------------------------------------------------------------------------------

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

    The following documents are filed as a part of this report:

(a) (1) Financial Statements

<TABLE>
<S>                                                                  <C>
Consolidated Statements of Operations..............................  Annual Report*
Consolidated Statements of Cash Flows..............................  Annual Report*
Consolidated Balance Sheets........................................  Annual Report*
Consolidated Statements of Changes in Shareholders' Equity.........  Annual Report*
Notes to Consolidated Financial Statements.........................  Annual Report*
Report of Independent Public Accountants...........................  Annual Report*
</TABLE>

---------
* Incorporated herein by reference from Exhibit 13.

  (2) Schedules

<TABLE>
<CAPTION>
                                                                                    LOCATION
                                                                                    --------
<S>    <C>                                                                          <C>
Report of Independent Public Accountants on Financial Statement Schedule..........  page 17
II.    Valuation and Qualifying Accounts for each of the Three Years in the Period
       Ended December 31, 1997....................................................  page 18
All other schedules have been omitted because they are not applicable or not
  required or because the required information is shown in the financial
  statements or notes thereto.
</TABLE>

  (3) Exhibits

The exhibits set forth in the accompanying Index to Exhibits are filed as a part
of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14 (c) of this Report.

EXHIBIT
 NUMBER   DESCRIPTION
--------  ----------------------------------------------------------------------
 10.14    Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended,
          is hereby incorporated by reference to Exhibit 10.14 to the Company's
          Annual Report on Form 10-K for the year ended December 31, 1996.
 10.15    Description of Terms of Signing Letter with Donald W. Warkentin dated
          June 7, 1995, is hereby incorporated by reference to Exhibit 10.15 to
          the Company's Annual Report on Form 10-K for the year ended December
          31, 1996.
 10.16    Aerial Communications, Inc. Compensation Plan for Non-Employee
          Directors is hereby incorporated by reference to Exhibit 99.1 to the
          Company's Form S-8 dated May 2, 1997.
 10.17    Description of Supplemental Benefit Agreement with Donald W. Warkentin
          dated August 2, 1996.

(b) Reports on Form 8-K filed during the quarter ended December 31, 1997.

    The Company filed on December 29, 1997, a Current Report on Form 8-K dated
December 18, 1997, for the purpose of filing the news release dated December 18,
1997, concerning the Company's announcement that it had received an offer from
its parent company, Telephone and Data Systems, Inc. [AMEX: TDS], to acquire all
of the issued and outstanding Common Shares of the Company not already owned by
TDS. The offer was made in connection with, and is subject to TDS shareholder
approval of and the effectiveness of, TDS's announced corporate restructuring.

16
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE

To the Shareholders and Board of Directors of
AERIAL COMMUNICATIONS, INC.:

    We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the Aerial Communications,
Inc. and Subsidiaries Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 28, 1998
(except with respect to the matters discussed in Note 9, as to which the date is
February 5, 1998). Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The financial
statement schedule listed in Item 14 (a) (2) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This financial statement schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 28, 1998
(Except with respect to the matters discussed in Note 9,
as to which the date is February 5, 1998)

                                                                              17
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                          COLUMN C
                                                                            COLUMN B     ADDITIONS                   COLUMN E
                                                                           BALANCE AT    CHARGED TO                 BALANCE AT
                                COLUMN A                                  BEGINNING OF   COSTS AND     COLUMN D       END OF
                              DESCRIPTION                                    PERIOD       EXPENSES    DEDUCTIONS      PERIOD
------------------------------------------------------------------------  ------------  ------------  -----------  ------------
<S>                                                                       <C>           <C>           <C>          <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
  Valuation Allowance for Deferred Tax Assets...........................   $   15,029   $    114,383  $        --  $    129,412
  Allowance for Doubtful Accounts deducted from Accounts Receivable.....           --          7,252           --         7,252
FOR THE YEAR ENDED DECEMBER 31, 1996
  Valuation Allowance for Deferred Tax Assets...........................        1,291         13,738           --        15,029
FOR THE YEAR ENDED DECEMBER 31, 1995
  Valuation Allowance for Deferred Tax Assets...........................   $      170   $      1,121  $        --  $      1,291
</TABLE>

18
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S>                                             <C>        <C>
                                                AERIAL COMMUNICATIONS, INC.

                                                By:
                                                           ------------------------------------------
                                                                      Donald W. Warkentin
                                                              PRESIDENT (CHIEF EXECUTIVE OFFICER)

                                                By:
                                                           ------------------------------------------
                                                                        J. Clarke Smith
                                                                   VICE PRESIDENT-FINANCE AND
                                                                  ADMINISTRATION AND TREASURER
                                                                   (CHIEF FINANCIAL OFFICER)

                                                By:
                                                           ------------------------------------------
                                                                        B. Scott Dailey
                                                           CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>

Dated: March 26, 1998

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                    SIGNATURE                                  TITLE(S)                     DATE
--------------------------------------------------  ------------------------------  ---------------------
<S>                                                 <C>                             <C>
             /s/ DONALD W. WARKENTIN                                      DIRECTOR     March 26, 1998
        ----------------------------------
               Donald W. Warkentin

               /s/ J. CLARKE SMITH                                        DIRECTOR     March 26, 1998
        ----------------------------------
                 J. Clarke Smith

            /s/ LEROY T. CARLSON, JR.                        CHAIRMAN AND DIRECTOR     March 26, 1998
        ----------------------------------
              LeRoy T. Carlson, Jr.

               /s/ LEROY T. CARLSON                                       DIRECTOR     March 26, 1998
        ----------------------------------
                 LeRoy T. Carlson

              /s/ MURRAY L. SWANSON                                       DIRECTOR     March 26, 1998
        ----------------------------------
                Murray L. Swanson

             /s/ RUDOLPH E. HORNACEK                                      DIRECTOR     March 26, 1998
        ----------------------------------
               Rudolph E. Hornacek

                /s/ JAMES BARR III                                        DIRECTOR     March 26, 1998
        ----------------------------------
                  James Barr III

             /s/ WALTER C.D. CARLSON                                      DIRECTOR     March 26, 1998
        ----------------------------------
               Walter C.D. Carlson

                /s/ JOHN D. FOSTER                                        DIRECTOR     March 26, 1998
        ----------------------------------
                  John D. Foster

            /s/ THOMAS W. WILSON, JR.                                     DIRECTOR     March 26, 1998
        ----------------------------------
              Thomas W. Wilson, Jr.
</TABLE>

                                                                              19
<PAGE>
--------------------------------------------------------------------------------
                                 EXHIBIT INDEX
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                  DESCRIPTION
--------  ----------------------------------------------------------------------
<C>       <S>

  3.1     Restated Certificate of Incorporation of the Company, is hereby
          incorporated by reference to Exhibit 3.1 to the Company's Form 8-K
          dated November 20, 1996.

  3.2     Restated Bylaws of the Company, are hereby incorporated by reference
          to Exhibit 3.2 to the Company's Amendment No. 1 to Form S-1
          (Registration No. 333-1514).

  4.1     Trust Indenture Agreement dated as of November 4, 1996, between the
          Company as issuer, TDS as guarantor, and The First National Bank of
          Chicago, as trustee for the Company's Series A Zero Coupon Notes, due
          2006, is hereby incorporated by reference to Exhibit 4.1 to the
          Company's Form 8-K dated November 4, 1996.

  9.1(a)  Voting Trust Agreement, dated as of June 30, 1989, is hereby
          incorporated by reference to an exhibit to Post-Effective Amendment
          No. 3 to the TDS Registration Statement on Form S-1, No. 33-12943.

  9.1(b)  Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated
          as of June 30, 1989, is hereby incorporated by reference to Exhibit
          9.2 to TDS's Annual Report on Form 10-K for the year ended December
          31, 1991.

  9.1(c)  Amendment dated as of November 20, 1992, to the Voting Trust Agreement
          dated as of June 30, 1989, as amended, is hereby incorporated by
          reference to Exhibit 9.1(c) to TDS's Annual Report on Form 10-K for
          the year ended December 31, 1992.

 10.1     Form of Exchange Agreement between the Company and TDS, is hereby
          incorporated by reference to Exhibit 10.1 to the Company's Amendment
          No. 1 to Form S-1 (Registration No. 333-1514).

 10.2     Revolving Credit Agreement dated as of August 1, 1995, between the
          Company and TDS, is hereby incorporated by reference to Exhibit 10.2
          to the Company's Amendment No. 1 to Form S-1 (Registration No.
          333-1514).

 10.3     Amendment dated August 29, 1997, to Revolving Credit Agreement between
          the Company and TDS.

 10.4     Form of Tax Allocation Agreement between the Company and TDS, is
          hereby incorporated by reference to Exhibit 10.4 to the Company's
          Amendment No. 1 to Form S-1 (Registration No. 333-1514).

 10.5     Form of Cash Management Agreement between the Company and TDS, is
          hereby incorporated by reference to Exhibit 10.5 to the Company's
          Amendment No. 1 to Form S-1 (Registration No. 333-1514).

 10.6     Form of Intercompany Agreement between the Company and TDS, is hereby
          incorporated by reference to Exhibit 10.6 to the Company's Amendment
          No. 1 to Form S-1 (Registration No. 333-1514).

 10.7     Form of Registration Rights Agreement between the Company and TDS, is
          hereby incorporated by reference to Exhibit 10.7 to the Company's
          Amendment No. 1 to Form S-1 (Registration No. 333-1514).

 10.8     Form of Insurance Cost Sharing Agreement between the Company and TDS,
          is hereby incorporated by reference to Exhibit 10.8 to the Company's
          Amendment No. 1 to Form S-1 (Registration No. 333-1514).

 10.9     Form of Employee Benefit Plans Agreement between the Company and TDS,
          is hereby incorporated by reference to Exhibit 10.9 to the Company's
          Amendment No. 1 to Form S-1 (Registration No. 333-1514).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
  NO.                                  DESCRIPTION
--------  ----------------------------------------------------------------------
<C>       <S>
 10.10*   Software License Agreement dated as of December 15, 1995, between the
          Company and Aethos Communications, Inc., is incorporated by reference
          to Exhibit 10.11 to the Company's Amendment No. 1 to Form S-1
          (Registration No. 333-1514).

 10.11*   Project Management and Construction Agreement dated as of January 15,
          1996, between the Company and Fluor Daniel, Inc., is hereby
          incorporated by reference to Exhibit 10.12 to the Company's Amendment
          No. 1 to Form S-1 (Registration No. 333-1514).

 10.12*   PCS Infrastructure Supply Contract dated as of March 1, 1996, between
          the Company and Nokia Telecommunications Inc., is hereby incorporated
          by reference to Exhibit 10.13 to the Company's Amendment No. 1 to Form
          S-1 (Registration No. 333-1514).

 10.13*   Credit Agreement dated as of June 19, 1996, and rider thereto dated
          October 30, 1996, between the Company and Nokia Telecommunications
          Inc., is hereby incorporated by reference to Exhibit 99.1 to the
          Company's Form 8-K dated June 19, 1996.

 10.14    Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended,
          is hereby incorporated by reference to the Company's Annual Report on
          Form 10-K for the year ended December 31, 1996.

 10.15    Description of Terms of Signing Letter with Donald W. Warkentin dated
          June 7, 1995, is hereby incorporated by reference to Exhibit 10.15 to
          the Company's Annual Report on Form 10-K for the year ended December
          31, 1996.

 10.16    Aerial Communications, Inc. Compensation Plan for Non-Employee
          Directors is hereby incorporated by reference to Exhibit 99.1 to the
          Company's Form S-8 dated May 2, 1997.

 10.17    Description of Supplemental Benefit Agreement with Donald W. Warkentin
          dated August 2, 1996.

 11       Computation of earnings per common share

 13       Incorporated portions of the 1997 Annual Report to Shareholders

 21       List of Subsidiaries of the Registrant

 23       Consent of Independent Public Accountants

 27       Financial Data Schedule
</TABLE>

---------
* Confidential material appearing in this exhibit was omitted and filed
  separately with the Securities and Exchange Commission in accordance with Rule
  406 promulgated under the Securities Act of 1933.
<PAGE>
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AERIAL COMMUNICATIONS, INC.
8410 West Bryn Mawr - Suite 1100
Chicago, Illinois 60631
Phone: (773) 399-4200
Fax: (773) 399-4170