<PAGE>   1
                                                               EXHIBIT 13

Financial Section


2     SELECTED FINANCIAL DATA

2     Selected Five-Year Consolidated Data

3     Selected Five-Year Proportionate Data

7     MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
      OPERATIONS

21    CONSOLIDATED FINANCIAL STATEMENTS

21    Report of Management

22    Report of Independent Accountants

23    Consolidated Statements of Income for

      the years ended December 31, 1997, 1996, and 1995

24    Consolidated Balance Sheets as of December 31, 1997 and 1996

25    Consolidated Statements of Stockholders' Equity for the years ended
      December 31, 1997, 1996, and 1995

26    Consolidated Statements of Cash Flows for the years ended December 31,
      1997, 1996, and 1995

27    Notes to Consolidated Financial Statements

46    Selected Proportionate Financial Data


                                      -1-
<PAGE>   2
Selected Financial Data - Consolidated

SELECTED FIVE-YEAR CONSOLIDATED DATA
AIRTOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

--------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)

<TABLE>
<CAPTION>
                                                                       For the Year Ended December 31
                                                      --------------------------------------------------------------------
OPERATING RESULTS                                     1997(a)        1996(a)          1995          1994(b)        1993(b)
--------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>            <C>            <C>            <C>    
Operating revenues                                    $ 3,594        $ 2,252        $ 1,619        $ 1,247        $ 1,058
Operating income                                      $   706        $   281        $   113        $    73        $   129
Equity in net income of unconsolidated wireless       $   200        $   133        $   152        $   110        $    32
systems
Interest:
   Expense                                            $   (90)       $   (52)       $   (13)       $   (10)       $   (22)
   Income                                             $    18        $    14        $    35        $    55        $    12
Income from operations (c)                            $   448        $   199        $   132        $    98        $    41
Preferred dividends                                   $    54        $    20        $    --        $    --        $    --
Net income applicable to common stockholders          $   394        $   179        $   132        $    98        $    35
Per share data:
   Income from operations (c)
      Basic and diluted                               $  0.89        $  0.40        $  0.27        $  0.20        $  0.09
   Net income applicable to common stockholders
      Basic and diluted                               $  0.78        $  0.36        $  0.27        $  0.20        $  0.08
--------------------------------------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
                                                                          December 31
                                                      --------------------------------------------------------------------
BALANCE SHEET DATA                                     1997           1996(a)        1995           1994(b)        1993(b)
--------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>            <C>            <C>            <C>    
Investments in unconsolidated wireless systems        $ 2,068        $ 1,992        $ 3,076        $ 1,698        $ 1,155
Intangible assets, net                                $ 3,297        $ 3,409        $   606        $   471        $   413
Total assets                                          $ 8,970        $ 8,524        $ 5,648        $ 4,488        $ 4,077
Long-term debt, including current portion             $ 1,419        $ 1,669        $   906        $   130        $    79
Total stockholders' equity                            $ 5,529        $ 5,062        $ 3,751        $ 3,459        $ 3,337
Working capital (deficit)                             $  (254)       $  (120)       $    19        $   736        $ 1,347
Capital expenditures and capital calls,
   excluding acquisitions (d)                         $ 1,023        $   903        $ 1,015        $   494        $   304
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


(a)      In December 1996, AirTouch Communications, Inc. and its subsidiaries
         (the "Company") obtained a controlling interest in Telecel
         Communicacoes Pessoias, S.A. ("Telecel"). The Company consolidated
         Telecel's Balance Sheet as of December 31, 1996 and began consolidating
         Telecel's results of operations on January 1, 1997. In August 1996, the
         Company completed its acquisition of Cellular Communications, Inc. See
         Note F, "Partnerships and Acquisitions," to the Consolidated Financial
         Statements for further information.

(b)      Prior to April 1, 1994, the Company was an 86.1% owned subsidiary of
         Pacific Telesis Group ("Telesis"). On April 1, 1994, the Company was
         spun off from Telesis. Prior to December 3, 1993, the Company was 100%
         owned by Telesis.

(c)      Income before preferred dividends (1997 and 1996) and cumulative effect
         of accounting changes (1993).

(d)      For the year ended December 31.



                                      -2-
<PAGE>   3
Selected Financial Data - Proportionate

SELECTED FIVE-YEAR PROPORTIONATE DATA
--------------------------------------------------------------------------------

The following table is not required by generally accepted accounting principles
("GAAP") and is not intended to replace the Consolidated Financial Statements
prepared in accordance with GAAP. It is presented to provide supplemental data.
Because significant assets of the Company are not consolidated and because of
the substantial effect of the formation of certain entities on the year-to-year
comparability of the Company's consolidated financial results, the Company
believes that proportionate financial and operating data facilitates the
understanding and assessment of its Consolidated Financial Statements.

Under GAAP, the Company consolidates the entities in which it has a controlling
interest and uses the equity method to account for entities over which the
Company has significant influence but does not have a controlling interest. In
contrast, proportionate accounting reflects the Company's relative ownership
interests in operating revenues and expenses for both its consolidated and
equity-method entities. For example, U.S. cellular proportionate results present
the Company's share - its percentage ownership - for all significant U.S.
cellular operations, including those corporations and partnerships where the
Company does not own more than 50 percent. Similarly, total proportionate
results show the Company's share of all its significant worldwide operations.


TOTAL COMPANY (1)
--------------------------------------------------------------------------------
(Dollars in millions and operating data in thousands)




<TABLE>
<CAPTION>
                                                                     For the Year Ended December 31
                                                    ---------------------------------------------------------------
PROPORTIONATE FINANCIAL DATA                         1997          1996          1995          1994          1993
-------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>           <C>           <C>   
Service and other revenues                          $4,907        $3,925        $2,679        $1,799        $1,228
Operating expenses before
   depreciation and amortization expenses (2)        3,171         2,801         1,976         1,293           876
Depreciation and amortization expenses                 789           603           406           334           254
-------------------------------------------------------------------------------------------------------------------
Operating income                                    $  947        $  521        $  297        $  172        $   98
-------------------------------------------------------------------------------------------------------------------
Operating cash flow (3)                             $1,736        $1,124        $  703        $  506        $  352
Operating cash flow margin (4)                        35.4%         28.6%         26.2%         28.1%         28.7%
-------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                             December 31
                                                   ---------------------------------------------------------------
PROPORTIONATE OPERATING DATA                          1997         1996          1995          1994          1993
------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>           <C>           <C>   
Cellular and PCS POPs (5) (6)                      180,032       178,317       164,908        99,508        75,290
Cellular and PCS subscribers (5)                     7,536         5,146         3,059         1,948         1,206
Cellular and PCS subscriber net adds in period,
   excluding acquisitions (5)                        2,336         1,625           974           713           409
Paging units in service                              3,188         2,886         2,474         1,647         1,269
------------------------------------------------------------------------------------------------------------------
</TABLE>


See footnotes beginning on page 6.



                                      -3-
<PAGE>   4
Selected Financial Data - Proportionate


U.S. CELLULAR OPERATIONS
--------------------------------------------------------------------------------
(Dollars in millions, except per unit data and operating data in thousands)


<TABLE>
<CAPTION>
                                                                      For the Year Ended December 31
                                                   --------------------------------------------------------------
PROPORTIONATE FINANCIAL DATA                        1997          1996          1995          1994          1993
-----------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>           <C>           <C>           <C>   
Service and other revenues                         $2,363        $1,984        $1,523        $1,160        $  892
Cost of revenues                                      236           222           188           136           116
Selling and customer operations expenses (2)          902           781           591           423           299
General, administrative, and other expenses           169           160           139           122            97
Depreciation and amortization expenses                388           292           189           186           165
-----------------------------------------------------------------------------------------------------------------
Operating income                                   $  668        $  529        $  416        $  293        $  215
-----------------------------------------------------------------------------------------------------------------
Operating cash flow (3)                            $1,056        $  821        $  605        $  479        $  380
Operating cash flow margin (4)                       44.7%         41.4%         39.7%         41.3%         42.6%
</TABLE>


<TABLE>
<CAPTION>
                                                                             December 31
                                                   --------------------------------------------------------------
PROPORTIONATE OPERATING DATA                        1997          1996          1995          1994          1993
-----------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>           <C>           <C>           <C>   
Cellular POPs (6)                                  43,364        43,364        37,739        35,390        34,889
Cellular subscribers                                4,309         3,403         2,262         1,560         1,046
Cellular subscriber net adds in period,
   excluding acquisitions                             906           770           591           514           286
Monthly average revenue per unit                   $   53        $   61        $   70        $   78        $   83
Monthly cash cost per unit                         $   29        $   36        $   42        $   46        $   48
Capital expenditures and capital calls,
   excluding acquisitions (GAAP Basis)             $  466        $  340        $  406        $  231        $  145
-----------------------------------------------------------------------------------------------------------------
</TABLE>


INTERNATIONAL OPERATIONS
-------------------------------------------------------------------------------
(Dollars in millions, except per unit data and operating data in
thousands)


<TABLE>
<CAPTION>
                                                                        For the Year Ended December 31
                                                    -----------------------------------------------------------------
PROPORTIONATE FINANCIAL DATA                         1997          1996          1995           1994            1993
---------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>            <C>            <C>   
Service and other revenues                          $2,181        $1,640        $  918         $  435         $  175
Operating expenses before
   depreciation and amortization expenses (2)        1,452         1,319           794            405            205
Depreciation and amortization expenses                 283           226           154             96             48
---------------------------------------------------------------------------------------------------------------------
Operating income (loss)                             $  446        $   95        $  (30)        $  (66)        $  (78)
---------------------------------------------------------------------------------------------------------------------
Operating cash flow (3)                             $  729        $  321        $  124         $   30         $  (30)
Operating cash flow margin (4)                        33.4%         19.6%         13.5%           6.9%         (17.1)%
</TABLE>

<TABLE>
<CAPTION>
                                                                                    December 31
                                                    -----------------------------------------------------------------
PROPORTIONATE OPERATING DATA                         1997          1996          1995           1994           1993
---------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>           <C>            <C>            <C>   
Cellular POPs (6)                                  122,439       120,724       112,869         64,118         40,401
Cellular subscribers                                 3,135         1,734           797            388            160
Cellular subscriber net adds in period,
   excluding acquisitions                            1,347           846           383            199            123
Monthly average revenue per unit                    $   79        $  115        $  139         $  152         $  150
Monthly cash cost per unit                          $   53        $   92        $  120         $  142         $  175
Capital expenditures and capital calls,
   excluding acquisitions (GAAP Basis)              $  264        $  318        $  229         $  148         $   92
---------------------------------------------------------------------------------------------------------------------
</TABLE>



See footnotes beginning on page 6.


                                      -4-
<PAGE>   5
Selected Financial Data - Proportionate


U.S. PAGING OPERATIONS (7)
--------------------------------------------------------------------------------
(Dollars in millions and operating data in thousands)



<TABLE>
<CAPTION>
                                                              For the Year Ended December 31
                                                -----------------------------------------------------
FINANCIAL DATA                                  1997        1996        1995        1994        1993
-----------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>         <C>         <C> 
Service and other revenues (8)                  $330        $297        $226        $189        $149
Operating expenses before
   depreciation and amortization expenses        222         209         151         122          99
Depreciation and amortization expenses            74          64          43          37          31
-----------------------------------------------------------------------------------------------------
Operating income                                $ 34        $ 24        $ 32        $ 30        $ 19
-----------------------------------------------------------------------------------------------------
Operating cash flow (3)                         $108        $ 88        $ 75        $ 67        $ 50
Operating cash flow margin (4)                  32.7%       29.6%       33.2%       35.4%       33.6%
</TABLE>

<TABLE>
<CAPTION>
                                                                       December 31
                                                -----------------------------------------------------
OPERATING DATA                                  1997         1996       1995        1994        1993
-----------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>         <C>         <C> 
Paging units in service                         3,101       2,850       2,338       1,525       1,167
Paging units in service net adds in period,
   excluding acquisitions                         246         512         463         358         324
Capital expenditures and capital calls,
   excluding acquisitions (GAAP Basis)          $  67        $ 98        $ 72        $ 61        $ 53
-----------------------------------------------------------------------------------------------------
</TABLE>



U.S. PCS OPERATIONS (5)(9)
--------------------------------------------------------------------------------
(Dollars in millions, except per unit data and operating data in thousands)


<TABLE>
<CAPTION>
                                                            For the Year Ended December 31
                                                -----------------------------------------------------
PROPORTIONATE FINANCIAL DATA                    1997        1996         1995        1994        1993
-----------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>          <C>         <C>         <C>
Service and other revenues                      $ 33        $  1         $--         $--         $--
</TABLE>

<TABLE>
<CAPTION>
                                                                      December 31
                                                -----------------------------------------------------
PROPORTIONATE OPERATING DATA                     1997        1996         1995        1994        1993
-----------------------------------------------------------------------------------------------------
<S>                                             <C>         <C>          <C>         <C>         <C>
PCS POPs (5)(6)                                 14,229      14,229      14,300          --          --
PCS subscribers (5)                                 92           9          --          --          --
PCS subscriber net adds in period,
   excluding acquisitions (5)                       83           9          --          --          --
Monthly average revenue per unit                $   60        N.M.        $ --        $ --        $ --
-----------------------------------------------------------------------------------------------------
</TABLE>



See footnotes beginning on page 6.


                                      -5-
<PAGE>   6
Selected Financial Data - Proportionate




      Footnotes:

N.M.  Information not meaningful

(1)   Reflects financial and operating data of systems in which the Company owns
      an interest, multiplied by the Company's ownership interest, exclusive of
      cost-based investments and certain equity-based investments that are not
      material to the information presented.

(2)   Includes net losses on equipment sold to acquire and retain customers.

(3)   Operating cash flow is defined as operating income plus depreciation and
      amortization and is not the same as cash flow from operating activities in
      the Company's Consolidated Statements of Cash Flows. Proportionate
      operating cash flow represents the Company's ownership interests in the
      respective entities' operating cash flows. As such, proportionate
      operating cash flow does not represent cash available to the Company.

(4)   Operating cash flow margin is calculated by dividing "Operating cash flow"
      by "Service and other revenues."

(5)   PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"), a
      U.S. personal communications services ("PCS") business in which the
      Company has a 25% interest.

(6)   POPs are the estimated market population multiplied by the Company's
      ownership interest in a licensee operating in that market. Includes
      markets of certain cost-based and equity-based investments not included in
      proportionate operating results.

(7)   U.S. Paging Operations, which are wholly owned by the Company, include
      operations in Canada.

(8)   Includes any gain or loss on equipment sales.

(9)   Operations began in the fourth quarter of 1996.



                                      -6-
<PAGE>   7
Management's Discussion & Analysis
Financial Condition & Results of Operations


GENERAL

Management's discussion and analysis is intended to assist in the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of AirTouch Communications, Inc., together
with its subsidiaries and partnerships (collectively, the "Company" or
"AirTouch"). This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and accompanying Notes.

Private Securities Litigation Reform Act Safe Harbor Statement. In addition to
historical information, management's discussion and analysis includes certain
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements are subject to risks and uncertainties that could cause the Company's
actual results and financial position to differ materially. Such factors
include, but are not limited to: a change in economic conditions in the various
markets served by the Company's operations which would adversely affect the
level of demand for wireless services; greater-than-anticipated competitive
activity requiring reduced pricing and/or new product offerings or resulting in
higher customer acquisition costs; greater-than-expected growth in customers and
usage driving increased investment in network capacity; the level of fraudulent
activity; the impact of new business opportunities requiring significant
up-front investments; the pending acquisition of U S WEST Media Group's cellular
properties and its interest in PrimeCo Personal Communications, L.P. in the
U.S.; the impact on capital spending from the deployment of new technologies;
and the possibility that technologies will not perform according to expectations
or that vendors' performance will not meet Company requirements. These and other
risks and uncertainties related to the business are described in detail in the
Company's 1997 Annual Report on Form 10-K under the heading "Investment
Considerations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.

BASIS OF PRESENTATION

CONSOLIDATION VS. THE EQUITY METHOD

In accordance with generally accepted accounting principles ("GAAP"), the
Company consolidates revenues and expenses of each subsidiary and partnership in
which the Company has a controlling interest. The Company uses the equity method
to record the operating results of entities in which the Company has significant
influence, but does not have a controlling interest. Consolidated operating
revenues and expenses during 1997, 1996, and 1995 principally included six U.S.
cellular markets, all U.S. paging markets, and Europolitan Holdings AB
("Europolitan"), the Company's cellular system in Sweden (formerly NordicTel
Holdings AB or "NordicTel"). On December 31, 1996, AirTouch consolidated Telecel
Communicacoes Pessoais, S.A. ("Telecel"), its cellular system in Portugal,
subsequent to acquiring a controlling interest and, accordingly, Telecel's
results were included in consolidated results for the year ended December 31,
1997. The six U.S. cellular markets included in consolidated revenues and
expenses during 1997, 1996, and 1995 were Los Angeles, Sacramento, Atlanta, San
Diego, Wichita, and Topeka. In addition, the Company began consolidating the
results of its Great Lakes Market (cellular properties in Michigan and Ohio,
including Detroit, Cleveland and Columbus) on August 16, 1996, the date on which
AirTouch completed its acquisition of the remaining capital stock of Cellular
Communications, Inc. ("CCI") that it did not already own. For further
information regarding this acquisition, see "Cellular Communications, Inc.
Merger."

GAAP VS. PROPORTIONATE PRESENTATION

Tables presenting results of operations on a proportionate basis are included as
supplementary information in the discussion and analysis of results of
operations for the Company's U.S. cellular and international operations.
Proportionate presentation is a pro rata consolidation which reflects the
Company's share of revenues and expenses in both its consolidated and
unconsolidated wireless systems, net of interests of minority and equity
partners. Proportionate results are calculated by multiplying the Company's
ownership interest in each wireless system by each system's total operating
results, whereas the presentation prepared in accordance with GAAP requires
consolidation of wireless systems controlled by the Company and the equity
method of accounting for wireless systems in 



                                      -7-
<PAGE>   8
Management's Discussion & Analysis
Financial Condition & Results of Operations



which the Company has significant influence, but not a controlling interest.

Net income under either GAAP or proportionate presentation is the same.

Proportionate presentation is not required by GAAP, nor is it intended to
replace the consolidated operating results prepared and presented in accordance
with GAAP. However, since significant wireless systems are not consolidated,
proportionate information is provided as supplemental data to facilitate a more
detailed understanding and assessment of consolidated operating results prepared
and presented in accordance with GAAP.


COMPOSITION OF OPERATING REVENUES AND EXPENSES

Operating revenues include cellular and paging service revenues, as well as
equipment sales. Cellular service revenues primarily consist of charges for air
time use, monthly network access fees, and in-bound roaming charges (in-bound
roaming refers to use of the Company's wireless networks by customers of other
cellular carriers). Paging service revenues primarily consist of paging service
charges and rentals of paging units in the United States. Equipment sales
consist of revenues from sales of cellular telephones, pagers, and accessories.
Equipment sales are not a primary part of the Company's cellular or paging
businesses. Rather, the Company offers cellular and paging equipment at
competitive prices, which are often at or below cost, as an incentive for new
customers to subscribe to its cellular and paging services. The Company also
offers discounted or free equipment as an incentive for certain existing
customers to remain a subscriber to its wireless services. For purposes of
proportionate presentation, the Company reflects the net loss on sales of
cellular telephones as a selling and customer operations expense.

Operating expenses include: cost of revenues; cost of equipment sales; selling
and customer operations expenses; general, administrative, and other expenses;
and depreciation and amortization expenses. Cost of revenues primarily consists
of cellular and paging network operating costs, interconnection fees assessed by
local exchange carriers, and costs of cellular roaming fraud. Interconnection
costs have fixed and variable components. The fixed component of interconnection
costs consists of monthly flat-rate fees for facilities leased from local
exchange carriers. The variable component of interconnection costs, which
fluctuates in relation to the level of cellular calls and paging messages,
consists of per-minute use fees charged by local exchange carriers for cellular
calls or paging messages terminating on their networks. Selling and customer
operations expenses primarily consist of compensation to sales channels;
salaries, wages, and related benefits for sales and customer service personnel;
and billing, advertising, and promotional expenses. General, administrative, and
other expenses primarily consist of salaries, wages, and related benefits for
general and administrative personnel, international license application costs,
bad debt, and other overhead expenses. Depreciation and amortization primarily
consists of depreciation recorded for the Company's cellular and paging networks
and amortization of intangibles such as wireless license costs, subscriber
lists, and goodwill.

RESULTS OF OPERATIONS

The following discussions compare the results of operations for the year ended
December 31, 1997 to the year ended December 31, 1996 and the results of
operations for the year ended December 31, 1996 to the year ended December 31,
1995. The operating results of these periods are not necessarily indicative of
operating results in future periods. The following comparative information
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes for each period discussed, as well as the information
presented in all other sections of management's discussion and analysis.

1997 VS. 1996

CONSOLIDATED RESULTS OF OPERATIONS

Improvements in consolidated operating income resulted primarily from increases
in the operating income of U.S. cellular and international operations. As
indicated in the U.S. cellular and international operations' discussions, the
increase in consolidated operating income resulted from consolidation during
1997 of the Great Lakes market and Telecel, as well as substantial subscriber
growth in U.S. and international cellular markets.

The decrease in U.S. equity in net income (loss) of unconsolidated wireless
systems was attributable to consolidation of the Great Lakes market beginning
August 16, 1996 (see "Cellular Communications, Inc. Merger") and increased
operating losses of PrimeCo 



                                      -8-
<PAGE>   9
Management's Discussion & Analysis
Financial Condition & Results of Operations



Personal Communications, L.P. ("PrimeCo") associated with the start-up phase of
the personal communications services ("PCS") business. Decreases due to
consolidation of the Great Lakes market and increased losses of PrimeCo were
partially offset by improved operating results of CMT Partners, AirTouch's
cellular joint venture operating primarily in the San Francisco Bay Area. The
improvements in international equity in net income (loss) of unconsolidated
wireless systems were due primarily to improved profitability resulting from
substantial growth in the subscriber base and, secondarily, to favorable
adjustments resulting from changes in estimates based on the Company's
assessment of various tax positions recorded in 1997.

The increases in interest expense resulted from higher average debt balances and
a reduction in capitalized interest as the related assets under construction
were placed in service.

The decrease in miscellaneous income was primarily attributable to a $56 million
gain recorded during 1996 for the sale of Dansk Mobiltelefon AB ("DMT"), an
investment held by Europolitan. Net of minority interest and taxes, the sale of
DMT resulted in a $6 million increase in consolidated net income.

Excluding the effect of equity in net income (loss) of unconsolidated
international wireless systems, foreign income tax rate differences and minority
interest for consolidated international operations, and a 1996 reduction in the
valuation allowance related to consolidated international operations, the
effective tax rates were approximately 43% and 44% for the years ended December
31, 1997 and 1996, respectively.

Year 2000 Compliance

Information and Operational Systems. Many of the Company's computerized systems
are affected by the year 2000 issue, which refers to the inability of such
systems to properly process dates beyond December 31, 1999. The Company also has
numerous computerized interfaces with third parties and is vulnerable to failure
of such third parties to adequately address their year 2000 issues. System
failures resulting from this issue could cause significant disruption to the
Company's operations, including the Company's ability to provide certain
wireless services and correctly bill customers, resulting in potential revenue
loss and increased costs. The Company is currently evaluating alternative
solutions with respect to its mission critical systems, which include wireless
network, billing, and customer care systems. The Company is also evaluating
alternatives for numerous other less significant systems. The Company plans for
all mission critical systems to be year 2000 compliant by early 1999. The
Company has identified its major computerized interfaces with third parties and
will work with such parties to take any necessary corrective action during 1998
and 1999; however, the Company cannot provide any assurance that all significant
third parties will implement timely corrective action necessary on their part to
prevent disruption of AirTouch's operations. As of December 31, 1997, costs
incurred to correct year 2000 issues have not been material to the Company's
operating results or financial position. Since the Company has not yet completed
its plans for all affected systems, the total estimated cost for upgrading or
replacing all affected systems has not been quantified. Total costs could be
material to the Company's results of operations or financial position in future
reporting periods. Based on preliminary assessments, the Company currently
believes that it will be able to obtain the internal and external resources
necessary to complete timely upgrades or replacements of its mission critical
systems, thereby preventing significant operational disruptions.

Products Sold. Management believes that the original manufacturers of handsets
and pagers are primarily liable for failures of such products. However, in the
event of such product failures, the Company could experience service revenue
loss and be required to incur additional costs to furnish customers with
replacement equipment on a temporary or permanent basis to prevent further
service revenue loss. In such situations, the Company believes it would have
legal recourse against the original manufacturer of the product.



                                      -9-
<PAGE>   10
Management's Discussion & Analysis
Financial Condition & Results of Operations

U.S. CELLULAR OPERATIONS

================================================================================
U.S. Cellular Operating Results (GAAP Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                      For the Year Ended
                                                            December 31
                                           -------------------------------------
                                                     Actual                 Pro 
                                           ----------------------         Forma 
                                                                            (c)
(Dollars in millions)                        1997           1996            1996
--------------------------------------------------------------------------------
<S>                                        <C>            <C>            <C>    
Service and other revenues                 $ 2,351        $ 1,634        $ 2,092
Equipment sales                                125             60             81
--------------------------------------------------------------------------------
Operating revenues                           2,476          1,694          2,173
--------------------------------------------------------------------------------
Operating expenses
   before depreciation and
   amortization expenses                     1,452          1,055          1,301
Depreciation and
   amortization expenses                       381            240            350
--------------------------------------------------------------------------------
Operating income                               643            399            522
Equity in net income (loss) of
   unconsolidated wireless systems             121            200            105
Minority interests in net (income)
   loss of consolidated wireless
   systems                                     (70)           (71)           (71)
Other (income) expense included
   in equity income and minority
   interests (a)                               (26)             1            (23)
--------------------------------------------------------------------------------
U.S. cellular operating contribution
   to net income (b)                       $   668        $   529        $   533
================================================================================
</TABLE>



(a)      Represents income taxes and non-operating expenses or income included
         in equity in net income (loss) of unconsolidated wireless systems and
         in minority interests in net (income) loss of consolidated wireless
         systems.

(b)      Represents the Company's share of combined operating income of
         consolidated and unconsolidated U.S. cellular operations, net of the
         interests of minority and equity partners (equal to proportionate
         operating income presented on page 16).

(c)      Adjusted to present results as if the Great Lakes market had been
         wholly owned and consolidated during the year ended December 31, 1996.

Cellular Communications, Inc. Merger. Effective August 16, 1996, AirTouch
acquired the remaining 63% of CCI's capital stock that it did not already own.
As a result of the acquisition, AirTouch now owns 100% of CCI and New Par, the
equally owned partnership between the Company and CCI that operated cellular
properties in Michigan and Ohio prior to the merger. Accordingly, the operating
results of CCI and New Par (referred to elsewhere in management's discussion and
analysis as the "Great Lakes" market) are reflected in equity earnings at the
Company's ownership interest prior to the merger and in consolidated results at
100% thereafter. Since the actual results of operations for the years ended
December 31, 1997 and 1996 are not comparable, pro forma results for the year
ended December 31, 1996 are included in the preceding table to reflect results
as if the Great Lakes market had been wholly owned and consolidated during all
of 1996.

U.S. Cellular Operations - 1997 vs. Pro Forma 1996.

The improvement in U.S. cellular consolidated operating revenues during the year
ended December 31, 1997, was due to an approximate 30% increase in total minutes
of use attributable primarily to a 26% increase in subscribers, partially offset
by an approximate 14% decline in average revenue per minute of use. The average
revenue per customer declined approximately 13% comparing the year ended
December 31, 1997 to the year ended December 31, 1996. The Company achieved
customer growth in its consolidated markets through advertising and by
continuing to offer competitive incentive programs such as waived service
establishment charges, discounted monthly access fees, discounted cellular
handsets, discounted air time packages, promotional air time credits at the
beginning of service contracts, options to purchase bundled minutes of use at
fixed monthly rates, and reduced or fixed rates for off-peak usage and roaming.
The declines in average revenue per customer and average revenue per minute of
use were primarily attributable to continued penetration of consumer markets and
to rate reductions and discounts offered to new and existing customers in
response to increasing competition. Consumer usage patterns contributed to
declines in average revenue per customer because consumers typically use their
telephones more during lower-rate, off-peak calling periods. Declines in average
revenue per customer and average revenue per minute of use were partially offset
by a slight increase in minutes of use per customer during 1997, as compared to
the prior year. The Company anticipates increasing competitive pressure to
result in continuing price declines and reduced customer growth rates in the
near term and possibly in future years, which could reduce revenues in the
Company's U.S. cellular business compared to current revenue levels. The Company
expects the shift toward consumer markets and such increasing competitive
pressures to continue to result in declines in average revenue per customer and
average revenue per minute of use. However, the Company believes, that over
time, declining prices and other factors will result in migration of minutes of
use from landline systems to the Company's wireless systems.

U.S. cellular operating margins increased from 24% during 1996 to 26% during
1997. Operating cash flow 



                                      -10-
<PAGE>   11
Management's Discussion & Analysis
Financial Condition & Results of Operations



margins (operating margins excluding the effect of depreciation and amortization
expenses) increased from 40% during 1996 to 41% during 1997. Improvements in
operating margins despite a 14% decline in average revenue per minute of use
resulted from a greater decline of 16% in the average cash cost per minute of
use (including the loss on equipment sales). The average revenue per customer
declined 13%, while the average cash cost per customer (including the loss on
equipment sales) declined 15%. Declining cash costs per customer and per minute
of use reflect the Company's continuing efforts to reduce cash costs more
rapidly than the related declines in average revenue per customer and average
revenue per minute of use. Decreases in average cash costs resulted from several
factors, including increased economies of scale, reductions in roaming fraud, a
reduction in interconnection rates, declines in handset costs and reductions in
handset subsidies offered to customers, and a shift in customer acquisitions to
lower-cost direct sales channels. The Company has also reduced the rate at which
customers discontinue service ("churn") by continually improving customer
service and increasing its focus on customer incentive programs designed to
retain existing customers, which is significantly less expensive than replacing
customers who discontinue service. Depreciation and amortization increased 9%,
due primarily to depreciation of significantly larger property, plant, and
equipment balances associated with analog network expansion and digital cellular
deployment across all consolidated markets.

The improvement in U.S. cellular equity in net income (loss) of unconsolidated
wireless systems resulted from improved operating results of CMT Partners, the
Company's partnership which operates cellular properties primarily in the San
Francisco Bay Area. Consistent with the Company's consolidated U.S. markets, CMT
Partners achieved increased earnings through substantial customer growth and
significant reductions in the average cash cost per customer, partially offset
by declines in average revenue per customer.

Other Matters Affecting U.S. Cellular Operations

U S WEST Transaction. On January 29, 1998, the Company and U S WEST, Inc. ("U S
WEST") entered into a definitive agreement for AirTouch to acquire U S WEST
Media Group's domestic wireless business, including U S WEST Media Group's
interest in PrimeCo (the "1998 Agreement"). Earnings per share dilution
resulting from the 1998 Agreement, primarily due to the amortization of
acquisition intangibles, incremental interest expense, preferred dividends, and
common shares issued is expected to reach $0.40 per share in 1999 and decline
thereafter. The Company plans to pursue cost savings to mitigate this dilution,
however, there can be no assurance that such plans will successfully mitigate
any dilution. The 1998 Agreement, which is expected to close by mid-1998, is
subject to Hart-Scott-Rodino clearance and other government approvals.
Shareholder approvals are not required. For a discussion of funding of this
acquisition, see "Liquidity and Capital Resources-Future Funding
Requirements-Acquisitions." In the event that the 1998 Agreement is not
consummated, the parties will revert to their 1994 agreement as described in the
Company's Form 10-K for the year ended December 31, 1996 under "Business--Joint
Ventures--U S WEST Transaction". For a more detailed description of the terms of
this transaction, see Note F, "Partnerships and Acquisitions-U S WEST
Transaction," to the Consolidated Financial Statements.

U.S. PAGING OPERATIONS
All U.S. paging markets are wholly owned by the Company.



================================================================
U.S. Paging Operating Results (GAAP Basis)
----------------------------------------------------------------
<TABLE>
<CAPTION>
                                             For the Year Ended
                                                December 31
                                             ------------------
(Dollars in millions)                        1997         1996
--------------------------------------------------------------
<S>                                          <C>         <C> 
Service and other revenues                   $330        $293
Equipment sales                                39          50
--------------------------------------------------------------
Operating revenues                            369         343
--------------------------------------------------------------
Operating expenses before depreciation
   and amortization expenses                  261         255
Depreciation and amortization expenses         74          64
--------------------------------------------------------------
Operating income                             $ 34        $ 24
==============================================================
Operating cash flow (a)                      $108        $ 88
Operating cash flow margin (b)               29.3%       25.7%
==============================================================
</TABLE>


(a)      See Footnote (d) on page 47.

(b)      Operating cash flow margins in the GAAP presentation above differ from
         the same margins presented in "Selected Proportionate Financial Data"
         because costs of equipment sales are included in operating expenses in
         this presentation in accordance with GAAP, rather than being presented
         as a reduction to service and other revenues as is done in the
         proportionate presentation for U.S. paging.

Operating revenues increased approximately 8%, due primarily to a 9% increase in
paging units in service, partially offset by an approximate 3% decline in the
average revenue per unit in service. Increased revenues associated with
subscriber growth were also offset by declines in pager sales attributable to




                                      -11-
<PAGE>   12
Management's Discussion & Analysis
Financial Condition & Results of Operations



decreases in the number of units in service added. Operating cash flow margins
(operating margins excluding the effect of depreciation and amortization)
increased from 26% to 29%, due to increased service and other revenues and lower
costs of paging equipment sales attributable to declines in units in service
added, partially offset by moderate increases in network operating costs
necessary to serve the expanded customer base. Increased service and other
revenues resulted from growth in paging units in service, a shift from paging
service sold at wholesale rates through resellers to service sold directly by
the Company or through retail sales channels, and retail service price increases
in selected markets. Increased depreciation and amortization resulted from
expansion of paging networks and higher depreciation of more expensive leased
alphanumeric pagers, which comprised a larger percentage of leased pagers during
1997.

INTERNATIONAL OPERATIONS


================================================================================
International Operating Results (GAAP Basis)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                   For the Year Ended
                                                       December 31
                                           ----------------------------------
                                                                        Pro
                                                 Actual                Forma
                                           ------------------           (c)
(Dollars in millions)                       1997         1996          1996
-----------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>  
Service and other revenues                 $ 685        $ 190        $ 521
Equipment sales                               66           22           62
-----------------------------------------------------------------------------
Operating revenues                           751          212          583
-----------------------------------------------------------------------------
Operating expenses
   before depreciation and
   amortization expenses                     551          239          479
Depreciation and
   amortization expenses                      85           34           68
-----------------------------------------------------------------------------
Operating income (loss)                      115          (61)          36
Equity in net income (loss) of
   unconsolidated wireless
   systems                                   199          (18)         (42)
Minority interests in net (income)
   loss of consolidated wireless
   systems                                   (49)         (24)         (49)
Other (income) expense included
   in equity income and minority
   interests (a)                             181          198          155
-----------------------------------------------------------------------------
International operating contribution
   to net income (b)                       $ 446        $  95        $ 100
=============================================================================
</TABLE>


(a)      Represents income taxes and non-operating expenses or income included
         in equity in net income (loss) of unconsolidated wireless systems and
         in minority interests in net (income) loss of consolidated wireless
         systems.

(b)      Represents the Company's share of combined operating income of
         consolidated and unconsolidated international operations, net of the
         interests of minority and equity partners (equal to proportionate
         operating income (loss) presented on page 16).

(c)      Adjusted to present results for the year ended December 31, 1996 as if
         (1) Telecel had been consolidated and the Company's ownership interest
         in Telecel had been 51% and (2) the Company's 1997 ownership interests
         in its unconsolidated wireless systems had been the ownership interests
         during the corresponding periods of 1996.

International Investment Ownership Increases. Actual consolidated international
operating results presented in the preceding table for the year ended December
31, 1996 reflect the operations of Europolitan, the Company's 51%-owned cellular
system in Sweden. On December 31, 1996, the Company consolidated Telecel, its
cellular system in Portugal, subsequent to acquiring a 51% controlling interest
and, accordingly, consolidated international operating results presented in the
preceding table for the year ended December 31, 1997 reflect the operations of
both Telecel and Europolitan. Operating results for other international markets
are reflected in equity in net income (loss) of unconsolidated wireless systems
during all periods presented. Since the actual results of operations for each
period are not comparable, pro forma results for the year ended December 31,
1996 are included in the preceding table to reflect results as described in
footnote (c) to the preceding table.

International Operations - 1997 vs. Pro Forma 1996. The increase in operating
revenues resulted primarily from an 80% increase in Europolitan and Telecel's
combined average subscribers, partially offset by a 25% decrease in Europolitan
and Telecel's combined average revenue per customer and unfavorable changes in
foreign exchange rates compared to the U.S. Dollar. If foreign exchange rates
had remained constant, operating revenues would have increased 46%. Operating
margins improved from 6% during 1996 to 15% during 1997, due primarily to
substantial subscriber growth and rapidly declining cash costs per customer
achieved as Europolitan and Telecel's operations continued to gain operating
scale. If foreign exchange rates had remained constant, operating income would
have increased 344%.

Improvement in equity in net income (loss) of unconsolidated wireless systems
was due to improved operating results in Europe and Japan. Improved results in
these wireless systems resulted primarily from increasing economies of scale and
continued subscriber growth, partially offset by overall declines in the average
revenue per customer. In 



                                      -12-
<PAGE>   13
Management's Discussion & Analysis
Financial Condition & Results of Operations



addition, the Company recognized certain favorable adjustments resulting from
changes in estimates based on the Company's assessment of various tax positions.
Improvements were also partially offset by unfavorable movements in all foreign
currency exchange rates.

Other Matters Affecting International Operations

Foreign Currencies. The Company engages in risk management activities to hedge
foreign currency denominated investments and firm capital commitments. The
Company does not engage in speculative foreign exchange activities.

The Company's foreign exposures primarily take the form of equity investments in
foreign wireless systems and are viewed as long-term assets valued in the local
currency, translated into United States dollars and reported in the Company's
financial statements. The Company hedges a portion of these investments with
forward foreign currency exchange contracts and foreign currency denominated
loans. These hedges are in accordance with the Company's objective to offset the
United States dollar values of foreign currency denominated assets with foreign
currency denominated liabilities. The accounting treatment is described in Note
A, "Summary of Significant Accounting Policies-Financial Instruments," to the
Consolidated Financial Statements.

Virtually all of the Company's economic hedges qualify as hedges under
accounting rules. Non-qualifying hedges relate to cost method investments that
do not qualify for hedge accounting or mismatches between the hedge instruments
and the hedged investments due to equity losses of foreign wireless systems
during start-up. All gains and losses pertaining to hedges that do not qualify
for hedge accounting are included in net income.

Deferred Taxes. International equity in net income (loss) of unconsolidated
wireless systems included tax benefits of $30 million and $10 million in 1997
and 1996, respectively. These tax benefits are recorded in "Equity in net income
(loss) of unconsolidated wireless systems" on the Consolidated Statements of
Income. The tax benefits were recorded as an asset that represents future
benefits the international unconsolidated wireless systems will receive by
deducting the net operating losses from future taxable income. At December 31,
1997, the Company's proportionate share of deferred tax assets of its
international equity investees was approximately $161 million, which was offset
by a valuation allowance of approximately $84 million. While the Company
believes that it is more likely than not that the net deferred tax assets will
be fully realized, there can be no assurance this will happen as certain factors
beyond the control of the equity investees and the Company, such as
deteriorating local economic conditions and increasing competition, can affect
future timing and amounts of taxable income.

1996 VS. 1995

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated operating income improved $168 million or 149%, due primarily to
improvements of $109 million and $28 million in operating income of U.S.
cellular and international operations, respectively. The remaining increase in
consolidated operating income of $31 million was primarily attributable to the
absence of AirTouch Teletrac (a radio vehicle location service subsidiary sold
on January 17, 1996) during most of 1996 and a $25 million loss reserve recorded
for AirTouch Teletrac in 1995. Equity in net income (loss) of unconsolidated
wireless systems decreased $19 million due primarily to the consolidation of the
Great Lakes market beginning August 16, 1996 (see "Cellular Communications, Inc.
Merger") and increased operating losses of PrimeCo associated with the start-up
phase of the PCS business. Such decreases were largely offset by improvements in
the operating results of international cellular systems and CMT Partners (the
Company's partnership which operates cellular properties primarily in the San
Francisco Bay Area).

The increase in interest expense resulted from higher debt balances. Similarly,
the decrease in interest income resulted from lower cash balances available for
investment. The increase in miscellaneous income was primarily attributable to a
$56 million gain on the sale of DMT, an investment held by Europolitan. Net of
minority interest and taxes, the sale of DMT resulted in a $6 million increase
in consolidated net income.

Excluding the effect of equity in net income (loss) of unconsolidated
international wireless systems, foreign income tax rate differences and minority
interest for consolidated international operations, a 1996 reduction in the
valuation allowance related to consolidated international operations, and 1995
tax benefits related to the tax loss on the sale of AirTouch Teletrac, the
effective tax rates were approximately 



                                      -13-
<PAGE>   14
Management's Discussion & Analysis
Financial Condition & Results of Operations



44% and 45% for the years ended December 31, 1996 and 1995, respectively.

U.S. CELLULAR OPERATIONS


================================================================================
U.S. Cellular Operating Results (GAAP Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                      For the Year Ended
                                                          December 31
                                                    ----------------------
(Dollars in millions)                                 1996            1995
---------------------------------------------------------------------------
<S>                                                 <C>            <C>    
Service and other revenues                          $ 1,634        $ 1,145
Equipment sales                                          60             44
---------------------------------------------------------------------------
Operating revenues                                    1,694          1,189
---------------------------------------------------------------------------
Operating expenses before depreciation
   and amortization expenses                          1,055            771
Depreciation and amortization expenses                  240            128
---------------------------------------------------------------------------
Operating income                                        399            290
Equity in net income (loss) of unconsolidated
   wireless systems                                     200            197
Minority interests in net (income) loss of
   consolidated wireless systems                        (71)           (56)
Other (income) expense included in equity
   income and minority interests (a)                      1            (15)
---------------------------------------------------------------------------
U.S. cellular operating contribution
   to net income (b)                                $   529        $   416
===========================================================================
</TABLE>


(a)      Represents income taxes and non-operating expenses or income included
         in equity in net income (loss) of unconsolidated wireless systems and
         in minority interests in net (income) loss of consolidated wireless
         systems.

(b)      Represents the Company's share of combined operating income of
         consolidated and unconsolidated U.S. cellular operations, net of the
         interests of minority and equity partners (equal to proportionate
         operating income presented on page 16).

Cellular Communications, Inc. Merger. Effective August 16, 1996, AirTouch
acquired the remaining 63% of CCI's capital stock that it did not already own.
As a result of the acquisition, AirTouch now owns 100% of CCI and New Par, the
equally owned partnership between the Company and CCI that operated cellular
properties in Michigan and Ohio prior to the merger. Accordingly, the operating
results of CCI and New Par (referred to elsewhere in management's discussion and
analysis as the "Great Lakes" market) are reflected in equity earnings at the
Company's ownership interest prior to the merger and in consolidated results at
100% thereafter. Since the actual results of operations for the years ended
December 31, 1996 and 1995 are not comparable, the following discussion of
operating revenues and operating income excludes the consolidated operating
results of the Great Lakes market for the period from August 16, 1996, the date
of acquisition, through December 31, 1996.

Excluding the operating results of the Great Lakes market during 1996, U.S.
cellular consolidated operating revenues increased 16%, due primarily to a 30%
increase in subscribers, partially offset by a 14% decrease in the average
revenue per cellular customer. The Company achieved customer growth in its
consolidated markets through advertising and by continuing to offer incentive
programs such as waived service establishment charges, discounted monthly access
fees, discounted cellular handsets, free or discounted air time packages, and
reduced or fixed rates for off-peak usage and roaming. The decline in average
revenue per customer was primarily attributable to continued success in
penetrating the consumer markets and to rate reductions and discounts associated
with customer incentive programs and marketing promotions. Consumer usage
patterns contributed to declines in average revenue per customer because
consumers typically place and receive fewer calls than commercial customers and
often use their telephones more during lower-rate, off-peak calling periods.

Excluding the operating results of the Great Lakes market during 1996, U.S.
cellular operating income increased 18% and operating margins were consistent at
approximately 24%. Operating cash flow margins (operating margin excluding the
effect of depreciation and amortization expenses) increased from 35% to 37%.
Stable margins despite declining average revenue per customer resulted primarily
from a 19% decline in the average cash cost per customer (including the loss on
equipment sales) in the Company's consolidated markets, which reflects the
Company's continuing efforts to reduce cash costs faster than the related
declines in average revenue per customer. Decreases in average cash costs
resulted from several factors, including increased economies of scale,
significant reductions in roaming fraud, declines in handset costs, a shift in
customer acquisitions to lower-cost direct sales channels, and some reduction in
interconnection rates. The Company has also reduced the rate at which customers
discontinue service by increasing its focus on customer incentive programs
designed to retain existing customers, which is significantly less expensive
than replacing customers that discontinue service. The aforementioned cost
reductions were partially offset by increases in personnel, billing, facilities,
and certain other costs necessary to serve the expanded customer base. Excluding
operating results of the Great Lakes market during 1996, depreciation and
amortization increased by approximately 31%, due primarily to depreciation of
significantly larger property, plant, and equipment balances associated 



                                      -14-
<PAGE>   15
Management's Discussion & Analysis
Financial Condition & Results of Operations



with analog network expansion and digital cellular deployment across various
consolidated markets.

Equity in net income of U.S. cellular properties increased 2%, reflecting a 16%
increase in the net income of CMT Partners, partially offset by the effect of
consolidation of the Great Lakes market beginning August 16, 1996. Prior to its
consolidation, approximately 69% of the net income of the Great Lakes market was
reflected in equity in net income (loss) of unconsolidated wireless systems (see
"Cellular Communications, Inc. Merger").

U.S. PAGING OPERATIONS
All U.S. paging markets are wholly owned by the Company.


================================================================================
U.S. Paging Operating Results (GAAP Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                             For the Year Ended
                                                December 31
                                             ------------------
(Dollars in millions)                        1996         1995
---------------------------------------------------------------
<S>                                          <C>         <C> 
Service and other revenues                   $293        $220
Equipment sales                                50          45
---------------------------------------------------------------
Operating revenues                            343         265
---------------------------------------------------------------
Operating expenses before depreciation
   and amortization expenses                  255         190
Depreciation and amortization expenses         64          43
---------------------------------------------------------------
Operating income                             $ 24        $ 32
===============================================================
Operating cash flow (a)                      $ 88        $ 75
Operating cash flow margin (b)               25.7%       28.3%
===============================================================
</TABLE>

(a)      See Footnote (d) on page 47.


(b)      Operating cash flow margins in the GAAP presentation above differ from
         the same margins presented in "Selected Proportionate Financial Data"
         because costs of equipment sales are included in operating expenses in
         this presentation in accordance with GAAP, rather than being presented
         as a reduction to service and other revenues as is done in the
         proportionate presentation for U.S. paging.

Operating revenues increased 29%, due primarily to the acquisition of Message
Center Beepers, Inc. ("Message Center") in mid-December 1995 and to a 22%
increase in paging units in service in existing and start-up paging markets.
Operating income declined 25% and operating margins decreased from 12% to 7%.
Operating cash flow margins (operating margins excluding the effect of
depreciation and amortization) decreased from 28% to 26%. The decline in the
operating cash flow margin resulted primarily from significant operating costs
incurred in initiating service in start-up markets. Increased depreciation and
amortization associated with the expansion of paging networks and amortization
of intangibles acquired in connection with Message Center, combined with
increased cash costs in start-up markets, resulted in the more significant
decline in the overall operating margin.

INTERNATIONAL OPERATIONS


================================================================================
International Operating Results (GAAP Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                    For the Year Ended
                                                        December 31
                                                   --------------------
(Dollars in millions)                                1996         1995
-----------------------------------------------------------------------
<S>                                                 <C>          <C>  
Service and other revenues                          $ 190        $ 133
Equipment sales                                        22           19
-----------------------------------------------------------------------
Operating revenues                                    212          152
-----------------------------------------------------------------------
Operating expenses before depreciation
   and amortization expenses                          239          214
Depreciation and amortization expenses                 34           27
-----------------------------------------------------------------------
Operating loss                                        (61)         (89)
Equity in net income (loss) of unconsolidated
   wireless systems                                   (18)         (36)
Minority interests in net (income) loss of
   consolidated wireless systems                      (24)          20
Other (income) expense included in equity
   income and minority interests (a)                  198           75
-----------------------------------------------------------------------
International operating contribution
   to net income (b)                                $  95        $ (30)
=======================================================================
</TABLE>


(a)      Represents income taxes and non-operating expenses or income included
         in equity in net income (loss) of unconsolidated wireless systems and
         in minority interests in net (income) loss of consolidated wireless
         systems.


(b)      Represents the Company's share of combined operating income of
         consolidated and unconsolidated international operations, net of the
         interests of minority and equity partners (equal to proportionate
         operating income (loss) presented on page 16).

The 40% increase in operating revenues resulted primarily from substantial
subscriber growth in Europolitan's markets. Operating losses declined 32% and
negative operating margins improved from 59% to 29%, due primarily to rapidly
declining cash costs per customer achieved as Europolitan's operations gained
scale.

Equity losses decreased 50% due to significant improvement in existing
operations in Germany, Portugal, Belgium, and Japan partially offset by
increased losses of start-up operations in Spain, South Korea, Italy, and
Poland. Improved results of existing operations resulted from increasing scale
and continued subscriber growth, partially offset by slight declines in the
average revenue per customer. Higher start-up losses were attributable to
acquisition costs associated with rapid subscriber growth.

International equity in net income (loss) of unconsolidated wireless systems
included tax 



                                      -15-
<PAGE>   16
Management's Discussion & Analysis
Financial Condition & Results of Operations



benefits of $10 million and $40 million in 1996 and 1995, respectively. These
tax benefits are recorded in "Equity in net income (loss) of unconsolidated
wireless systems" on the Consolidated Statements of Income. The tax benefits
were recorded as an asset that represents future benefits the equity investees
will receive by deducting the net operating losses from future taxable income.

PROPORTIONATE RESULTS OF OPERATIONS

Proportionate information for the Company's U.S. cellular and international
operations is presented as supplemental information only. Proportionate results
are a pro rata consolidation of the Company's share of all U.S. cellular and
international operating revenues and expenses, net of the interests of minority
and equity partners. Since significant U.S. cellular and international
operations are not consolidated, the Company believes proportionate information
facilitates a more detailed understanding of the Company's operating results
prepared and presented in accordance with GAAP.


================================================================================
U.S. Cellular Operating Results (Proportionate Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                For the Year Ended 
                                                    December 31
                                      -----------------------------------
(Dollars in millions)                   1997          1996          1995
-------------------------------------------------------------------------
<S>                                   <C>           <C>           <C>   
Service and other revenues            $2,363        $1,984        $1,523
-------------------------------------------------------------------------
Cost of revenues                         236           222           188
Selling and customer operations
   expenses (a)                          902           781           591
General, administrative, and
   other expenses                        169           160           139
Depreciation and amortization
   expenses                              388           292           189
-------------------------------------------------------------------------
Operating income                      $  668        $  529        $  416
-------------------------------------------------------------------------
Operating cash flow (b)               $1,056        $  821        $  605
Operating cash flow margin (c)          44.7%         41.4%         39.7%
=========================================================================
</TABLE>


(a)      See Footnote (c) on page 47.

(b)      See Footnote (d) on page 47.

(c)      See Footnote (e) on page 47.



================================================================================
International Operating Results (Proportionate Basis)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                               For the Year Ended
                                                    December 31
                                        ---------------------------------
(Dollars in millions)                   1997          1996          1995
-------------------------------------------------------------------------
<S>                                    <C>           <C>           <C>   
Service and other revenues(a)          $2,181        $1,640        $  918
-------------------------------------------------------------------------
Operating expenses before
   depreciation and amortization
   expenses (b)                         1,452         1,319           794
Depreciation and amortization
   expenses                               283           226           154
-------------------------------------------------------------------------
Operating income (loss)                $  446        $   95        $  (30)
-------------------------------------------------------------------------
Operating cash flow (a)(c)             $  729        $  321        $  124
Operating cash flow margin (d)           33.4%         19.6%         13.5%
==========================================================================
</TABLE>

(a)      If foreign exchange rates had remained constant, service and other
         revenues and operating cash flow would have increased 51% and 163%,
         respectively, comparing 1997 to 1996 and 87% and 189%, respectively,
         comparing 1996 to 1995.

(b)      See Footnote (c) on page 47.

(c)      See Footnote (d) on page 47.

(d)      See Footnote (e) on page 47.


CONTINGENCIES

The Company is party to various legal proceedings, including certain antitrust
litigation. See Note M, "Commitments and Contingencies," to the Consolidated
Financial Statements.

MARKET RISK

INTEREST AND FOREIGN EXCHANGE RATE RISKS

The Company is exposed to risks of unfavorable movements in interest and foreign
currency exchange rates. In certain cases, the Company enters into derivative
financial instrument contracts to manage its exposure to such risks. With
respect to foreign currency exchange rate risk, the Company enters into forward
foreign currency exchange contracts ("forward contracts") to hedge its net
investment in its international wireless systems and to manage risks associated
with firm capital commitments denominated in foreign currencies. With respect to
interest rate risks, the Company attempts to mitigate its exposure to interest
rate changes and to minimize its costs of funds using interest rate swaps. In
general interest rate swaps are used to convert variable-rate debt to fixed-rate
debt and to reduce interest rate risk associated with future borrowings. The
Company does not enter any such arrangements for purposes of trading or
speculation. Additionally, the Company does not anticipate any near-term changes
in the nature of its market risk exposures or in management's objectives and
strategies with respect to managing such exposures. 




                                      -16-
<PAGE>   17
Management's Discussion & Analysis
Financial Condition & Results of Operations



As of December 31, 1997, the Company's financial instruments that are subject to
interest and foreign currency exchange rate risks included long-term debt with
an aggregate fair value of $1.4 billion and forward contracts with an aggregate
positive market value of $60 million. The long-term debt was denominated in U.S.
Dollars, Swedish Krona, German Deutschmarks, Japanese Yen, and Portuguese
Escudos. The forward contracts were denominated in German Deutschmarks, Japanese
Yen, Belgian Francs, Spanish Pesetas, Italian Lira, Korean Won, Portuguese
Escudos, and Swedish Krona. Long-term debt held in the U.S. and denominated in
U.S. Dollars totaled approximately $1 billion, which included $900 million in
public debt bearing interest at fixed rates between 7.0% and 7.5% and $70
million in commercial paper bearing interest at a variable money market rate.
Long-term debt held in the U.S. also included $180 million denominated in German
Deutschmarks bearing interest at a weighted average Deutschmark interest rate of
3.87%. In addition, as of December 31, 1997, Europolitan and Telecel also held
various long-term debt instruments totaling $148 million and $55 million,
respectively, all of which were denominated in their domestic currencies. The
remaining long-term debt consisted of individually insignificant, fixed-rate
instruments predominantly denominated in U.S. Dollars. See Note H, "Debt and
Credit Facilities," to the Consolidated Financial Statements for further
detailed information concerning the Company's debt instruments and credit
facilities.

The Company uses a statistical modeling technique known as "value-at-risk"
("VAR") to compute required disclosures of the maximum probable loss, within a
certain confidence level, in the fair value of its financial instruments subject
to interest and foreign currency exchange rate risks. VAR may be calculated
using several types of models. The Company uses the "variance/co-variance"
model, which calculates VAR based on the actual historical volatility of the
related interest and foreign exchange rates and the actual historical
correlation of such rates with one another. The Company's calculations were
based on the actual correlation of such rates observed during the preceding
year, a 95% confidence level, and a one-year holding period for each financial
instrument (except for those instruments maturing prior to December 31, 1998).
The model was applied to all of the Company's debt instruments and forward
contracts. With respect to foreign exchange rate risk, the VAR for the Company's
debt instruments and forward contracts was $18 million and $49 million,
respectively. With respect to interest rate risk, the VAR for the Company's debt
instruments and forward contracts was $58 million and $53 million, respectively.

VAR amounts are statistical estimates representing the maximum probable loss in
fair value that the Company could incur given a certain confidence level (i.e.,
with 95% certainty, the value of the instruments included in the VAR model is
not likely to decline more than the VAR amounts shown above due to movements in
the relevant market rates). VAR amounts do not represent actual losses which
will be incurred by the Company. In addition, although changes in market rates
may adversely impact the fair value of the Company's debt instruments, market
rate changes will have an immaterial impact on earnings or cash flows since the
majority of the Company's existing debt bears interest at fixed rates. Further,
potential changes in the fair value of forward contracts will be offset by
changes in the fair value of the underlying asset hedged by the forward
contract.

EQUITY PRICE RISK

The Company also holds a $55 million cost-based, available-for-sale investment
in common stock and warrants for common stock of QUALCOMM, Inc. ("QUALCOMM"), a
publicly traded company in the U.S. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the investment in common stock of QUALCOMM is reported at
its market value in the Company's financial statements. The Company's investment
in QUALCOMM is subject to equity price risks. A 10% decline in the price of
QUALCOMM stock would result in a $6 million decrease in the fair value of the
Company's investment.

In addition to QUALCOMM, the Company holds certain cost-based investments in
Globalstar L.P. (a satellite-based wireless communications partnership), a
German landline telephone company, a Japanese long distance company, certain
smaller U.S. cellular properties, and certain Japanese cellular properties. As
of December 31, 1997, investment balances for these entities totaled $110
million and were reported in "Investments in unconsolidated wireless systems,"
in the Company's Consolidated Balance Sheets. These investments also expose the
Company to risk of loss; however, it is not practicable to estimate the fair
value of these investments as quoted market prices are not available and
alternative information which might be relevant to estimating such fair value is
not readily available to the Company. Accordingly, it is not practicable to
provide information concerning sensitivity to relevant market rates for these
investments. 



                                      -17-
<PAGE>   18
Management's Discussion & Analysis
Financial Condition & Results of Operations



LIQUIDITY AND CAPITAL RESOURCES 

The Company defines liquidity as its ability to generate resources to finance
business expansion, construct capital assets, and pay its current obligations.
The Company requires substantial capital to operate and expand its existing
wireless systems, to construct new wireless systems, and to acquire interests in
existing wireless systems.

1997 CAPITAL SPENDING, DEBT SERVICE, AND DIVIDEND REQUIREMENTS

During 1997, the Company incurred capital expenditures of $683 million for
additions to property, plant, and equipment for its consolidated wireless
networks and other capital expenditures, primarily to increase cellular and
paging network capacity and to expand customer operations functions necessary to
support customer growth. The Company invested an additional $445 million in its
unconsolidated wireless systems to fund the expansion and build-out of cellular
and PCS networks and to increase its interest in certain systems. In addition to
capital funding, the Company elected to retire $179 million of long-term debt in
the U.S. prior to its maturity. The Company also paid $54 million in preferred
dividends and reduced its net commercial paper and debt position approximately
$42 million.

FUNDING OF 1997 CAPITAL SPENDING, DEBT SERVICE, AND DIVIDEND REQUIREMENTS

Cash flows from operations of $1.3 billion, combined with beginning cash
balances, proceeds from the issuance of common stock, and net proceeds from
other investing and financing activities, were sufficient to fund net debt
retirement, capital requirements, preferred dividend obligations, and net
distributions to minority partners.

FUTURE FUNDING REQUIREMENTS

The Company will continue to be required to make substantial expenditures in
connection with its efforts to expand its existing wireless business and,
potentially, to pursue opportunities to expand into new markets. U.S. and
international requirements for capital expenditures and contributions to
unconsolidated wireless systems for existing operations are expected to be
approximately $1.1 billion during 1998.

CONSOLIDATED EXPENDITURES

The Company plans to incur significant capital expenditures in its consolidated
U.S. markets to expand its existing analog and Code Division Multiple Access
("CDMA") digital wireless networks and to construct and deploy new digital
wireless networks to meet current and future capacity requirements resulting
from both subscriber growth and increased network use by existing customers. The
Company now offers CDMA digital cellular service in all of its managed U.S.
cellular markets.

The Company's 1997 capital expenditures for digital technology surpassed 1997
capital expenditures for analog technology, and the Company expects annual
digital spending to continue to be greater than annual analog spending for the
foreseeable future. Digital networks enable significant increases in the
Company's cellular network capacity and allow the Company to offer additional
services and features comparable to those available on digital networks
operating at PCS frequencies. Accordingly, the Company anticipates that a
significant portion of its future U.S. wireless network traffic will migrate to
digital service as customers take advantage of enhanced digital features such as
superior voice quality, longer handset battery life, and improved security.
However, both analog and digital technologies are expected to coexist for the
foreseeable future due to continued demand for analog service and the fact that
analog networks provide the only common roaming platform currently available
throughout the United States.

Management believes that a viable analog market will continue to exist for the
foreseeable future to serve consumers and other customers who do not desire
digital features or who do not wish to purchase new digital handsets. With
respect to roaming capabilities, the Company believes that a significant portion
of its digital and analog customer base, as well as customers of other carriers
who roam on the Company's networks, will continue to require access to
nationwide analog networks in the United States. Accordingly, the Company plans
to maintain and, as required, expand its analog networks and to offer dual-mode
(analog/CDMA digital), dual-band (cellular/PCS frequencies) handsets in each of
its U.S. digital markets to facilitate the greatest possible roaming
capabilities for its customers.

At December 31, 1997, the Company was committed to spend approximately $236
million for the acquisition of property, plant, and equipment for its existing
consolidated operations. In addition to these commitments, the Company plans to
make additional capital expenditures of approximately $633 million during 1998
to increase the capacity of its existing wireless networks and to continue
deployment of CDMA digital technology. At December 31, 1997, the Company had
also committed to spend approximately $157 million for the purchase of cellular
handsets, pagers, and other items.



                                      -18-
<PAGE>   19
Management's Discussion & Analysis
Financial Condition & Results of Operations



In addition, the Federal Communications Commission ("FCC") has recently adopted
rules requiring carriers such as the Company to provide customers in the U.S.
with local number portability, the ability for customers to retain their
telephone numbers if they choose to switch landline or wireless carriers.
Providing this functionality will result in additional capital requirements and
operating expenses in future years. FCC rules require the Company to provide
certain local number portability services by December 31, 1998 and to provide
complete local number portability services by June 30, 1999. The Company and
certain wireless industry groups have petitioned the FCC for a delay in the June
30, 1999 implementation date. The Company has not yet fully assessed the cost of
complying with the FCC's number portability rules; such costs could be material
to the Company's results of operations or financial position in future reporting
periods.

The Company will also be required to upgrade its wireless networks in the U.S.
to provide certain functionality to authorized law enforcement agencies. In this
regard, the FCC has adopted rules requiring wireless carriers to electronically
provide "Emergency 911" authorities with the physical location of wireless
callers requesting emergency assistance. In addition, new U.S. Federal laws
pursuant to the Communications Assistance Law Enforcement Act ("CALEA") will
require the Company to provide law enforcement agencies with certain network
functionality and other assistance in criminal investigations, including digital
wiretapping capabilities. The FCC rules concerning "Emergency 911" services and
CALEA both require the responsible government agencies to reimburse the Company
for its costs incurred to upgrade its networks and to provide on-going
assistance to law enforcement agencies; however, the Company can provide no
assurance that all such costs will be recoverable.

UNCONSOLIDATED WIRELESS SYSTEMS

As of December 31, 1997, the Company was committed to make capital contributions
of approximately $21 million to its existing unconsolidated wireless systems. In
addition to these commitments, the Company plans to make additional capital
contributions of approximately $228 million during 1998 to certain of its
existing U.S. and international unconsolidated wireless systems, including
contributions to PrimeCo to fund its operating losses and the continuing
build-out of its CDMA PCS networks.

On March 4, 1998, the Company announced that a consortium, of which it is a
member, was named the winner of a nationwide cellular service license in Egypt.
The consortium bid $516 million for the license, of which the Company's share is
expected to be approximately $155 million. In addition to the license cost, the
Company could be required to begin funding operations of the Egyptian venture
during 1998. The Company is also pursuing a cellular service license in
Switzerland, which may result in further capital requirements during 1998. The
Company continually evaluates opportunities to increase its ownership interests
in its existing international wireless systems and to acquire interests in new
international wireless licenses, either of which could result in incremental
capital commitments.

ACQUISITIONS

On January 29, 1998, the Company and U S WEST entered into a definitive
agreement for AirTouch to acquire U S WEST Media Group's domestic wireless
business, including U S WEST Media Group's interest in PrimeCo, in exchange for
approximately $4.3 billion in AirTouch common and preferred stock and the
assumption by AirTouch of $1.4 billion of U S WEST Media Group's long-term debt,
for a total purchase price of approximately $5.7 billion. The number of AirTouch
common shares to be issued in connection with the 1998 Agreement is expected to
be between 60.8 and 67.1 million shares, depending on the volume weighted
average trading price of AirTouch common stock during the thirty trading days
ending five trading days prior to closing. The transaction is structured so as
to qualify as a tax-free reorganization for U.S. Federal tax purposes. For a
more detailed description of the terms of this transaction, see Note F,
"Partnerships and Acquisitions-U S WEST Transaction," to the Consolidated
Financial Statements.

OTHER REQUIREMENTS

In October 1997, the Company's Board of Directors authorized the repurchase of
up to $1 billion of AirTouch common and preferred stock. The Company plans to
buy shares on the open market from time to time, based on market conditions.

FINANCING SOURCES

In March 1996, the Company initiated a commercial paper program consisting of
the sale of discounted notes that are exempt from registration under the
Securities Act of 1933. The Company's Board of 



                                      -19-
<PAGE>   20
Management's Discussion & Analysis
Financial Condition & Results of Operations

Directors authorized the issuance of commercial paper in amounts necessary to
finance the Company's working capital requirements, provided that the amount
outstanding under the commercial paper program, together with all indebtedness
incurred under the Company's $2 billion long-term revolving credit facility (the
"Facility"), does not in the aggregate exceed $2 billion.

In addition to its Facility and commercial paper program, the Company may obtain
any required financing under its Registration Statement on Form S-3 (Reg. No.
33-62787), which registered $2 billion in various forms of debt and equity
securities (the "Shelf"). As of December 31, 1997, there have been three debt
issues pursuant to the Shelf which remain outstanding. On July 16, 1996, the
Company issued long-term debt pursuant to the Shelf in the form of $250 million
in 7.125% Notes and $400 million in 7.50% Notes, maturing in July 2001 and July
2006, respectively. Interest on the Notes is payable semi-annually on January 15
and July 15, commencing in 1997. In addition, on October 2, 1996, the Company
issued additional long-term debt pursuant to the Shelf in the form of $250
million in 7.00% Notes, maturing in October 2003. The Notes require semi-annual
interest payments due on April 1 and October 1, commencing in 1997.

FUNDING OF FUTURE REQUIREMENTS

The Company anticipates cash flows from operations to be its primary source of
funding for capital requirements of its existing operations, debt service, and
preferred dividends through the end of 1998, including the Company's incremental
debt service and preferred dividend obligations resulting from the pending
acquisition of U S WEST Media Group's domestic wireless business. However,
should additional funding be required due to award of one or more new
international cellular licenses, new investment opportunities, repurchase of
AirTouch common or preferred stock, or other unanticipated events, the Company
may raise the required funds through borrowings or public or private sales of
debt or equity securities. Such funding may be obtained through borrowings under
the Facility; through the Company's commercial paper program; from additional
securities which may be issued from time to time under the Shelf; through the
issuance of securities in a transaction exempt from registration under the
Securities Act of 1933; or a combination of one or more of the foregoing. The
Company believes, that in the event of such requirements, it will be able to
access the capital markets on terms and in amounts adequate to meet its
objectives. However, given the possibility of changes in market conditions or
other occurrences, there can be no certainty that such funding will be available
in quantities or on terms favorable to the Company.


                                      -20-
<PAGE>   21
Report of Management


To the Stockholders of AirTouch Communications, Inc.:

FINANCIAL STATEMENTS


The management of AirTouch Communications, Inc. and its subsidiaries prepared
the accompanying Consolidated Financial Statements and is responsible for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles in the United States applied on a
consistent basis and are not misstated as a result of material fraud or error.
The Consolidated Financial Statements include amounts based on management's best
estimates and judgments, where necessary. Management also prepared the other
information in this annual report and is responsible for its accuracy and
consistency with the Consolidated Financial Statements.

The Company's Consolidated Financial Statements have been audited by Price
Waterhouse LLP, independent accountants. Management has made available to Price
Waterhouse LLP all of the Company's financial records and related data, as well
as the minutes of meetings of the Board of Directors. Furthermore, management
believes that all of the representations made to Price Waterhouse LLP during
their audits were valid and appropriate.

INTERNAL CONTROL SYSTEM

AirTouch Communications, Inc. and its subsidiaries maintain a system of internal
controls over financial reporting, one of the purposes of which is to provide
reasonable assurance to the Company's management and Board of Directors
regarding the preparation of reliable published financial statements. The Audit
and Investment Committee of the Board of Directors is responsible for overseeing
the Company's financial reporting process on behalf of the Board. 

During 1997, the Audit and Investment Committee met regularly with management,
internal audit, and the independent accountants to review internal controls,
accounting, auditing, and financial reporting matters.

The system of internal controls contains self-monitoring mechanisms, and actions
are taken to correct deficiencies as they are identified. Even an effective
internal control system, no matter how well designed, has inherent limitations -
including the possibility of the circumvention or overriding of controls - and
therefore can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, internal
control system effectiveness may vary over time.

The Company assessed its internal control system in its consolidated operations
throughout the year ended December 31, 1997. Criteria for effective internal
control over financial reporting described in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") were considered in management's control process assessments.
To assess the internal control systems in its unconsolidated partnerships and
corporations, management relied on reports issued by the Company's internal
audit group and various external public accountants who performed audits of
those entities, where such reports were available. Management believes that, as
of December 31, 1997, its overall system of internal control over financial
reporting was operating effectively.


/s/ Sam Ginn
Chairman and Chief Executive Officer


/s/ Mohan Gyani
Executive Vice President and Chief Financial Officer

March 2, 1998


                                      -21-
<PAGE>   22
Report of Independent Accountants


To the Board of Directors and Stockholders of AirTouch Communications, Inc.:

In our opinion, the accompanying Consolidated Balance Sheets and the related
Consolidated Statements of Income, of Stockholders' Equity and of Cash Flows
present fairly, in all material respects, the financial position of AirTouch
Communications, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.


Our audits were made for the purpose of forming an opinion on the Consolidated
Financial Statements taken as a whole. The Selected Proportionate Financial Data
(Proportionate Financial Data) for each of the three years in the period ended
December 31, 1997, appearing on page 46 is presented for additional analysis and
is not a required part of the basic financial statements. As discussed on page
47, this Proportionate Financial Data has been prepared by the Company to
present financial information that, in the opinion of management, is not
provided by financial statements prepared in conformity with generally accepted
accounting principles. The Proportionate Financial Data reflects selected
operating data of the Company's consolidated and unconsolidated investments
using the proportionate method of accounting and is not a presentation in
accordance with generally accepted accounting principles. Such Proportionate
Financial Data for each of the three years in the period ended December 31,
1997, determined on the basis of presentation described on page 47, has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the Consolidated Financial Statements taken as a whole.


/s/ PRICE WATERHOUSE LLP

San Francisco, California
March 2, 1998


                                      -22-
<PAGE>   23
Consolidated Statements of Income


AirTouch Communications, Inc. and Subsidiaries
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                        For the Year Ended December 31
                                                                    --------------------------------------
(Dollars in millions, except per share information)                    1997          1996          1995
----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>           <C>      
Operating revenues                                                  $   3,594     $   2,252     $   1,619
----------------------------------------------------------------------------------------------------------
Operating expenses:
   Cost of revenues                                                       846           521           373
   Selling and customer operations expenses                               990           705           525
   General, administrative, and other expenses                            503           394           392
   Depreciation and amortization expenses                                 549           351           216
----------------------------------------------------------------------------------------------------------
Total operating expenses                                                2,888         1,971         1,506
----------------------------------------------------------------------------------------------------------
Operating income                                                          706           281           113

Equity in net income (loss) of unconsolidated wireless systems:
   U.S.                                                                     1           151           188
   International                                                          199           (18)          (36)
Minority interests in net (income) loss of consolidated wireless
   systems                                                               (119)          (95)          (36)
Interest:
   Expense                                                                (90)          (52)          (13)
   Income                                                                  18            14            35
Foreign exchange gain                                                       8             6             3
Miscellaneous income (expense)                                             (9)           61            (9)
----------------------------------------------------------------------------------------------------------
Income before income taxes and preferred dividends                        714           348           245
Income taxes                                                              266           149           113
----------------------------------------------------------------------------------------------------------
Income before preferred dividends                                         448           199           132
Preferred dividends                                                        54            20            --
----------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders                        $     394     $     179     $     132
==========================================================================================================
Net income applicable to common stockholders - per share
   Basic and diluted                                                $    0.78     $    0.36     $    0.27
==========================================================================================================
Weighted average shares outstanding (in thousands)                    503,883       500,051       494,925
==========================================================================================================
</TABLE>



                 The accompanying Notes are an integral part of
                     the Consolidated Financial Statements.



                                      -23-
<PAGE>   24
Consolidated Balance Sheets

AirTouch Communications, Inc. and Subsidiaries




<TABLE>
<CAPTION>
                                                                                                                  December 31
                                                                                                             --------------------
(Dollars in millions)                                                                                          1997        1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                          <C>         <C>    
ASSETS
Current assets:
   Cash and cash equivalents                                                                                 $     1     $    28
   Accounts receivable (net of allowance for uncollectibles of $44 and $61, respectively)                        472         416
   Inventories                                                                                                   106          55
   Other receivables                                                                                              44          33
   Due from related parties                                                                                       48          34
   Other current assets                                                                                           51          58
---------------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                                             722         624

Property, plant, and equipment, net                                                                            2,539       2,322
Investments in unconsolidated wireless systems                                                                 2,068       1,992
Intangible assets, net                                                                                         3,297       3,409
Deferred charges and other noncurrent assets                                                                     344         177
---------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                                 $ 8,970     $ 8,524
=================================================================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable, trade                                                                                   $   244     $   200
   Current portion of long-term debt                                                                              57          16
   Other current liabilities                                                                                     675         528
---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                                        976         744

Long-term debt                                                                                                 1,362       1,653
Deferred income taxes                                                                                            711         693
Deferred credits                                                                                                  86         104
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                                              3,135       3,194
---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interests in consolidated wireless systems                                                              306         268
---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
   Preferred stock and additional paid-in capital ($.01 par value; 50 million
     shares authorized):
      Series A (6 million shares authorized, no shares issued or outstanding)                                     --          --
      6.00% Class B Mandatorily Convertible (24 million shares authorized;
        17.2 million shares issued and outstanding; liquidation value of $500)                                   500         500
      4.25% Class C Convertible (19 million shares authorized, 11.1 million shares issued
        and outstanding; liquidation value of $554)                                                              541         541
   Common stock and additional paid-in capital ($.01 par value; 1.1 billion shares authorized,
        506.1 million shares issued and 505.5 million shares outstanding [net of 0.5 million treasury
        shares at cost of $11] at December 31, 1997, 502.6 million shares issued and 502.3 million shares
        outstanding [net of 0.2 million treasury shares at cost of $4] at December 31, 1996)                   4,079       3,987
   Retained earnings                                                                                             415          21
   Cumulative translation adjustment                                                                             (32)          3
   Other                                                                                                          26          10
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                                     5,529       5,062
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                                   $ 8,970     $ 8,524
=================================================================================================================================
</TABLE>

               The accompanying Notes are an integral part of the
                       Consolidated Financial Statements


                                      -24-
<PAGE>   25
Consolidated Statements of Stockholders' Equity



AirTouch Communications, Inc. and Subsidiaries

================================================================================



<TABLE>
<CAPTION>
                                                     Class B         Class C
                                                   Preferred       Preferred          Common        Retained        Cumulative
                                                   Stock (a)       Stock (a)       Stock (a)        Earnings       Translation
(Dollars in millions)                               and APIC        and APIC        and APIC       (Deficit)        Adjustment  
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>             <C>             <C>          
December 31, 1994 balances                          $     --        $     --        $  3,750        $   (290)           $   11  
Net income                                                                                               132                    
Shares issued under incentive and
   employee benefits programs                                                             40                                    
Shares issued for acquisition                                                             94                                    
Treasury share additions from
   incentive plan forfeitures, net of shares
   reissued under incentive programs                                                      (2)                                   
Foreign currency translation gain                                                                                            6  
Unearned compensation                                                                                                           
Compensation expense                                                                                                            
Unrealized holding gain on noncurrent
   available-for-sale securities, net                                                                                           
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 balances                                --              --           3,882            (158)               17  
Income before preferred dividends                                                                        199                    
Preferred stock dividends (b)                                                                            (20)                   
Preferred stock issued                                   500             541                                                    
Stock options issued for CCI merger                                                       17                                    
Shares issued under incentive and
   employee benefits programs                                                             90                                    
Treasury share additions from
   incentive plan forfeitures, net of shares
   reissued under incentive programs                                                     (2)                                    
Foreign currency translation loss                                                                                          (14) 
Unearned compensation                                                                                                           
Compensation expense                                                                                                            
Unrealized holding loss on noncurrent
   available-for-sale securities, net                                                                                           
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 balances                               500             541           3,987              21                 3  
Income before preferred dividends                                                                        448                    
Preferred stock dividends (b)                                                                            (54)                   
Shares issued under incentive and
   employee benefits programs                                                             99                                    
Treasury share additions, principally from
   incentive plan forfeitures, net of shares
   reissued under incentive programs                                                      (7)                                   
Foreign currency translation loss                                                                                         ( 35)  
Unearned compensation                                                                                                           
Compensation expense                                                                                                            
Unrealized holding gain on noncurrent
   available-for-sale securities, net                                                                                           
--------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 balances                            $  500          $  541        $  4,079         $   415        $     (32)  
================================================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                  
                                                  
                                                  
(Dollars in millions)                                 Other      Total
-----------------------------------------------------------------------
<S>                                                   <C>       <C>    
December 31, 1994 balances                            $   (11)  $ 3,460
Net income                                                          132
Shares issued under incentive and
   employee benefits programs                                        40
Shares issued for acquisition                                        94
Treasury share additions from
   incentive plan forfeitures, net of shares
   reissued under incentive programs                                 (2)
Foreign currency translation gain                                     6
Unearned compensation                                      ( 8)      (8)
Compensation expense                                         6        6
Unrealized holding gain on noncurrent
   available-for-sale securities, net                       23       23
-----------------------------------------------------------------------
December 31, 1995 balances                                  10    3,751
Income before preferred dividends                                   199
Preferred stock dividends (b)                                       (20)
Preferred stock issued                                            1,041
Stock options issued for CCI merger                                  17
Shares issued under incentive and
   employee benefits programs                                        90
Treasury share additions from
   incentive plan forfeitures, net of shares
   reissued under incentive programs                                 (2)
Foreign currency translation loss                                   (14)
Unearned compensation                                      (13)     (13)
Compensation expense                                        16       16
Unrealized holding loss on noncurrent
   available-for-sale securities, net                       (3)      (3)
-----------------------------------------------------------------------
December 31, 1996 balances                                  10    5,062
Income before preferred dividends                                   448
Preferred stock dividends (b)                                       (54)
Shares issued under incentive and
   employee benefits programs                                        99
Treasury share additions, principally from
   incentive plan forfeitures, net of shares
   reissued under incentive programs                                 (7)
Foreign currency translation loss                                   (35)
Unearned compensation                                      (14)     (14)
Compensation expense                                        21       21
Unrealized holding gain on noncurrent
   available-for-sale securities, net                        9        9
-----------------------------------------------------------------------
December 31, 1997 balances                               $  26  $ 5,529
=======================================================================
</TABLE>


(a)      See Note I, "Capital Stock," to the Consolidated Financial Statements
         for changes in the number of shares.

(b)      Class B Preferred dividends are $1.74 per share per annum and Class C
         Preferred dividends are $2.125 per share per annum. For 1996, preferred
         stock was outstanding from August 16, 1996 through December 31, 1996.



                 The accompanying Notes are an integral part of
                     the Consolidated Financial Statements.




                                      -25-
<PAGE>   26
Consolidated Statements of Cash Flows



AirTouch Communications, Inc. and Subsidiaries

================================================================================

<TABLE>
<CAPTION>
                                                                                      For the Year Ended December 31
                                                                                     --------------------------------
(Dollars in millions)                                                                  1997        1996        1995
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>         <C>         <C>    
Cash flows from operating activities:
   Income before preferred dividends                                                 $   448     $   199     $   132
   Adjustments to reconcile income before preferred dividends
      for items currently not affecting operating cash flows:
         Depreciation, amortization, and other noncash charges                           561         358         222
         Equity in net (income) loss of unconsolidated wireless systems                 (200)       (133)       (152)
         Distributions received from equity investees                                    383         140         104
         Minority interests in net income (loss) of consolidated wireless systems        119          95          36
         Deferred income tax (benefit) expense                                            75          33          24
         Loss (gain) on sale of assets and telecommunications interests                    2         (60)         (4)
         Changes in assets and liabilities:
            Accounts receivable, net                                                     (69)         (7)        (52)
            Other current assets and receivables                                         (87)         24          53
            Deferred charges and other noncurrent assets                                   9          61         (33)
            Accounts payable and other current liabilities                                91          26          (6)
            Deferred credits and other liabilities                                         3          39          (2)
---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities                                                   1,335         775         322
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Investments in unconsolidated wireless systems                                       (445)       (857)     (1,264)
   Proceeds from sale of wireless systems                                                 --         131           4
   Additions to property, plant, and equipment                                          (683)       (480)       (502)
   Proceeds from sale of property, plant , and equipment                                  16          25          18
   Maturity of available-for-sale securities                                               7          11          86
   Maturity of held-to-maturity investments                                               --          --         310
   Other investing activities                                                              8          (5)        (14)
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities                                                  (1,097)     (1,175)     (1,362)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Proceeds from issuing long-term debt and commercial paper                             406       2,323         767
   Retirement of long-term debt and commercial paper                                    (627)     (1,991)         (8)
   Distributions to minority interests of consolidated wireless systems                  (71)        (56)        (21)
   Contributions from minority interests of consolidated wireless systems                  5           1           6
   Proceeds from common shares issued                                                     83          80          32
   Increase (decrease) in short-term borrowings                                           --          --         (86)
   Payment of preferred stock dividends                                                  (54)         (7)         --
   Other financing activities                                                             (2)         (4)          4
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities                                                    (260)        346         694
---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents                              (5)         (1)         --
---------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                                                  (27)        (55)       (346)
Beginning cash and cash equivalents                                                       28          83         429
---------------------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents                                                     $     1     $    28     $    83
=====================================================================================================================
Supplemental information:
   Cash payments for:
      Interest, net of amounts capitalized                                           $    94     $    22     $     4
      Income taxes                                                                   $   154     $    54     $   108
   Noncash financing activities:
      Preferred stock and options issued for CCI merger (a)                          $    --     $ 1,057     $    --
      Common stock issued for paging acquisition                                     $    --     $    --     $    94
=====================================================================================================================
</TABLE>


(a)      See Note F, "Partnerships and Acquisitions - CCI Merger," for
         additional noncash information.


                 The accompanying Notes are an integral part of
                     the Consolidated Financial Statements.



                                      -26-
<PAGE>   27
Notes to Consolidated Financial Statements


A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

AirTouch Communications, Inc., a holding company, together with its
subsidiaries, unconsolidated partnerships, and corporations (collectively
referred to herein as the "Company"), provide wireless telecommunications
services in the United States, Europe, and Asia. The principal business units of
AirTouch Communications, Inc. are AirTouch Cellular, AirTouch Paging, and
AirTouch International. These business units principally provide cellular and
paging services. The majority of the Company's revenues are provided by its U.S.
cellular operations, AirTouch Cellular.

The Consolidated Financial Statements include the accounts of the Company, its
subsidiaries, and partnerships in which the Company has a direct controlling
interest. All significant intercompany balances and transactions have been
eliminated. Certain prior period items have been reclassified to conform with
the 1997 format; however, these classifications did not effect previously
reported net income.

On December 31, 1996, the Company consolidated Telecel Communicacoes Pessoias,
S.A. ("Telecel"), its cellular system in Portugal, subsequent to obtaining a
controlling interest. Accordingly, Telecel's Balance Sheet was consolidated in
the Company's Consolidated Balance Sheet as of December 31, 1996. On January 1,
1997, the Company began consolidating Telecel's results of operations.

Effective August 16, 1996, the Company completed its acquisition of Cellular
Communications, Inc. ("CCI"). Prior to the merger, the Company owned
approximately 37% of the outstanding capital stock of CCI and the Company and
CCI each held a 50% interest in New Par, a partnership that owned and operated
cellular systems located principally in Michigan and Ohio. The Company used the
equity method of accounting to report the results of both CCI and New Par prior
to the merger on August 16, 1996. Since the merger, CCI and New Par have been
consolidated in the Company's Consolidated Financial Statements. See Note F,
"Partnerships and Acquisitions - CCI Merger," for further information.

Effective January 17, 1996, the Company sold its vehicle location and fleet
tracking services business, AirTouch Teletrac ("Teletrac"). In 1995, the Company
recorded a pre-tax charge of approximately $25 million primarily related to the
write-down of its investment in Teletrac to net realizable value. For the year
ended December 31, 1995, Teletrac reported a pre-tax loss of $26 million.

The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applicable in the United
States. Conformity with GAAP requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, 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.

Cash Equivalents

Cash equivalents are short-term, highly liquid, held-to-maturity investments
with original maturities of 90 days or less from the date of purchase.

Inventories

Inventories held for sale are valued at lower of cost or market. Costs are based
on either the first-in, first-out, or average methods. Market is determined
using replacement cost in accordance with industry standards.

Foreign Currency Translation and Transactions

Results of operations for international investments are translated using average
exchange rates during the period, while assets and liabilities are translated
using end-of-period rates. The resulting exchange gains or losses are
accumulated in the "Cumulative translation adjustment" account (the "CTA
account"), a component of stockholders' equity. All gains and losses resulting
from foreign currency transactions are included in operations.

Financial Instruments

The Company is exposed to market risks arising from foreign currency and
interest rate fluctuations. The Company enters into foreign currency hedging
activities to reduce currency exposures to its long-term investments in
international wireless systems. The Company hedges a portion of these
investments with long-dated forward foreign currency exchange contracts
("forward contracts"). In addition, the Company enters into forward contracts to
reduce exposures of firm capital commitments denominated in foreign currencies.
The Company also enters into interest rate swap agreements to manage its
exposure to fluctuations in interest rates in an effort to minimize the
Company's cost of funds. Swap agreements are primarily used to effectively
convert existing variable rate debt to fixed rate and to reduce the interest
rate risk for future borrowings. The Company does not hold 



                                      -27-
<PAGE>   28
Notes to Consolidated Financial Statements



or issue financial instruments for trading or speculative purposes.

Foreign currency hedges. Under a forward contract, the Company undertakes to
exchange an agreed upon amount of a foreign currency for equivalent U.S. dollars
at a specified rate at a stated future date. Gains or losses associated with
forward contracts that are designated and effective as economic hedges
("qualifying hedges") of net foreign investments are recorded in the CTA
account, a separate component of stockholders' equity, with a corresponding
adjustment to a deferred asset or liability account. Cash flows resulting from
such hedges are reported in the Statements of Cash Flows in investing
activities. Gains and losses upon termination of net investment hedges are
recorded in the CTA account. Gains and losses related to qualifying hedges of
firm commitments are deferred and are recognized as adjustments of carrying
amounts when the hedged transactions occur. Cash flows resulting from these
hedges are reported in the Statements of Cash Flows in the same category as the
cash flows from the items being hedged. Gains or losses on forward contracts
that do not qualify as hedges are recorded in "Foreign exchange gain (loss)" in
the Consolidated Statements of Income.

Interest rate hedges. Under an interest rate swap, the Company agrees with
another party to exchange interest payments at specified intervals over a
defined term. Interest payments are calculated by reference to the notional
amount of the instrument based on the fixed and variable terms of the swap
agreement. The net interest received or paid as part of the interest rate swap
is accounted for as an adjustment to interest expense. The Company amortizes the
fair value of forward interest rate swaps used to hedge future borrowings over
the term of the related debt when incurred. Cash flows resulting from such
hedges are reported in the Statements of Cash Flows in operating activities.
Also, gains or losses on termination of interest rate swaps are deferred and
amortized over the remaining term of the related debt.

Property, Plant, and Equipment

Assets of businesses purchased are recorded at their fair values at the date of
acquisition. All other property, plant, and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful life of the asset. Land is not depreciated. Gains and losses on disposals
are included in income at amounts equal to the difference between the net book
value of the disposed assets and the proceeds received upon disposal.
Expenditures for replacements and betterments are capitalized, while
expenditures for maintenance and repairs are charged against earnings as
incurred. Assets under construction are not depreciated until placed into
service. Interest cost incurred during the construction period is capitalized,
as discussed below in "Capitalized Interest."

Intangible Assets

The Company uses modeling techniques on new acquisitions and long-range business
plans, revised annually, to assess whether a revision of the existing estimated
useful lives of intangible assets is necessary.

FCC licenses. The Federal Communications Commission ("FCC") issues cellular
licenses that enable U.S. cellular carriers to provide service in specific
Cellular Geographic Service Areas. A cellular license is issued conditionally
for ten years. Historically, the FCC has routinely granted license renewals
providing the licensees have complied with applicable rules, policies, and the
Communications Act of 1934, as amended. The Company believes it has complied and
intends to continue to comply with these standards and is amortizing the related
costs using the straight-line method over 40 years.

FCC licenses for U.S. paging operations are amortized on a straight-line basis
over 40 years. FCC licenses acquired by the Company through business
combinations are generally stated at appraised values as of the date of
acquisition and amortized using the straight-line method over 40 years.

International licenses. Licenses for the Company's international cellular and
paging operations are amortized on a straight-line basis over the expected term
of the licenses, which are up to 30 years.

Subscriber lists. Subscriber lists acquired through business combinations are
generally stated at appraised values as of the date of acquisition. Amortization
is computed using the straight-line method over estimated average customer
service length, typically two to five years.

Goodwill. The excess of the purchase price paid over the fair value of net
assets acquired in business combinations is recorded as goodwill and is
amortized over its expected useful period, generally 40 years, using the
straight-line method.

Investments in Unconsolidated Wireless Systems

The equity method is used to account for investments in all U.S. cellular
markets and international markets in 



                                      -28-
<PAGE>   29

Notes to Consolidated Financial Statements


which the Company has significant influence but does not have controlling
interest, including those investments in which the Company's ownership
percentage may be less than 20%. Limited partnership interests and other
unconsolidated wireless system investments in which the Company has a minor
interest and does not exercise significant influence are accounted for using the
cost method.

Earnings Per Share

Basic earnings per share is calculated based on net income after deducting
dividends on preferred stock divided by the weighted average common shares
outstanding. Diluted earnings per share is calculated based on net income after
deducting dividends on preferred stock divided by the sum of the weighted
average common shares outstanding and any common stock equivalents. Common stock
equivalents are determined using the treasury stock method. Convertible
preferred stock and convertible debt, using the "if converted" method, had an
anti-dilutive impact on earnings per share and were not included in the
calculation of diluted earnings per share.

Capitalized Interest

The Company capitalizes interest which is applicable to the construction of
significant additions to property, plant, and equipment and on start-up
investments in unconsolidated wireless systems accounted for under the equity
method of accounting until their principal operations commence. These costs are
amortized over the related assets' estimated useful lives. Total interest
incurred was $103 million, $83 million, and $28 million for 1997, 1996, and
1995, respectively, of which $13 million, $31 million, and $15 million was
capitalized in 1997, 1996, and 1995, respectively.

Advertising Expense

The Company primarily expenses advertising costs as incurred. Advertising
expense was $178 million in 1997, $107 million in 1996, and $80 million in 1995.


B.  ACCOUNTING CHANGES

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of
an Enterprise and Related Information," and SFAS No. 130, "Reporting
Comprehensive Income."

SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information in interim reports. SFAS No. 130 establishes standards for reporting
and displaying comprehensive income and its components in a full set of
financial statements. The Company intends to adopt SFAS No. 131 effective with
the issuance of its December 31, 1998 financial statements and SFAS No. 130
effective with the issuance of its first quarter 1998 financial statements,
consistent with the required adoption periods. The implementation of SFAS No.
131 and SFAS No. 130 will not have an impact on the Company's financial position
or results of operations.

Effective with the issuance of the 1997 financial statements, the Company
implemented the provisions of SFAS No. 128, "Earnings Per Share." Under SFAS
No. 128, the Company is required to replace the traditional earnings per share
("EPS") disclosures with a dual presentation of "Basic" and "Diluted" EPS.
Implementation of SFAS No. 128 did not have an impact on the Company's financial
position or results of operations or on previously reported EPS.

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

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company had a
choice of adopting a fair value based method of accounting for employee
stock-based compensation plans, as established by SFAS No. 123, or retaining the
intrinsic value-based method prescribed under Accounting Principles Board
Opinion ("APB") No. 25, provided certain pro forma disclosures were made.
Effective January 1, 1996, the Company chose to retain the intrinsic value-based
method of accounting for employee stock-based compensation plans as prescribed
by APB No. 25 and adopted the pro forma disclosure provisions of SFAS No. 123,
which did not have an impact on the Company's financial position or its results
of operations.



                                      -29-
<PAGE>   30
Notes to Consolidated Financial Statements

C.  PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consists of the following:

<TABLE>
<CAPTION>
---------------------------------------------------------------------
                                                      December 31
                                   Depreciable    -------------------
(Dollars in millions)             Lives (Years)    1997      1996(a)
---------------------------------------------------------------------
<S>                               <C>             <C>       <C>   
Land                                       --     $   29    $   29
Buildings and
  leasehold improvements               5 - 50        214       205
Cellular plant and equipment           5 - 15      2,878     2,435
Pagers, paging terminals,
  and other paging equipment           3 - 15        303       292
Other equipment and furniture          2 - 10        542       540
Construction in progress                   --        194       196
---------------------------------------------------------------------
                                                   4,160     3,697
Less: accumulated depreciation                     1,621     1,375
---------------------------------------------------------------------
                                                  $2,539    $2,322
=====================================================================
</TABLE>

(a)      Certain items have been reclassified to conform with the 1997
         presentation.

Depreciation expense relating to property, plant, and equipment was $429 million
in 1997, $295 million in 1996, and $196 million in 1995. During 1995 the Company
completed a review of the estimated service lives of certain U.S. and
international cellular telecommunications equipment. As a result, the Company
and certain of its equity investees extended the estimated service lives of such
equipment from seven to ten years. The change was made to reflect more
accurately the estimated periods that such assets will remain in service and was
effective January 1, 1995. The ten-year depreciation period is consistent with
current industry standards. The change increased net income by $26 million or
$.05 per share for both basic and diluted for the year ended 1995.


D.  FINANCIAL INSTRUMENTS

Market Risk Management

As of December 31, 1997 and 1996, the Company had outstanding forward foreign
currency exchange contracts principally denominated in Lira, Escudos, Belgian
Francs, Deutschmarks, Krona, Pesetas, Won, and Yen. These contracts had face
amounts totaling $814 million, and $821 million as of December 31, 1997 and
1996, respectively, with maturities through 2004. The amounts exchanged are
calculated on the basis of the face amounts of the financial instruments.

As of December 31, 1997, the Company was not a party to any interest rate or
other swaps. However, in February 1998, the Company entered into several forward
interest rate swaps with an aggregate notional amount of $500 million to
effectively lock in interest rates for certain future debt issues.

Concentration of Credit Risk

The off-balance-sheet risk in outstanding forward foreign currency exchange
contracts and interest rate swaps involves both the risk of a counterparty not
performing under the terms of the contract and the risk associated with changes
in market value. The Company monitors its positions, the credit ratings of
counterparties, and the level of contracts the Company enters into with any one
party. The counterparties to these contracts are major financial institutions.
The Company has a policy of entering into contracts with parties that have at
least an "AA-" (or equivalent) credit rating as well as other stringent
qualifications and, given the high level of credit quality of its derivative
counterparties, the Company does not believe it necessary to obtain collateral
arrangements. The Company believes that the probability of losses from
counterparty nonperformance on settlements of these transactions is remote and
that any such nonperformance would not have any material adverse effect upon the
Company's financial position or results of operations. The Company does not have
any significant exposure to any individual counterparty.

Financial instruments that potentially subject the Company to concentrations of
credit risk are trade receivables and interest-bearing investments. Due to the
large volume and diversity of the Company's customer base, concentrations of
credit risk with respect to trade receivables are limited. The Company avoids
concentrations of credit risk in its interest-bearing investment portfolio by
investing in securities issued by the U.S. Government and its agencies, and by
limiting other investments in interest-bearing securities to instruments which
are highly rated by nationally recognized statistical rating agencies. As of
December 31, 1997, the Company held no significant interest-bearing investments.



                                      -30-
<PAGE>   31
Notes to Consolidated Financial Statements


Fair Value
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                          December 31
                                                    ---------------------------------------------------
                                                              1997                       1996
                                                    ---------------------       -----------------------
                                                    Carrying     Estimated      Carrying     Estimated
(Dollars in millions)                                  Value    Fair Value         Value    Fair Value
-------------------------------------------------------------------------------------------------------
<S>                                                 <C>         <C>             <C>         <C>
Financial assets:
   Noncurrent assets                                  $   61        $   61        $   49        $   49
   Investments at cost                                $  110           N/A        $   72           N/A
   Forward foreign currency exchange contracts        $   86        $   60        $   --        $   --
Financial liabilities:
   Current obligations                                $   57        $   57        $   16        $   16
   Long-term debt, including leases                   $1,362        $1,393        $1,653        $1,672
   Forward foreign currency exchange contracts        $   --        $   --        $   24        $   48
   Off-balance-sheet financial instruments            $   --        $    5        $   --        $    4
=======================================================================================================
</TABLE>
N/A -  Not available

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

Noncurrent assets: represents an investment in shares and warrants of common
stock and is recorded at quoted market prices.

Investments at cost: it is not practicable to estimate the fair value of the
Company's cost-based investments because quoted market prices are not available
and, since certain of these ventures are in a start-up phase, other valuation
techniques are not appropriate. Further, alternative information which might be
pertinent to estimating the fair value of such investments is not readily
available to the Company.

Current obligations: due to the short-term character of the securities and
obligations, carrying amounts are a reasonable approximation of fair value.

Long-term debt, including leases: interest rates that are currently available to
the Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value for debt issues that are not quoted on an exchange.

Forward foreign currency exchange contracts: forward foreign currency exchange
contracts are based on the current value in the market for transactions with
similar terms adjusted for the holding period.

Off-balance-sheet financial instruments: off-balance-sheet instruments include
interest rate swaps and financial guarantees issued by the Company. Fair values
of interest rate swaps are based on the current value in the market for
transactions with similar terms adjusted for the holding period. Fair value of
financial guarantees issued by the Company is based on estimated fees to enter
into similar arrangements. Such guarantees issued by the Company include letters
of responsibility and letters of support for various credit facilities and
financing activities of certain of its subsidiaries and affiliates (see Note M,
"Commitments and Contingencies - Other," for further information).



                                      -31-
<PAGE>   32
Notes to Consolidated Financial Statements



E. INVESTMENTS IN UNCONSOLIDATED WIRELESS SYSTEMS 

The Company's investments in unconsolidated wireless systems consist of the
following:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                              December 31
                                                      --------------------------
(Dollars in millions)                                  1997                1996
--------------------------------------------------------------------------------
<S>                                                   <C>                 <C>   
Investments at equity                                 $1,958              $1,920
Investments at cost                                      110                  72
--------------------------------------------------------------------------------
                                                      $2,068              $1,992
================================================================================
</TABLE>


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                          Percentage of Ownership
                                                                December 31
                                                          ----------------------
                                                             1997           1996
--------------------------------------------------------------------------------
<S>                                                         <C>            <C>  
EQUITY INVESTMENTS
U.S.:
  CMT Partners (California, Texas, Missouri, and Kansas)    50.0%          50.0%
  Nevada RSA2 Ltd. Partnership (Lander, Nevada)             50.0%          50.0%
  TOMCOM, L.P. (a)                                          35.0%          35.0%
  Centel Cellular Company of Nevada Limited
    Partnership (Las Vegas, Nevada)                         27.8%          27.8%
  PrimeCo Personal Communications, L.P. (a)                 25.0%          25.0%
International:
  Telechamada-Servicio de Pessoais, S.A. (Portugal) (a)     50.9%          50.9%
  Cellular Communications India Ltd. (India)                49.0%          49.0%
  Northstar Paging Holdings Ltd. (Canada)                   48.5%          00.0%
  Mannesmann Mobilfunk GmbH (Germany)                       34.8%          34.8%
  Belgacom Mobile (Belgium)                                 25.0%          25.0%
  Globalstar de Mexico, S. de R. L. de C.V. (Mexico) (a)    24.6%          24.6%
  Globalstar Canada Company (Canada) (a)                    23.4%          00.0%
  Airtel Movil, S.A. (Spain)                                21.7%          16.7%
  RPG Cellular Services Limited (India)                     20.0%          20.0%
  Polkomtel S.A. (Poland)                                   19.3%          19.3%
  Sistelcom-Telemensaje, S.A. (Spain) (a)                   17.5%          17.5%
  Omnitel-Pronto Italia, S.p.A. (Italy) (a)                 15.5%          15.5%
  Tokyo Digital Phone Co. (Japan)                           15.0%          15.0%
  Kansai Digital Phone Co. (Japan)                          13.0%          13.0%
  Central Japan Digital Phone Co. (Japan)                   13.0%          13.0%
  Shinsegi Mobile Telecommunication Co., Ltd. (South Korea) 10.7%          10.7%
  MobiFon S A (Romania)                                     10.0%          10.0%

COST INVESTMENTS
U.S.:
  GTE Mobilnet of Santa Barbara Limited Partnership         10.0%          10.0%
  Globalstar, L.P.                                           5.7%           6.4%
  Cal-One Cellular Limited Partnership                       5.6%           5.6%
  Fresno MSA Limited Partnership                             1.1%           1.1%
International:
  Japan:
    International Digital Communications, Inc.              10.0%          10.0%
    Digital TU-KA (b)                                        4.5%           4.5%
  Germany:
    Mannesmann Arcor (a)                                     2.2%           0.0%
================================================================================
</TABLE>

(a)      Indirect ownership through partially owned venture.

(b)      Includes Chugoku, Kyushu, Tohoku, Hokkaido, Hokuriku, and Shikoku
         regions.


                                      -32-
<PAGE>   33
Notes to Consolidated Financial Statements



The Company has options to purchase additional interests, ranging from 6% to
10%, in several of its international cellular consortia. The Company expects the
purchases to occur in 1999.

Condensed combined financial information for unconsolidated wireless systems
accounted for under the equity method is summarized as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                               For the Year Ended December 31 (a)
                                        ----------------------------------------------------------------------------------
                                                  1997                         1996                        1995
                                        ----------------------------------------------------------------------------------
                                          United        Inter-         United        Inter-        United          Inter-
(Dollars in millions)                     States       national        States       national        States        national
--------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>           <C>            <C>            <C>    
Operating revenues/equity in net
  income of partnership                 $   899        $ 8,886        $ 1,168       $ 7,419        $ 1,281        $ 3,684
Operating income (loss)                 $  (232)       $ 1,225        $   190       $  (251)       $   420        $  (497)
==========================================================================================================================
Net income (loss)                       $  (238)       $   330        $   205       $  (760)       $   411        $  (539)
Other partners' and stockholders'
  share of net income (loss)               (243)           107             59          (764)           213           (519)
--------------------------------------------------------------------------------------------------------------------------
Company's share of
  net income (loss)                           5            223            146             4            198            (20)
Amortization of intangibles
  and other adjustments                      (4)           (24)             5           (22)           (10)           (16)
--------------------------------------------------------------------------------------------------------------------------
Equity in net income (loss) of
  unconsolidated wireless systems       $     1        $   199        $   151       $   (18)       $   188        $   (36)
==========================================================================================================================
</TABLE>

(a)      Includes results of operations for Telecel for 1996 and 1995. Telecel's
         results of operations have been consolidated beginning January 1997.
         Also, includes results of operations for CCI and New Par through August
         15 for 1996 and the entire year for 1995.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                                         December 31
                                                   -----------------------------------------------------
                                                          1997                            1996
                                                   -----------------------------------------------------
                                                    United                       United
(Dollars in millions)                               States  International        States   International
--------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>            <C>            <C>    
Current assets                                     $   249        $ 1,863        $   270        $ 2,440
Noncurrent assets                                    3,093          8,271          2,652          7,055
Current liabilities                                   (466)        (4,006)          (552)        (3,309)
Noncurrent liabilities and minority interest          (345)        (4,139)          (362)        (3,774)
--------------------------------------------------------------------------------------------------------
Total partners' and stockholders' capital            2,531          1,989          2,008          2,412
Other partners' and stockholders'
   share of capital                                  1,785          1,349          1,376          1,696
--------------------------------------------------------------------------------------------------------
Company's share of capital                             746            640            632            716
Goodwill and other intangible items                     72            500             76            496
--------------------------------------------------------------------------------------------------------
Equity investments in unconsolidated
   wireless systems                                $   818        $ 1,140        $   708        $ 1,212
========================================================================================================
</TABLE>


International equity in net income (losses) include tax benefits of $30 million,
$10 million, and $40 million in 1997, 1996, and 1995, respectively. These tax
benefits are recorded in "Equity in net income (loss) of unconsolidated wireless
systems" in the Consolidated Statements of Income. The tax benefits were
recorded as an asset that represents future benefits the entities will receive
by deducting the net operating losses from future taxable income. At December
31, 1997 and 1996, the Company's proportionate share of deferred tax assets of
its international equity subsidiaries was $161 million and $172 million,
respectively, which was offset by related proportionate valuation allowances of
$84 million and $103 million, respectively.

While the Company believes that it is more likely than not that the net deferred
tax assets will be fully realized, there can be no assurance that this will
happen as certain factors beyond the control of the entities and the Company,
such as deteriorating local economic 


                                      -33-
<PAGE>   34
Notes to Consolidated Financial Statements



conditions and increasing competition, can affect future timing and amounts of
taxable income.


F. PARTNERSHIPS AND ACQUISITIONS

U S WEST Transaction

On January 29, 1998, the Company entered into an agreement to acquire the U.S.
cellular business and the 25% PrimeCo Personal Communications, L.P. interest
(the "Acquired Businesses") of U S WEST Media Group ("Media"). The acquisition
is structured as a tax-free merger in which the subsidiaries of Media owning the
Acquired Businesses will merge into the Company, which will be the surviving
corporation. In the merger, the Company will issue shares of common stock having
a value (the "Common Value") of between $2.685 billion and $2.735 billion
(depending on the volume weighted average common stock trading price during the
thirty trading days ending on the fifth trading day prior to closing (the
"Determination Price")) and shares of Class D Cumulative Preferred Stock and
Class E Cumulative Preferred Stock having an aggregate value of approximately
$1.6 billion and will assume approximately $1.4 billion of debt associated with
the Acquired Businesses. The number of shares of common stock to be issued will
be determined by dividing the Common Value by the Determination Price, subject
to a minimum price of $40 and a maximum price of $45. Accordingly, the Company
will issue between approximately 60.8 million and 67.1 million shares of common
stock. In the event that any of Media's cellular interests are not transferred
to the Company, the amount of stock to be issued and the amount of debt to be
assumed will be reduced appropriately. Closing of the acquisition, which is
subject to Hart-Scott-Rodino clearance and certain other approvals, is expected
by mid-1998. If consummated, the transaction will replace the parties'
multi-phased joint venture announced in 1994. If the transaction is not
consummated, the parties will revert to the prior multi-phased joint venture
transaction.

PrimeCo Personal Communications, L.P.

In October 1994, the Company and U S WEST ("ATI/USW") joined with Bell Atlantic
Corporation (formerly Bell Atlantic Corporation and NYNEX Corporation) ("BA") to
form a partnership to jointly pursue personal communications services ("PCS")
opportunities called PrimeCo Personal Communications, L.P. ("PrimeCo"). PrimeCo
is owned equally by ATI/USW and BA, and is governed by a board composed of three
members from each of ATI/USW and BA. In March 1995, PrimeCo was awarded eleven
30 MHz PCS licenses with bids of approximately $1.1 billion. The acquired
markets complement the existing U.S. cellular franchises of the partners.
PrimeCo launched service in November 1996. The Company has already contributed
its share of the PCS license costs and of certain build-out expenses, and
expects to continue to make significant capital contributions to PrimeCo and to
experience substantial operating losses associated with the start-up phase of
the PCS business, which is expected to last several years. Currently, the
Company has a 25% indirect interest in PrimeCo through an interest in its PCS
Partnership with U S WEST.

Either ATI/USW or BA may cause PrimeCo to be dissolved on October 20, 2001, and
any PCS properties owned by it to be allocated between them according to agreed
upon criteria. Bell Atlantic is subject to certain standstill restrictions with
respect to the Company through October 20, 2001, unless such restrictions are
earlier terminated or suspended.

TOMCOM

Concurrent with the formation of PrimeCo, ATI/USW and BA formed another
partnership called TOMCOM, L.P. ("TOMCOM"). TOMCOM was formed to develop
technical and service standards for the partners' wireless properties, pursue
national marketing strategies, develop information technology, create a national
distribution strategy, and implement joint purchasing arrangements. TOMCOM is
governed by a board composed of three members from each of ATI/USW and BA.

Unlike the Company's transaction with U S WEST, the agreements with BA do not
provide for a merger of cellular properties. Accordingly, each of ATI/USW and BA
will continue to hold such properties separately.

CCI Merger

Effective August 16, 1996, the Company completed its acquisition of the
approximately 63% of CCI's outstanding stock that it did not already own. The
cost to the Company for the August 1996 acquisition was approximately $1.6
billion including liabilities assumed less cash and cash equivalents acquired.
The merger consideration consisted of $1.04 billion in AirTouch preferred
securities, $393 million in cash, AirTouch stock options valued at approximately
$17 million, and assumption of $217 million of Zero Coupon Convertible
Subordinated Notes Due 1999.

The merger has been accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the net assets acquired
based upon their appraised 




                                      -34-
<PAGE>   35
Notes to Consolidated Financial Statements



fair values. The excess of the purchase price over the final appraised fair
values of net assets acquired was $1.086 billion and has been recorded as
goodwill, which is being amortized on a straight-line basis over 40 years. The
following cash and noncash entries were recorded in connection with the merger:

<TABLE>
<CAPTION>
-------------------------------------------------
(Dollars in millions)
-------------------------------------------------
<S>                                       <C>    
Fair value of assets acquired             $ 2,326
Liabilities assumed                           867
Fair value of preferred stock
  and stock options issued                  1,057
-------------------------------------------------
Cash paid, including acquisition costs        402
Less: cash acquired                           221
-------------------------------------------------
Net cash paid                             $   181
=================================================
</TABLE>

Pro Forma Summary. The following unaudited pro forma summary presents the
Company's consolidated results of operations as if the merger occurred at the
beginning of the respective periods, after giving effect to certain adjustments
including amortization of goodwill and other intangibles, increased interest
expense from debt issued to fund the merger, deduction for preferred stock
dividends, and related income tax effects. These pro forma results are not
necessarily indicative of those that would have occurred had the merger taken
place at the beginning of the respective periods.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                          For the Year Ended
                                                               December 31
                                                         -----------------------
(Dollars in millions, except per share amounts)           1996              1995
--------------------------------------------------------------------------------
<S>                                                      <C>              <C>   
Operating revenues                                       $2,731           $2,279
Net income applicable to common
   stockholders                                          $  125           $   15
Net income applicable to common
   stockholders - per share
      Basic and diluted                                  $ 0.25           $ 0.03
--------------------------------------------------------------------------------
</TABLE>


G. INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                               December 31
                                                        ------------------------
(Dollars in millions)                                    1997               1996
--------------------------------------------------------------------------------
<S>                                                     <C>               <C>   
FCC and international licenses                          $1,544            $1,508
Goodwill                                                 1,926             1,958
Other intangible assets                                    177               173
--------------------------------------------------------------------------------
                                                         3,647             3,639
Less: accumulated amortization                             350               230
--------------------------------------------------------------------------------
                                                        $3,297            $3,409
================================================================================
</TABLE>

Amortization expense relating to intangible assets was $120 million for 1997,
$56 million for 1996, and $20 million for 1995.

H. DEBT AND CREDIT FACILITIES

Long-term debt consists of the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                               December 31
                                                         -----------------------
(Dollars in millions)                                      1997             1996
--------------------------------------------------------------------------------
<S>                                                      <C>              <C>   
U.S. borrowings:
  Notes, 7.5% due 2006 (a)                               $  398           $  398
  Notes, 7.125% due 2001                                    250              250
  Notes, 7.0% due 2003                                      250              250
  Revolving credit facility                                 180              117
  Commercial paper                                           70              196
  Zero coupon notes                                          --              179
  Other                                                      30                2
Europolitan borrowings                                      148              169
Telecel borrowings                                           55               64
Other foreign currency borrowings                            23               26
Capital leases                                               15               18
--------------------------------------------------------------------------------
                                                          1,419            1,669
Less: portion due within one year                            57               16
--------------------------------------------------------------------------------
                                                         $1,362           $1,653
================================================================================
</TABLE>

(a) Net of discount

The Company is in compliance with all covenants associated with its debt and
credit facilities. Annual maturities of long-term debt are as follows: 1998, $57
million; 1999, $73 million; 2000, $328 million; 2001, $252 million; 2002, $59
million; 2003 and thereafter, $650 million.

U.S. Borrowings

Notes. In 1996 the Company issued long-term notes payable totaling $900 million
and utilized the proceeds to meet general corporate requirements and its cash
obligations in connection with the CCI acquisition. The debt was issued in three
tranches to establish a debt portfolio of staggered maturities. Interest on the
Notes is payable semi-annually.




                                      -35-
<PAGE>   36
Notes to Consolidated Financial Statements



Revolving credit facility. The Company has a $2 billion multi-currency revolving
credit facility with a syndicate of banks which expires in July 2000 (the
"Facility"). Borrowings under the Facility are unsecured, bear interest at the
London Interbank Offered Rate ("LIBOR") plus a margin which is based on the
Company's debt rating, and are available in U.S. Dollars or selected foreign
currencies. However, foreign currency borrowings may not exceed $300 million. A
commitment fee, also based on the Company's credit rating, is paid on the unused
portion of the Facility. Borrowings outstanding under the Facility during 1997
were denominated in Deutschmarks, and the weighted average balance outstanding
during the year was $120 million. Borrowings outstanding at December 31, 1997
consist of 320 million Deutschmarks ($180 million) and have a weighted average
Deutschmark interest rate of 3.87%. The amount available for borrowing under the
Facility is $1.75 billion at December 31, 1997. Commercial paper borrowings are
supported by the Facility and are deducted from the Facility in determining
amounts available for borrowing.

Commercial paper. The Company's commercial paper program consists of discounted
notes that are exempt from registration under the Securities Act of 1933. Under
the terms of the program any amounts outstanding, together with all indebtedness
incurred under the Facility, can not in aggregate exceed $2 billion. The Company
obtained A-2 and P-2 prime commercial paper ratings from Standard and Poor's
Corporation and Moody's Investor Service, respectively. These ratings may be
revised or withdrawn by the rating agencies at any time. Commercial paper
borrowings are classified as long-term debt because these borrowings are
supported by the Facility. During 1997, the weighted average interest rate of
commercial paper borrowings was 5.67% and the average amount outstanding was
$244 million.

Zero coupon notes. In conjunction with its acquisition of CCI, the Company
assumed the obligations relating to CCI's $217 million Zero Coupon Convertible
Subordinated Notes Due 1999. The Company redeemed the Zero Coupon Notes on
January 27, 1997 for an aggregate redemption price of $181 million.

Europolitan Borrowings

The Company's cellular subsidiary in Sweden, Europolitan Holdings AB (formerly
known as NordicTel Holdings AB), has borrowings outstanding under two long-term
revolving credit facilities. One credit agreement is a 200 million Krona ($26
million) revolving credit facility due in December 1999 (the "1999 Revolver").
Borrowings under the 1999 Revolver are collateralized by Europolitan Holdings
AB's equity shares in its wholly owned operating subsidiary. At December 31,
1997, the effective interest rate of the 1999 Revolver is 4.55% and the amount
outstanding is 144 million Krona ($20 million). The other credit facility is a
1.4 billion Krona ($181 million) multi-currency revolving credit facility with a
syndicate of financial institutions which is due in November, 2000 (the
"Europolitan Revolver"). Borrowings under the Europolitan Revolver bear interest
at LIBOR plus a margin. The Europolitan Revolver is guaranteed by the Company.
At December 31, 1997, the effective interest rate of the Europolitan Revolver is
5.02% and the amount outstanding is 550 million Krona ($71 million). A
commitment fee is paid on the unused portion of the Europolitan Revolver. Also
outstanding at December 31, 1997 is a $57 million borrowing under a long-term
credit arrangement with an international banking consortium. This borrowing was
retired in January 1998 with funds obtained from the Europolitan Revolver.

Telecel Borrowings

Telecel issued bonds due in 1998 and 1999 and utilized the proceeds to finance
infrastructure development. At December 31, 1997, the weighted average interest
rate of these bonds is 5.84% and the amount outstanding is 10 billion Escudos
($55 million). Telecel maintains various revolving credit facilities which
provide for borrowings of up to 3.25 billion Escudos ($18 million). No
borrowings were outstanding under these revolving credit facilities during 1997
or 1996.


                                      -36-
<PAGE>   37
Notes to Consolidated Financial Statements


I. CAPITAL STOCK

The following table summarizes changes in the number of equity security shares
outstanding:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
                                          Class B       Class C
                                        Preferred     Preferred            Common
(In millions)                               Stock         Stock             Stock
---------------------------------------------------------------------------------
<S>                                     <C>           <C>                  <C>
Shares outstanding at
  December 31, 1994 (a)                       --            --              493.8
Merger, paging company                        --            --                3.2
Incentive programs and
  Employee Benefits plans                     --            --                1.7
Treasury stock activity (b)                   --            --               (0.1)
---------------------------------------------------------------------------------
Shares outstanding at
  December 31, 1995 (a)                       --            --              498.6
Merger, CCI                                   17.2          11.1               --
Incentive programs and
  Employee Benefits plans                     --            --                3.8
Treasury stock activity (b)                   --            --               (0.1)
---------------------------------------------------------------------------------
Shares outstanding at
  December 31, 1996 (a)                       17.2          11.1            502.3
Incentive programs and
  Employee Benefits plans                     --            --                3.5
Treasury stock activity (b)                   --            --               (0.3)
---------------------------------------------------------------------------------
Shares outstanding at
  December 31, 1997 (a)                       17.2          11.1            505.5
=================================================================================
</TABLE>


(a)      In addition to the common shares outstanding, a subsidiary of the
         Company owns 122,960 shares of the Company's common stock; because the
         accounting treatment for subsidiary-held shares is similar to that for
         treasury stock, the subsidiary-held shares are not considered
         outstanding.

(b)      Primarily composed of treasury stock additions from incentive plan
         forfeitures, net of shares reissued under incentive programs.

Preferred Stock

Of the 50 million authorized shares of preferred stock, 6 million shares have
been designated as Series A Participating Preferred Stock. There are no
outstanding shares of Series A Participating Preferred Stock. In connection with
the acquisition of CCI described in Note F, the Company's Board of Directors
authorized the creation of 24 million shares of 6.00% Class B Mandatorily
Convertible Preferred Stock, Series 1996 (the "Class B Preferred") and 19
million shares of 4.25% Class C Convertible Preferred Stock, Series 1996 (the
"Class C Preferred"). Both the Class B Preferred and Class C Preferred (the
"Preferred Shares") have a par value of $0.01 per share.

Holders of the Preferred Shares are entitled to receive dividends in preference
to, and in priority over, any dividends upon any shares of the Company ranking
junior to the Preferred Shares as to dividends, but subject to the rights of
holders of shares of the Company having a preference and a priority over the
payment of dividends on the Preferred Shares. Holders of Class B Preferred are
entitled to receive cumulative preferential dividends at the rate of $1.74 per
share per annum, payable quarterly in arrears, and holders of Class C Preferred
are entitled to receive cumulative preferential dividends at the rate of $2.125
per share per annum, also payable quarterly in arrears.

Each share of Class B Preferred mandatorily converts into Company common stock
on August 16, 1999 (or earlier if the Company is a party to a merger or
consolidation in which the Company is not the surviving or continuing
corporation or if the Company transfers its property as an entirety or
substantially as an entirety). Each share of Class B Preferred mandatorily
converts into between 0.806 and one share of Company common stock, depending
upon the trading price of the Company common stock at the time of conversion.
Each Class B Preferred share is also convertible at the option of the holder at
any time into 0.806 of a share of Company common stock. Class B Preferred shares
are not redeemable by the Company. In the event of liquidation, whether
voluntary or involuntary, the holders of Class B Preferred are entitled to
receive a liquidation preference equal to $29.00 per share plus all accrued and
unpaid dividends. The holders of Class B Preferred shares are entitled to vote
on any matter coming before any meeting in which the common stockholders are
entitled to vote, on the basis of four-fifths of a vote for each Class B
Preferred share held.

The Class C Preferred shares will mature on August 16, 2016, and the holders
will be entitled to receive cash equal to $50.00 per share plus an amount equal
to all accrued and unpaid dividends. Class C Preferred shares are convertible at
the option of the holder into 1.379 shares of the Company's common stock,
subject to certain adjustments. The Class C Preferred is not redeemable by the
Company prior to August 16, 1999. Thereafter under certain circumstances the
Class C Preferred may be converted into shares of common stock through August
16, 2006, and thereafter until maturity may be redeemed for cash or converted
into shares of common stock at the option of the Company. Therefore, for
financial reporting purposes, these shares are not considered to be mandatorily
redeemable. In the event of liquidation, either voluntary or involuntary, the
Class C Preferred holders are entitled to a liquidation preference equal to
$50.00 per share plus accrued and unpaid dividends. The holders of Class C



                                      -37-
<PAGE>   38
Notes to Consolidated Financial Statements


Preferred are not entitled to vote unless the Class C Preferred dividends are in
arrears and unpaid for six quarterly dividend periods, and in certain other
circumstances, in which case holders of Class C Preferred are entitled to
certain rights to vote for the election of two directors.

Both the Class B Preferred and Class C Preferred are subject to certain
anti-dilution adjustments. For Delaware law purposes, the stated capital
attributable to the Preferred Shares is $0.01 per share.

Stockholder Rights Plan

The Company's stockholder rights plan (the "Rights Plan") provides for the
distribution of rights ("Rights") to holders of outstanding shares of common
stock. Except as set forth below, each Right, when exercisable, entitles the
stockholder to purchase from the Company one one-hundredth of a share of Series
A Participating Preferred Stock at a price of $80.00 per share, subject to
adjustment.

The Rights are not currently exercisable, but would become exercisable if
certain events occurred related to a person or group ("Acquiring Person")
acquiring or attempting to acquire 10% or more of the Company's common stock. In
the event that the Rights become exercisable, each holder of a Right (other than
an Acquiring Person) would be entitled to purchase, for the exercise price then
in effect, shares of the Company's common stock having a market value at the
time of such transaction of two times the exercise price for each Right.

The Board of Directors, at its option, may at any time after a person becomes an
Acquiring Person (but not after the acquisition by such person of 50% or more of
the outstanding common stock) exchange on behalf of the Company all or part of
the then outstanding and exercisable Rights for shares of common stock at an
exchange ratio of one share of common stock for each Right.

At any time prior to the earlier of the occurrence of either (i) a person
becoming an Acquiring Person or (ii) the expiration of the Rights, the Company
may redeem the Rights in whole, but not in part, at a price of $0.01 per Right.

Stock Repurchase

The Company's Board of Directors has authorized the repurchase of up to $1
billion of Company common and preferred stock. Accordingly, based on market
conditions, the Company intends to occasionally buy its shares on the open
market. As of December 31, 1997, the Company had repurchased 7,000 common shares
under this program.


J. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

The Company has a Long-Term Stock Incentive Plan (the "Plan") under which it has
reserved 49 million shares of common stock. Awards to eligible employees under
the Plan can take the form of incentive ("ISOs") or non-qualified ("NSOs") stock
options, stock appreciation rights ("SARs"), restricted stock, stock units, or a
combination of these forms. The options granted to date have a term of up to ten
years and generally vest over three to four years of continuous employment and,
in some cases, require that certain stock performance conditions be met before
vesting.

The Plan requires that the exercise price be equal to the fair market value of
the stock at the grant date for ISOs and at the discretion of the Company for
NSOs. The exercise price may be paid in cash, stock already owned by the holder,
or a combination. SARs may be settled in cash or stock at the discretion of the
Company. The settlement of SARs issued in conjunction with NSOs requires the
related unexercised NSOs to be canceled. Restricted stock is held in escrow
until the vesting provisions are satisfied, although such shares have full
voting and other rights. Stock units represent shares of common stock. Holders
of stock units are not required to pay for such units and have no voting or
other rights as a stockholder. Although the Company does not currently pay
dividends on its common stock, stock units may have dividend rights at the
Company's discretion. Settlement of stock unit awards may be in cash, shares, or
a combination at the discretion of the Company.

During 1996, the terms of certain restricted stock awards for those employees
not eligible to receive stock options were amended to provide early vesting if
certain 1997 business goals were achieved. These 1997 business goals were met
and the restricted stock awards were vested and released as of March 2, 1998.

In February 1998, the Company's Board of Directors approved a new restricted
stock incentive program for those employees not eligible to receive stock
options. Vesting will occur at the earlier of (i) meeting certain targets
related to the Company's common stock price or proportionate operating cash flow
or (ii) March 2, 2005. Approximately 675,000 shares were issued under this award
on March 2, 1998.

For purposes of the following pro forma disclosures required by SFAS No. 123,
the estimated fair value of options is amortized to expense over the option's




                                      -38-
<PAGE>   39
Notes to Consolidated Financial Statements



vesting period. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option valuation model. The Black-Scholes model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models, such as the Black-Scholes model, require the input of highly
subjective assumptions including the expected stock price volatility which are
subject to change from time to time. For this reason, and because the SFAS No.
123 fair value-based method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation costs are
not necessarily indicative of costs to be expected in future years.

The following pro forma information has been prepared as if the Company had
accounted for its employee stock options using the fair value-based method of
accounting established by SFAS No. 123:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                     For the Year Ended 
(Dollars in millions, except per share                   December 31
amounts)                                     -----------------------------------
                                              1997          1996          1995
--------------------------------------------------------------------------------
<S>                                          <C>           <C>           <C>    
Net income applicable to
common stockholders:
  As reported                                $   394       $   179       $   132
  Pro forma (a)                              $   357       $   154       $   128
Net income applicable to common
  stockholders - per share:
  Basic and diluted:
    As reported                              $  0.78       $  0.36       $  0.27
    Pro forma (a)                            $  0.71       $  0.31       $  0.26
================================================================================
</TABLE>



(a)      Based on the following assumptions for grants in 1997, 1996, and 1995,
         respectively: risk-free weighted average interest rates of 6.2%, 6.0%,
         and 5.4%; volatility factors of the expected market price of the
         Company's common stock of 29.8%, 29.0%, and 29.0%; and weighted average
         expected option lives of 4.9 years, 4.3 years, and 4.1 years.

Total compensation recognized under APB No. 25 was $21 million, $11 million, and
$3 million for 1997, 1996, and 1995, respectively.




                                      -39-
<PAGE>   40
Notes to Consolidated Financial Statements



There were 23 million shares available for future employee awards at December
31, 1997. The following table summarizes employee award activity:

<TABLE>
<CAPTION>
                                      ------------------------------------------------------------------------------------------
                                                  1997                          1996                              1995
                                      ------------------------------------------------------------------------------------------
                                                         Weighted                        Weighted                       Weighted
                                                          Average                         Average                        Average
                                                         Exercise                        Exercise                       Exercise
                                         Shares             Price         Shares            Price         Shares           Price
---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>           <C>               <C>            <C>              <C>      
Outstanding, beginning of year        21,377,935        $   27.62     12,618,329        $   25.63      7,034,403        $   18.52
Stock options granted                  2,746,983        $   26.29     10,176,998        $   29.48      7,158,965        $   30.61
Restricted stock granted                  79,237            --           813,210            --           284,618            --
Stock units granted                      418,333            --            59,532            --             7,465            --
Options exercised                     (2,018,949)       $   22.07       (585,251)       $   16.26       (506,802)       $   16.06
Awards forfeited                      (1,458,410)       $   32.52       (645,387)       $   28.61       (328,697)       $   20.98
Restricted stock issued                  (79,397)           --        (1,012,346)           --          (925,277)           --
Stock units issued                       (30,449)           --           (47,150)           --          (106,346)           --
---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year              21,035,283        $   27.07     21,377,935        $   27.62     12,618,329        $   25.63
---------------------------------------------------------------------------------------------------------------------------------
Options exercisable                    9,053,724        $   25.75      5,822,319        $   23.27      3,195,121        $   17.61
=================================================================================================================================
</TABLE>

Summary information concerning outstanding and exercisable employee stock awards
as of December 31, 1997 is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                       Weighted
                                        Average     Weighted                        Weighted
                                      Remaining      Average                         Average
         Range of         Number    Contractual     Exercise              Number    Exercise
  Exercise Prices    Outstanding           Life        Price         Exercisable       Price
---------------------------------------------------------------------------------------------
<S>                  <C>            <C>             <C>              <C>            <C>
$  0.00 - $  0.00(a)     452,013        9.0 yrs       $ 0.00                  --     $ 0.00
$ 12.09 - $ 22.63      3,194,553        3.4 yrs      $ 19.34           2,884,788     $19.23
$ 23.00 - $ 32.75     14,939,030        5.7 yrs      $ 27.26           5,524,039     $28.28
$ 33.28 - $ 59.85      2,449,687        7.9 yrs       $41.00             644,897     $33.30
---------------------------------------------------------------------------------------------
                      21,035,283                                       9,053,724
=============================================================================================
</TABLE>

(a)      Relates to stock units granted under a fixed plan which does not
         require the holders to pay for such units.



                                      -40-
<PAGE>   41
Notes to Consolidated Financial Statements



Exercise prices of some options differ from the market price of the stock on the
grant date. The following table summarizes options by those that have exercise
prices equal to, greater than, or less than the market price on the grant date.
The weighted average fair values below have been determined using the
Black-Scholes model.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                       Exercise Price     Exercise Price        Exercise Price
                                             Equal To       Greater Than            Less Than
                                     Market Price (a)    Market Price (a)     Market Price (a)
----------------------------------------------------------------------------------------------
<S>                                  <C>                 <C>                  <C>
1997:
  Options granted                           2,746,983                  --                  --
  Weighted average exercise price       $       26.29                  --                  --
  Weighted average fair value           $        9.59                  --                  --
1996:
  Options granted                           8,503,618           1,673,380                  --
  Weighted average exercise price       $       26.13       $       46.52                  --
  Weighted average fair value           $        7.79       $        8.62                  --
1995:
  Options granted                           6,088,415           1,070,550                  --
  Weighted average exercise price       $       30.14       $       33.28                  --
  Weighted average fair value           $        8.69       $       12.16                  --
=============================================================================================
</TABLE>

(a)      Represents the closing market price of the Company's common stock as
         quoted on the grant date.


In connection with the Company's acquisition of CCI described in Note F, options
to purchase CCI stock were converted into options to purchase 1,924,001 shares
of Company common stock (the "CCI Options"). At the time of conversion, the CCI
Options had a weighted average exercise price of $20.24 per share and a weighted
average fair value of $8.59 per share. There were 329,530 CCI Options
outstanding and exercisable at December 31, 1997.

At the time of its spin-off from Pacific Telesis Group ("Telesis"), the Company
granted SARs, which were not a part of the Plan, to an investment firm that
advised Telesis and the Company. The Company and Telesis each granted SARs
covering 350,000 shares of their respective common stock. The SARs expired in
April 1997. As of December 31, 1997, 325,000 SARs had been exercised.

The Company also has an Employee Stock Purchase Plan ("ESPP") under which it has
reserved 2.4 million shares of common stock. The purpose of the ESPP is to
provide employees with the opportunity to increase their interest in the success
of the Company by purchasing stock from the Company on favorable terms and
paying for such purchases through payroll deductions. Stock purchases under the
ESPP were 580,953 shares, 429,981 shares, and 358,301 shares for 1997, 1996, and
1995, respectively. The weighted average fair value of the ESPP purchases was
estimated at $5.88 per share in 1997, $5.78 per share in 1996, and $5.85 per
share in 1995 based upon the Black-Scholes model using the following assumptions
for 1997, 1996, and 1995, respectively: risk-free weighted average interest
rates of 5.5%, 5.1%, and 5.7%, volatility factors of the expected market price
of the Company's common stock of 33.9%, 29.7%, and 27.8%, and an expected life
of 90 days for all years.




                                      -41-
<PAGE>   42
Notes to Consolidated Financial Statements



K.  INCOME TAXES

The components of income tax expense for each of the three years in the period
ended December 31 are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------
(Dollars in millions)          1997         1996         1995
--------------------------------------------------------------
<S>                           <C>          <C>          <C>  
Current:
  Federal                     $  80        $  90        $  78
  State and other taxes          57           26           10
  Foreign                        54           --            1
--------------------------------------------------------------
   Total current                191          116           89
--------------------------------------------------------------
Deferred:
  Federal                        78           49           23
  State and other taxes          (8)          --           14
  Foreign                         5          (16)         (13)
--------------------------------------------------------------
   Total deferred                75           33           24
--------------------------------------------------------------
Total income taxes            $ 266        $ 149        $ 113
==============================================================
</TABLE>

The domestic and foreign components of income (loss) before income taxes and
preferred dividends for each year ended December 31 are as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------
(Dollars in millions)             1997        1996         1995
----------------------------------------------------------------
<S>                              <C>         <C>          <C>  
U.S. operations                  $ 423       $ 405        $ 306
International operations           291         (57)         (61)
----------------------------------------------------------------
Income before income taxes
  and preferred dividends        $ 714       $ 348        $ 245
================================================================
</TABLE>

Significant components of the Company's deferred tax liabilities and assets are
as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                               December 31
                                                          ----------------------
(Dollars in millions)                                      1997            1996
--------------------------------------------------------------------------------
<S>                                                       <C>             <C>  
Deferred tax liabilities:
  Amortization                                            $ 474           $ 447
  Depreciation                                              192             114
  Investments in U.S. partnerships                           79             138
  Unrealized gains                                           28              17
  Other                                                      28              38
--------------------------------------------------------------------------------
                                                            801             754
--------------------------------------------------------------------------------
Deferred tax assets:
  Foreign tax benefits in consolidated
    subsidiaries                                             20              24
  Accruals deductible when paid                              22              34
  Organization and start-up costs                             1               6
  Accounts receivable                                        19              11
  Currency translation adjustment                            34               4
  Other                                                      32              34
--------------------------------------------------------------------------------
                                                            128             113
Less: valuation allowance                                     7               2
--------------------------------------------------------------------------------
                                                            121             111
Total deferred taxes recorded in
  Consolidated Balance Sheets                             $ 680           $ 643
================================================================================
Current                                                   $ (17)          $ (24)
Noncurrent                                                  697             667
--------------------------------------------------------------------------------
Net deferred tax liabilities                              $ 680           $ 643
================================================================================
</TABLE>

Although there can be no assurances, the Company believes that it is more likely
than not that it will generate future taxable income sufficient to fully realize
future benefits from the net deferred tax assets of $121 million.

At December 31, 1997, the Company had $46 million in net operating loss
carryforwards for foreign tax reporting purposes, substantially all of which can
be carried forward indefinitely.

The reasons for differences each year between the statutory federal income tax
rate and the effective income tax rate are provided in the following
reconciliation:



                                      -42-
<PAGE>   43
Notes to Consolidated Financial Statements



<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
                                                1997          1996           1995
----------------------------------------------------------------------------------
<S>                                             <C>           <C>           <C>  
Statutory federal income
  tax rate                                      35.0%         35.0%         35.0%
Increase (decrease) in taxes
  resulting from:
    Equity in net income (loss)
      of certain unconsolidated
      wireless systems                          (9.8)         (0.2)          9.6
    State income taxes, net of
      federal tax benefit                        4.3           4.3           6.7
    Nondeductible amortization                   2.1           3.2           1.7
    Tax impact of foreign
      income                                     3.8          (0.9)         (5.2)
    Other                                        1.9           1.5          (1.6)
----------------------------------------------------------------------------------
Effective income tax rate                       37.3%         42.9%         46.2%
==================================================================================
</TABLE>

At December 31, 1997, $68 million of deferred tax liabilities, related to $454
million of cumulative unrepatriated earnings on consolidated foreign
subsidiaries and equity investments in unconsolidated foreign wireless systems,
were excluded from recognition under SFAS No. 109, "Accounting for Income
Taxes," because such earnings are intended to be reinvested indefinitely.

For each the years ended, December 31, 1997, 1996, and 1995, consolidated net
deferred tax liabilities increased (decreased) by $(27) million, $(17) million,
and $6 million, respectively, due to amounts recorded directly to the currency
translation adjustment component of stockholders' equity. For each the years
ended, December 31, 1997, 1996, and 1995, consolidated net deferred tax
liabilities also increased (decreased) by $5 million, $(2) million, and $15
million, respectively, due to amounts recorded directly to other components of
stockholders' equity.

L.  EMPLOYEE BENEFITS

Defined Contribution Plan

The Company sponsors a defined contribution plan (the "Retirement Plan") which
covers substantially all full-time employees. The Company's contributions to the
Retirement Plan are based on a percentage of pay and on matching a portion of
employee contributions. The cost recognized for the Retirement Plan was $30
million in 1997, $24 million in 1996, and $17 million in 1995.

Defined Benefit Pension Plan

The Company maintains a defined benefit plan (the "Pension Plan") under which
individuals who were employees at December 31, 1986, and transferees from
Pacific Telesis Group, receive pension, death, and survivor benefits based on a
percentage of their final five-year average pay and years of service. The
accrual of service credit was discontinued in 1986 for Pension Plan
participants. Thus, pension benefits only increase as a participant's
compensation increases.

The Pension Plan's actual return on assets exceeds its periodic pension cost and
therefore the Company's Consolidated Statements of Income include pension income
of $7 million in 1997, $5 million in 1996, and $6 million in 1995. The Pension
Plan's net funded status exceeds its projected benefit obligation and therefore
the Company's Consolidated Balance Sheets include a net pension asset of $42
million at December 31, 1997 and $35 million at December 31, 1996. The
assumptions used in estimating the Pension Plan's projected benefit obligation
include a discount rate of 7.0%, a compensation increase rate of 5.5%, and a
long-term rate of return on Pension Plan assets of 8.5%. The assets of the
Pension Plan are primarily composed of publicly traded mutual and index funds.

Other Postretirement Benefits

The Company provides medical and dental benefits for eligible retired employees
and their eligible dependents and also provides life insurance benefits to
eligible retired employees (the "Postretirement Plan"). The Company retains the
right, subject to existing agreements and applicable legal requirements, to
amend or eliminate these postretirement benefits.

The net periodic postretirement benefit expense for the Postretirement Plan was
$3 million for 1997, $2 million for 1996, and $1 million for 1995. The accrued
postretirement benefit obligation, which is principally unfunded, recorded in
the Company's Consolidated Balance Sheets was $21 million at December 31, 1997
and $18 million at December 31, 1996. The assumptions used in estimating the
accumulated postretirement benefit obligation include a discount rate of 7.0%, a
compensation increase rate of 5.5%, and a long-term rate of return on
Postretirement Plan assets of 8.5%. The estimates also include an escalation
factor for anticipated increases in health care costs. The escalation rate
begins at 7.0% in 1998, gradually decreases to 5.0% by the year 2002, and
remains at that level thereafter. A 1% increase in these health care cost trend
rates would increase the accumulated postretirement benefit obligation by $4
million.



                                      -43-
<PAGE>   44
Notes to Consolidated Financial Statements



M. COMMITMENTS AND CONTINGENCIES

Contingencies

The Company has been a defendant in various antitrust lawsuits filed in both
state and federal courts. In 1993, a class action complaint was filed in Orange
County Superior Court alleging price fixing in the Los Angeles cellular market.
A parallel class action filed in Orange County Superior Court in 1994 was stayed
pending the resolution of the 1993 case. In 1997, a settlement was reached in
the case which has been approved by the Court. In 1994, two class action
complaints were filed against the Company, one in San Diego County Superior
Court and one in the U.S. District Court also alleging price fixing. The state
case was dismissed and a tentative settlement has been reached in the federal
case, which has not yet been approved by the court. Also in 1994, a class action
complaint was filed against the Company in San Francisco County Superior Court
alleging price fixing. In 1996, an almost identical class action complaint was
filed against the Company in Alameda County Superior Court. The two cases were
assigned to a single judge for coordination. In late 1997, a settlement was
reached in these cases which the court has preliminarily approved. In the
aggregate these settlements will not have a material adverse effect on the
Company's financial position or results of operations.

The Company is party to various other legal proceedings in the ordinary course
of business. Although the ultimate resolution of these various other proceedings
cannot be ascertained, management does not expect that they will have a material
adverse effect on the Company's financial position or results of operations.

Lease Commitments

The Company leases various facilities and equipment under noncancelable lease
arrangements. Most leases contain renewal options for varying periods. Rent
expense under all operating leases was $83 million, $76 million, and $50 million
in 1997, 1996, and 1995, respectively.

Future minimum lease payments under noncancelable operating leases with an
initial term of one year or more are as follows at December 31, 1997:

<TABLE>
<CAPTION>
---------------------------------------
(Dollars in millions)
---------------------------------------
<S>                              <C>  
1998                             $  81
1999                                73
2000                                62
2001                                41
2002                                29
Thereafter                         132
---------------------------------------
Total minimum lease payments     $ 418
---------------------------------------
</TABLE>

Other

In the ordinary course of business, the Company has issued letters of
responsibility and letters of support for performance guarantees, refundable
security deposits, and credit facilities of certain subsidiaries and affiliates
providing varying degrees of recourse to the Company. At December 31, 1997, the
Company's proportionate share under such arrangements was $403 million. The
Company believes the probability it will be required to pay under these various
arrangements is remote.

At December 31, 1997, the Company was committed to spend $414 million for the
acquisition of property, plant, and equipment, purchases of cellular equipment
and other items, and capital contributions to unconsolidated wireless systems.




                                      -44-
<PAGE>   45
Notes to Consolidated Financial Statements



N.  ADDITIONAL FINANCIAL INFORMATION

Other Current Liabilities
--------------------------------------------------------------------------------
Other current liabilities consist of the following:

<TABLE>
<CAPTION>
-----------------------------------------------------
                                        December 31
                                    -----------------
(Dollars in millions)                1997       1996
<S>                                 <C>       <C>   
-----------------------------------------------------
Accrued expenses                    $ 161     $   92
Accrued compensation and benefits     138        116
Accrued liabilities                   110         22
Taxes payable                          78         69
Deferred revenue                       61         43
Interest payable                       35         39
Other accounts payable                 28         67
Other                                  64         80
-----------------------------------------------------
                                    $ 675     $  528
====================================================
</TABLE>

Information About Foreign Operations

Selected consolidated financial data for the Company's domestic and foreign
operations is presented below. Operating revenues represent sales to
unaffiliated customers, and there were no sales or transfers between domestic
and foreign operations. Assets maintained for general corporate purposes are
primarily included within U.S. operations.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(Dollars in millions)                        1997          1996            1995
--------------------------------------------------------------------------------
<S>                                        <C>           <C>            <C>    
Operating revenues:
  U.S. operations                          $ 2,843       $ 2,040        $ 1,467
  International operations                     751           212            152
--------------------------------------------------------------------------------
                                           $ 3,594       $ 2,252        $ 1,619
--------------------------------------------------------------------------------
Operating income (loss):
  U.S. operations                          $   591       $   342        $   202
  International operations                     115           (61)           (89)
--------------------------------------------------------------------------------
                                           $   706       $   281        $   113
--------------------------------------------------------------------------------
Identifiable assets:
  U.S. operations                          $ 5,662       $ 5,493        $ 2,007
  International operations                   1,240         1,039            565
  Investments in unconsol-
    idated wireless systems                  2,068         1,992          3,076
--------------------------------------------------------------------------------
                                           $ 8,970       $ 8,524        $ 5,648
--------------------------------------------------------------------------------
</TABLE>



O. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
------------------------------------------------------------------------------------------------------
1997                                                           First     Second      Third      Fourth
------------------------------------------------------------------------------------------------------
<S>                                                             <C>        <C>        <C>        <C> 
Operating revenues                                              $836       $901       $916       $941
Operating income                                                $208       $199       $215       $ 84
Income before preferred dividends                               $ 77       $119       $141       $111
Preferred dividends                                             $ 13       $ 13       $ 14       $ 14
Net income applicable to common stockholders                    $ 64       $106       $127       $ 97
Net income applicable to common stockholders - per share:
   Basic and diluted                                           $0.13      $0.21      $0.25      $0.19
------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
1996                                                           First      Second     Third      Fourth
------------------------------------------------------------------------------------------------------
<S>                                                             <C>        <C>        <C>        <C> 
Operating revenues                                              $449       $481       $601       $721
Operating income                                                $ 49       $ 63       $106       $ 63
Income before preferred dividends                               $ 52       $ 61       $ 59       $ 27
Preferred dividends                                             $ --       $ --       $  7       $ 13
Net income applicable to common stockholders                    $ 52       $ 61       $ 52       $ 14
Net income applicable to common stockholders - per share:
   Basic and diluted                                           $0.10      $0.12      $0.10      $0.03
======================================================================================================
</TABLE>





                                      -45-
<PAGE>   46
Selected Proportionate Financial Data(a)



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                              For the Year Ended December 31
                                                                           -----------------------------------
(Dollars in millions)                                                       1997          1996           1995
--------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>           <C>   
TOTAL COMPANY (b)
Service and other revenues                                                 $4,907        $3,925        $2,679
Operating expenses before depreciation and amortization expenses (c)        3,171         2,801         1,976
Depreciation and amortization expenses                                        789           603           406
--------------------------------------------------------------------------------------------------------------
Operating income                                                           $  947        $  521        $  297
--------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders                               $  394        $  179        $  132
Operating cash flow (d)                                                    $1,736        $1,124        $  703
Operating cash flow margin (e)                                               35.4%         28.6%         26.2%
==============================================================================================================

U.S. CELLULAR OPERATIONS
Service and other revenues                                                 $2,363        $1,984        $1,523
Cost of revenues                                                              236           222           188
Selling and customer operations expenses (c)                                  902           781           591
General, administrative, and other expenses                                   169           160           139
Depreciation and amortization expenses                                        388           292           189
--------------------------------------------------------------------------------------------------------------
Operating income                                                           $  668        $  529        $  416
--------------------------------------------------------------------------------------------------------------
Operating cash flow (d)                                                    $1,056        $  821        $  605
Operating cash flow margin (e)                                               44.7%         41.4%         39.7%
==============================================================================================================

INTERNATIONAL OPERATIONS
Service and other revenues                                                 $2,181        $1,640        $  918
Operating expenses before depreciation and amortization expenses (c)        1,452         1,319           794
Depreciation and amortization expenses                                        283           226           154
--------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                    $  446        $   95        $  (30)
--------------------------------------------------------------------------------------------------------------
Operating cash flow (d)                                                    $  729        $  321        $  124
Operating cash flow margin (e)                                               33.4%         19.6%         13.5%
==============================================================================================================

U.S. PAGING OPERATIONS (f)
Service and other revenues (g)                                             $  330        $  297        $  226
Operating expenses before depreciation and amortization expenses              222           209           151
Depreciation and amortization expenses                                         74            64            43
--------------------------------------------------------------------------------------------------------------
Operating income                                                           $   34        $   24        $   32
--------------------------------------------------------------------------------------------------------------
Operating cash flow (d)                                                    $  108        $   88        $   75
Operating cash flow margin (e)                                               32.7%         29.6%         33.2%
==============================================================================================================
U.S. PCS OPERATIONS (h)
Service and other revenues                                                 $   33        $    1        $   --
==============================================================================================================
</TABLE>



                                      -46-
<PAGE>   47
Selected Proportionate Financial Data


Footnotes:


(a)      This table is not required by GAAP and is not intended to replace the
         Consolidated Financial Statements prepared in accordance with GAAP. It
         is presented to provide supplemental data. Because significant assets
         of the Company are not consolidated, the Company believes that
         proportionate financial and operating data facilitates the
         understanding and assessment of its Consolidated Financial Statements.
         Under GAAP, the Company consolidates the entities in which it has a
         direct controlling interest and uses the equity method to account for
         entities over which the Company has significant influence but does not
         have a direct controlling interest. In contrast, proportionate
         accounting reflects the Company's relative ownership interests in
         operating revenues and expenses for both its consolidated and equity
         method entities. For example, U.S. cellular proportionate results
         present the Company's share -- its percentage ownership -- for all
         significant U.S. cellular operations, including those entities where
         the Company does not own more than 50 percent. Similarly, total
         proportionate results show the Company's share of all its significant
         worldwide operations. Certain prior period data has been reclassified
         and restated to conform to the current year presentation.

(b)      Reflects results of systems in which the Company owns an interest,
         multiplied by the Company's ownership interest, exclusive of cost-based
         investments and certain equity-based investments that are not material
         to the information presented.

(c)      Includes net losses on equipment sold to acquire and retain customers.

(d)      Operating cash flow is defined as operating income plus depreciation
         and amortization and is not the same as cash flow from operating
         activities in the Company's Consolidated Statements of Cash Flows.
         Proportionate operating cash flow represents the Company's ownership
         interests in the respective entities' operating cash flows. As such,
         proportionate operating cash flow does not represent cash available to
         the Company.

(e)      Operating cash flow margin is calculated by dividing "Operating cash
         flow" by "Service and other revenues."

(f)      U.S. Paging Operations, which are wholly owned by the Company, include
         operations in Canada.

(g)      Includes any gain or loss on equipment sales.

(h)      PCS data relates to PrimeCo Personal Communications, L.P. ("PrimeCo"),
         a U.S. personal communications services ("PCS") business in which the
         Company has a 25% interest. Operations began in the fourth quarter of
         1996.




                                       47