<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

SELECTED CONSOLIDATED FINANCIAL DATA

Year Ended December 31,                                   1997          1996          1995         1994           1993
------------------------------------------------     --------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S>                                                  <C>          <C>           <C>           <C>           <C>
OPERATING FINANCIAL DATA
Operating Revenues                                     $  55,952     $       -      $      -      $     -       $     -
Operating (Loss)                                        (218,165)      (43,950)       (7,562)      (1,977)          (65)
Investment (Losses)                                       (2,518)         (304)            -             -            -
Interest Income-affiliate                                     95         4,488             -            -             -
Interest Income-other                                      2,402         1,158            49            2             -
Gain on sale of PCS licenses                                   -         2,582             -            -             -
Interest Expense-affiliate                                21,558         1,960         1,051           50            40
Interest Expense-other                                     5,507           802             -            -             -
(Loss) Before Income Taxes                              (245,251)      (38,788)       (8,564)      (2,025)         (103)
Net (Loss)                                             $(247,057)    $ (37,921)     $ (6,468)     $(1,283)      $   (67)
Weighted Average Common and
   Series A Common Shares (000) (1)                       71,512        67,492        59,086       59,086        59,086
(Loss) per Common and Series A Common Share            $   (3.45)    $   (0.56)     $  (0.11)     $ (0.02)      $     -
Dividends per Common and
   Series A Common Share                               $       -     $       -      $      -      $     -       $     -

BALANCE SHEET
Working Capital                                        $ (51,566)    $ (80,347)     $ 33,141      $   149       $    40
Property & Equipment (Net)                               604,104       252,423        12,087            -           414
Investment in PCS Licenses (Net)                         297,043       304,354       305,818       20,401             -
Total Assets                                             960,648       672,827       360,444       21,320           512
Revolving Credit Agreement-TDS                           448,234             -        60,238       22,659           650
Long-Term Debt                                           196,439       103,743             -            -             -
Common Shareholders'
   Equity (Deficit)                                    $ 192,427     $ 437,785      $281,282      $(1,444)      $  (161)

OTHER DATA
Capital Expenditures (2)                               $ 387,718     $ 242,270      $297,551      $20,401       $     -
Population Equivalents                              27.6 million  27.6 million  27.6 million            -             -

</TABLE>

(1) Weighted Average Common and Series A Common Shares outstanding give
retroactive effect to the recapitalization in conjunction with the Company's
April 1996 initial public offering, as if the transaction had occurred January
1, 1993.

(2) Includes non-cash transactions.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Aerial Communications, Inc. ("Aerial" or the "Company" - NASDAQ symbol:
AERL), an 82.5%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS"),
was formed to acquire Personal Communications Services ("PCS") licenses from
the Federal Communications Commission ("FCC"), construct PCS networks in its
Major Trading Areas ("MTAs") and offer wireless PCS communications services
in these areas. See "Proposed TDS Corporate Restructuring."

Since its acquisition of PCS licenses in the FCC broadband Block A and Block
B PCS auction, which concluded in March of 1995, the Company has been
devoting its efforts to recruiting an experienced management team, developing
and executing a business plan, raising capital and designing and constructing
a PCS network in each of its MTAs (Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus).

The Company's focus in 1997 has been the preparation of each of its markets
for initial service launch and the development of its PCS business. 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 currently has 1,044 cell sites in service across all its markets.

With the launch of service in its MTAs between March and June of 1997, the
Company transitioned from the development stage to being an operating
enterprise. As a result of this transition, the Company experienced in 1997
increased revenues and operating expenses, and incurred substantial losses.
The Company had no revenues and significantly less expenses in 1995, 1996 and
for the first quarter of 1997.

RESULTS OF OPERATIONS

The Company's results of operations for 1997 compared to 1996 and 1995
reflect primarily increased activities undertaken to launch and grow PCS
services in its MTAs. Such activities significantly increased the Company's
net loss to $247.1 million from $37.9 million in 1996 and $6.5 million in
1995. During 1997 the Company ceased to be classified as a development stage
enterprise with the launch of service in its six MTAs. In addition to
launching PCS services, the Company's focus in 1997 was the continued
build-out of its PCS network and expansion of its customer base. Building its
customer base will be the Company's focus in 1998.

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

OPERATING REVENUES

OPERATING REVENUES totaled $55.9 million for the year ended December 31,
1997, reflecting the launch of service in all six MTAs during 1997. In late
March 1997 the Company began offering PCS service in Columbus, Ohio and
during the second quarter the Company began offering service in its remaining
MTAs. The Company finished 1997 with approximately 125,000 customers.

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. Service revenue totaled $32.3 million in 1997.

EQUIPMENT SALES REVENUE totaled $23.6 million in 1997. Equipment sales
revenue represents the sale of handsets and related accessories to retailers,
independent agents and end user customers.

OPERATING EXPENSES

OPERATING EXPENSES totaled $274.1 million for the year ended December 31,
1997, compared to $44.0 million in 1996 and $7.6 million in 1995, reflecting
the Company's expanded level of business activity required to launch service
and transition to post-launch operations.

SYSTEM OPERATIONS EXPENSE totaled $30.7 million in 1997, reflecting the costs
of operating the Company's network in all MTAs. Significant costs include
cell site rent and maintenance, utilities, landline interconnection and toll
charges and salaries and benefits of engineering and maintenance employees.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

MARKETING AND SELLING EXPENSE totaled $46.0 million in 1997, primarily
reflecting the Company's aggressive marketing campaign that accompanied the
launch of service and continued throughout the remainder of the year.
Marketing and selling expenses primarily consist of salaries and benefits of
sales and marketing personnel, sales commissions, the cost of promotions, and
the cost of print, radio and television advertising.

CUSTOMER SERVICE EXPENSE totaled $20.9 million in 1997, reflecting customer
service activity at the Company's National Operations Center in connection
with the launch and support of its six MTAs.

COST OF EQUIPMENT SOLD totaled $71.5 million in 1997, reflecting the launch
of service and filling of third-party distribution channels for handsets.

GENERAL AND ADMINISTRATIVE EXPENSE totaled $58.8 million in 1997 compared to
$28.8 million in 1996 and $4.8 million in 1995. The increase in 1997 over
1996 and 1995 is attributable to expenses associated with the growth of the
Company's management and operating teams required to launch service and
transition to post-launch operations, and the resulting increases in
salaries, employee benefits, and overhead expenses. The Company had 1,414
employees at December 31, 1997, compared to 424 employees at December 31,
1996, and less than 50 employees at December 31, 1995.

DEVELOPMENT COSTS totaled $5.8 million in 1997 as compared to $15.1 million
in 1996 and $2.8 million in 1995. The $9.3 million decrease in development
costs in 1997 is primarily due to the Company being a development stage
enterprise for all of 1996 while, in the second quarter of 1997, the Company
ceased to be classified as a development stage enterprise with the launch of
service in its six MTAs.

OTHER

INVESTMENT LOSSES totaled $2.5 million in 1997 as compared to $0.3 million in
1996. Investment losses represent the Company's 49% share of the net loss of
the Wireless Alliance, LLC, a joint venture associated with the Company's
Minneapolis MTA and designed to extend the PCS footprint to areas that were
not in the Company's initial build-out.

INTEREST INCOME-AFFILIATE totaled $0.1 million in 1997 as compared to $4.5
million in 1996. Interest income-affiliate represents interest income earned
on the proceeds of the Company's April 1996 initial public offering ("IPO")
invested in the TDS cash management program pending use in PCS network
development and construction. Proceeds from the IPO were fully utilized by
the end of January 1997.

INTEREST INCOME-OTHER totaled $2.4 million in 1997 as compared to $1.2
million in 1996. Interest income-other primarily represents interest income
earned on the excess proceeds from the Company's November 1996 sale of Series
A Zero Coupon Notes pending use in PCS network development and construction.
The proceeds from the sale of the Series A Zero Coupon Notes were fully
utilized by the end of August 1997. Interest income-other was not significant
in 1995.

GAIN ON SALE OF PCS LICENSES represents the pretax gain of $0.2 million
recognized on the sale of the Guam license in May 1996 and the pretax gain of
$2.4 million recognized on the sale of the Alaska license in December 1996.

INTEREST EXPENSE-AFFILIATE totaled $21.6 million in 1997 as compared to $2.0
million in 1996 and $1.1 million in 1995. The $19.6 million increase in 1997
is primarily due to the average outstanding balance of borrowings under the
Revolving Credit Agreement with TDS being greater in 1997. Interest
expense-affiliate in 1997 represents interest on amounts borrowed under the
Revolving Credit Agreement and the TDS 3% guarantee fees primarily associated
with the Series A Zero Coupon Notes, less interest capitalized of $2.7
million. The 1996 amount primarily represents interest on amounts borrowed
under the Revolving Credit Agreement, less interest capitalized of $0.6
million. The 1995 amount represents interest on amounts borrowed under the
Revolving Credit Agreement, less interest capitalized of $16.6 million.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INTEREST EXPENSE-OTHER totaled $5.5 million in 1997 as compared to $0.8
million in 1996 and relates to the Series A Zero Coupon Notes issued in
November 1996, less interest capitalized. The Company capitalized interest
expense of $3.3 million and $0.6 million related to the Series A Zero Coupon
Notes and interim financing under the Nokia Credit Agreement in 1997 and
1996, respectively.

Interest capitalization in 1997 and 1996 is based solely upon expenditures
incurred related to PCS network construction and information system
development. Interest capitalization in 1995 represents interest capitalized
on the cost of licenses acquired prior to TDS's $289.2 million equity
contribution which covered such costs.

INCOME TAX EXPENSE totaled $1.8 million in 1997, as compared to a benefit of
$0.9 million in 1996 and a benefit of $2.1 million in 1995. The $2.7 million
increase in income tax expense is primarily due to an increase in the
estimated valuation allowance associated with deferred tax assets generated
by net operating losses. See "Income Taxes" below for a discussion of the
Company's Tax Allocation Agreement with TDS.

The weighted average Common and Series A Common Shares increased to 71.5
million in 1997 as compared to 67.5 million in 1996 and 59.1 million (after
giving retroactive affect to the recapitalization described in Note 8-Common
Stock) in 1995 due primarily to 12.3 million Common Shares issued on April
25, 1996, in connection with the Company's IPO.

INCOME TAXES

The Company is included in a consolidated federal income tax return with
other members of the TDS consolidated group. For financial reporting
purposes, the Company computes federal income taxes as if it were filing a
separate return as its own affiliated group and was not included in the TDS
group. TDS and the Company are parties to a Tax Allocation Agreement under
which the Company is able to carry forward any losses and credits and use
them to offset any future income tax liabilities to TDS.

For 1995 and prior years, TDS reimbursed the Company for the federal income
tax benefit of any net operating loss of the Company which reduced the
provision for income taxes reflected in TDS's consolidated statements of
income. The Company and TDS entered into a Tax Allocation Agreement which
became effective as of January 1, 1996 (the "1996 Tax Allocation Agreement"),
pursuant to which, among other things, TDS no longer reimburses the Company
on a current basis for losses or credits used by TDS in the year they are
generated. Instead, the Company will be compensated (i.e., future tax
liabilities will be reduced) for TDS's use of tax benefits at such time as
the Company could utilize such benefits on a separate return basis.

If the 1996 Tax Allocation Agreement had been in place during 1995, the
Company would have recorded a deferred tax asset of $11.9 million (net of a
valuation allowance of $6.2 million) and a deferred tax liability of $14.0
million, resulting in deferred tax expense of $2.1 million being recognized
in the Consolidated Statements of Operations. The deferred tax asset
primarily relates to the net operating loss ("NOL") carryforward, which
requires a valuation allowance to be provided when it is more likely than not
that some portion of the deferred tax asset will not be realized. Due to the
absence of an established earnings history of the Company, a valuation must
be provided to the extent that temporary differences related to the deferred
tax liability do not reverse in the 15 year NOL carryforward period. The
deferred tax liability is primarily created due to the accelerated
amortization of the PCS license cost and the current deduction of interest
that was capitalized for book purposes. Therefore, the deferred tax expense
represents that portion of the NOL which was created by accelerated tax
amortization of the PCS licenses and the related interest deduction which may
not be realized because those temporary differences reverse over 40 years.

INFLATION

Management believes that inflation affects the Company's business to no
greater extent than the general economy.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

The costs of development, construction, start-up and post-launch activities
of the Company require substantial capital. From inception through December
31, 1997, the Company had expended $304.4 million for licenses, including
capitalized interest, $642.1 million for all other capital expenditures and
incurred cumulative net losses of $292.9 million. The Company expects to
incur significant operating losses and to generate negative cash flow from
operating activities during the next several years as it continues to build
its customer base.

Cash flows used by operating activities were $206.9 million in 1997 and $17.8
million in 1996, and cash flows provided by operating activities were $0.1
million in 1995. Operating cash outflow (operating loss before depreciation
and amortization expense) totaled $177.6 million in 1997, $42.0 million in
1996 and $7.5 million in 1995. Cash flows used by other operating activities
(investment and other income, interest expense, changes in working capital
and changes in other assets and liabilities) required cash investments of
$29.3 million in 1997 and provided cash totaling $24.2 million in 1996 and
$7.6 million in 1995.

Cash flows from financing activities provided $449.9 million in 1997, $164.1
million in 1996 and $297.9 million in 1995. Cash provided in 1997 was due
primarily to $448.2 million in borrowings under the Revolving Credit
Agreement. In April 1996, the Company received proceeds from its IPO of
$195.3 million, net of underwriting discounts and commissions. The Company
used a portion of the net proceeds to repay the then outstanding balance
under the Revolving Credit Agreement with TDS. In 1996 the Company received
from TDS $28.8 million representing the balance due in connection with TDS's
$289.2 million contribution to the equity capital of the Company in 1995. The
1995 equity contribution was made to cover the original cost of the licenses
acquired in the FCC auction. Cash flows from financing activities in 1995
were generated by borrowings under the Revolving Credit Agreement with TDS.

Cash flows used in investing activities totaled $273.3 million in 1997,
$111.3 million in 1996 and $297.8 million in 1995. Cash used in 1997 resulted
primarily from $274.7 million in additions to property and equipment,
primarily launch-related network and information system assets. Total 1997
additions to property and equipment, including noncash transactions, were
$387.7 million, including $291.9 million for cell sites, $38.4 million for
switching equipment, $55.6 million for information system assets and $1.8
million for other activities. Cash used in 1996 resulted primarily from
$112.9 million in additions to property and equipment, primarily network and
information system assets, offset by $2.3 million in proceeds received from
the sale of PCS licenses. Total 1996 additions to property and equipment,
including noncash transactions, were $242.3 million, including $150.4 million
for cell sites, $53.2 million for switching equipment and $38.7 million for
other activities, including information system development and property and
equipment in service (primarily computer equipment and software, office
equipment and leasehold improvements). Cash requirements in 1995 related
largely to the Company's $285.4 million acquisition of eight licenses in the
FCC auction and $12.1 million in additions to property and equipment and
capitalized construction costs.

The Company has substantially completed all phases of its network build-out
and anticipates that the continuing development of its PCS networks and
services will require substantial capital over the next several years. For
1998 the Company estimates that the aggregate funds required for capital
expenditures will total approximately $75 million. The Company estimates
requiring $235 million for working capital requirements to fund operations
for all of 1998, including an estimated $57 million in interest expense
related to the Revolving Credit Agreement. The Company expects 1998 capital
and operating expenditures to be financed using a variety of sources
including, but not limited to, additional borrowings under the TDS Revolving
Credit Agreement, vendor financing and an investment by a minority equity
investor.

In March 1996, the Company selected Nokia Telecommunications Inc. ("Nokia")
as its sole supplier of digital radio channel and switching infrastructure
equipment during the initial build-out of its PCS networks. Nokia agreed to
provide up to $200 million in financing for the equipment through a Credit
Agreement with the Company dated June 19, 1996 ("Credit Agreement"). In
accordance with the provisions of the Credit Agreement, the Company issued,
in tranches, 10-year unsecured zero coupon promissory notes, the proceeds of
which were paid to Nokia in satisfaction of borrowings by the Company under
the Credit Agreement.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Pursuant to the Credit Agreement, on November 4, 1996, the Company issued
$226.2 million in aggregate principal amount at maturity Series A Zero Coupon
Notes ("Series A Notes") due in 2006. The issue price of the Series A Notes
was $100 million and there is no periodic payment of interest. The per annum
yield to maturity on the Series A Notes is 8.34% (computed on a semi-annual
bond equivalent basis). The proceeds of the sale of the Series A Notes were
paid to Nokia in satisfaction of all then outstanding obligations and future
obligations of the Company up to $100 million under the Credit Agreement.

Pursuant to the Credit Agreement, on February 5, 1998, the Company issued
$220.0 million in aggregate principal amount at maturity Series B Zero Coupon
Notes ("Series B Notes") due in 2008 (representing the final issuance of zero
coupon notes under the Credit Agreement). The issue price of the Series B
Notes was $100 million and there is no periodic payment of interest. The per
annum yield to maturity on the Series B Notes is 8.05% (computed on a
semi-annual bond equivalent basis). The proceeds of the sale of the Series B
Notes were paid to Nokia in satisfaction of all then outstanding obligations
and future obligations of the Company (to the extent not satisfied from the
proceeds of the sale of the Series A Notes) up to $100 million under the
Credit Agreement.

The Series A and Series B Notes ("Notes") rank in the same priority with all
other unsecured and unsubordinated indebtedness of the Company. The Notes and
the obligations under the Credit Agreement are fully and unconditionally
guaranteed by TDS at an annual fee rate of 3%. The Notes are subject to
optional redemption by the Company after five years from the applicable date
of issuance at redemption prices which reflect original issue discount
accured since issuance.

In April of 1996, the Company sold 12.3 million of its Common Shares,
approximately 17.2% of the then total outstanding shares of common stock, at
a price of $17 per share in its IPO. The net proceeds from the offering,
after underwriters fees, were $195.3 million. A portion of the net proceeds
was applied to the repayment of the $64.1 million then outstanding
indebtedness (including accrued interest) to TDS under the Revolving Credit
Agreement. Proceeds from the IPO were fully utilized by the end of January
1997.

At December 31, 1997, the Company had approximately $26.8 million available
for borrowing under its $475 million Revolving Credit Agreement with TDS. In
February 1998, the Company secured from TDS a $50 million increase in the
amount it may borrow under the Revolving Credit Agreement to $525 million. In
addition to the Revolving Credit Agreement with TDS, other sources of capital
may include additional vendor financing as well as private equity and debt
financing. If sufficient additional future funding is not made available to
the Company on terms and prices acceptable to the Company, the Company would
have to reduce its operating activities, which could have a material adverse
impact on the Company's financial condition and results of future operations.

The Company has assessed and continues to assess the impact of the Year 2000
Issue on its reporting systems and operations for purposes of ensuring its
systems are Year 2000 compliant. The Company's major systems have been
recently purchased or developed and management does not expect the effort
needed to achieve Year 2000 compliance to be significant. The Year 2000 Issue
exists because many computer systems and applications abbreviate dates by
eliminating the first two digits of the year, assuming that these two digits
would always be "19". Unless corrected, this shortcut is expected to cause
problems when the century date occurs. On that date, some computer programs
may recognize the date as January 1, 1900 instead of January 1, 2000. This
may cause systems to incorrectly process critical financial and operational
information, or stop processing altogether. Additionally, computer
applications may be affected before January 1, 2000, if calculations into the
year 2000 are involved. Management believes that the cost of addressing the
Year 2000 Issue to be incurred in 1998 and 1999 will not be material to
future results or financial condition. If management's steps are not
successful in making its systems Year 2000 compliant, it could have a
material adverse effect on results of operations.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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 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.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN
"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.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

Year Ended December 31,                              1997           1996            1995
-------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S>                                                <C>            <C>             <C>
OPERATING REVENUES
   Service                                         $  32,307      $      -        $     -
   Equipment sales                                    23,645             -              -
-------------------------------------------------------------------------------------------
   Total Operating Revenues                           55,952             -              -
-------------------------------------------------------------------------------------------
OPERATING EXPENSES

   System operations                                  30,655             -              -
   Marketing and selling                              45,974             -              -
   Customer service                                   20,882             -              -
   Cost of equipment sold                             71,454             -              -
   General and administrative                         58,825        28,843          4,795
   Depreciation                                       36,045             -              -
   Amortization of intangibles                         4,509             -              -
   Development costs                                   5,773        15,107          2,767
-------------------------------------------------------------------------------------------
   Total Operating Expenses                          274,117        43,950          7,562
-------------------------------------------------------------------------------------------
OPERATING (LOSS)                                    (218,165)      (43,950)        (7,562)

INVESTMENT AND OTHER INCOME
   Investment (losses)                                (2,518)         (304)             -
   Interest income-affiliate                              95         4,488              -
   Interest income-other                               2,402         1,158             49
   Gain on sale of PCS licenses                            -         2,582              -
-------------------------------------------------------------------------------------------
   Total Investment and Other Income                     (21)        7,924             49
-------------------------------------------------------------------------------------------
(LOSS) BEFORE INTEREST AND
   INCOME TAXES                                     (218,186)      (36,026)        (7,513)

INTEREST EXPENSE
   Interest expense-affiliate                         21,558         1,960          1,051
   Interest expense-other                              5,507           802              -
-------------------------------------------------------------------------------------------
   Total Interest Expense                             27,065         2,762          1,051
-------------------------------------------------------------------------------------------
(LOSS) BEFORE INCOME TAXES                          (245,251)      (38,788)        (8,564)
   Income tax expense (benefit)                        1,806          (867)        (2,096)
-------------------------------------------------------------------------------------------
NET (LOSS)                                         $(247,057)     $(37,921)       $(6,468)
-------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND
  SERIES A COMMON SHARES (000s)                       71,512        67,492         59,086

(LOSS) PER COMMON AND SERIES A
  COMMON SHARE                                     $   (3.45)      $ (0.56)       $ (0.11)
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,                               1997           1996           1995
----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                   <C>          <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (Loss)                                         $(247,057)     $(37,921)     $ (6,468)
   Add (Deduct) adjustments to
      reconcile net (loss) to net cash (used)
      provided by operating activities:
   Depreciation and amortization                         40,554         1,934            47
   Noncash interest expense-Series A Notes                8,341         1,327             -
   Investment losses                                      2,518           304             -
   Gain on sale of PCS licenses                               -        (2,582)            -
   Change in accounts receivable-customer               (24,030)           -              -
   Change in income tax refund receivable-affiliate           -        12,502       (12,320)
   Change in inventory                                  (25,949)           -              -
   Change in accounts payable-affiliates                    284          (795)        1,284
   Change in accounts payable-trade and other            30,606         3,491         6,401
   Change in accrued interest-affiliate                   3,665        (1,497)        1,392
   Change in deferred tax liability-net                   1,806         2,231        10,407
   Change in other assets and liabilities                 2,399         3,225          (617)
----------------------------------------------------------------------------------------------
                                                       (206,863)      (17,781)          126
----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Change in Revolving Credit Agreement-TDS             448,234       (60,238)      297,937
   Change in note receivable-affiliate                        -        28,836             -
   Issuance of common stock                               1,699       195,485             -
----------------------------------------------------------------------------------------------
                                                        449,933       164,083       297,937
----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Additions to property and equipment                 (274,709)     (112,940)      (12,134)
   Investment in PCS licenses                                 -             -      (285,417)
   Change in note receivable-other                        1,925             -             -
   Proceeds from sale of PCS licenses                         -         2,275             -
   Change in temporary and other investments               (558)         (614)         (261)
----------------------------------------------------------------------------------------------
                                                       (273,342)     (111,279)     (297,812)
----------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                     (30,272)       35,023           251
CASH AND CASH EQUIVALENTS-
   Beginning of year                                     35,284           261            10
----------------------------------------------------------------------------------------------
   End of year                                        $   5,012     $  35,284     $     261
----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>

December 31,                                                    1997           1996
---------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                           <C>            <C>
CURRENT ASSETS
   Cash and cash equivalents:
      General funds                                           $  5,012       $    869
      Affiliated cash equivalents                                    -         34,415
---------------------------------------------------------------------------------------
                                                                 5,012         35,284

   Temporary investments                                           197            315
   Accounts receivable:
      Customers, less allowance of $7,252 in 1997               24,030              -
      Affiliates                                                    22              -
      Other                                                        185              -
   Interest receivable-affiliate                                     -            243
   Interest receivable-other                                         -            508
   Note receivable-other                                             -          1,925
   Inventory                                                    25,949              -
   Other                                                         2,808            704
---------------------------------------------------------------------------------------
                                                                58,203         38,979
---------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT

   Property and equipment, net of accumulated
      depreciation of $38,018 in 1997 and $1,981 in 1996       584,723         18,592
   Work in process                                              19,381        233,831
   Prepaid network infrastructure costs                              -         70,300
---------------------------------------------------------------------------------------
                                                               604,104        322,723
---------------------------------------------------------------------------------------
INVESTMENTS

   Investment in PCS licenses, net of accumulated
      amortization of $4,489 in 1997                           297,043        304,354
   Other                                                         1,298          6,771
---------------------------------------------------------------------------------------
                                                               298,341        311,125
---------------------------------------------------------------------------------------
TOTAL ASSETS                                                  $960,648       $672,827
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

December 31,                                                 1997              1996
---------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                       <C>              <C>
CURRENT LIABILITIES

   Accounts payable:
      Affiliates                                          $     773       $     489
      Trade                                                  92,020          57,114
      Other                                                       -          36,246
   Accrued interest-affiliate                                 3,665               -
   Microwave relocation costs payable                         7,354          17,046
   Contribution payable                                           -           6,453
   Other                                                      5,957           1,978
--------------------------------------------------------------------------------------
                                                            109,769         119,326
--------------------------------------------------------------------------------------
REVOLVING CREDIT AGREEMENT-TDS                              448,234               -
--------------------------------------------------------------------------------------
LONG-TERM DEBT                                              196,439         103,743
--------------------------------------------------------------------------------------
DEFERRED TAX LIABILITY-NET                                   13,779          11,973
--------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
   Common Shares, $1.00 par value; authorized
      100,000,000 shares; issued and outstanding
      31,610,605 and 31,359,460 shares in 1997
      and 1996, respectively                                 31,611          31,359
   Series A Common Shares, $1.00 par value;
      authorized 60,000,000 shares; issued and
      outstanding 40,000,000 shares                          40,000          40,000
   Additional paid-in capital                               413,746         412,299
   Retained deficit                                        (292,930)        (45,873)
--------------------------------------------------------------------------------------
                                                            192,427         437,785
--------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $ 960,648       $ 672,827
--------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

Year Ended December 31,                                         1997          1996          1995
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                          <C>            <C>            <C>
COMMON STOCK

   Balance at beginning of year                              $       -      $      1       $      1
   Deduct Recapitalization                                           -            (1)             -
------------------------------------------------------------------------------------------------------
   Balance at the end of year                                $       -      $      -       $      1
------------------------------------------------------------------------------------------------------

COMMON SHARES

   Balance at beginning of year                              $  31,359      $      -       $      -
   Add
      Recapitalization                                               -        19,086              -
      Initial Public Offering                                        -        12,250              -
      Employee Benefit Plans                                       252            23              -
------------------------------------------------------------------------------------------------------
   Balance at end of year                                    $  31,611      $ 31,359       $      -
------------------------------------------------------------------------------------------------------

SERIES A COMMON SHARES

   Balance at beginning of year                              $  40,000      $      -       $      -
   Add Recapitalization                                              -        40,000              -
------------------------------------------------------------------------------------------------------
   Balance at end of year                                    $  40,000      $ 40,000       $      -
------------------------------------------------------------------------------------------------------

ADDITIONAL PAID-IN CAPITAL

   Balance at beginning of year                              $ 412,299      $289,233       $     39
   Add/(Deduct)
      Equity Contribution from TDS                                   -             -        289,194
      Recapitalization                                               -       (59,085)            -
      Initial Public Offering                                        -       183,015              -
      Capital Stock Expense                                          -        (1,061)            -
      Employee Benefit Plans                                     1,447           197              -
------------------------------------------------------------------------------------------------------
   Balance at the end of year                                $ 413,746      $412,299       $289,233
------------------------------------------------------------------------------------------------------

RETAINED DEFICIT

   Balance at beginning of year                              $ (45,873)     $ (7,952)      $ (1,484)
   Net (Loss)                                                 (247,057)      (37,921)        (6,468)
------------------------------------------------------------------------------------------------------
   Balance at end of year                                    $(292,930)     $(45,873)      $ (7,952)
------------------------------------------------------------------------------------------------------

</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION OF BUSINESS

Aerial Communications, Inc. (the "Company" or "Aerial") is an 82.5%-owned
subsidiary of Telephone and Data Systems, Inc. ("TDS"). The Company was
incorporated in Delaware on July 23, 1991, as American Portable
Telecommunications, Inc. and changed its name to American Portable Telecom,
Inc. ("APTI") effective January 18, 1996. On November 12, 1996, the Company
changed its name to Aerial Communications, Inc. The Company was formed to
acquire Personal Communications Services ("PCS") licenses, construct PCS
networks in its Major Trading Areas ("MTAs") and offer wireless PCS
communications services in these areas. The Company acquired its licenses in
the Federal Communications Commission ("FCC") broadband Block A and Block B
PCS auction (the "PCS auction") which concluded in March 1995. The Company
acquired licenses in the Columbus (Ohio), Houston (Texas), Kansas City
(Missouri), Minneapolis (Minnesota), Pittsburgh (Pennsylvania), and Tampa-St.
Petersburg-Orlando (Florida) MTAs covering approximately 27.6 million
population equivalents ("POPs").

      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 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.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (a) DEVELOPMENT STAGE COMPANY

Effective with the second quarter of 1997, the Company ceased to be a
development stage company and presents its 1997 results of operations, cash
flows and financial position in a manner similar to other operating
enterprises within the industry.

      (b) PRINCIPLES OF CONSOLIDATION

The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles. The consolidated financial
statements include the accounts of Aerial Communications, Inc. and its
wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. The preparation of the consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Certain amounts reported in prior years have been reclassified to conform to
the current year presentation.

      (c) REVENUE RECOGNITION AND INVENTORY

Revenues from operations consist of charges to customers for monthly access,
airtime, value-added services and long-distance charges. Revenues are
recognized as the services are rendered. Unbilled revenues, resulting from
PCS services provided from the billing cycle date to the end of each month,
are estimated and recorded.

Revenues from operations also consist of equipment sales to national
retailers, independent agents and end user customers. Revenues from equipment
sales are recognized upon the shipment of goods to retailers and independent
agents or upon sale through direct distribution channels to end user
customers.

Handset inventory is stated at current replacement cost.

      (d) ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising costs totaled
$21.1 million, $1.4 million and $0 for the years ended December 31, 1997,
1996 and 1995, respectively. Prior to launching service, the Company was a
development stage enterprise and advertising costs were included in
Development costs.

      (e) PENSION PLAN

Effective July 1, 1995, the Company began providing pension benefits for its
employees under a qualified, noncontributory, defined contribution pension
plan. Under this plan, pension benefits and costs are calculated separately
for each participant and are funded currently. Pension costs were $326,000,
$72,000 and $11,000 in 1997, 1996 and 1995, respectively.

      (f) CASH AND CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND MARKETABLE
          SECURITIES

Cash and cash equivalents consists of cash on hand and those short-term,
highly-liquid investments with original maturities of three months or less.
Those investments with original maturities of greater than three but less
than twelve months are classified as temporary investments. Temporary
investments are stated at cost. Those investments with original maturities of
more than twelve months are classified as marketable securities and are
stated at amortized cost. The Company's investments in marketable non-equity
securities, included in Other investments, have maturities of one to five
years and are classified as held to maturity.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amounts of Cash and cash equivalents and Temporary investments
approximate fair value due to the short-term nature of these investments. The
amortized cost of the marketable non-equity securities approximate their
aggregate fair value.

      (g) PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is provided based on
the straight-line method over the estimated useful lives of the respective
assets, generally ten years for network assets and five years for information
system assets and office equipment. Leasehold improvements are amortized over
ten years or the lease term, whichever is shorter.

Property and equipment consists of:

<TABLE>
<CAPTION>

December 31,                                       1997            1996
----------------------------------------------------------------------------
(Dollars in thousands)
<S>                                               <C>            <C>
Network                                           $514,525       $     -
Information systems                                 83,950        15,951
Office equipment                                    15,800         3,180
Leasehold improvements and other                     8,466         1,442
                                                   622,741        20,573
----------------------------------------------------------------------------
Accumulated depreciation                           (38,018)       (1,981)
----------------------------------------------------------------------------
   Property and equipment-net                     $584,723       $18,592
</TABLE>

      (h) WORK IN PROCESS

Work in process includes expenditures for the design, construction and
testing of the Company's PCS networks as well as the cost to relocate
dedicated private microwave links currently operating in the Company's
spectrum in its MTAs. Work in process also includes the costs associated with
developing information systems. The Company capitalizes interest on such
expenditures where appropriate. When the assets are placed in service, the
Company transfers the assets to the appropriate property and equipment
category.

      (i) INVESTMENT IN PCS LICENSES

Investment in PCS licenses is recorded at historical cost, which includes the
purchase price of the licenses acquired by the Company in the PCS auction
plus capitalized interest of $16.6 million incurred while readying the
licenses in the Company's MTAs for use. The Company recorded capitalized
interest through December 31, 1995, when TDS contributed approximately $289.2
million in equity capital to the Company for the original cost of its
licenses. The Company began amortizing the licenses straight-line over 40
years upon commencement of service in each respective MTA. Accumulated
amortization on the licenses at December 31, 1997, totaled $4.5 million.

      (j) IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 1996, the Company implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under SFAS No. 121, the Company is required to review long-lived assets
and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the book value of a long-lived asset
may not be recoverable. An impairment loss would be recognized whenever the
review demonstrates that the book value of a long-lived asset is not
recoverable. The implementation of SFAS No. 121 did not have an impact on the
Company's financial position or results of operations.

      (k) MICROWAVE RELOCATION COSTS PAYABLE

Microwave relocation costs payable represent obligations of the Company to
pay its share of the costs to relocate dedicated private microwave links
currently operating in the Company's spectrum in its MTAs. The carrying
amount reported in the balance sheet for microwave relocation costs payable
approximates fair value because of the short maturity of those instruments.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (l) (LOSS) PER COMMON AND SERIES A COMMON SHARE

(Loss) per Common and Series A Common Share was computed based on the
weighted average of Common and Series A Common Shares outstanding during the
period, adjusted to give retroactive effect to the recapitalization in
conjunction with the Company's 1996 initial public offering ("IPO"), as if
this transaction had occurred at January 1, 1995 (See Note 8 - Common Stock).

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," effective December 31, 1997. The implementation of
SFAS No. 128 had no effect on reported (Loss) per Common and Series A Common
Share due to the current Net (Loss). In 1997 and 1996, respectively, 1.4
million and 0.3 million stock options were not included in computing diluted
(Loss) per Common and Series A Common Share because their effects were
antidilutive.

      (m) SUPPLEMENTAL CASH FLOW DISCLOSURES

The following summarizes interest and income taxes paid and certain noncash
transactions.

<TABLE>
<CAPTION>

Year Ended December 31,                          1997          1996          1995
---------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                            <C>            <C>           <C>
Income tax benefits - cash payments
from TDS resulting from taxable losses
generated by the Company in prior years        $     -        $15,598       $    185

Interest paid to non-affiliates                    428          1,107              -

Interest and guarantee fees paid to TDS
or converted to debt under the
Revolving Credit Agreement                      24,297          3,496         17,699

TDS equity contribution-conversion of
debt under the Revolving Credit
Agreement to equity and receipt of note
receivable-affiliate                                 -              -        289,194
</TABLE>

In 1997, $113.0 million in additions to property and equipment (amounts in
service and work in process, collectively) were financed through a
combination of long-term debt, accounts payable-trade, microwave relocation
costs payable and prepaid network infrastructure costs. In 1996, $199.6
million in additions to property and equipment and prepaid network
infrastructure costs were financed through a combination of long-term debt,
accounts payable-trade and other and microwave relocation costs payable.

The Company incurred interest charges totaling $33.1 million in 1997. In
1997, the interest charges were comprised of $21.0 million paid to TDS
relating to the Revolving Credit Agreement (See Note 4 - Revolving Credit
Agreement), $3.3 million paid to TDS for guarantee fees on the Series A Zero
Coupon Notes and obligations under the Nokia Credit Agreement (See Note 5 -
Long-Term Debt), $0.4 million paid to Nokia for interest charges relating to
the Credit Agreement, $8.3 million in accrued interest on the Series A Zero
Coupon Notes and $0.1 million in other interest charges. Of these amounts,
the Company capitalized $6.0 million relating to its work in process
expenditures. The remaining $27.1 million was charged to expense.

In 1996, the Company incurred interest charges of $4.0 million. The interest
charges were comprised of $2.0 million paid to TDS relating to the Revolving
Credit Agreement, $0.6 million paid to TDS for guarantee fees on the Series A
Zero Coupon Notes and obligations under the Nokia Credit Agreement, $70,000
paid to Nokia for interest charges relating to the Credit Agreement and $1.3
million in accrued interest on the Series A Zero Coupon Notes. Of these
amounts, the Company capitalized $1.2 million relating to its work in process
expenditures. The remaining $2.8 million was charged to expense.

During 1995, the Company incurred interest charges of $17.7 million related
to its Revolving Credit Agreement with TDS. Of this amount, the Company
capitalized $16.6 million relating to the development of its PCS licenses.
The remaining $1.1 million was charged to expense.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. INCOME TAXES

The Company entered into a tax allocation agreement with TDS under which the
Company will continue to join in filing consolidated federal income tax
returns with the TDS affiliated group unless TDS's ownership of the Company
falls beneath 80%. For 1995, TDS reimbursed the Company for the reduction in
the provision for federal income taxes reflected in TDS's consolidated
statements of income resulting from the inclusion of the Company and its
subsidiaries in the TDS affiliated group. The Company had recorded these
amounts in "Income tax refund receivable - affiliate" (See Note 2 (m) -
Summary of Significant Accounting Policies - Supplemental cash flow
disclosures).

For tax years beginning after December 31, 1995, TDS no longer reimburses the
Company on a current basis for losses or credits used by the TDS affiliated
group. Instead, the Company is compensated (by an offset to amounts the
Company would otherwise be required to pay to TDS for federal income taxes)
for TDS's use of tax benefits at such time as the Company could utilize such
benefits on a separate return basis. The Company will be required to pay TDS
an amount equal to the greater of the federal income tax liability of the
Company, calculated as if it were a separate affiliated group (including any
minimum tax liability, notwithstanding the absence of consolidated group
liability for minimum tax), or the tax calculated using the highest marginal
tax rate (before taking into account tax credits) of the TDS affiliated group.

Subject to the completion of the Aerial Merger, TDS intends to terminate
certain intercompany agreements between TDS and Aerial. See Note 1 - Proposed
TDS Corporate Restructuring for a discussion of the proposed merger.

The Company records all deferred tax liabilities or assets for the deferred
tax consequences of all temporary differences. Income tax provisions are
summarized below:

<TABLE>
<CAPTION>

Year Ended December 31,                         1997         1996         1995
----------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>
(Dollars in thousands)

Federal income tax provision (benefit):
   Current                                    $    -       $(3,098)     $(12,502)
   Deferred                                    1,561         1,671          9,574
State income tax provision:
   Current                                         -             -              -
   Deferred                                      245           560            832
----------------------------------------------------------------------------------
Income tax expense (benefit)                  $1,806       $  (867)     $ (2,096)
----------------------------------------------------------------------------------
</TABLE>

The temporary differences which gave rise to significant portions of the net
deferred tax liability were as follows:

<TABLE>
<CAPTION>

December 31,                                                 1997         1996
----------------------------------------------------------------------------------
<S>                                                        <C>          <C>
(Dollars in thousands)

Deferred tax asset:
   Net operating loss carryforwards                        $ 171,896    $  26,419
   Less: valuation allowance                                (129,412)     (15,029)
----------------------------------------------------------------------------------
Total deferred tax asset                                     $42,484      $11,390
----------------------------------------------------------------------------------
Deferred tax liability:
   Licenses                                                $  19,025    $  13,650
   Property and equipment                                     19,004          435
   Partnership investment                                      9,235        2,573
   Deferred charges-interest                                   6,088        6,088
   Other                                                       2,911          617
----------------------------------------------------------------------------------
Total deferred tax liability                               $  56,263    $  23,363
----------------------------------------------------------------------------------
Net deferred tax liability                                 $  13,779    $  11,973
----------------------------------------------------------------------------------
</TABLE>

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company records a deferred tax asset associated with net operating loss
carryforwards and then assesses the need for any valuation allowance
associated with those carryforwards. At December 31, 1997, the federal net
operating loss carryforward available to offset future taxable income is
$377.8 million and expires between 2012 and 2013. The amount of state net
operating loss carryforward available to offset future taxable income is
$552.9 million and expires between 1998 and 2013.

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. During 1997, the
valuation allowance increased $114.4 million primarily due to the Company's
increased net operating losses.

The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:

<TABLE>
<CAPTION>

Year Ended December 31,                                  1997         1996       1995
----------------------------------------------------------------------------------------
<S>                                                     <C>          <C>         <C>
Statutory federal income tax rate                        35.0%        35.0%      35.0%
State income taxes, net of federal benefit               (0.1)        (0.9)      (6.3)
Effects of valuation allowance on deferred tax asset    (35.6)       (29.7)         -
Other                                                       -         (2.2)      (4.2)
----------------------------------------------------------------------------------------
Effective income tax rate                               (0.7)%         2.2%      24.5%
----------------------------------------------------------------------------------------
</TABLE>

4. REVOLVING CREDIT AGREEMENT

The Company entered into a Revolving Credit Agreement with TDS on August 1,
1995, as amended, under which all of the outstanding obligations of the
Company to TDS are incorporated. At December 31, 1997, the Company had
secured from TDS an agreement to borrow up to $475 million under the
Revolving Credit Agreement. Pursuant to the Revolving Credit Agreement, the
Company may borrow from TDS at an interest rate equal to 1.5% above prime
rate until the principal amount becomes due, and pay on demand an interest
rate equal to 3.5% above such prime rate on any overdue principal or overdue
installment of interest. The advances made under the Revolving Credit
Agreement are unsecured. Interest on the balance due under the Revolving
Credit Agreement is payable quarterly and no principal is payable until its
maturity, which is December 31, 1999. The terms of the Revolving Credit
Agreement also include, among others, restrictions on incurring certain
additional indebtedness and on paying dividends. The total amount advanced to
the Company under the Revolving Credit Agreement as of December 31, 1997, was
$448.2 million. The carrying value of the Company's borrowings under the
Revolving Credit Agreement approximates the fair value of the borrowings, as
the Revolving Credit Agreement is variable debt with the interest rate based
on the prime lending rate.

Subject to the completion of the Aerial Merger, TDS intends to terminate
certain intercompany agreements between TDS and Aerial. See Note 1 - Proposed
TDS Corporate Restructuring for a discussion of the proposed merger.

5. LONG-TERM DEBT

On November 4, 1996, the Company issued $226.2 million in aggregate principal
amount at maturity Series A Zero Coupon Notes ("Series A Notes") due in 2006.
The issue price of the Series A Notes was $100 million and there is no
periodic payment of interest. The per annum yield to maturity on the Series A
Notes is 8.34% (computed on a semi-annual bond equivalent basis) and the
effective rate is 8.09%. The proceeds of the sale of the Series A Notes were
paid to Nokia Telecommunications Inc. ("Nokia") in satisfaction of all then
outstanding obligations and future obligations up to $100 million of the
Company under the June 19, 1996, Credit Agreement, as amended, with Nokia
(the "Credit Agreement" or "Nokia Credit Agreement"). The excess of the
proceeds from the sale of the Series A Notes over the Company's current
obligations (i.e., financed purchases under the Credit Agreement) to Nokia
was recorded as Prepaid network infrastructure costs. Nokia paid the Company
monthly interest on the unused portion of the proceeds from the Series A
Notes. At December 31, 1996, the Company had recorded $70.3 million in
Prepaid network infrastructure costs. The Company paid Nokia for future
equipment purchases by reducing the amount of the prepaid balance by the cost
of the equipment purchased. Prepaid network infrastructure costs were fully
utilized for the purchase of equipment by the end of August 1997.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Series A Notes are unsecured obligations of the Company and rank in the
same priority with all other unsecured and unsubordinated indebtedness of the
Company. The Series A Notes and obligations of the Company under the Credit
Agreement are fully and unconditionally guaranteed by TDS at an annual fee
rate of 3%. Guarantee fees owed TDS are payable semiannually. The Series A
Notes are subject to optional redemption by the Company after five years from
the date of issuance at redemption prices which reflect the original issue
discount accured since issuance.

At December 31, 1997, the Company had a balance of $196.4 million in
Long-term debt which consisted of $112.1 million related to the Series A
Notes and $84.3 million in obligations under the Nokia Credit Agreement. The
Company pays interest monthly to Nokia on the outstanding balance under the
Credit Agreement. At December 31, 1996, the balance in Long-term debt was
$103.7 million which related entirely to the Series A Notes.

The carrying value of the Company's Series A Notes is greater than its fair
value, estimated to be $108.8 million. The fair value was estimated using
discounted cash flow analysis. The carrying value of the Company's
obligations under the Nokia Credit Agreement approximates the fair value of
the obligations, as the Credit Agreement is variable debt with the interest
rate based on the 30 day London Interbank Offered Rate ("LIBOR") plus 0.32%.

6. RELATED PARTY TRANSACTIONS

The Company is billed for all services it receives from TDS and its
subsidiaries, consisting primarily of information processing and general
management services. Such billings are based on expenses specifically
identified to the Company and on allocations of common expenses. Such
allocations are based on the relationship of the Company's assets, employees,
investment in plant and expenses to the total assets, employees, investment
in plant and expenses of TDS. Management believes the method used to allocate
common expenses is reasonable and that all expenses and costs applicable to
the Company are reflected in the accompanying financial statements on a basis
which is representative of what they would have been if the Company operated
on a stand alone basis. Billings to the Company from TDS totaled $3.9
million, $2.0 million and $1.2 million during 1997, 1996 and 1995,
respectively.

In 1996, TDS completed development of a new financial reporting system for
all of its subsidiaries, including the Company. The Company recorded
approximately $2.4 million related to this system in Property and equipment.

In 1997 and 1996, the Company deposited its excess cash in a cash management
program administered by TDS. Deposits made into the program were generally
available to the Company with interest each month equal to 30 day commercial
paper rates plus 0.25%.

On December 31, 1995, the Company received additional equity funding of
$289.2 million from TDS. The Company recorded the $289.2 million in
Additional paid-in capital.

Subject to the completion of the Aerial Merger, TDS intends to terminate
certain intercompany agreements between TDS and Aerial. See Note 1 - Proposed
TDS Corporate Restructuring for a discussion of the proposed merger.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. COMMITMENTS

The costs of development, construction, start-up and post-launch activities
of the Company require substantial capital. From inception through December
31, 1997, the Company had expended approximately $304.4 million for its six
licenses, including capitalized interest, approximately $642.1 million for
all other capital expenditures and incurred cumulative net losses of $292.9
million. At December 31, 1997, the Company had orders totaling approximately
$12.9 million with Nokia and certain tower vendors for infrastructure
equipment as part of the Company's initial build out of its PCS networks.
Also at December 31, 1997, the Company had orders totaling approximately
$27.1 million with various handset vendors for handsets and accessories. The
Company expects to incur significant operating losses and to generate
negative cash flow from operating activities during the next several years as
it continues to build its PCS customer base. The Company estimates that its
aggregate capital requirements for 1998 will total approximately $310
million, with $75 million needed for capital additions and $235 million
needed to fund operations.

The Company and its subsidiaries have leases for certain office facilities,
warehouses, retail store locations and cell sites which are classified as
operating leases. For the years ended December 31, 1997, 1996 and 1995, rent
expense for term leases was $10.3 million, $2.1 million and $0.2 million,
respectively, and for cancelable leases $1.1 million, $0.5 million and $0.1
million, respectively. At December 31, 1997, the aggregate minimum rental
commitments under noncancelable operating leases for the years 1998 through
2002 and 2003 and thereafter, are approximately $15.5 million, $15.5 million,
$15.2 million, $14.2 million, $9.3 million and $14.3 million, respectively.

      LEGAL PROCEEDINGS

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.

8. COMMON STOCK

      TAX-DEFERRED SAVINGS PLAN

Effective July 1, 1995, the Company adopted the TDS Tax-Deferred Savings Plan
(the "Savings Plan"), a qualified profit sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. As amended on August 15,
1996, participating employees have the option of investing their
contributions in Aerial Common Shares, TDS Common Shares, United States
Cellular Corporation (a subsidiary of TDS) Common Shares, American Paging,
Inc. (a subsidiary of TDS) Common Shares, or five other non-affiliated funds.
The Company has reserved 300,000 Common Shares for issuance under the Savings
Plan. Employer matching contributions are made in Aerial Common Shares.
Aerial employees were issued 184,533 Common Shares in 1997 and 23,460 Common
Shares in 1996 in connection with the Savings Plan.

      STOCK-BASED COMPENSATION PLANS

The Company accounts for stock options and its employee stock purchase plan
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). No compensation costs have been recognized
for the employee stock purchase plan. Some options granted in 1997 had
exercise prices that were less than the quoted market price of the Company's
stock on the date they were granted. In accordance with APB 25, compensation
expense of $26,000 was recorded related to these options in 1997.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Had compensation expense for all plans been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's Net (Loss) and (loss) per share
would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>

Year Ended December 31,                                    1997              1996
----------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S>                                                     <C>               <C>
Net (Loss)
   As Reported                                          $(247,057)        $(37,921)
   Pro Forma                                            $(250,957)        $(38,323)
Basic and diluted (loss) per share
   As Reported                                          $   (3.45)        $  (0.56)
   Pro Forma                                            $   (3.51)        $  (0.57)
</TABLE>

A summary of the status of the Company's stock option plan at December 31,
1996 and 1997, and changes during the years ended is presented in the table
and narrative below:

<TABLE>
<CAPTION>
                                                                              Weighted Average
                                                                 ------------------------------------------
                                                                                                 Remaining
                                                                                                Contractual
                                              Number of Shares    Option Prices   Fair Values      Life
-----------------------------------------------------------------------------------------------------------
<S>                                             <C>                  <C>            <C>         <C>
Outstanding January 1, 1996                             -
Granted                                           310,305            $17.00         $7.41
-----------------------------------------------------------------------------------------------------------
Outstanding December 31, 1996
(61,397 exercisable at $17.00)                    310,305            $17.00                     9.33 Years

Granted                                         1,137,435            $ 9.46         $4.42
Exercised                                          (2,553)           $ 4.94
Forfeited                                         (56,450)           $14.44
-----------------------------------------------------------------------------------------------------------
Outstanding December 31, 1997
(633,030 exercisable from $4.94 to $17.00)      1,388,737            $10.95                     8.51 Years
</TABLE>

      EMPLOYEE STOCK OPTIONS

Effective April 25, 1996, the Company began providing long-term incentive
benefits for its senior managers by adopting the Aerial Communications, Inc.
Long-Term Incentive Plan (the "Stock Option Plan"). The Company has reserved
1.5 million Common Shares for option grants. During 1997, Aerial employees
were issued 767 Common Shares in connection with the Stock Option Plan. The
options are exercisable over a specified period not in excess of ten years
from the date they are granted. Options granted in 1996 and 1997 expire in
2006 and 2007, or the date of the employee's termination of employment, if
earlier. Most options vest annually over five years in 20% increments, from
December 15, 1996, through December 15, 2000. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 1997 and
1996, respectively: risk free interest rates of 6.59% and 5.53%; dividend
yield of 0%; expected lives of 9.4 years and 7.4 years; and volatility of
51.32% and 26.36%.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      EMPLOYEE STOCK PURCHASE PLAN

The Company adopted the 1996 APTI Employee Stock Purchase Plan (the "Stock
Purchase Plan") effective October 1, 1996. The Company has reserved 200,000
Common Shares for sale to the employees of the Company and its subsidiaries
in connection with the Stock Purchase Plan. Shares can be purchased twice a
year and the price per share is 85% of the stock's closing price on
designated purchase dates. During 1997, Aerial employees were issued 59,822
Common Shares in connection with the Stock Purchase Plan. The fair value of
the employees' purchase rights was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997: risk free interest rate of 6.21%; dividend yield of 0%;
expected life of 0.8 years; and volatility of 51.18%.

      NON-EMPLOYEE DIRECTOR COMPENSATION

In April 1997, the Company established the Compensation Plan For Non-Employee
Directors (the "Compensation Plan"). Under the Compensation Plan, the
Company's independent directors are to be paid an annual fee of $20,000 that
is payable half in cash and half in Company stock. The number of Common
Shares to be delivered to each independent director is based upon the average
market value of the Company's stock for a certain period prior to the date of
the Annual Shareholder's Meeting. The Company has reserved 20,000 Common
Shares for issuance to the Company's independent directors under the
Compensation Plan. In 1997, 6,003 shares were issued to non-employee
directors under this plan.

      INITIAL PUBLIC OFFERING

The Company sold 12.3 million Common Shares at a price of $17 per share in an
initial public offering on April 25, 1996. Proceeds of the offering, net of
underwriting discounts and commissions, totaled $195.3 million. The Company
used a portion of the net proceeds to repay TDS approximately $64.1 million,
representing the then outstanding balance (including accrued interest) under
the Revolving Credit Agreement, and used the balance of the funds to
partially finance construction, development and operating costs incurred to
establish its PCS networks. Proceeds of the offering were fully utilized by
the end of January 1997.

      RECAPITALIZATION

On March 28, 1996, TDS, as the sole shareholder of the Company at such time,
executed a consent to action in lieu of a meeting, voting all 1,000 shares of
common stock of the Company then outstanding for the approval of a Restated
Certificate of Incorporation of the Company. Such Restated Certificate of
Incorporation authorized (a) 60 million Common Shares, $1.00 par value per
share; (b) 60 million Series A Common Shares, $1.00 par value per share; (c)
60 million Series B Common Shares, $1.00 par value per share; and (d) 10
million Preferred Shares, $1.00 par value per share. Upon the filing of the
Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware on April 19, 1996, the 1,000 shares of common stock of the
Company theretofore held by TDS were converted into 19.1 million common
shares and 40 million Series A Common Shares of the Company.

      SERIES A COMMON SHARES

Series A Common Shares are convertible on a share-for-share basis into Common
Shares and are entitled to 15 votes per share. No Series A Common Shares were
converted during 1997 or 1996.

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. SUBSEQUENT EVENTS

Pursuant to the Credit Agreement, on February 5, 1998, the Company issued
$220.0 million in aggregate principal amount at maturity Series B Zero Coupon
Notes ("Series B Notes") due in 2008. The issuance of the Series B Notes
represents the final issuance of zero coupon notes under the Credit
Agreement. The issue price of the Series B Notes was $100 million and there
is no periodic payment of interest. The per annum yield to maturity on the
Series B Notes is 8.05% (computed on a semi-annual bond equivalent basis).
The proceeds from the sale of the Series B Notes were paid to Nokia in
satisfaction of all then outstanding obligations and future obligations of
the Company (to the extent not satisfied from the proceeds of the sale of the
Series A Notes) up to $100 million under the Credit Agreement.

The Series B Notes are unsecured obligations of the Company and rank in the
same priority with all other unsecured and unsubordinated indebtedness of the
Company. The Series B Notes are fully and unconditionally guaranteed by TDS
at annual fee rate of 3%. Guarantee fees owed TDS are payable semiannually.
The Series B Notes are subject to optional redemption by the Company after
five years from the date of issuance at redemption prices which reflect
original issue discount accured since issuance.

In February 1998, the Company secured from TDS a $50 million increase in the
amount it may borrow under the Revolving Credit Agreement to $525 million.

10. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>

Quarter Ended                                          March 31        June 30         Sept. 30        Dec. 31
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S>                                                   <C>              <C>              <C>            <C>
1997
Operating Revenues                                    $      -         $  7,143         $ 18,648       $ 30,161
Operating (Loss)                                       (21,614)         (51,633)         (64,537)       (80,381)
Net (Loss)                                             (22,340)         (55,475)         (76,598)       (92,644)
Weighted Average Common and Series A
   Common Shares (000)                                  71,384           71,499           71,559         71,604
(Loss) per Common and Series A
   Common Share                                       $  (0.31)        $  (0.78)        $  (1.07)      $  (1.29)

1996
Operating Revenues                                    $      -         $      -         $      -       $      -
Operating (Loss)                                        (5,746)          (7,761)         (10,805)       (19,638)
Net (Loss)                                              (6,671)          (7,206)          (9,829)       (14,215)
Weighted Average Common and
   Series A Common Shares (000)                         59,086           68,105           71,336         71,355
(Loss) per Common and Series A
   Common Share                                       $  (0.11)        $  (0.11)        $  (0.14)      $  (0.20)

</TABLE>

<PAGE>

                  AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES

REPORT OF MANAGEMENT

Management of Aerial Communications, Inc. ("Aerial") has the responsibility
for preparing the accompanying consolidated financial statements and for
their integrity and objectivity. The statements were prepared in accordance
with generally accepted accounting principles applied on a consistent basis,
and in management's opinion are fairly presented. The financial statements
include amounts that are based on management's best estimates and judgments.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the financial statements.

Management has established and maintains a system of internal control that
provides reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial
reporting.

The system of internal control provides for appropriate division of
responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process and updated as necessary. Management monitors the system of internal
control for compliance, considers recommendations for improvements and
updates such policies and procedures as necessary. Monitoring includes an
internal auditing program to independently assess the effectiveness of the
internal controls and recommend possible improvements thereto. Management
believes that the Aerial system of internal control is adequate to accomplish
the objectives discussed herein. The concept of reasonable assurance
recognizes that the costs of a system of internal accounting controls should
not exceed, in management's judgment, the benefits to be derived.

The consolidated financial statements of Aerial Communications, Inc. have
been audited by Arthur Andersen LLP, Independent Public Accountants.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Aerial Communications, Inc.:

We have audited the accompanying consolidated balance sheets of Aerial
Communications, Inc. (a Delaware Corporation and an 82.5%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

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

/s/ Arthur Andersen LLP

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)


                                       40
<PAGE>

                     AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES


AERIAL STOCK AND DIVIDEND INFORMATION

The Company's Common Shares are listed on the NASDAQ under the symbol "AERL"
and in the newspaper as "Aerial". As of February 28, 1998, the Company's Common
Shares were held by 579 registered holders and 6,500 beneficial holders. All
of the Series A Common Shares were held by TDS. No public trading market exists
for the Series A Common Shares, but the Series A Common Shares are
convertible on a share-for-share basis into Common Shares.

The trading price of the Common Shares on April 25, 1996, the date on which
the Common Shares were first offered for sale to the public was $17.00 per
share.

The Company has never paid any cash dividends and currently intends to retain
any future earnings for use in the Company's business. In addition, the
Revolving Credit Agreement with TDS prohibits the payment of dividends on
the Company's Common Shares and Series A Common Shares, except to the extent of
one-half of the cumulative consolidated net income, if any, of the Company
for periods after December 31, 1996.

MARKET PRICE PER COMMON SHARE BY QUARTER

No public trading market exists for Aerial's Series A Common Shares and
therefore, quotations are not available. The high and low sales prices of the
Common Shares on the NASDAQ as reported by the Dow Jones News Service are as
follows:

<TABLE>
<CAPTION>

1997         1st         2nd         3rd         4th
---------------------------------------------------------
<S>        <C>         <C>         <C>         <C>
High       $ 8.88      $ 9.63     $ 9.94      $10.63
Low        $ 5.25      $ 3.88     $ 7.38      $ 7.00

1996         1st         2nd         3rd         4th
---------------------------------------------------------
High       $  --       $17.75     $12.00      $10.13
Low        $  --       $ 9.75     $ 8.25      $ 6.63

</TABLE>