<PAGE>


                                                                      Exhibit 13


Aerial Communications, Inc. and Subsidiaries


Management's Discussion and Analysis of Financial Condition and Results of
Operations

RESULTS OF OPERATIONS

Aerial Communications, Inc. ("Aerial" or the "Company" - NASDAQ symbol: AERL),
an 82.3%-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.

The Company provides PCS service in Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus (Ohio). The Columbus MTA launched
service on March 27, 1997. The Company's five remaining MTAs launched service
during the second quarter of 1997. With the launch of service in its MTAs during
the second quarter of 1997, the Company transitioned from the development stage
to being an operating enterprise. As a result of this transition, the Company
has experienced an increase in revenues and operating expenses, and incurred
substantial losses.

The following is a table of summarized operating data for the Company's
consolidated operations.
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------  
As of December 31,                                            1998          1997  
----------------------------------------------------------------------------------  
  <S>                                                       <C>            <C>

  Total MTA population (in millions)                            27.7          27.6  
  Customers                                                  311,900       125,000  
  Average monthly revenue per customer (year to date)       $     51             *  
  Average monthly revenue per customer (fourth quarter)     $     49             *  
  MTA penetration                                               1.13%         0.45% 
  MTAs in operation                                                6             6 
  Cell sites in service                                        1,180         1,044  
  Total number of employees                                    1,907         1,414  
----------------------------------------------------------------------------------  
</TABLE>

* The average monthly service revenue per customer in 1997 does not provide a
meaningful comparison as the initial users and usage patterns are not comparable
to the current users and usage patterns.

The Company's results of operations for 1998 compared to 1997 and 1996 reflect
increased activities undertaken to grow PCS services in its MTAs after the
launch of service in 1997. Such activities significantly increased the Company's
net loss to $337.9 million in 1998 from $247.1 million in 1997 and $37.9 million
in 1996. During 1998 the Company's focus was on the growth of its customer base.

In December 1998, TDS announced the withdrawal of its offer to exchange tracking
stock for the outstanding common shares of Aerial which it did not own. TDS also
announced that it was pursuing a tax-free spin-off of its 82.3% interest in
Aerial, as well as reviewing other alternatives. See Proposed TDS Corporate
Restructuring for further discussion of the spin-off.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Years Ended December 31, 1998, 1997 and 1996

Operating Revenues

OPERATING REVENUES totaled $155.2 million for the year ended December 31, 1998,
an increase of $99.2 million as compared to 1997. The increase reflects the
growth of the Company's customer base during 1998 as the Company added
approximately 186,900 customers. The increase is also due to the Company
providing service in all its markets for all of 1998 as compared to only part of
1997. The Company had no revenues in 1996.

SERVICE REVENUE totaled $123.6 million in 1998, an increase of $91.3 million as
compared to 1997. 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 (local service revenue). Service revenue
also consists of charges to customers of other wireless carriers who use the
Company's PCS network when roaming (outcollect roaming revenue) and charges for
long-distance calls made on the Company's systems (long-distance revenue). The
increase in 1998 service revenue was driven by the growth in the number of
customers using the Company's PCS network. The Company's average revenue per
customer per month ("ARPU") was $51 for 1998.

EQUIPMENT SALES REVENUE totaled $31.5 million in 1998, an increase of $7.9
million as compared to 1997. Equipment sales revenue represents the sale of
handsets and related accessories to retailers, independent agents and end user
customers. The increase in equipment sales revenue reflects the increase in
sales volume, partially offset by a decline in handset prices.

Operating Expenses

OPERATING EXPENSES totaled $435.1 million for the year ended December 31, 1998,
compared to $274.1 million in 1997 and $44.0 million in 1996, reflecting the
Company's expanded level of business activity required to launch service,
transition to post-launch operations and its significant efforts to build and
serve its customer base. In 1996, the Company was still a development stage
enterprise and classified all expenses as either general and administrative or
development costs.

SYSTEM OPERATIONS EXPENSE totaled $69.1 million in 1998, an increase of $38.4
million as compared to 1997. The increase in system operations expense is due to
the increased size of the Company's network and its fully operational status
during all of 1998 as compared to only part of 1997. As of December 31, 1998,
the Company's PCS network had 1,180 cell sites in service and had been
operational in all of the Company's markets throughout all of 1998. The Company
launched service in its MTAs between March and June of 1997, with approximately
600 cell sites in service. As of December 31, 1997, the network had 1,044 cell
sites.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Significant system operations expenses include cell site rent expense and system
maintenance expense which increased $7.7 million and $6.2 million, respectively,
in 1998 as compared to 1997. Salaries and employee related-expenses increased
$8.2 million, primarily reflecting an increase in engineering and maintenance
personnel since December 31, 1997, as well as a decrease in internal capitalized
labor costs. Other system operations expenses increased $7.7 million in
aggregate, primarily driven by cell site utility expense, property tax expense,
consulting and temporary service expense and roamer fraud expense.

System operations expenses also include customer usage expense which increased
$8.6 million in 1998 primarily due to increased landline interconnection and
toll charges, reflecting an increasing customer base and increased use of the
Company's network by its customers.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

MARKETING AND SELLING EXPENSE totaled $79.7 million in 1998, an increase of
$33.7 million as compared to 1997. Gross customer activations were approximately
333,100 in 1998 as compared to approximately 141,900 in 1997. Significant
marketing and selling expenses include the salaries and benefits of sales and
marketing personnel, which increased $11.4 million in 1998, primarily reflecting
an increase in sales and marketing personnel since December 31, 1997.
Advertising expenses increased $7.0 million, reflecting the costs of
establishing and promoting Aerial's service through print, radio and television
advertising. Sales commission expense increased $4.9 million in 1998, due to the
growth in the Company's customer base. Retail store and office rent increased
$3.7 million, primarily due to the Company's increasing number of store and
kiosk locations across its markets. Other marketing and selling expenses
increased $6.7 million in aggregate, primarily driven by increases in
consulting, temporary services, phone expenses and other sales expenses.

CUSTOMER SERVICE EXPENSE totaled $53.5 million in 1998, an increase of $32.6
million as compared to 1997. The increase was driven by rapid customer growth,
as well as the efforts to manage that growth with increased personnel (including
the establishment of a second customer service center in Kansas City) and new
and evolving information systems. The higher than anticipated level of customer
service expense is primarily due to increased salary and benefit expenses
reflecting the increased number of customer service employees, the effects of
higher than planned bad debt costs, and additional consulting and temporary
service expenses directed at reducing both bad debt and customer churn.

COST OF EQUIPMENT SOLD totaled $87.7 million in 1998, an increase of $16.2
million as compared to 1997. The increase primarily reflects the growth in
handset unit sales to support the rise in customer activations.

GENERAL AND ADMINISTRATIVE EXPENSE totaled $61.7 million in 1998, an increase of
$2.9 million as compared to 1997. General and administrative expense includes
the costs of operating the Company's local business offices and its corporate
expenses other than the corporate engineering and marketing departments. The
1998 increase in general and administrative expense is primarily due to losses
on write-offs of certain information systems replaced or to be replaced. In
1996, general and administrative expenses were $28.8 million, consisting
primarily of salaries, employee benefits and other overhead expenses. General
and administrative expenses were less in 1996 due primarily to a smaller
employee base.

DEPRECIATION EXPENSE was $75.8 million in 1998, an increase of $39.8 million as
compared to 1997. The increase is due to rising fixed asset balances as a result
of the Company's network build-out and the amount of time that the network
assets have been in service in 1998 as compared to 1997. As of December 31,
1998, the Company had $696.5 million of property and equipment in service which
had largely been operational throughout all of 1998. As of December 31, 1997,
the Company had $622.7 million of property and equipment in service, the PCS
network portion of which had only been in operation since the second quarter of
1997.

AMORTIZATION EXPENSE was $7.6 million in 1998, an increase of $3.1 million as
compared to 1997. Upon the commencement of service in a particular market, the
Company began amortizing that market's related PCS license. Aerial launched
service across all of its markets between March and June of 1997. As a result,
consolidated amortization expense in 1997 reflects less than a full year's
expense while 1998's expense reflects a full year of amortization.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

DEVELOPMENT COSTS totaled $5.8 million in 1997 and $15.1 million in 1996.
Development costs primarily represent pre-launch marketing, consulting and legal
costs. In 1996, the Company was a development stage enterprise for the entire
year. Effective in the second quarter of 1997, the Company was no longer a
development stage enterprise and prospectively began classifying expenses to
reflect its operational status.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Operating (Loss)

OPERATING (LOSS) totaled $(280.0) million in 1998, $(218.2) million in 1997 and
$(44.0) million in 1996. Although service revenues are expected to continue to
grow during 1999 as the Company builds its customer base, the Company expects to
continue to have operating losses and to generate negative operating cash flow
at least through 1999 as it incurs costs associated with that growth.

Investment and Other Income

MINORITY SHARE OF LOSS totaled $23.6 million in 1998 and represents Sonera
Ltd.'s ("Sonera") share of the consolidated net loss of Aerial Operating
Company, Inc. ("AOC").

INVESTMENT LOSSES totaled $0.1 million in 1998, $2.5 million in 1997 and $0.3
million in 1996. In 1997 and 1996, investment losses represented the Company's
49% share of the net loss of the Wireless Alliance, LLC, ("WALLC"), 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. Because
the Company's share of the cumulative losses have exceeded its investment in the
WALLC, the Company did not recognize any losses related to the WALLC in 1998.
Investment losses in 1998 relate to the Company's investments in the North
American GSM Alliance LLC and the GSM Capital Limited Partnership (both formed
to promote the interests of the wireless telecommunications industry using GSM
technology).

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 $0.9 million in 1998, $2.1 million in 1997 and
$1.1 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 and the February 1998 sale of Series B Zero Coupon Notes
pending use in PCS network development and construction. The proceeds from the
sale of the Series A and Series B Zero Coupon Notes have been fully utilized.

GAIN ON SALE OF PCS LICENSES represents the pretax gain recognized on the sale
of the Guam and Alaska licenses.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Interest and Income Taxes

INTEREST EXPENSE-AFFILIATE totaled $62.1 million in 1998, $21.6 million in 1997
and $2.0 million in 1996. Interest expense-affiliate in 1998 represents interest
on amounts borrowed under the Revolving Credit Agreement, the TDS 3% guarantee
fees associated with both the Series A and Series B Zero Coupon Notes and
amounts financed under the Nokia 1996 and 1998 Credit Agreements. Interest
expense-affiliate in 1997 represents interest on amounts borrowed under the
Revolving Credit Agreement and the TDS 3% guarantee fees associated with the
Series A Zero Coupon Notes and Nokia 1996 Credit Agreement, less interest
capitalized of $2.7 million. The 1996 interest expense-affiliate amount
primarily represents interest on amounts borrowed under the Revolving Credit
Agreement, less interest capitalized of $0.6 million. Interest expense-affiliate
increased $40.5 million in 1998 and $19.6 million in 1997, primarily due to the
increasing average outstanding balance of borrowings under the Revolving Credit
Agreement with TDS.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

INTEREST EXPENSE-OTHER totaled $18.0 million in 1998, $5.5 million in 1997 and
$0.8 million in 1996. In 1998, interest expense-other relates to interest
expense accreted on the Series A and Series B Zero Coupon Notes as well as
interest expense associated with the Nokia 1996 and 1998 Credit Agreements, less
interest capitalized of $0.1 million. In 1997 and 1996, interest expense-other
relates primarily 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 1996 Credit Agreement in 1997 and 1996, respectively.
Interest expense-other increased $12.5 million in 1998 and $4.7 million in 1997,
primarily due to the increasing average outstanding balance in long-term debt.

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 its 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 may carry forward any losses and credits and use them to offset
income tax liabilities to TDS if any arise in the future.

Net (Loss) and (Loss) Per Common and Series A Common Share

Net (Loss) totaled $(337.9) million in 1998, $(247.1) million in 1997 and
$(37.9) million in 1996. Net (Loss) per Common and Series A Common Share was
$(4.71) in 1998, $(3.45) in 1997 and $(0.56) in 1996. The increase in the
Company's Net (Loss) and Net (Loss) per Common and Series A Common Share in 1998
reflects the Company's fully operational status during all of 1998 as compared
to 1997 when the Company was not fully operational until the end of the second
quarter. The 1996 Net (Loss) and Net (Loss) per Common and Series A Common Share
reflects the Company's status as a development stage enterprise for the entire
year.

INFLATION

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

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,
1998, the Company had expended $304.4 million for its six licenses, including
capitalized interest, $739.1 million for all other capital expenditures and
incurred cumulative net losses of $630.8 million. The Company expects to incur
significant operating losses and to generate negative cash flow from operating
activities at least through 1999 as it continues to build its customer base.

Cash flows used by operating activities were $228.8 million in 1998, $206.9
million in 1997 and $17.8 million in 1996. Operating cash outflow (operating
loss before depreciation and amortization expense) totaled $196.6 million in
1998, $177.6 million in 1997 and $42.0 million in 1996.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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 $32.2 million in 1998, $29.3 million
in 1997 and provided cash totaling $24.2 million in 1996. 

Cash flows from financing activities provided $302.7 million in 1998, $449.9 
million in 1997 and $164.1 million in 1996. Cash provided in 1998 was 
primarily due to $301.7 million in borrowings under the Revolving Credit 
Agreement. The Company also received $200 million from the sale to Sonera of 
a 19.4% equity interest in AOC (see Note 4 - Minority Interest for further 
discussion).

<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

The proceeds from the sale were remitted to TDS to pay down part of the
outstanding balance under the Revolving Credit Agreement. 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.

Cash flows used in investing activities totaled $74.0 million in 1998, $273.3
million in 1997 and $111.3 million in 1996. Cash used in 1998 was primarily due
to $74.6 million in additions to property and equipment for PCS network and
information system assets. Total 1998 additions to property and equipment,
including noncash transactions, were $97.0 million, including $43.8 million for
cell sites, $23.0 million for switching equipment, $27.6 million for information
system assets and $2.6 million for other activities.

Additions to cell sites in 1998 were due to the need for additional sites to
fill in and improve the coverage of the Company's PCS network within its MTAs.
Additions to switching equipment in 1998 were primarily due to the need for
increased network capacity to handle greater call volume. Additions to
information system assets primarily reflected the costs associated with the
completion of the new Kansas City customer service center, new inventory and
payroll systems and improvements to the Company's billing system. Other capital
expenditures were primarily for leasehold improvements and office furniture and
equipment.

Cash used in 1997 resulted primarily from $274.7 million in additions to
property and equipment, primarily 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 systems
development and property and equipment in service (primarily computer equipment
and software, office equipment and leasehold improvements).

The Company's fixed asset additions have been financed through a combination of
borrowings under the Revolving Credit Agreement with TDS, the proceeds from the
IPO, the Series A and Series B Zero Coupon Notes, and the Nokia 1996 and 1998
Credit Agreements.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

For 1999, the Company estimates that the aggregate funds required for capital
expenditures for the continuing development of its PCS networks and services
will total approximately $130 million. The Company will be building additional
cell sites to augment its existing coverage area, primarily corridor coverage on
interstates to suburbs. The Company will continue to upgrade its switching and
other fixed network equipment to support future customer growth. Also in 1999,
capital expenditures related to information systems will include a significant
upgrade of the Company's billing system, the Year 2000 Issue, new hardware and
software to support employee growth, and other project initiatives.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

The Company estimates requiring $205 million for working capital requirements to
fund operations for all of 1999, including an estimated $80 million in interest
expense related to the Revolving Credit Agreement and TDS 3% guarantee fees
related to both the Series A and Series B Zero Coupon Notes and the Nokia 1998
Credit Agreement.

Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to
$200 million in financing for digital radio channel and switching infrastructure
equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996
Credit Agreement"). In accordance with the provisions of the 1996 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 1996 Credit Agreement. On November 4, 1996,
the Company issued $226.2 million in aggregate principal amount at maturity of
Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998,
the Company issued $220.0 million in aggregate principal amount at maturity of
Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the
final issuance of zero coupon notes under the 1996 Credit Agreement). The
aggregate issue price of the Series A and Series B Zero Coupon Notes was $200
million. The proceeds were paid to Nokia in satisfaction of all obligations of
the Company under the 1996 Credit Agreement.

On June 30, 1998, the Company and Nokia entered into an agreement ("1998 Credit
Agreement") in which Nokia will provide up to an aggregate $150 million in
financing to the Company for the purchase of network infrastructure equipment
and services from Nokia. Loans under the 1998 Credit Agreement are to be made
available in two $75 million tranches. With respect to Tranche A, the Company
may borrow up to $75 million until June 30, 1999. Tranche A loans mature on June
30, 1999; however, the maturity date of Tranche A loans may be extended to June
30, 2000, upon written notice and payment of an extension fee by the Company to
Nokia. A second $75 million ("Tranche B") becomes available commencing on June
30, 1999, and ending on June 30, 2000, the maturity date of Tranche B loans. The
obligations of the Company under the 1998 Credit Agreement are fully and
unconditionally guaranteed by TDS at an annual fee rate of 3% (see Note 5 -
Long-Term Debt for further discussion). As of December 31, 1998, the Company had
$29.5 million available for borrowing under the Tranche A portion of the 1998
Credit Agreement with Nokia.

On September 8, 1998, pursuant to the terms of a Purchase Agreement dated
June 1, 1998 (the "Purchase Agreement"), Sonera made a $200 million 
investment in AOC. Sonera purchased approximately 2.4 million shares of 
common stock of AOC representing a 19.4% equity interest in AOC. Sonera has 
the right, subject to adjustment under certain circumstances, to exchange 
each share of AOC common stock which it owns for 6.72919 Common Shares of 
Aerial. Upon the exchange of all of the AOC shares, Sonera would own an 
18.452% equity interest in Aerial, reflecting a purchase price equivalent to 
$12.33 per Common Share of Aerial (the "Equivalent Purchase Price"). See Note 
4 - Minority Interest for further discussion.

Under the terms of the Purchase Agreement, the Revolving Credit Agreement
between the Company and TDS dated August 1, 1995, as amended, pursuant to which
the Company owed TDS $665.0 million as of August 31, 1998, was terminated. A new
Revolving Credit Agreement between AOC and TDS was substituted, under which AOC
was indebted to TDS for $665.0 million as of August 31, 1998.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

The new Revolving Credit Agreement provides that the amount of any proceeds 
raised by the Company or AOC in connection with the sale of equity (see Note 
4 - Minority Interest) or debt will be used to reduce the borrowings under 
the Revolving Credit Agreement as well as reduce the total amount AOC may 
borrow under the Revolving Credit Agreement. Additionally, any borrowings 
under the Nokia 1998 Credit Agreement (see Note 5 - Long-Term Debt) 
concurrently reduces by the same amount the authorized total line of credit 
available to AOC under the Revolving Credit Agreement. Pursuant to these 
terms, AOC paid to TDS the $200 million it had received from Sonera to reduce 
the outstanding balance under the Revolving Credit Agreement.

<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

On November 3, 1998, TDS approved an amendment to the Revolving Credit Agreement
dated August 31, 1998, between TDS and AOC. Under the Revolving Credit
Agreement, as amended, AOC may borrow up to a maximum amount (the "Maximum
Amount"), less the amount of any debt or equity financing obtained by AOC or the
Company, including the amount of any borrowings under the Nokia 1998 Credit
Agreement. The Maximum Amount under the amended Revolving Credit Agreement was
increased to $650 million in February 1999. The interest rate under the amended
Revolving Credit Agreement is equal to the prime rate plus 3%. Interest on the
balance due under the amended Revolving Credit Agreement is payable quarterly
and no principal is payable until April 2, 2000.

The following table summarizes AOC's borrowing capacity under the Revolving
Credit Agreement as of December 31, 1998:

<TABLE>

<S>                                                         <C>
(Dollars in thousands)
----------------------------------------------------------------------
Maximum amount available                                     $ 615,000
Reduced by:
  Vendor financing under the Nokia 1998 Credit Agreement       (45,472)
  Amount outstanding under the Revolving Credit Agreement     (549,943)
----------------------------------------------------------------------
  Net amount available for borrowing                         $  19,585
----------------------------------------------------------------------
</TABLE>


In March 1999, TDS agreed to pay the Company $114.5 million as a settlement 
for tax losses incurred by the Company and utilized by the TDS consolidated 
tax group. The Company used the funds to repay a portion of the existing AOC 
Indebtedness to TDS, thereby increasing the amount available under the 
Revolving Credit Agreement. Accordingly, available funding under the 
Revolving Credit Agreement is now expected to last through June of 1999. TDS 
has not committed to any further financing of the Company's operations. It is 
the intent of TDS and Aerial management to obtain the necessary level of 
financial support from sources other than TDS to enable the Company to pay 
its debts as they become due. TDS and Aerial management believe the Company 
has the ability to obtain that financial support. Sources of additional 
capital may include vendor financing and public and private equity and debt 
financings by the Company or its subsidiaries. If sufficient future funding 
is not available on terms and prices acceptable to the Company, the Company 
would have to reduce its construction and operating activities or take other 
actions, which could have a material adverse impact on Company's financial 
condition and results of operations.

<PAGE>


Aerial Communications, Inc. and Subsidiaries

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
proposal was part of TDS's proposed corporate restructuring which included
issuing three new classes of common stock (commonly known as "tracking" stock)
and changing the state of incorporation of TDS from Iowa to Delaware. The three
new classes of stock were intended to separately reflect the performance of
TDS's cellular telephone, landline telephone and personal communications
services businesses.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

In December 1998, TDS announced the withdrawal of its offer to exchange tracking
stock for the outstanding common shares of Aerial which it did not own. TDS also
announced that it was pursuing a tax-free spin-off of its 82.3% interest in
Aerial, as well as reviewing other alternatives. TDS intends to ask the Internal
Revenue Service ("IRS") to rule on the tax-free status of such a distribution.
There are a number of conditions that must be met for a spin-off to occur,
including receipt of a favorable IRS ruling, final approval by the TDS Board,
certain government and third party approvals, and review by the Securities and
Exchange Commission ("SEC") of appropriate SEC filings. TDS intends to seek
shareholder approval of a proposal to distribute Aerial Series A Common Shares,
on a pro-rata basis, to holders of TDS Series A Common Shares; and Aerial Common
Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be no
assurance that a spin-off will be consummated or that other alternatives will
not be pursued. Prior to any spin-off, it is expected that Aerial will seek
additional financing so that Aerial would have the appropriate capitalization to
operate as a stand-alone entity. In connection with such financing, all or a
portion of Aerial's debt to TDS may be converted into equity. See the Liquidity
and Capital Resources section for further discussion of the Company's financing.

Following the announcement by TDS in December 1998, that it intended to 
distribute to its shareholders all of the capital stock of Aerial that it 
owns, and that Aerial would seek additional financing from sources other than 
TDS in connection therewith, Sonera contacted TDS to express certain concerns 
about the announcement. Sonera has asserted that the TDS announcement 
reflects a change in circumstances that warrant the renegotiation of certain 
matters related to its investment in AOC, including an adjustment in the 
Equivalent Purchase Price, and has raised the possibility of litigation in 
connection therewith. TDS and Aerial intend to attempt to reach a mutually 
acceptable resolution of the concerns raised by Sonera. There can be no 
assurance that this matter will not lead to litigation, or that it will not 
have a material adverse effect on Aerial or on the plans relating to the 
refinancing and spin-off of Aerial.

MARKET RISK

The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. The majority of the Company's debt is in the form of
variable rate notes with original maturities ranging from one to ten years. The
Series A and Series B Zero Coupon Notes are fixed rate debt and therefore,
fluctuations in interest rates can lead to significant fluctuations in the fair
value of these instruments. The Company does not enter into financial
derivatives to reduce its exposure to interest rate risks.

The table below provides the fair value (fair values were estimated using
discounted cash flow analyses) and weighted average interest rates of the
Company's outstanding debt at December 31, 1998. 

<TABLE> 
<CAPTION>
                             Amount Maturing           Wtd. Avg.
Expected Maturity Date    (Dollars in thousands)     Interest Rate
-------------------------------------------------------------------
<S>                        <C>                       <C>   

1999                                    --                 -- 
2000                               595,415              10.33%
2001                                    --                 -- 
2002                                    --                 -- 
2003                                    --                 -- 
Thereafter                         446,220               8.20%
Total                          $ 1,041,635               9.42%
-------------------------------------------------------------------
Fair Value at 12/31/98         $   828,005
-------------------------------------------------------------------
</TABLE>


<PAGE>


Aerial Communications, Inc. and Subsidiaries

YEAR 2000 ISSUE

The Year 2000 Issue exists because many computer systems and applications
abbreviate dates using only two digits, rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems,
applications and embedded technology may recognize the date as January 1, 1900,
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

The Company's management has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv)
Validation and (v) Implementation.

The awareness phase consists of establishing a Year 2000 Project Team that
reports periodically to Aerial's Audit Committee, and developing an overall
strategy. A Year 2000 Program Office has been established at the TDS corporate
level to coordinate activities of the Year 2000 Project Team, to monitor the
current status of individual projects, to report periodically to the TDS Audit
Committee, and to promote the exchange of information between all business units
to share knowledge and solution techniques. Aerial management has made the Year
2000 Issue a top priority. The Year 2000 effort covers the network and
supporting infrastructure for the provision of PCS services; the operational and
financial information technology ("IT") systems and applications, such as
computer systems that support key business functions such as billing, finance,
customer service, procurement and supply; and a review of the Year 2000
compliance efforts of the Company's critical suppliers.

The assessment phase includes the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of systems and hardware that
are not Year 2000 compliant. Included in the assessment phase is an analysis of
risk management factors such as contingency plans and legal matters. The
assessment phase was substantially completed in the last quarter of 1998.

The renovation phase consists of the conversion or replacement of selected
platforms, applications, databases and utilities. The renovation of mission
critical systems, applications and hardware is scheduled to be substantially
completed by the second quarter of 1999.

The validation phase includes testing, verifying and validating the renovated or
replaced platforms, applications, databases and utilities. A goal of the
validation phase is to conduct independent verification testing of mission
critical systems, applications and hardware as well as network and system
component upgrades received from suppliers. In addition, selected Year 2000
upgrades are slated to undergo testing in a controlled environment that
replicates the current environment and is equipped to simulate the turn of the
century and leap year dates. The Cellular Telecommunications Industry
Association ("CTIA") has formed a working group to coordinate efforts of various
carriers and manufacturers to facilitate in inter-network Year 2000 testing. The
Company is monitoring CTIA's testing program. Validation of the Company's
mission critical systems, applications and hardware is scheduled to be completed
in the third quarter of 1999.

The implementation phase involves migrating the converted and renovated mission
critical systems, applications and hardware into production. This phase has been
started and is expected to be completed early in the fourth quarter of 1999.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management cannot provide assurance that its plan to achieve Year 2000
compliance will be successful as it is subject to various risks and
uncertainties. The Company's current schedule is subject to change depending on
developments that may arise through unforeseen circumstances in the renovation,
validation and implementation phases of the Company's compliance efforts. The
Company, like most other telecommunications operators, is highly dependent on
the telecommunications network vendors to provide compliant hardware, systems
and applications, as well as other third parties, including vendors, other
telecommunications service providers, government agencies and financial
institutions, to deliver reliable services. The Company is dependent on the
development of compliant hardware, systems and applications and upgrades by
experts, both internal and external, and the availability of critical resources
with the requisite skill sets.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

The Company's ability to meet its target dates is dependent upon the timely
provision of necessary upgrades and modifications by its suppliers and internal
resources. In addition, the Company cannot guarantee that third parties on whom
it depends for essential services (such as electric utilities, financial
institutions and interconnected telecommunications operators, etc.) will convert
their critical systems and processes in a timely manner. Failure or delay by any
of these parties could significantly disrupt the Company's business, including
the provision of PCS services, billing and collection processes, and other areas
of the business, and cause a material adverse affect on the Company's results of
operations, financial position and cash flow.

The Company's Year 2000 worst-case scenario may involve interruption of
telecommunications services and data processing services and/or interruption of
customer billing, operating and other information systems. As part of its Year
2000 initiative, the Company is evaluating a variety of adverse scenarios and is
in the process of developing contingency and business continuity plans tailored
for adverse Year 2000-related occurrences. The contingency and business
continuity plans are expected to assess the potential for business disruption in
various scenarios, and to provide key operational back-up, recovery and
restorational alternatives.

The Company's contingency plan initiatives will include the following:
reviewing, assessing and updating existing business recovery plans; identifying
teams who will be on call during the millennium change to monitor the network,
critical systems, operations centers and business processes to react immediately
to facilitate repairs; re-prioritization of mission critical work processes and
associated resources; developing alternate processes to support critical
customer functions in the event information systems or mechanized processes
experience Year 2000 disruptions; working with public saftey agencies to provide
alternate methods of emergency communication for the Company's customers and the
agencies; establishing replacement/repair parallel paths to provide for repair
and readiness of existing systems and components that are scheduled for
replacement by the year 2000, in the event the replacement schedules are not
met; developing alternate plans for critical suppliers of products/services that
fail to meet Year 2000 compliance commitment schedules; developing data
retention and recovery procedures to be in place for customer and critical
business data to provide pre-millennium backups with on-site as well as off-site
data copies. The Company anticipates having these contingency plans in place
before December 31, 1999.

The Company estimates that the total costs of its Year 2000 efforts will be
approximately $15 million. Through December 31, 1998, the total costs associated
with the Year 2000 Issue were approximately $2 million. The timing of
expenditures may vary and is not necessarily indicative of readiness efforts or
progress to date. Though Year 2000 Project costs will directly impact the
reported level of future net income, the Company intends to manage its total
cost structure, including deferral of non-critical projects, in an effort to
mitigate the impact of Year 2000 Project costs.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

The above information, which contains statements that are "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995, is
based on the Company's current best estimates, which were derived using numerous
assumptions of future events, including the availability and future costs of
certain technological and other resources, third party modification actions and
other factors. Given the complexity of these issues and the possibility of
unidentified risks, actual results may vary materially from those anticipated
and discussed above. Specific factors that might cause such differences include,
among others, the availability and cost of personnel trained in this area, the
ability to locate and correct all affected computer code, the timing and success
of remedial efforts of third party suppliers, and similar uncertainties.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of
Operations

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; UNANTICIPATED CHANGES IN GROWTH IN PCS
CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES
OFFERED IN THE COMPANY'S MARKETS; AND UNANTICIPATED PROBLEMS WITH THE YEAR 2000
ISSUE. 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,                                       1998           1997           1996
---------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S>                                                        <C>            <C>            <C>

OPERATING REVENUES
 Service                                                    $ 123,640      $  32,307      $     --
 Equipment sales                                               31,514         23,645            --
---------------------------------------------------------------------------------------------------
 Total Operating Revenues                                     155,154         55,952            --
---------------------------------------------------------------------------------------------------
OPERATING EXPENSES
 System operations                                             69,066         30,655            --
 Marketing and selling                                         79,704         45,974            --
 Customer service                                              53,516         20,882            --
 Cost of equipment sold                                        87,715         71,454            --
 General and administrative                                    61,737         58,825         28,843
 Depreciation                                                  75,846         36,045            --
 Amortization of intangibles                                    7,555          4,509            --
 Development costs                                                 --          5,773         15,107
---------------------------------------------------------------------------------------------------
 Total Operating Expenses                                     435,139        274,117         43,950
---------------------------------------------------------------------------------------------------
OPERATING (LOSS)                                             (279,985)      (218,165)       (43,950)
---------------------------------------------------------------------------------------------------
INVESTMENT AND OTHER INCOME
 Minority share of loss                                        23,620             --             --
 Investment (losses)                                             (128)        (2,518)          (304)
 Interest income-affiliate                                        --              95          4,488
 Interest income-other                                            882          2,133          1,158
 Other income                                                     442            269             --
 Gain on sale of PCS licenses                                      --             --          2,582
---------------------------------------------------------------------------------------------------
 Total Investment and Other Income                             24,816            (21)         7,924
---------------------------------------------------------------------------------------------------
(LOSS) BEFORE INTEREST AND INCOME TAXES                      (255,169)      (218,186)       (36,026)
---------------------------------------------------------------------------------------------------
INTEREST EXPENSE
 Interest expense-affiliate                                    62,137         21,558          1,960
 Interest expense-other                                        18,010          5,507            802
---------------------------------------------------------------------------------------------------
 Total Interest Expense                                        80,147         27,065          2,762
---------------------------------------------------------------------------------------------------
(LOSS) BEFORE INCOME TAXES                                   (335,316)      (245,251)       (38,788)
 Income tax expense (benefit)                                   2,579          1,806           (867)
---------------------------------------------------------------------------------------------------
NET (LOSS)                                                  $(337,895)     $(247,057)     $ (37,921)
---------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND
  SERIES A COMMON SHARES (000s)                               71,723         71,512         67,492
(LOSS) PER COMMON AND SERIES A COMMON SHARE               $   (4.71)     $   (3.45)     $   (0.56)
---------------------------------------------------------------------------------------------------
</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,                                      1998           1997           1996
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                      <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net (Loss)                                               $(337,895)     $(247,057)     $ (37,921)
 Add (Deduct) adjustments to reconcile net (loss) 
   to net cash (used) by operating activities:
 Depreciation and amortization                               83,401         40,554          1,934
 Noncash interest expense-Series A and B Notes               16,210          8,341          1,327
 Change in deferred taxes                                     2,579          1,806          2,231
 Investment losses                                              128          2,518            304
 Gain on sale of PCS licenses                                    --             --         (2,582)
 Minority share of loss                                     (23,620)            --             --
 Loss on sale of property and equipment                       3,242             --             --
 Change in accounts receivable-customer                        (174)       (24,030)            --
 Change in income tax refund receivable-affiliate                --             --         12,502
 Change in inventory                                         14,571        (25,949)            --
 Change in accounts payable-affiliates                         (121)           284           (795)
 Change in accounts payable-trade and other                   6,680         30,606          3,491
 Change in accrued interest-affiliate                         1,274          3,665         (1,497)
 Change in other assets and liabilities                       4,924          2,399          3,225
---------------------------------------------------------------------------------------------------
                                                           (228,801)      (206,863)       (17,781)
---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Borrowings under the Revolving Credit Agreement-TDS        301,709        448,234             --
 Repayments of borrowings under the
   Revolving Credit Agreement-TDS                          (200,000)            --        (60,238)
 Proceeds from minority investor                            200,000             --             --
 Change in note receivable-affiliate                             --             --         28,836
 Issuance of common stock                                     1,002          1,699        195,485
---------------------------------------------------------------------------------------------------
                                                            302,711        449,933        164,083
---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Additions to property and equipment                        (74,580)      (274,709)      (112,940)
 Change in note receivable                                       --          1,925             --
 Proceeds from sale of PCS licenses                              --             --          2,275
 Proceeds from sale of property and equipment                   711             --             --
 Change in temporary and other investments                     (110)          (558)          (614)
---------------------------------------------------------------------------------------------------
                                                            (73,979)      (273,342)      (111,279)
---------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS            (69)       (30,272)        35,023
CASH AND CASH EQUIVALENTS -
 Beginning of year                                            5,012         35,284            261
---------------------------------------------------------------------------------------------------
 End of year                                              $   4,943      $   5,012      $  35,284
---------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these statements.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

ASSETS
-------------------------------------------------------------------------------
December 31,                                              1998           1997
-------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                  <C>            <C>
CURRENT ASSETS
 Cash and cash equivalents                           $   4,943      $   5,012
 Temporary investments                                      35            197
 Accounts receivable:
   Customers, less allowance of
   $5,875 and $7,252, respectively                      24,204         24,030
   Roaming                                               2,252             --
   Other                                                 1,348            207
 Inventory                                              11,378         25,949
 Prepaid rent                                            3,666          1,630
 Other                                                     898            984
-------------------------------------------------------------------------------
                                                        48,724         58,009
-------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
 In service and under construction                     733,958        642,122
 Less accumulated depreciation                        (112,677)       (38,018)
-------------------------------------------------------------------------------
                                                       621,281        604,104
-------------------------------------------------------------------------------
INVESTMENTS
 Investment in PCS licenses, net of accumulated
  amortization of $12,044 and $4,489, respectively     289,488        297,043
 Other                                                   1,444          1,298
-------------------------------------------------------------------------------
                                                       290,932        298,341
-------------------------------------------------------------------------------
 Deferred costs                                            410            194
-------------------------------------------------------------------------------
TOTAL ASSETS                                         $ 961,347      $ 960,648
-------------------------------------------------------------------------------
</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,                                        1998           1997
---------------------------------------------------------------------------
(Dollars in thousands)
<S>                                              <C>            <C>
CURRENT LIABILITIES
 Accounts payable:
  Affiliates                                      $   6,727      $     773
  Trade                                              56,097         92,020
 Accrued interest-affiliate                           4,939          3,665
 Accrued compensation                                 5,169          3,414
 Accrued taxes                                        7,015          1,957
 Microwave relocation costs payable                   1,828          7,354
 Other                                                4,349            586
---------------------------------------------------------------------------
                                                     86,124        109,769
---------------------------------------------------------------------------
 REVOLVING CREDIT AGREEMENT-TDS                     549,943        448,234
---------------------------------------------------------------------------
 LONG-TERM DEBT                                     278,010        196,439
---------------------------------------------------------------------------
 DEFERRED TAX LIABILITY-NET                          16,357         13,779
---------------------------------------------------------------------------
 MINORITY INTEREST                                    5,835             --
---------------------------------------------------------------------------

COMMON SHAREHOLDERS' EQUITY
 Common Shares, $1.00 par value; authorized
   100,000,000 shares; issued and outstanding
   31,788,982 and 31,610,605, respectively           31,789         31,611
 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                         584,114        413,746
 Retained deficit                                  (630,825)      (292,930)
---------------------------------------------------------------------------
                                                     25,078        192,427
---------------------------------------------------------------------------
 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $ 961,347      $ 960,648
---------------------------------------------------------------------------
</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,                   1998          1997          1996
-------------------------------------------------------------------------------
(Dollars in thousands)

<S>                                  <C>              <C>            <C>
COMMON STOCK
 Balance at beginning of year         $      --       $      --      $       1
 Deduct recapitalization                     --               --            (1)
-------------------------------------------------------------------------------
 Balance at the end of year           $      --       $      --      $      --
-------------------------------------------------------------------------------

COMMON SHARES
 Balance at beginning of year         $  31,611       $  31,359      $      --
 Add:
  Recapitalization                           --              --         19,086
  Initial public offering                    --              --         12,250
  Employee benefit plans                    178             252             23
-------------------------------------------------------------------------------
 Balance at end of year               $  31,789       $  31,611      $  31,359
-------------------------------------------------------------------------------

SERIES A COMMON SHARES
 Balance at beginning of year         $  40,000       $  40,000      $      --
 Add recapitalization                        --              --         40,000
-------------------------------------------------------------------------------
 Balance at end of year               $  40,000       $  40,000      $  40,000
-------------------------------------------------------------------------------

ADDITIONAL PAID-IN CAPITAL
 Balance at beginning of year         $ 413,746       $ 412,299      $ 289,233
 Add (Deduct):
  Recapitalization                           --              --        (59,085)
  Gain on sale of subsidiary stock      169,544              --             --
  Initial public offering                    --              --        183,015
  Capital stock expense                      --              --         (1,061)
  Employee benefit plans                    824           1,447            197
-------------------------------------------------------------------------------
 Balance at the end of year           $ 584,114       $ 413,746      $ 412,299
-------------------------------------------------------------------------------

RETAINED DEFICIT
 Balance at beginning of year         $(292,930)      $ (45,873)     $  (7,952)
 Net (Loss)                            (337,895)       (247,057)       (37,921)
-------------------------------------------------------------------------------
 Balance at end of year               $(630,825)      $(292,930)     $ (45,873)
-------------------------------------------------------------------------------
</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. PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, Aerial Communications, Inc. ("Aerial" or the "Company")
received a proposal from Telephone and Data Systems, Inc. ("TDS") to acquire all
of the issued and outstanding Common Shares of Aerial not already owned by TDS.
The proposal was part of TDS's proposed corporate restructuring which included
issuing three new classes of common stock and changing the state of
incorporation of TDS from Iowa to Delaware. The three new classes of stock were
intended to separately reflect the performance of TDS's cellular telephone,
landline telephone and personal communications services businesses.

In December 1998, TDS announced the withdrawal of its offer to exchange 
tracking stock for the outstanding common shares of Aerial which it did not 
own. TDS also announced that it was pursuing a tax-free spin-off of its 82.3% 
interest in Aerial, as well as reviewing other alternatives. TDS intends to 
ask the Internal Revenue Service ("IRS") to rule on the tax-free status of 
such a distribution. There are a number of conditions that must be met for a 
spin-off to occur, including a receipt of a favorable IRS ruling, final 
approval by the TDS Board, certain government and third party approvals, and 
review by the Securities and Exchange Commission ("SEC") of appropriate SEC 
filings. TDS intends to seek shareholder approval of a proposal to distribute 
Aerial Series A Common Shares, on a pro-rata basis, to holders of TDS Series 
A Common Shares; and Aerial Common Shares, on a pro-rata basis, to holders of 
TDS Common Shares. There can be no assurance that a spin-off will be 
consummated or that other alternatives will not be pursued. Prior to any 
spin-off, it is expected that Aerial will seek additional financing so that 
Aerial would have the appropriate capitalization to operate as a stand-alone 
entity. In connection with such financing, all or a portion of Aerial's debt 
to TDS may be converted into equity. See also Note 11--Contingency for 
discussion of the concerns raised by Sonera Ltd. about the spin-off 
announcement made by TDS, which has raised the possibility of litigation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
Aerial is an 82.3%-owned subsidiary of 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 27.7 million population
equivalents ("POPs"). As of December 31, 1998, the Company had approximately
311,900 customers.

(B) DEVELOPMENT STAGE ENTERPRISE
Effective with the second quarter of 1997, the Company ceased to be a
development stage enterprise and presents its 1998 and 1997 results of
operations, cash flows and financial position in a manner similar to other
operating enterprises within the industry.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

(C) 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 80.6% interest in Aerial
Operating Company, Inc. ("AOC"). The MTAs are wholly-owned subsidiaries of AOC.
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 as
well as 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.

(D) REVENUE RECOGNITION AND INVENTORY
Revenues from operations consist of charges to customers for monthly access,
airtime, value-added services, outcollect roaming 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 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.

(E) ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs totaled
$25.8 million, $21.1 million and $1.4 million for the years ended December 31,
1998, 1997 and 1996, respectively. Prior to launching service, the Company was a
development stage enterprise and advertising costs were included in development
costs.

(F) 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 $611,000, $326,000 and
$72,000 in 1998, 1997 and 1996, respectively.

(G) 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. The Company's investments in marketable non-equity securities,
included in other investments, are stated at amortized cost, have maturities of
one to five years and are classified as held-to-maturity.

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.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

(H) 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 (including work in process) consists of:
<TABLE>
<CAPTION>

---------------------------------------------------------
December 31,                        1998           1997
---------------------------------------------------------
(Dollars in thousands)

<S>                             <C>            <C>      
 Cell sites and equipment       $ 484,638      $ 442,308
 Switching equipment              114,470         91,598
 Information systems              108,279         83,950
 Office equipment                  18,247         15,800
 Leasehold improvements             8,324          8,466
---------------------------------------------------------
                                  733,958        642,122
---------------------------------------------------------
 Accumulated depreciation        (112,677)       (38,018)
---------------------------------------------------------
 Property and equipment-net     $ 621,281      $ 604,104
---------------------------------------------------------
</TABLE>

Gains and losses on the disposition of property and equipment are included in
operating expenses.

(I) 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.

(J) 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,
1998 and 1997, totaled $12.0 million and $4.5 million, respectively.

(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

(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, 1996 (see Note 9 - Common Stock).


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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 1998, 1997 and 1996, respectively, 1.7
million, 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,                          1998        1997        1996
--------------------------------------------------------------------------------
(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
 Interest paid to non-affiliates                 1,911         428       1,107
 Interest and guarantee fees paid to TDS
   or converted to debt under the
   Revolving Credit Agreement                  $57,219     $24,297     $ 3,496
--------------------------------------------------------------------------------
</TABLE>

In 1998, $71.5 million in additions to property and equipment (amounts in
service and work in process, collectively) were financed through long-term debt
and accounts payable-affiliate. In 1997, $113.0 million in additions to property
and equipment 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.

In 1998, the Company incurred interest charges totaling $80.2 million. In 1998,
the interest charges were comprised of $55.4 million paid to TDS relating to the
Revolving Credit Agreement (see Note 6 - Revolving Credit Agreement), $6.7
million paid to TDS for guarantee fees on the Series A and Series B Zero Coupon
Notes and obligations under the Nokia 1998 and 1996 Credit Agreements (see Note
5 - Long-Term Debt), $1.0 million paid to Nokia for interest charges relating to
the 1998 Credit Agreement, $16.2 million in accrued interest on the Series A and
Series B Zero Coupon Notes, and $0.9 million in other interest charges. Of these
amounts, the Company capitalized $0.1 million relating to its work in process
expenditures. The remaining $80.1 million was charged to expense.

In 1997, the Company incurred interest charges totaling $33.1 million. In 1997,
the interest charges were comprised of $21.0 million paid to TDS relating to the
Revolving Credit Agreement (see Note 6 - Revolving Credit Agreement), $3.3
million paid to TDS for guarantee fees on the Series A Zero Coupon Notes and
obligations under the Nokia 1996 Credit Agreement (see Note 5 - Long-Term Debt),
$0.4 million paid to Nokia for interest charges relating to the 1996 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.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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 1996 Credit Agreement, $70,000
paid to Nokia for interest charges relating to the 1996 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.



<PAGE>


Aerial Communications, Inc. and Subsidiaries

(N) NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive Income (Loss) equals Net (Loss) for the year ended December 31,
1998.

The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 98-1 "Accounting for Computer Software Developed
for or Obtained for Internal Use," which became effective January 1999. To
eliminate the diversity in practice in accounting and improve financial
reporting, SOP 98-1 provides guidance for accounting for software developed for
internal use. Management does not anticipate that the effect on results of
operations and financial position will be material.

The AICPA issued SOP 98-5 "Reporting on the Costs of Start-up Activities," which
became effective January 1999. SOP 98-5 requires that costs of start-up
activities, including organizational costs, should be charged to operations as
incurred. Management believes SOP 98-5 will have no effect on results of
operations and financial position.

3. INCOME TAXES
The Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group. The Company and TDS are parties to a Tax
Allocation Agreement (the "Agreement"). The Agreement provides that the Company
and its subsidiaries be included with the TDS affiliated group in a consolidated
federal income tax return and in state income or franchise tax returns in
certain situations. For financial reporting purposes, the Company computes its
federal income taxes as if it were filing a separate return as its own
affiliated group and is not included in the TDS group. Under the Agreement the
Company may carry forward any losses and credits, and use them to offset income
tax liabilities to TDS if any arise in the future. See Note 10--Subsequent 
Event for further discussion of the Agreement.

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,                        1998        1997        1996 
------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                         <C>         <C>         <C>     
 Federal income tax provision (benefit):
   Current                                   $    --     $    --     $(3,098)
   Deferred                                    2,078       1,561       1,671
 State income tax provision:
   Current                                        --          --          --
   Deferred                                      501         245         560
------------------------------------------------------------------------------
 Income tax expense (benefit)                $ 2,579     $ 1,806     $  (867)
------------------------------------------------------------------------------
</TABLE>


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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

------------------------------------------------------------------
Year ended December 31,                     1998           1997
------------------------------------------------------------------
(Dollars in thousands)
<S>                                    <C>            <C>      
 Deferred tax asset:
   Net operating loss carryforwards     $ 357,460      $ 171,896
   Less: valuation allowance             (277,782)      (129,412)
------------------------------------------------------------------
 Total deferred tax asset               $  79,678      $  42,484
------------------------------------------------------------------
 Deferred tax liability:
   Licenses                             $  24,060      $  19,025
   Property and equipment                  39,364         19,004
   Partnership investment                  13,967          9,235
   Minority share of loss                   9,934           --
   Deferred charges-interest                5,273          6,088
   Other                                    3,437          2,911
------------------------------------------------------------------
 Total deferred tax liability           $  96,035      $  56,263
------------------------------------------------------------------
 Net deferred tax liability             $  16,357      $  13,779
------------------------------------------------------------------
</TABLE>

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, 1998, the federal net operating loss
carryforward available to offset future taxable income is $802.4 million
(generating a $280.8 million deferred tax asset) and expires between 2012 and
2018. The amount of state net operating loss carryforward available to offset
future taxable income, primarily of the individual MTAs which generated the
loss, is $1,086.2 million (generating a $76.7 million deferred tax asset) and
expires between 2000 and 2018.

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 1998, the
valuation allowance increased $148.4 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,                                       1998         1997         1996
----------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>          <C>  
 Statutory federal income tax rate                            35.0%        35.0%        35.0%
 State income taxes, net of federal benefit                   (0.1)        (0.1)        (0.9)
 Effects of valuation allowance on deferred tax asset        (35.7)       (35.6)       (29.7)
 Other                                                          --           --         (2.2)
----------------------------------------------------------------------------------------------
 Effective income tax rate                                    (0.8)%       (0.7)%        2.2%
----------------------------------------------------------------------------------------------
</TABLE>

4. MINORITY INTEREST
On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June
1, 1998, Sonera Ltd. ("Sonera"), formerly Telecom Finland Ltd., made a $200
million investment in AOC, a then wholly -owned subsidiary of the Company.
Sonera purchased approximately 2.4 million shares of common stock of AOC at a
price of approximately $83 per share representing a 19.4% equity interest in
AOC. The sale of the AOC Common Shares was recorded at a fair market value which
was more than the Company's book value investment in AOC. The Company adjusted
its book value investment in AOC as a result of this sale and increased
additional paid-in capital $169.5 million in 1998.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Sonera's equity ownership amount in AOC is subject to adjustment based on 
Aerial's 20-day average stock price during the three years commencing 
September 8, 1998. Depending on the level of increase in the stock price, 
Sonera's ownership amount in AOC could decline to approximately 15%. In 
addition, after five years Sonera's equity in AOC becomes incrementally 
exchangeable for equity in Aerial or, in certain circumstances, incrementally 
exchangeable for equity in TDS or cash or any combination of the foregoing. 
See also Note 11--Contingency for discussion of the concerns raised by Sonera 
about the spin-off announcement made by TDS, which has raised the possibility 
of litigation.

Minority share of loss of $23.6 million represents Sonera's share of AOC's
consolidated net loss from September 8, 1998 (the closing date) to December 31,
1998.

5. LONG-TERM DEBT
Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to
$200 million in financing for digital radio channel and switching infrastructure
equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996
Credit Agreement"). In accordance with the provisions of the 1996 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 1996 Credit Agreement. On November 4, 1996,
the Company issued $226.2 million in aggregate principal amount at maturity of
Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998,
the Company issued $220.0 million in aggregate principal amount at maturity of
Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the
final issuance of zero coupon notes under the 1996 Credit Agreement). The
aggregate issue price of the Series A and Series B Zero Coupon Notes was $200
million. The proceeds were paid to Nokia in satisfaction of all then outstanding
and future obligations of the Company up to $200 million under the 1996 Credit
Agreement.

On June 30, 1998, the Company and Nokia entered into an agreement ("1998 Credit
Agreement") in which Nokia will provide up to an aggregate $150 million in
financing to the Company for the purchase of network infrastructure equipment
and services from Nokia. Loans under the 1998 Credit Agreement are to be made
available in two $75 million tranches. With respect to Tranche A, the Company
may borrow up to $75 million until June 30, 1999. Tranche A loans mature on June
30, 1999; however, the maturity date of Tranche A loans may be extended to June
30, 2000, upon written notice and payment of an extension fee by the Company to
Nokia. A second $75 million ("Tranche B") becomes available commencing on June
30, 1999, and ending on June 30, 2000, the maturity date of Tranche B loans.
Interest under the 1998 Credit Agreement is payable monthly at a per annum rate
equal to the 30-day London Interbank Offered Rate ("LIBOR") plus 0.25% (the
"Eurodollar margin"). The Eurodollar margin on any Tranche A loans with an
extended maturity date is subject to adjustment based on ratings for TDS
long-term senior unsecured debt.

The Series A and 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 A and Series B Notes and obligations of
the Company under the 1998 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 and Series B 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 accreted since
issuance.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

Of the $278.0 million in long-term debt at December 31, 1998, $45.5 million
represents borrowings under the 1998 Credit Agreement, with the balance
representing the Series A and Series B Zero Coupon Notes, including accreted
interest.

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 1996 Credit Agreement.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

The $121.2 million carrying value of the Company's Series A Notes is less than
its fair value, estimated to be $124.9 million. The $111.3 million carrying
value of the Company's Series B Notes is greater than its fair value, estimated
to be $107.7 million. The fair values were estimated using discounted cash flow
analyses. The $45.5 million carrying value of the Company's obligations under
the 1998 Credit Agreement approximates the fair value of the obligations, as the
1998 Credit Agreement is variable rate debt with the interest rate based on the
30-day LIBOR plus 0.25%.

6. REVOLVING CREDIT AGREEMENT
The Company entered into a Revolving Credit Agreement with TDS on August 1,
1995, under which all of the outstanding obligations of the Company to TDS are
incorporated. Under the terms of the Sonera Purchase Agreement, the Revolving
Credit Agreement between the Company and TDS, pursuant to which the Company owed
TDS $665.0 million as of August 31, 1998, was terminated. A new Revolving Credit
Agreement, between AOC and TDS was substituted, under which AOC was indebted to
TDS for $665.0 million as of August 31, 1998.

The new Revolving Credit Agreement between AOC and TDS provides that the 
amount of any proceeds raised by the Company or AOC in connection with the 
sale of equity (see Note 4 - Minority Interest), or debt will be used to 
reduce the borrowings under the Revolving Credit Agreement as well as reduce 
the total amount AOC may borrow under the Revolving Credit Agreement. 
Additionally, any borrowings under the Nokia 1998 Credit Agreement (See Note 
5 - Long-Term Debt) concurrently reduces by the same amount the authorized 
total line of credit available to AOC under the Revolving Credit Agreement. 
Pursuant to these terms, AOC paid to TDS the $200 million it had received 
from Sonera to reduce its borrowings under the Revolving Credit Agreement.

On November 3, 1998, TDS approved an amendment to the Revolving Credit 
Agreement dated August 31, 1998, between TDS and AOC. Under the Revolving 
Credit Agreement, as amended, AOC will be permitted to borrow up to a maximum 
amount (the "Maximum Amount"), less the amount of any debt or equity 
financing obtained by AOC or the Company, including the amount of any 
borrowings under the Nokia 1998 Credit Agreement. The Maximum Amount under 
the amended Revolving Credit Agreement was increased to $650 million in 
February 1999. The interest rate under the amended Revolving Credit Agreement 
is equal to the prime rate plus 3%. Interest on the balance due under the 
amended Revolving Credit Agreement is payable quarterly and no principal is 
payable until April 2, 2000. The following table summarizes AOC's borrowing 
capacity under the Revolving Credit Agreement as of December 31, 1998:

<TABLE>
<CAPTION>

(Dollars in thousands)
----------------------------------------------------------------------------
<S>                                                               <C>
 Maximum amount available                                          $ 615,000
 Reduced by :
   Vendor financing under the Nokia 1998 Credit Agreement            (45,472)
   Amount outstanding under the Revolving Credit Agreement          (549,943)
----------------------------------------------------------------------------
 Net amount available for borrowing                                $  19,585
----------------------------------------------------------------------------
</TABLE>

See Note 10--Subsequent Event for further discussion of the Revolving Credit 
Agreement.

The $549.9 million 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 rate debt with the interest rate based on
the prime lending rate.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

7. 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


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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 $8.6 million, $3.9 million
and $2.0 million during 1998, 1997 and 1996, respectively.

In 1998, TDS developed a new payroll system for all of its subsidiaries,
including the Company. Also in 1998, the Company and TDS developed a new
inventory system for Aerial and its subsidiaries. The Company recorded
approximately $6.1 million related to these systems in property and equipment.

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%.

Subject to the completion of TDS's proposed spin-off of the Company, certain
intercompany agreements between TDS and Aerial could be terminated. See 
Note 1-- Proposed TDS Corporate Restructuring for further discussion.

8. COMMITMENTS
The costs of development, construction, start-up and post-launch activities of
the Company require substantial capital. From inception through December 31,
1998, the Company had expended approximately $304.4 million for its six
licenses, including capitalized interest, approximately $739.1 million for all
other capital expenditures and incurred cumulative net losses of $630.8 million.
The Company expects to incur significant operating losses and to generate
negative cash flow from operating activities during 1999 as it continues to
build its PCS customer base. The Company estimates that its aggregate capital
requirements for 1999 will total approximately $335 million, with $130 million
needed for capital additions and $205 million needed to fund operations
(including an aggregate $80 million in interest expense and guarantee fees
payable to TDS).

On December 31, 1998, the Company had orders totaling approximately $3.9 million
with Nokia for infrastructure equipment. Also on December 31, 1998, the Company
had orders totaling approximately $9.1 million with various handset vendors for
handsets and accessories.

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, 1998, 1997 and 1996, rent
expense for non-cancelable operating leases was $21.5 million, $10.3 million and
$2.1 million, respectively; and for cancelable leases, $0.3 million, $1.1
million and $0.5 million, respectively. On December 31, 1998, the aggregate
minimum rental commitments under non-cancelable operating leases for the years
1999 through 2003 and 2004, and thereafter, are approximately $20.5 million,
$20.1 million, $18.6 million, $11.5 million, $6.0 million and $14.3 million,
respectively.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

9. 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


<PAGE>


Aerial Communications, Inc. and Subsidiaries

investing their contributions in Aerial Common Shares, TDS Common Shares, United
States Cellular Corporation (a subsidiary of TDS) Common Shares or five
non-affiliated funds. The Company has reserved 600,000 Common Shares for
issuance under the Savings Plan. Employer matching contributions are made in
Aerial Common Shares. Aerial issued 73,815, 184,533 and 23,460 Common Shares in
1998, 1997 and 1996, respectively, 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 1998 and 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
$20,000 and $26,000 was recorded related to these options in 1998 and 1997,
respectively.

Had compensation expense for all plans been determined consistent with SFAS 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>

--------------------------------------------------------------------------------------
                                              1998             1997            1996
--------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
<S>                                    <C>              <C>              <C>        
Net (Loss)
  As Reported                          $  (337,895)     $  (247,057)     $  (37,921)
  Pro Forma                            $  (340,382)     $  (250,957)     $  (38,323)
Basic and diluted (loss) per share
  As Reported                          $     (4.71)     $     (3.45)     $    (0.56)
  Pro Forma                            $     (4.75)     $     (3.51)     $    (0.57)
--------------------------------------------------------------------------------------
</TABLE>

A summary of the status of the Company's stock option plan at December 31, 1998,
1997 and 1996, and changes during the years then ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>

                                                                                      Weighted Average
                                                                      ------------------------------------------------
                                                  Number of Shares    Option Prices    Fair Values    Contractual 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
 Granted                                             678,861           $     5.85       $  3.46
 Exercised                                           (30,873)          $     4.94
 Forfeited                                          (316,764)          $    10.45
----------------------------------------------------------------------------------------------------------------------

 Outstanding December 31, 1998
 (1,019,192 exercisable from $3.71 to $17.00)      1,719,961           $     9.13                        7.69 Years
</TABLE>


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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 3
million Common Shares for option grants. Aerial employees were issued 6,450
Common Shares in 1998 and 767 Common Shares in 1997 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. Most options expire 10 years after
the grant date, or 30 days after the date of the employee's termination of
employment, if earlier. Most options vest annually over three to five years 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 1998, 1997 and 1996,
respectively: risk free interest rates of 5.20%, 6.59% and 5.53%; dividend yield
of 0%; expected lives of 8.8 years, 9.4 years and 7.4 years; and volatility of
58.17%, 51.32% and 26.36%.

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. The last purchase date under the Stock Purchase Plan was
September 30, 1998. Aerial employees were issued 93,996 Common Shares in 1998
and 59,822 Common Shares in 1997 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 1998 and 1997, respectively: risk free interest rate of 4.99%
and 6.21%; dividend yield 0%; expected life of 1.8 and 0.8 years; and volatility
of 51.59% and 51.18%. The weighted average fair value of the employees purchase
rights were $1.94 in 1998 and $2.08 in 1997.

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. The
Company issued 4,116 and 6,003 shares to non-employee directors under this plan
in 1998 and 1997, respectively.

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.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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) 100 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


<PAGE>


Aerial Communications, Inc. and Subsidiaries

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 1998, 1997 or 1996. As of December 31, 1998, all of the
Company's outstanding Series A Common Shares were held by TDS.

10. SUBSEQUENT EVENT
On March 12, 1999, the TDS and Aerial boards of directors approved a tax
settlement agreement calling for payment of $114.5 million from TDS to Aerial
under the September 8, 1998 Tax Allocation Agreement. The settlement covers tax
losses incurred by Aerial and used by TDS for the period commencing January 1,
1996 and ending with the date of the proposed spin-off of Aerial, currently
planned for the third quarter of 1999. The above payment, made on March 15,
1999, was used to pay down the outstanding balance under the Revolving Credit
Agreement.

11. CONTINGENCY
Following the announcement by TDS in December 1998, that it intended to 
distribute to its shareholders all of the capital stock of Aerial that it 
owns, and that Aerial would seek additional financing from sources other than 
TDS in connection therewith, Sonera contacted TDS to express certain concerns 
about the announcement. Sonera has asserted that the TDS announcement 
reflects a change in circumstances that warrant the renegotiation of certain 
matters related to its investment in AOC, including an adjustment in the 
Equivalent Purchase Price, and has raised the possibility of litigation in 
connection therewith. TDS and Aerial intend to attempt to reach a mutually 
acceptable resolution of the concerns raised by Sonera. There can be no 
assurance that this matter will not lead to litigation, or that it will not 
have a material adverse effect on Aerial or on the plans relating to the 
refinancing and spin-off of Aerial.

12. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                                                        Quarter Ended
 Quarter Ended                                        March 31       June 30      Sept. 30       Dec. 31
--------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)

1998
<S>                                                   <C>           <C>           <C>           <C>     
 Operating revenues                                   $ 30,746      $ 36,688      $ 38,438      $ 49,382
 Operating (Loss)                                      (69,313)      (67,462)      (60,607)      (82,603)
 Net (Loss)                                            (86,921)      (89,474)      (79,137)      (82,363)
 Weighted average Common and
   Series A Common Shares (000)                         71,636        71,730        71,735        71,789
 (Loss) per Common and
   Series A Common Share                              $  (1.21)     $  (1.25)     $  (1.10)     $  (1.15)

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)
--------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>


Aerial Communications, Inc. and Subsidiaries

SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Year Ended or at December 31,                             1998           1997           1996           1995           1994
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S>                                                   <C>            <C>            <C>            <C>            <C>    

OPERATING FINANCIAL DATA
 Operating Revenues                                   $ 155,154      $  55,952      $      --      $      --      $    --
 Operating (Loss)                                      (279,985)      (218,165)       (43,950)        (7,562)        (1,977)
 Minority share of loss                                  23,620             --             --             --             --
 Investment (losses)                                       (128)        (2,518)          (304)            --             --
 Interest income-affiliate                                 --               95          4,488             --             --
 Interest income-other                                      882          2,133          1,158             49              2
 Other income                                               442            269             --             --             --
 Gain on sale of PCS licenses                                --             --          2,582             --             --
 Interest expense-affiliate                              62,137         21,558          1,960          1,051             50
 Interest expense-other                                  18,010          5,507            802             --             --
 (Loss) Before Income Taxes                            (335,316)      (245,251)       (38,788)        (8,564)        (2,025)
 Net (Loss)                                           $(337,895)     $(247,057)     $ (37,921)     $  (6,468)     $  (1,283)
 Weighted Average Common
    and Series A Common Shares (000)(1)                  71,723         71,512         67,492         59,086         59,086
 (Loss) per Common
    and Series A Common Share                         $   (4.71)     $   (3.45)     $   (0.56)     $   (0.11)     $   (0.02)
 Dividends per Common
    and Series A Common Share                         $      --        $    --      $      --      $      --      $      --

BALANCE SHEET
 Working capital                                      $ (37,400)     $ (51,566)     $ (80,347)     $  33,141      $     149
 Property & Equipment (Net)                             621,281        604,104        252,423         12,087           --
 Investment in PCS licenses (Net)                       289,488        297,043        304,354        305,818         20,401
 Total Assets                                           961,347        960,648        672,827        360,444         21,320
 Revolving Credit Agreement-TDS                         549,943        448,234             --         60,238         22,659
 Long-Term Debt                                         278,010        196,439        103,743             --             --
 Minority Interest                                        5,835             --             --             --             --
 Common Shareholders' Equity (Deficit)                   25,078        192,427        437,785        281,282         (1,444
 Capital expenditures (2)                             $  96,950      $ 387,718      $ 242,270      $ 297,551      $  20,401
----------------------------------------------------------------------------------------------------------------------------
</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, 1994. 

(2) Includes non-cash transactions.

<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
Aerial's 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 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 82.3%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1998 and 1997, 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, 1998. 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.


<PAGE>


Aerial Communications, Inc. and Subsidiaries

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aerial
Communications, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

Arthur Andersen LLP


Chicago, Illinois
January 27, 1999
(except with respect to the matter discussed in Note 10, as to which the 
date is March 15, 1999)

<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 26, 1998, the Company's Common
Shares were held by 656 registered holders and 5,500 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.

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:


<PAGE>


Aerial Communications, Inc. and Subsidiaries
<TABLE>

<S>      <C>          <C>          <C>          <C>

1998          1st          2nd          3rd           4th
---------------------------------------------------------
High       $ 9.25       $ 8.00       $ 6.94       $  5.88
Low        $ 6.50       $ 5.75       $ 3.06       $  1.63

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