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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

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

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<S>        <C>
/X/        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                                      OR
/ /        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM                   TO
</TABLE>

                          COMMISSION FILE NO. 333-3288

                           CS WIRELESS SYSTEMS, INC.
             (Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S>                                                 <C>
                     DELAWARE                                           23-2751747
         (State or other jurisdiction of                             (I.R.S. Employer
          incorporation or organization)                           Identification No.)
</TABLE>

                         200 CHISHOLM PLACE, SUITE 202
                               PLANO, TEXAS 75075
          (Address of principal executive offices, including zip code)

                                 (972) 633-4000
              (Registrant's telephone number, including area code)

          Securities Registered Pursuant to Section 12(b) of the Act:

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                  TITLE OF EACH CLASS                            NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------------------------------------------  --------------------------------------------------------
<S>                                                       <C>
                          None                                                      None
</TABLE>

          Securities Registered Pursuant To Section 12(g) of The Act:
                                      None

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

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

    As of March 19, 1998, 10,700,506 shares of the Registrant's Common Stock
were outstanding, 442,305 shares of which were held by nonaffiliates. The
Company's Common Stock has not been registered with the Securities and Exchange
Commission, and no market exists for its Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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                           CS WIRELESS SYSTEMS, INC.
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
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<S>           <C>                                                                                            <C>
PART I.....................................................................................................           1

  Item 1.     Business.....................................................................................           1

  Item 2.     Properties...................................................................................          14

  Item 3....  Legal Proceedings............................................................................          14

  Item 4.     Submission of Matters to a Vote of Security Holders..........................................          15

PART II....................................................................................................          15

  Item 5.     Market for Registrant's Common Stock and Related Stockholder Matters.........................          15

  Item 6....  Selected Financial Data......................................................................          15

  Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations........          16

  Item 8.     Financial Statements and Supplementary Data..................................................          29

  Item 9.     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.........          29

PART III...................................................................................................          29

  Item 10.    Directors and Executive Officers of the Registrant...........................................          29

  Item 11.    Executive Compensation.......................................................................          31

  Item 12.    Security Ownership of Certain Beneficial Owners and Management...............................          33

  Item 13.    Certain Relationships and Related Transactions...............................................          35

PART IV....................................................................................................          37

  Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................          37

SIGNATURES.................................................................................................          40

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................         F-1
</TABLE>
<PAGE>
                           CS WIRELESS SYSTEMS, INC.
                        1997 ANNUAL REPORT ON FORM 10-K
                                     PART I

ITEM 1.  BUSINESS.

GENERAL

    THE COMPANY.  CS Wireless Systems, Inc. (together with its subsidiaries,
"CS" or the "Company") is one of the largest wireless cable television companies
in the United States in terms of line-of-sight ("LOS") households and
subscribers. The Company's 21 markets encompass approximately 7.7 million
television households, approximately 6.4 million of which are LOS households, as
estimated by the Company. As of December 31, 1997, the Company provided service
to approximately 67,125 subscribers.

    At March 19, 1998, CAI Wireless Systems, Inc. ("CAI") and Heartland Wireless
Communications, Inc. ("Heartland") owned 60% and 36%, respectively, of the
outstanding Common Stock of the Company. CAI is one of the largest developers,
owners and operators of wireless cable television systems in the United States.
Heartland is a leading developer, owner and operator of wireless cable systems
in small to mid-size markets located in the central United States.

    PRINCIPAL MARKETS OF THE COMPANY.  CS was formed in December 1993 as ACS
Ohio, Inc. On February 23, 1996 (the "Contribution Closing"), in exchange for
approximately 60% of the Company's Common Stock, CAI, directly or indirectly,
contributed to the Company the wireless cable television assets and all related
liabilities, or the stock of subsidiaries owning wireless cable television
assets, associated with the wireless cable television markets of Bakersfield and
Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio.
Simultaneously, in exchange for approximately 40% of the Company's Common Stock,
cash, a short-term note (the "Heartland Short-Term Note") and a long-term note
(the "Heartland Long-Term Note"), Heartland, directly or indirectly, contributed
or sold to the Company the wireless cable television assets and all related
liabilities associated with the wireless cable television markets of Grand
Rapids, Michigan; Minneapolis, Minnesota; Kansas City (suburbs), Missouri;
Dayton, Ohio; Dallas, Fort Worth and San Antonio, Texas; and Salt Lake City,
Utah. The contributions were made to the Company by CAI and Heartland pursuant
to a Participation Agreement, as amended (the "Participation Agreement"), among
the Company, CAI and Heartland. The Company subsequently acquired wireless cable
television rights and related assets in certain Midwest markets, including but
not limited to, the Effingham and Wellsville, Kansas; Story City, Iowa;
Scottsbluff, Nebraska; Kalispell, Montana and Rochester, Minnesota markets in
connection with the Company's merger acquisition of USA Wireless Cable, Inc. on
October 11, 1996 ("USA Wireless Acquisition"). The Company subsequently
consummated on September 3, 1997 an exchange of its wireless cable rights and
related assets in Salt Lake City, Utah for wireless cable rights and related
assets in Kansas City, Missouri pursuant to an agreement dated as of November 6,
1996 with People's Choice TV Corp. ("PCTV Swap").

    SIGNIFICANT INDEBTEDNESS.  On February 23, 1996, in a private placement, the
Company issued and sold 100,000 Units (the "Units"), with each Unit consisting
of four 11 3/8% Senior Discount Notes due 2006 (the "Old Discount Notes") (each
at $1,000 principal amount at maturity) and 1.1 shares of Common Stock (the
"Unit Offering"), for an aggregate purchase price of approximately $229.5
million. The Company received approximately $219.7 million in proceeds from the
Unit Offering, net of debt issuance costs, but prior to certain distributions
made in connection with the Participation Agreement. See NOTE 2 TO CONSOLIDATED
FINANCIAL STATEMENTS.

    The Company subsequently filed two Registration Statements on Form S-1 under
the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission (the "Commission") for the registration of
its 11 3/8% Series B Senior Discount Notes due 2006 (the "New Discount Notes").
The New Discount Notes are identical in all material respects to the Old
Discount Notes, except for certain transfer restrictions and registration rights
relating to the Old Discount Notes. Pursuant to each Registration Statement,
holders of Old Discount Notes were able to exchange Old Discount Notes for New
Discount Notes (the "Exchange Offer"). CS did not receive any proceeds from the
registration of the New

                                       2
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Discount Notes or the Exchange Offer. At March 30, 1998, approximately $289.2
million of outstanding indebtedness is payable under the New Discount Notes.

    The Company is incorporated under the laws of the state of Delaware. The
Company's principal executive offices are located at 200 Chisholm Place, Suite
202, Plano, Texas 75075, and its telephone number is 972/633-4000.

INDUSTRY OVERVIEW

    SUBSCRIPTION TELEVISION INDUSTRY.  The subscription television industry
began in the late 1940s to serve the needs of residents in predominantly rural
areas with limited access to local broadcast television stations. The industry
expanded to metropolitan areas due to, among other things, the fact that it
offered better reception and more programming. Currently, such systems offer
various types of programming, which generally include basic service, enhanced
basic, premium service and, in some instances, pay-per-view service.

    A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part, of
the number of channels and services included in the basic service package and
the cost of such services to the television system operator. In most instances,
a separate monthly fee for each premium service and certain other specific
programming is charged to customers, with discounts generally available to
customers receiving multiple premium services. Monthly service fees for basic,
enhanced basic and premium services constitute the major source of revenue for
subscription television systems. Converter rentals, remote control rentals,
installation charges and reconnect charges for customers who were previously
disconnected are also included in a subscription television system's revenues,
but generally are not a major component of such revenues.

    WIRELESS CABLE INDUSTRY BACKGROUND.  Wireless cable, as an alternative to
traditional, hard-wire cable television, was made possible by a series of rule
changes promulgated by the Federal Communications Commission ("FCC") in the
1980s. However, regulatory and other obstacles impeded the growth of the
wireless cable industry through the remainder of the 1980s. During the 1990s,
several factors have encouraged the growth of the wireless cable industry,
including (i) regulatory reforms by Congress and the FCC to facilitate
competition with hard-wire cable, (ii) federal legislation that increased the
availability of programming for wireless cable systems on non-discretionary
terms, (iii) consumer demand for alternatives to traditional hard-wire cable
service, (iv) enhanced ability of wireless cable operators to aggregate a
sufficient number of channels in each market to create a competitive product,
and (v) increased availability of capital to wireless cable operators in the
public and private markets. According to the Wireless Cable Association, Inc.,
there are approximately 250 wireless cable systems currently operating in the
United States which served approximately one million subscribers in 1997.

    Similar to traditional hard-wire cable systems, a wireless cable system
receives programming at a Headend. Traditional hard-wire cable systems transmit
signals from a central transmission facility and deliver the signal to a
subscriber's location through an extensive network of fiber optic and/or coaxial
cable, amplifiers and related equipment ("Cable Plant"). Wireless cable
programming, however, is retransmitted by microwave transmitters operating in
the 2150-2162 MHz and 2500-2686 MHz portions of the radio spectrum
(collectively, the "Wireless Cable Spectrum") from an antenna typically located
on a tower associated with the Headend to a small receiving antenna located on a
subscriber's rooftop. At the subscriber's location, the signals are converted to
frequencies that can pass through conventional coaxial cable into a descrambling
converter located on top of a television set. Wireless cable requires a clear
LOS, because the microwave frequencies used will not pass through dense foliage,
hills, buildings or other obstructions. To ensure the clearest LOS possible in
the Company's markets, the Company has placed, and plans to place, its transmit
antennae on towers or tall buildings in areas located in such markets. There
exists, in each of the Company's operating and targeted markets, a number of
acceptable locations for the placement of its transmit antennae, and the Company
does not believe that the failure to secure any one location for such placement
in any single market will materially affect the Company's operations in such
market. Additionally, some LOS obstructions can be overcome with the use of
signal repeaters which

                                       3
<PAGE>
retransmit an otherwise blocked signal over a limited area. The Company believes
that its coverage will be further enhanced upon the implementation of digital
technology. Since wireless cable systems do not require an extensive Cable
Plant, wireless cable operators can provide subscribers with a reliable signal
and a high quality picture with few transmission disruptions at a significantly
lower system capital cost per installed subscriber than traditional hard-wire
cable systems.

    Generally, 33 6 MHz channels are available for the transmission of wireless
cable programming in the 50 largest domestic markets, in addition to local
broadcast television channels which are not retransmitted over the microwave
channels. There are certain limitations described in ITEM 1.
BUSINESS--REGULATION below. Traditional hardwire cable companies may offer
between 35-60 analog channels in a given market; certain hardwire cable
companies have or are in the process of applying digital technology to increase
the number of channels available to subscribers. The wireless cable industry has
been exploring various applications of digital technology to microwave
transmissions in order to increase the number of channels offered for
subscription in various markets. The Company anticipates that digital wireless
equipment will be commercially available in the second quarter of 1998 and has
selected Dallas, Texas for its initial launch of digital video subscription
services.

    Additionally, the Company and other wireless cable companies have explored
alternative uses of microwave frequencies for other applications such as
Internet access and telephony delivery services. The Company launched, on a
limited basis, an Internet access service in Dallas in the fall of 1997.
Presently, the Internet access service utilizes microwave frequencies in one
direction using a traditional telephone line return path; however, the Company
received from the FCC developmental authority for two way flexible use of
certain frequencies in Dallas. See ITEM 1. BUSINESS--SERVICE OFFERINGS AND
MARKETING.

OPERATIONAL AND PLANNED MARKETS

    The table below outlines as of December 31, 1997 the characteristics of the
Company's operational markets and markets to be launched. The Company
anticipates that the Dallas, Texas market will be operational during the second
quarter of 1998.

<TABLE>
<CAPTION>
                                                       ESTIMATED
                                                     TOTAL SERVICE                    NUMBER OF       APPROXIMATE
                                                         AREA       ESTIMATED LOS  WIRELESS CABLE      NUMBER OF
MARKET                                               HOUSEHOLDS(A)  HOUSEHOLDS(A)    CHANNELS(B)      SUBSCRIBERS
---------------------------------------------------  -------------  -------------  ---------------  ---------------
<S>                                                  <C>            <C>            <C>              <C>
Bakersfield, CA....................................       162,000        151,000             32               8,750
Battle Creek/Kalamazoo, MI.........................       231,000        173,000             12      To be launched
Cameron/Maysville, MO..............................        65,000         59,000             33               3,070
Charlotte, NC(c)...................................       580,000        472,000             13      To be launched
Cleveland, OH......................................     1,178,000        884,000             29              20,745
Dallas, TX.........................................       981,000        872,000             29      To be launched
Dayton, OH(d)......................................       610,000        413,000             33              10,155
Fort Worth, TX.....................................       540,000        443,000             33                 780
Grand Rapids, MI...................................       346,000        259,000             16                 535
Kalispell, MT......................................        33,000         30,000             21      To be launched
Kansas City, MO(e).................................       432,000        389,000             25      To be launched
Minneapolis, MN....................................       959,000        882,000             28               4,150
Napoleon/BloomCenter, IN(d)........................       141,000        113,000             20      To be launched
Nortonville/Effingham, KS..........................        53,000         48,000             33               1,870
Rochester, MN......................................        57,000         51,000             23      To be launched
San Antonio, TX....................................       550,000        440,000             33              12,835
Scottsbluff, NE....................................        25,000         22,000             20      To be launched
Stockton/Modesto, CA...............................       350,000        300,000             32      To be launched
Story City, IA(f)..................................        77,000         73,000             42(g)            2,070
Sweet Springs, MO..................................        61,000         55,000             33               2,165
Wellsville, KS.....................................       229,000        206,000             33      To be launched
                                                     -------------  -------------           ---     ---------------
  Total............................................     7,660,000      6,335,000         --                  67,125
                                                     -------------  -------------           ---     ---------------
                                                     -------------  -------------           ---     ---------------
</TABLE>

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

(a) The Estimated Total Service Area Households for each market represents the
    Company's estimate of the number of households within the service area for
    the primary transmitter in each market based on census data. The Estimated
    LOS Households for each market represents the approximate number of
    Estimated Total Service Area Households within the service area of the
    primary transmitter that can receive an adequate unobstructed analog

                                       4
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    or digital signal, as estimated by the Company, based on topographical and
    engineering analyses. The service area for a market varies based on a number
    of factors, including the transmitter height, transmitter power and the
    proximity of adjacent wireless cable systems.

(b) The Number of Channels Available comprises 6 MHz wireless cable channels.
    Wireless cable channels either are licensed to the Company or are leased to
    the Company from other license holders. The Number of Channels also includes
    certain channels that are subject to FCC approval of applications for new
    station authorizations, power increases, transmitter relocations, as well as
    third party interference agreements. The FCC's failure to grant one or more
    new station applications could decrease the number of channels. The FCC's
    failure to grant one or more power increase or transmitter relocation
    applications, or the failure to obtain certain third party interference
    agreements, could delay the initiation of service and/or reduce the coverage
    area of the affected system or systems. Pursuant to a BTA Lease and Option
    Agreement, the Company has the exclusive right to apply for 12, 13 and 13
    channels in the Nortonville, Sweet Springs and Wellsville markets, which
    channels are included in the above table.

(c) The Company currently holds licenses or leases for five wireless cable
    channels and also has the right to develop nine additional channels,
    depending on interference considerations, in the Charlotte market as a
    result of its ownership of the Charlotte BTA. See ITEM 13. CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS--CHARLOTTE, NORTH CAROLINA BASIC
    TRADING AREA.

(d) When the FCC issues a station authorization, the licensee is afforded a
    certain period of time to complete construction. If the licensee cannot
    complete construction within the specified time frame, the licensee must
    file a request with the FCC for additional time to complete construction.
    The Napoleon/Bloom Center, Indiana market has 20 channels, all of which are
    the subject of currently pending requests for additional time to complete
    construction.

(e) The Kansas City, Missouri market was acquired by the Company from People's
    Choice TV Corp. in connection with the PCTV Swap (as defined) which was
    consummated during the third quarter of 1997.

(f) The Company assumed operational control of the Story City, Iowa market
    effective December 30, 1997. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS--STORY CITY, IOWA OPERATING MARKET.

(g) The number of channels available includes 15 low power television channels.

    At December 31, 1997, the Company operated wireless cable systems in
Bakersfield, California; Cleveland and Dayton, Ohio; San Antonio and Fort Worth,
Texas; Grand Rapids, Michigan; Cameron/ Maysville and Sweet Springs, Missouri;
Nortonville/Effingham, Kansas; and Minneapolis, Minnesota; and has acquired
channel rights in other markets including Charlotte, North Carolina; Dallas,
Texas and Stockton/Modesto, California. Effective December 30, 1997, the Company
assumed operational control over the Story City, Iowa market. See ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--STORY CITY, IOWA OPERATING
MARKET. The Company has markets that do not fit with the Company's strategy of
regional concentration, and therefore, the Company may sell or exchange such
systems. The Company has had preliminary discussions with potential buyers with
respect to such sales or exchanges; however, it does not have any definitive
arrangements with any such buyer and therefore cannot predict if or when such
sales or exchanges will occur.

    The Company intends to expand its markets and subscriber base through the
acquisition of wireless cable systems and channel rights in targeted markets
located in the mid-west and southwest regions of the United States. Through
selected acquisitions, divestitures, asset swaps and joint ventures, the Company
seeks to increase its regional concentration of wireless cable television
systems in order to realize economies of scale and operating efficiencies. The
Company believes that its strategy of increasing regional concentration of
wireless cable television systems and channel rights will also enhance the
Company's ability to attract potential joint venture opportunities with
strategic partners. The Company also believes that these partnerships will
enable it to benefit from the partners' capital, infrastructure and brand
identity, thereby increasing the Company's ability to penetrate its markets.
Consistent with this strategy, the Company continues to explore and pursue
opportunities to acquire additional wireless cable television assets in markets
that meet the Company's selection criteria, to divest itself of wireless cable
television assets that are inconsistent with the Company's regional market
emphasis, and to continually evaluate its current markets to ensure that its
portfolio of operating systems and channel interests reflect the Company's
growth strategy. It is the Company's policy not to discuss or comment upon
negotiations regarding such transactions until a definitive agreement is signed
or other circumstances indicate a high degree of probability that a transaction
will be consummated, unless applicable law otherwise requires.

                                       5
<PAGE>
    On October 11, 1996, the Company consummated the USA Wireless Acquisition.
USA owned wireless cable, television rights and related assets in certain
Midwest markets, including but not limited to the Effingham and Wellsville,
Kansas; Story City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and
Rochester, Minnesota markets (the "USA Markets"). Heartland executed a letter of
intent to purchase the Scottsbluff, Kalispell and Story City markets and
operated the latter market subsequent to the USA Wireless Acquisition. The
letter of intent was terminated and effective December 30, 1997, the Company
assumed operational control of the Story City market. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELOCATED TRANSACTIONS--STORY CITY, IOWA OPERATING MARKET.

    On May 22, 1997, the Company sold to Bell South Corporation (i) certain
assets acquired by the Company in connection with the acquisition of Heartland
Wireless Georgia Properties, Inc., including leases and licenses for wireless
cable frequency rights for wireless cable channels transmitting in Adairsville,
Powers Crossroads and Rutledge, Georgia and leases for the four tower sites in
such markets and (ii) the BTA licenses relating to Atlanta, Georgia for $6.0
million, subject to adjustment. The sales price of approximately $16.4 million
resulted in a gain of approximately $0.7 million. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--ATLANTA SUBURBS MARKET. Pursuant to the
Participation Agreement, the Company paid approximately $15 million to Heartland
for application against the Heartland Long-Term Note. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--HEARTLAND NOTE OBLIGATION.

    In September 1997, the Company consummated an Asset Exchange Agreement dated
as of November 6, 1996 with PCTV and People's Choice TV of Kansas City, Inc.,
pursuant to which the Company exchanged wireless cable rights and related assets
in its Salt Lake City, Utah market for PCTV's wireless cable rights and related
assets in its Kansas City, Missouri market.

SERVICE OFFERINGS AND MARKETING

    ANALOG SERVICES.  In 1997, the Company provided analog wireless television
services to the operational markets described above under "Operational and
Planned Markets." Typically, the Company offers for subscription 28 to 42
channels with transitional off-air, cable and premium programming options. The
services are generally offered through direct marketing to prospective
subscribers. The Company began in 1997 to minimize marketing and capital
expenditures associated with analog services and equipment in order to commit
resources to digital technology.

    DIGITAL VIDEO SERVICES.  The Company intended to launch digital television
services in its Dallas market in 1997. Towards that goal, the Company signed an
agreement in 1997 with General Instrument Corp. ("General Instrument") for the
purchase of equipment necessary to deliver digital signals to subscribers; the
timely delivery of commercially viable equipment was an integral component of
the Company's plans to offer digital video service. The vendor experienced
certain system integration problems with respect to the digital Headend
equipment and converter boxes. Due to the delay in delivery of the required
product, the Company and General Instrument agreed in February 1998 to amend
certain contractual obligations relating to delivery dates, performance
requirements, penalties and responsibilities in consideration for certain
pricing concessions. In connection with the amendment, the Company released
General Instrument from any claims it may have had with respect to the failure
of General Instrument to perform certain obligations prior to the deadlines
prescribed in the original agreement. The Company anticipates that General
Instrument will commence shipment of equipment required for the launch of
digital services in Dallas during the second quarter of 1998, provided General
Instrument successfully resolves certain outstanding integration problems. In
the event such problems are not successfully resolved, the intended commercial
launch of digital video services could be delayed.

    The Company has commercially tested its digital video services in multiple
dwelling units in Dallas, Texas. To date, the tests have been successful and the
Company has entered into service contracts with the owner and/or manager of
certain multiple dwelling units in the Dallas/Fort Worth metropolitan area.

    The Company filed a series of related modification applications with the FCC
requesting authority to operate a 50 watt digital video service in Dallas, the
majority of which have been granted by the FCC. There can be no assurance that
the Company will be granted authority with respect to any of its pending

                                       6
<PAGE>
applications or that the commercial deployment of any new products for which
authority has been or will be granted will be successful.

    The Company has begun to install digital equipment in San Antonio, its
second largest operational market, for the purpose of creating a hybrid digital
overlay. It is anticipated that existing technology will permit the Company to
offer a digital tier of video services and augment its current analog channel
offering resulting in a net channel gain of 42.

    INTERNET ACCESS.  The FCC has granted one way Internet access with respect
to all channels in the Wireless Cable Spectrum. The Company commenced a limited
commercial offering of its Internet access services in the fall of 1997 for the
propose of evaluating several business strategies. At this time, the Company is
exploring and evaluating the costs and benefits of (i) serving as a Internet
Service Provider to commercial and/or residential accounts, (ii) providing
transport services to existing or future Internet Service Providers and (iii)
acting in the capacity of a reseller of Internet access. The Company presently
broadcasts Internet access services at a speed of 10 Mbps, exponentially faster
than today's traditional 28.8 Kbps modems.

    The Company has received from the FCC developmental authority for two way
flexible use of two channels in its Dallas market on a test basis; such
authority expires on April 11, 1998, but a request for renewal will be filed
before such date.

    TELEPHONE SERVICES.  The Company has entered into interconnection agreements
with Southwestern Bell Corp. and GTE for the purpose of offering consumer and/or
multiple dwelling unit operators a bundled package of video, Internet access and
telephony services. Additionally, the Company entered into an agreement with
WorldCom, Inc. for the purpose of reselling long distance services.

    TWO WAY USE OF WIRELESS CABLE SPECTRUM.  The FCC has issued a notice of its
proposal to amend its rules to allow Wireless Cable Spectrum license holders to
engage in fixed two way transmissions. The flexibility to engage in two way
transmissions would greatly enhance the desirability of each of the Company's
video and Internet access services.

    MARKETING FOR MULTIPLE DWELLING UNITS.  The Company entered into a contract
in October, 1997 with DIRECTV, Inc. for the purpose of offering enhanced
programming choices to multiple dwelling units ("MDUs") in the Company's analog
markets. The contract enables the Company to improve its product offering at a
relatively lower capital cost in response to competitive pressures.

REGULATION

    GENERAL.  The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the Wireless Cable Spectrum; to approve
the assignment and/or transfer of control of such licenses; to approve the
location of wireless cable systems; to regulate the kind, configuration and
operation of equipment used by wireless cable systems; and to impose certain
equal employment opportunity and other obligations and reporting requirements on
wireless cable channel license holders and operators.

    The FCC has determined that wireless cable systems are not "cable systems"
for purposes of the Communications Act. Accordingly, a wireless cable system
does not require a local franchise and is subject to fewer local regulations
than a hard-wire cable system. Moreover, all transmission and reception
equipment for a wireless cable system can be located on private property; hence,
there is no need to make use of utility poles or dedicated easements or other
public rights of way. Although wireless cable operators typically must lease the
right to use wireless cable channels from the holders of channel licenses,
unlike hard-wire cable operators they do not have to pay local franchise fees.
Recently, legislation has been introduced in some states, including Illinois,
Maryland, Pennsylvania and Virginia, to authorize state and local authorities to
impose on all video program distributors (including wireless cable operators) a
tax on the distributors' gross receipts comparable to the franchise fees cable
operators pay. Similar legislation may be introduced in several other states.
While the proposals vary among states, the bills would require, if passed, as
much as 5.0% of gross receipts to be paid by wireless distributors to local
authorities. Efforts are

                                       7
<PAGE>
underway by the industry trade association to preempt such state taxes through
federal legislation. In addition, the industry is opposing the state bills as
they are introduced, and, in Virginia and Maryland, it has succeeded in either
blocking legislation or obtaining exemptions from the video tax that was
eventually enacted into law. However, it is not possible to predict whether new
state laws will be enacted which impose new taxes on wireless cable operators.
The imposition of a gross receipts tax on the Company could have a material
adverse effect on the Company's business.

    In the 50 largest markets, 33 6 MHz channels are available for wireless
cable (in addition to any local broadcast television channels that are not
retransmitted over the microwave channels). The FCC licenses and regulates the
use of channels by license holders and system operators. In each geographic
service area of all other markets, 32 6 MHz channels and one 4 MHz channel are
available for wireless cable (in addition to any local broadcast television
channels that are not retransmitted over the microwave channels). Except in
limited circumstances, 20 wireless cable channels in each of these geographic
service areas are generally licensed to qualified non-profit educational
organizations (commonly referred to as Instructional Television Fixed Service or
ITFS channels). In general, each of these channels must be used a minimum of 20
hours per week for instructional programming. The remaining "excess air time" on
an ITFS channel may be leased to wireless cable operators for commercial use,
without further restrictions (other than the right of the ITFS license holder,
at its option, to recapture up to an additional 20 hours of air time per week
for educational programming, or such other restrictions, including the recapture
of additional hours of air time, as may be included in any lease). Lessees of
ITFS' "excess air time," including the Company, generally have the right to
transmit to their customers the educational programming provided by the lessor
at no incremental cost. FCC rules permit ITFS license holders to consolidate
their educational programming on one or more of their ITFS channels, thereby
providing wireless cable operators leasing such channels, including the Company,
with greater flexibility in their use of ITFS channels. The remaining 13
channels available in most of the Company's operating and targeted markets are
made available by the FCC for full-time usage without programming restrictions.
Channels are allocated by the FCC in 6 MHz portions of the radio spectrum
reserved for Multi Channel Distribution Services ("MDS" which transmits at
2150-2162 MHz) and Multipoint Multi Channel Distribution Services ("MMDS" which
transmits at 2500-2686 MHz). MDS and MMDS channels are generally collectively
referred to as MMDS Channels.

    LICENSING PROCEDURES.  The actual number of wireless cable channels
available for licensing in any market is determined by the FCC's interference
protection and channel allocation rules. The FCC awards ITFS and MMDS licenses
based upon applications demonstrating that the applicant is legally, financially
and technically qualified to hold the license and that the operation of the
proposed station will not cause interference to other stations or proposed
stations entitled to interference protection.

    The FCC conducted an auction (the "BTA Auction") in 1996 of available
commercial wireless cable spectrum in 487 basic trading areas ("BTAs") and six
additional BTA-like geographic areas around the country. The winner of a BTA has
the right to develop the vacant MMDS frequencies throughout the BTA, consistent
with certain specified interference criteria that protect existing ITFS and MMDS
channels. Existing ITFS and MMDS channel rights holders must protect the BTA
winner's spectrum from interference caused by power increases or tower
relocations. CAI was the high bidder for 32 BTA authorizations, for a total of
$48.8 million of which $12.6 million relates to the Company's markets. Heartland
was the high bidder for 93 BTA authorizations, for a total of $19.8 million of
which $4.2 million relates to the Company's present markets. CAI and Heartland
are obligated to convey to the Company, at their cost, and the Company has
agreed to purchase, any rights acquired in the BTA Auction relating to the
Company's markets, as well as certain other BTAs. Rights to BTAs for the
Company's Bakersfield and Stockton/ Modesto, California; Charlotte, North
Carolina; and Cleveland, Ohio markets were acquired by CAI for approximately
$5.6 million. In addition, CAI purchased BTAs relating to Atlanta, Georgia and
Louisville, Kentucky for approximately $7.0 million. Of the aggregate $12.6
million, approximately $12.0 million has been paid by CAI through December 31,
1997 to the FCC in accordance with the rules of the BTA Auction. Heartland
purchased BTAs relating to Little Rock, Arkansas; Oklahoma City, Oklahoma; Grand
Rapids, Michigan; Dayton, Ohio; Minneapolis, Minnesota; Dallas and San Antonio,
Texas; and Benton

                                       8
<PAGE>
Harbor, Kalamazoo and Muskegan, Michigan for approximately $4.2 million. Of this
amount, approximately $0.9 million has been paid by Heartland to the FCC for
these BTAs. The Company has reimbursed CAI and Heartland in the amount of $12.0
million and $0.9 million (excluding interest), respectively, through December
31, 1997, and will continue to reimburse CAI and Heartland for any and all costs
incurred by CAI and Heartland, which total costs are estimated to be up to $16.8
million, excluding interest expense which accrues at 9.5% per annum, in
connection with these BTAs in accordance with the terms of the Participation
Agreement. The FCC has approved assignment of all of CAI's BTAs to the Company
other than the BTAs relating to the Stockton and Cleveland markets. The Company
and Heartland entered into a BTA Lease and Option Agreement pursuant to which
Heartland leases to the Company 10 BTAs and portions of four additional BTAs.
The Company has the option to purchase the leased BTAs. The Company's ability to
increase power or relocate its transmission facilities in markets where it is
not the owner of the BTA may be limited, which could increase the cost to the
Company of, and extend the time for, developing a commercially viable system.

    Under rules and policies for applications for new MMDS facilities filed
before the BTA Auction, the FCC would generally issue a conditional license that
permits the conditional licensee to commence construction of its facilities upon
the satisfaction of specified conditions. Construction of MMDS stations
generally must be completed within one year of grant of the conditional license.

    In February 1995, the FCC amended its rules and established "windows" for
the filing of new ITFS applications or major modifications to authorized ITFS
facilities. The first filing "window" was October 16 through 20, 1995. Where two
or more ITFS applicants file applications for the same channels and the proposed
facilities could not be operated without impermissible interference, the FCC
employs a set of comparative criteria to select from among the competing
applicants. Construction of ITFS stations generally must be completed within 18
months of the date of grant of the authorization.

    If construction of MMDS or ITFS stations is not completed within the
authorized construction period, the licensee must file an application with the
FCC seeking additional time to construct the station and demonstrate therein
compliance with certain FCC standards. If the extension application is not filed
or is not granted, the license will be deemed forfeited. ITFS and MMDS licenses
generally have terms of 10 years. Licenses must be renewed thereafter, and may
be revoked for cause in a manner similar to other FCC licenses. FCC rules
prohibit the sale for profit of a conditional MMDS license or a controlling
interest in the conditional licensee prior to construction of the station or, in
certain circumstances, prior to the completion of one year of operation.
However, the FCC permits the leasing of 100% of an MMDS licensee's spectrum to a
wireless cable operator and the granting of options to purchase a controlling
interest in a license even before such holding period has lapsed.

    Wireless cable transmissions are subject to FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). In July 1996, the FCC issued a Declaratory Ruling prescribing interim
rules for the implementation of digital technology. The declaratory ruling
permits the Company to commence installation and operations in a digital mode
under existing FCC technical interference criteria. The license holder is,
however, required to file for digital authorization. It is likely that, in the
longer term, the FCC will consider adopting both new technical and service rules
tailored to digital operations. The service rules could modify the respective
rights and obligations of the ITFS lessors and their commercial lessees of
"excess air time" in light of the increased capacity that would result from
digital compression. Even if the FCC adopts new service rules governing the
allocation of "excess air time" in a digital environment, it is anticipated that
there would be a dramatic increase in the number of channels that will be
available to the Company following the conversion to digital transmissions. The
Company has received necessary FCC approvals to permit use of digital
compression in a number of markets and believes the remaining approvals will be
obtained by the time it becomes commercially available; however, there can be no
assurance that these approvals will be forthcoming or timely. In addition, such
modifications filed with the FCC after the BTA Auction will be subject to the
interference protection rights of BTA Auction winners.

                                       9
<PAGE>
    The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of transmitting antennae and operations with
transmission characteristics (such as power and polarity). In order to commence
the operations of certain of the Company's markets, applications have been or
will be filed with the FCC to relocate and modify existing transmission
facilities.

    Under current FCC regulations, a wireless cable operator generally may serve
subscribers anywhere within the LOS of its transmission facility, provided that
it complies with interference standards. Under rules adopted by the FCC in 1995,
an MMDS channel license holder generally has a protected area of 35 miles around
its transmitter site. An ITFS channel license holder has protection as to all of
its receive sites, but the same protected area during excess capacity use by a
wireless cable operator as an MMDS license holder. In launching or upgrading a
system, the Company may wish to relocate its transmission facility or increase
its height or power. If such changes cause the Company's signal to violate
interference standards with respect to the protected area of other wireless
license holders, the Company would be required to obtain the consent of such
other license holders; however, there can be no assurance that such consents
would be received. The BTA license holder may serve subscribers within its BTA
provided it does not interfere with any existing license holders' 35 mile
protected service area, any adjacent BTA and/or ITFS license holders' receive
sites.

    INTERFERENCE ISSUES.  Interference from other wireless cable systems can
limit the ability of a wireless cable system to serve any particular point. In
licensing ITFS and MMDS systems, a primary concern of the FCC is avoiding
situations where proposed stations are predicted to cause interference with the
reception of previously authorized or proposed stations. Pursuant to FCC rules,
a wireless cable system is generally protected from interference within a radius
of 35 miles of the transmission site. In addition, modification applications
submitted after the BTA Auction are required to protect auction winners from
interference. The FCC's interference protection standards may make one or more
of these proposed modifications or new grants unavailable. In such event, it may
be necessary to negotiate interference agreements with the licensees of the
systems which would otherwise block such modifications or grants. There can be
no assurance that the Company will be able to negotiate all necessary
interference agreements that are on terms acceptable to the Company. In the
event the Company cannot obtain interference agreements required to implement
the Company's plans for a market, the Company may have to curtail or modify
operations in that market, utilize a less optimal tower location, or reduce the
height or power of the transmission facility, any of which could have a material
adverse effect on the growth of the Company in that market. In addition, while
the Company's leases with ITFS and MMDS licensees require their cooperation, it
is possible that one or more of the Company's channel lessors may hinder or
delay the Company's efforts to use the channels in accordance with the Company's
plans for the particular market. The Company and Heartland entered into an
Interference Management Agreement in 1996 for the purpose of managing potential
interference issues relating to markets operated by the Company and those
operated by Heartland.

    THE 1992 CABLE ACT.  On October 5, 1992, Congress enacted the 1992 Cable
Act, which compels the FCC to, among other things, (i) adopt comprehensive
federal standards for the local regulation of certain rates charged by hard-wire
cable operators, (ii) impose customer service standards on hard-wire cable
operators, (iii) govern carriage of certain broadcast signals by all
multi-channel video providers, and (iv) compel non-discriminatory access to
programming owned or controlled by vertically-integrated cable operators.

    The rate regulations adopted by the FCC do not regulate cable rates once
other multi-channel video providers serve, in the aggregate, at least 15% of the
households within the cable franchise area. The customer service rules adopted
by the FCC establish certain minimum standards to be maintained by traditional
hard-wire cable operators. These standards include prompt responses to customer
telephone inquiries, reliable and timely installations and repairs, and readily
understandable billing practices. These rules do not apply to wireless cable
operators, although the Company believes that it provides and will continue to
provide customer service superior to its hard-wire cable competitors.

                                       10
<PAGE>
    Under the retransmission consent provisions of the 1992 Cable Act and the
FCC's implementing regulations, all multi-channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
1992 Cable Act and the FCC's "must carry" rules to retransmit a specified number
of local commercial television or qualified low power television signals.

    The 1992 Cable Act and the FCC's implementing regulations impose limits on
exclusive programming contracts and prohibit programmers in which a cable
operator has an attributable interest from discriminating against cable
competitors with respect to the price, terms and conditions of programming. In
order to facilitate the negotiation of programming contracts and achieve volume
price concessions, the Company has joined a consortium of wireless cable
companies.

    While current FCC regulations are intended to promote the development of a
competitive subscription television industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse effect
on the Company. In addition, a number of legal challenges to the 1992 Cable Act
and the regulations promulgated thereunder have been filed, both in the courts
and before the FCC. These challenges, if successful, could result in increases
in the Company's operating costs and otherwise have a material adverse effect on
the Company. The Company's costs to acquire satellite-delivered programming may
be affected by the outcome of those challenges. Other aspects of the 1992 Cable
Act that have been challenged, the outcome of which could adversely affect the
Company, include the 1992 Cable Act's provisions governing rate regulation to be
met by traditional hard-wire cable companies. The 1992 Cable Act empowered the
FCC to regulate the basic subscription rates charged by traditional hard-wire
cable operators. The FCC recently issued rules requiring such cable operators,
under certain circumstances, to reduce the rates charged for non-premium
services by as much as 17%. Should these regulations withstand judicial and
regulatory challenges, the extent to which wireless cable operators may continue
to maintain a price advantage over traditional hard-wire cable operators could
be diminished. On the other hand, continued strict rate regulation of cable
rates would tend to impede the ability of hard-wire cable operators to upgrade
their cable plant and gain a competitive advantage over wireless cable.

    Due to the regulated nature of the subscription television industry, the
Company's growth and operations may be adversely impacted by the adoption of
new, or changes to existing, laws or regulations or the interpretations thereof.

    COPYRIGHT.  Under the federal copyright laws, permission from the copyright
holder generally must be secured before a video program may be retransmitted.
Under Section 111 of the Copyright Act of 1976 (the "Copyright Act"), certain
"cable systems" are entitled to engage in the secondary transmission of
programming without the prior permission of the holders of copyrights in the
programming. In order to do so, a cable system must secure a compulsory
copyright license. Such a license may be obtained upon the filing of certain
reports with and the payment of certain fees to the U.S. Copyright Office. In
1994, Congress enacted the Satellite Home Viewers Act of 1994 which enables
operators of wireless cable television systems to rely on the cable compulsory
license under Section 111 of the Copyright Act.

    RETRANSMISSION CONSENT.  Under the retransmission consent provisions of the
1992 Cable Act, wireless and hard-wire cable operators seeking to retransmit
certain commercial television broadcast signals must first obtain the permission
of the broadcast station in order to carry their signal. However, wireless cable
systems, unlike hard-wire cable systems, are not required under the FCC's "must
carry" rules to retransmit a specified number of local commercial television or
qualified low power television signals. Although there can be no assurances that
the Company will be able to obtain requisite broadcaster consents, the Company
believes in most cases it will be able to do so for little or no additional
cost.

                                       11
<PAGE>
    THE 1996 ACT.  The Telecommunications Act of 1996 (the "1996 Act") will
result in comprehensive changes to the regulatory environment for the
telecommunications industry as a whole. The 1996 Act will, among other things,
substantially reduce regulatory authority over cable rates. The legislation
affords hard-wire cable operators greater flexibility to offer lower rates to
certain of their customers and will thereby permit hard-wire cable operators to
target discounts to the Company's current or prospective subscribers. The
legislation will permit telephone companies to enter the video distribution
business, subject to certain conditions. The entry of telephone companies in the
video distribution business, with greater access to capital and other resources,
could provide significant competition to the wireless cable industry, including
the Company. In addition, the legislation affords relief to wireless cable
operators and direct broadcasting satellite service providers by exempting them
from local restrictions on reception antennae and preempting the authority of
local governments to impose certain taxes. Further, Congress has directed the
FCC to eliminate cable rate regulations for "small systems," as defined in the
1996 Act, and for large systems under certain prescribed circumstances, and for
all cable systems effective three years after enactment of the 1996 Act. The FCC
is still in the process of promulgating regulations that implement the
provisions of the legislation, and the Company cannot reasonably predict the
substance of rules and policies that remain to be adopted.

    MANDATORY ACCESS LAWS.  Certain states have legislation that each resident
of a MDU should not be denied access to programming provided by franchised cable
systems, notwithstanding the fact that the owner and/or manager of the MDU
entered into an exclusive agreement with a non-franchised video program
distributor. In several district courts, mandatory access laws have been held
unconstitutional. Such laws increase the competition for subscribers in MDUs. In
Ohio, mandatory access laws have encouraged competitors to vigorously pursue
opportunities with MDUs currently serviced by the Company; the Company has
contested application of the Ohio laws. There may also be restrictions imposed
by local authorities. There can be no assurance that the Company will not be
required to incur additional costs in complying with such regulations or
restrictions.

    OTHER.  Wireless cable license holders are subject to regulation by the
Federal Aviation Administration ("FAA") with respect to the construction,
marking, and lighting of transmission towers and to certain local zoning
regulations affecting construction of towers and other facilities. There may
also be restrictions imposed by local authorities. There can be no assurance
that the Company will not be required to incur additional costs in complying
with such regulations or restrictions. Future changes in the foregoing
regulations or any other regulations applicable to the Company could have a
material adverse effect on the Company's results of operations and financial
condition.

COMPETITION

    Wireless cable television operators face competition from a number of
sources, including potential competition from emerging trends and technologies
in the subscription television industry, some of which are described below.

    HARD-WIRE CABLE.  The Company's principal subscription television
competitors in each market are traditional hard-wire cable operators. Hard-wire
cable companies are generally well-established and known to potential customers
and have significantly greater financial and other resources than the Company.
According to a report issued by the FCC in September 1995, of the approximately
96 million total television households nationwide, approximately 85 million are
passed by hard-wire cable systems, and of those homes that are passed by cable,
approximately 62 million are hard-wire cable subscribers.

    DIRECT-TO-HOME ("DTH").  DTH satellite television services originally were
available via satellite receivers which generally were 7-to-12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has

                                       12
<PAGE>
reduced their popularity, although the Company will to some degree compete with
these systems in marketing its services.

    DIRECT BROADCAST SATELLITE ("DBS").  DBS involves the transmission of an
encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than most satellite-transmitted
signals, its reception can be accomplished with a relatively small (18-inch)
dish mounted on a rooftop or in the yard. DBS cannot, for technical and legal
reasons, provide local VHF/UHF broadcast channels as part of its service,
although many DBS subscribers receive such channels via standard over-the-air
receive antennas. Moreover, DBS may provide subscribers with access to broadcast
network distant signals only when such subscribers reside in areas unserved by
any broadcast station. The cost to a DBS subscriber for equipment and service is
generally substantially higher than the cost to wireless cable subscribers.
Three DBS services currently are available nationwide. According to DBS Digest,
there were approximately 5.8 million subscribers using DBS services in 1997.

    PRIVATE CABLE.  Private cable, also known as satellite master antenna
television, is a multi-channel subscription television service where the
programming is received by satellite receiver and then transmitted via coaxial
cable throughout private property, often MDUs, without crossing public rights of
way. Private cable operates under an agreement with a private landowner to
service a specific MDU, commercial establishment or hotel. The FCC permits
point-to-point delivery of video programming by private cable operators and
other video delivery systems in the 18 GHz band. Private cable operators compete
with the Company for exclusive rights of entry into larger MDUs, commercial
establishments and hotels.

    TELEPHONE COMPANIES.  The 1996 Act removed many of the restrictions on the
ability of local exchange carriers ("LECs"), including Regional Bell Operating
Companies ("RBOCs"), to provide video programming directly to subscribers in
their respective telephone service areas. Thus, while there remains a
prohibition against a LEC acquiring a hard-wire cable operator within its
telephone service area, LECs can build their own hard-wire cable systems. In
addition to having the opportunity to install traditional hard-ware cable, LECs
also have the option of installing high capacity fiber optic facilities. The
Company believes that it will continue to maintain a cost advantage over
installing hard-wire, fiber optic or open video distribution platforms due to
the high capital expenditures associated with such technologies. Bell South
Corporation has acquired wireless cable channel rights in Atlanta, Georgia, New
Orleans, Louisiana, and Miami, Florida and begun to offer services in New
Orleans. Pacific Telesis Group recently launched a 150 channel digital video
system in Los Angeles, California. The competitive effect of the entry of
telephone companies into the subscription television business, including
wireless cable, is still uncertain.

    LOCAL OFF-AIR VHF/UHF BROADCASTS.  Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox) provide free programming to
the public. Previously, subscription television operators could retransmit these
broadcast signals without permission. However, effective October 6, 1993,
pursuant to the 1992 Cable Act, local broadcasters may require that subscription
television operators obtain their consent before retransmitting local television
broadcasts. The Company has obtained such consents for its operating systems.
The Company will be required to obtain such consents in certain of its markets
to re-broadcast any such channels. The Company believes that it will be able to
obtain such consents, but no assurance can be given that it will be able to
obtain all such consents. The FCC also has recently permitted broadcast networks
to acquire, subject to certain restriction, ownership interests in hard-wire
cable systems. In some areas, several low power television ("LPTV") stations
authorized by the FCC are used to provide multi-channel subscription television
service to the public. LPTV transmits on conventional VHF/UHF broadcast
channels, but is restricted to very low power levels, which limits the area
where a high-quality signal can be received.

    LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS").  In 1993, the FCC initially
proposed to redesignate the 28 GHz band to create a new video programming
delivery service referred to as LMDS. In July 1995, the FCC proposed to award
licenses in each of 493 BTAs pursuant to auctions. Sufficient spectrum for up to
49 channels has been designated for the LMDS service. Two licenses will be
awarded in each BTA. The

                                       13
<PAGE>
LMDS licensees will share the 28 GHz frequency band with the Mobile Satellite
Service and the 31 GHz band with state and local governments. One license would
be awarded on a primary basis for an 1150 MHz frequency block, and the other on
a co-primary basis for a 150 MHz frequency block. The FCC contemplates allowing
LMDS licensees to use the spectrum for a variety of services, including
telephony, interactive video, video distribution, data transmission,
teleconferencing, and other applications. Depending on the type and number of
services offered, the cost of the customer-premises equipment could range from
$300 (for a video receive antenna), to $1,000 (for telephony, video and data
capabilities). The auction for LMDS spectrum commenced in February 1998 and was
concluded in March. The Company applied to participate in the auction; however,
the Company did not bid.

    LIMITED NUMBER OF MMDS CHANNELS.  Within each market, the Company must
compete with others to acquire, from the limited number of MMDS channels issued
or issuable, rights to a minimum number of MMDS channels needed to establish a
commercially viable system. Aggressive price competition or the passing of a
substantial number of presently unpassed households by any existing or new
subscription television service could have a material adverse effect on the
Company's results of operations and financial condition.

    TECHNOLOGY ADVANCES.  New and advanced technologies for the subscription
television industry, such as digital compression, fiber optic networks, DBS
transmission, video dialtone and LMDS, are in various stages of development of
commercial deployment. These technologies are being developed and supported by
entities, such as hard-wire cable companies and RBOCs, that have significantly
greater financial and other resources than the Company. These new technologies
could have a material adverse effect on the demand for MMDS subscription
television services.

  EMPLOYEES

    As of December 31, 1997, the Company has approximately 270 employees. The
Company has experienced no work stoppages and believes that it has good
relations with its employees.

ITEM 2.  PROPERTIES.

    The Company leases office sites in Plano, Texas, including office space
subleased from Heartland. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--HEARTLAND LEASE. The Company also leases or owns office space,
transmitting facilities, including tower space, tower sites and Headend
facilities, in all of its markets. The Company believes adequate leasehold space
is available in all locations in which the Company currently leases office or
transmission sites.

    The Company owns substantially all of the equipment which is necessary to
conduct its operations, except certain vehicles and certain test equipment. A
significant portion of the Company's investment in plant and equipment consists
of subscriber equipment, which includes antennae, block-down converters, remote
controls, and related installation equipment, principally located at the
subscribers' premises, and the reception and transmitter equipment located at
leased transmitter sites.

ITEM 3.  LEGAL PROCEEDINGS.

    During the fourth quarter of 1996, the Company became aware of a dispute
involving San Antonio Wireless, Inc. ("SAW") over the Company's lease rights to
eight ITFS channels for the San Antonio market. SAW is the putative lessee of
channel capacity leases with two ITFS licensees and has asserted that
predecessors of the Company were required to obtain SAW's consent to transfer
sublease rights to the channel capacity to the Company. Therefore, SAW has
asserted that the transfers of the lease rights to the Company were not valid.
SAW has also alleged that the Company failed to make monthly lease payments on a
timely basis, and that those failures constituted a material breach of the lease
agreements. SAW has purported in writing to evict the Company from the channel
leases and filed suit in Texas state court to pursue its claims. The Company's
position has been that either SAW's consent was not required for the

                                       14
<PAGE>
transfers, or that SAW was required to give its consent pursuant to the channel
leases. The Company has also asserted that, to the extent it might have failed
to make timely payments, such a failure or failures did not constitute a basis
for SAW to terminate the Company's lease rights. If SAW evicts the Company from
the eight ITFS channels, the Company's inability to transmit on such channels in
the present analog system could have a material adverse effect on the Company's
ability to offer subscribers in the San Antonio market an attractive programming
package, unless the Company can quickly convert its system in the market from
analog to digital. The Company has begun the conversion process. In addition,
SAW may pursue monetary damages related to the Company's unwillingness to vacate
the channels. SAW has filed a motion for summary judgment with respect to
certain of its claims; the Company contested the motion, which has not yet been
considered by the court. SAW and the Company are engaged in settlement
discussions.

    Although there can be no assurance of the final resolution of this matter,
the Company believes that, based upon its current knowledge of the facts of the
case, it has meritorious defenses to the claims made and intends to defend the
suit vigorously. The Company does not believe that the outcome of this lawsuit
will have a material adverse effect on the Company's financial position, results
of operations or cash flows. The Company has begun to install digital equipment
in San Antonio for the purpose of creating a digital overlay and increasing the
number of available channels. See ITEM 1. BUSINESS--SERVICE OFFERINGS AND
MARKETING.

    The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material adverse
effect on the Company's consolidated financial position, operating results or
liquidity.

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

    The Company did not submit any matters to a vote of security holders during
the fourth quarter of the year covered by this report.

                                    PART II

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

    The Company's Common Stock has not been registered with the Securities and
Exchange Commission, and no market exists for its Common Stock.

    The Company did not pay dividends on its Common Stock during the year ended
December 31, 1997.

ITEM 6.  SELECTED FINANCIAL DATA.

    The following table sets forth selected historical financial data for the
Company and the Company's Cleveland, Ohio market (the "Predecessor") as of
February 28, 1993 and 1994, and December 31, 1994, 1995, 1996 and 1997 and for
the years ended February 28, 1993 and 1994, the period from March 1, 1994 to
March 8, 1994, the period from March 9, 1994 to December 31, 1994, the period
from January 1, 1995 to September 29, 1995, the period from September 30, 1995
to December 31, 1995, and the years ended December 31, 1996 and 1997 which have
been derived from the financial statements of Metropolitan Cablevision, Inc.
("Cablevision"), MetroCable, Inc. ("MetroCable"), Metropolitan Satellite Corp.
("Metro Satellite"), ACS Ohio, Inc. and Subsidiaries ("ACS Ohio"), CS Wireless
Systems, Inc. and Subsidiaries (formerly ACS Ohio, Inc.) and certain assets of
Atlantic Microsystems, Inc. and the Company, which have been audited by
independent public accountants. Period-to-period comparisons of financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance due to the acquisition of the Predecessor on
March 9, 1994 by ACS Enterprises, Inc. ("ACS Enterprises"), the subsequent
acquisition of the Predecessor on September 29, 1995 by CAI and the contribution
of certain wireless cable television assets comprising various domestic markets
by CAI and Heartland at the

                                       15
<PAGE>
Contribution Closing. Additionally, on October 11, 1996 the Company acquired
certain assets in certain Midwest markets in connection with the USA Wireless
Acquisition. As a result of the acquisitions, financial information for periods
through March 8, 1994, periods from March 9, 1994 through September 29, 1995 and
periods subsequent to September 29, 1995 is presented on different cost bases
and, therefore, such information is not comparable.

    The information contained herein should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Financial Statement and Notes thereto of the Company and the
Predecessor as included on the pages immediately following the index to
Consolidated Financial Statements appearing on page F-1.
<TABLE>
<CAPTION>
                                                               PREDECESSOR
                                  ---------------------------------------------------------------------      COMPANY
                                                                                                         ---------------
                                  YEAR ENDED FEBRUARY                                                     SEPTEMBER 30,
                                           28           MARCH 1, 1994   MARCH 9, 1994   JANUARY 1, 1995      1995 TO
                                  --------------------   TO MARCH 8,   TO DECEMBER 31,   TO SEPTEMBER     DECEMBER 31,
                                    1993      1994(1)      1994(1)         1994(2)        29, 1995(2)        1995(3)
                                  ---------  ---------  -------------  ---------------  ---------------  ---------------
                                                                      (IN THOUSANDS)
<S>                               <C>        <C>        <C>            <C>              <C>              <C>
Statement of operations data:
Revenues........................  $   5,190  $   5,267    $     116       $   4,332        $   6,170        $   2,301
Costs and expenses, excluding
  depreciation and
  amortization..................      5,461      4,256           76           3,454            5,441            2,103
Depreciation and amortization...      1,560        836           10           1,571            3,020            1,796
Operating income (loss).........     (1,831)       175           30            (693)          (2,291)          (1,598)
Interest expense................      6,356      2,846           39              62              233                2
Net loss........................     (8,137)    (2,162)          (9)           (576)          (1,875)          (1,207)
Balance Sheet data (at period
  end):
Total assets....................      4,581      3,797       --              19,741           --               75,688
Total debt (excluding accrued
  interest).....................     35,190     10,117       --               2,471           --                  112
Total equity (deficit)..........    (58,371)   (10,846)      --              15,375           --               60,316
Other data:
EBITDA(4).......................      1,429      1,011           40             878              729              198

<CAPTION>

                                   YEAR ENDED     YEAR ENDED
                                  DECEMBER 31,   DECEMBER 31,
                                     1996(3)        1997(3)
                                  -------------  -------------

<S>                               <C>            <C>
Statement of operations data:
Revenues........................    $  22,738      $  26,920
Costs and expenses, excluding
  depreciation and
  amortization..................       27,192         30,825
Depreciation and amortization...       20,345         26,858
Operating income (loss).........      (24,799)       (30,763)
Interest expense................       24,959         31,995
Net loss........................      (28,527)       (52,565)
Balance Sheet data (at period
  end):
Total assets....................      414,237        370,703
Total debt (excluding accrued
  interest).....................      276,276        288,299
Total equity (deficit)..........      124,834         72,229
Other data:
EBITDA(4).......................       (4,454)        (3,905)
</TABLE>

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

(1) Through March 8, 1994, the wireless cable television system serving the
    Predecessor was comprised of MetroCable (and its predecessor, Cablevision)
    and Metro Satellite. The selected historical financial information has been
    derived from the financial statements of (i) Cablevision for the period from
    March 1, 1992 to June 3, 1993 and MetroCable for the period from June 4,
    1993 to March 8, 1994 and (ii) Metro Satellite for the period March 1, 1993
    to March 8, 1994.

(2) From March 9, 1994 through September 29, 1995, ACS Ohio provided wireless
    cable television service to the Predecessor. The selected historical
    financial information has been derived from the financial statements of ACS
    Ohio for the period from March 9, 1994 to September 29, 1995.

(3) Subsequent to September 29, 1995, the Company provided wireless cable
    television service as the Predecessor. The selected historical financial
    information has been derived from the financial statements of CAI Wireless
    Systems, Inc. and Subsidiaries and certain assets of Atlantic Microsystems,
    Inc. for the period from September 30, 1995 to December 31, 1995, and the
    financial statements of the Company for the years ended December 31, 1996
    and 1997.

(4) EBITDA means earnings before interest expense, income taxes, depreciation,
    amortization and other non-cash charges. EBITDA is a financial measure
    commonly used in the Company's industry and it is a widely accepted
    financial indicator of a company's ability to service and/or incur debt.
    However, EBITDA should not be considered as an alternative to cash flow from
    operating activities (as determined in accordance with generally accepted
    accounting principles "GAAP") as an indicator of operating performance or as
    a measure of liquidity.

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

OVERVIEW

    ACS Ohio was formed as a wholly owned subsidiary of ACS Enterprises in
December 1993, for the purpose of purchasing two related companies, MetroCable
and Metro Satellite, that together comprised the wireless cable system serving
the Cleveland, Ohio metropolitan area. MetroCable was formed on June 4, 1993 as
the successor in interest to Cablevision. ACS Enterprises was acquired by CAI on

                                       16
<PAGE>
September 29, 1995. ACS Ohio became a direct subsidiary of CAI upon the merger
of ACS Enterprises with and into CAI as of September 29, 1995. Financial
information for the period January 1, 1996 through February 23, 1996 reflects
the combined financial position and results of operations for the Company's
wireless cable system serving the Cleveland, Ohio metropolitan area, which
includes the accounts of the Company and certain assets of an affiliated
company, Atlantic Microsystems, Inc. CAI and Heartland contributed to the
Company certain wireless cable television assets comprising various domestic
markets at the Contribution Closing. For the period subsequent to February 23,
1996, the Company's consolidated financial statements include the results of
operations of the entities and assets contributed to the Company at the
Contribution Closing, which are collectively referred herein as the February 23,
1996 Contributions. Additionally, on October 11, 1996 the Company acquired
certain Midwest markets in connection with the USA Wireless Acquisition.

    The Predecessor's revenues are derived principally from the sale of
subscription video services using wireless technology. Its principal costs of
operations are programming, license fees, and general and administrative
expenses.

RESULTS OF OPERATIONS

    With respect to the discussion of the results of operations of the Company
and the Predecessor, the results presented are comprised of financial
information for the following entities and periods:

                 TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1997

<TABLE>
<S>                                 <C>
The Company.......................  Twelve months ended December 31, 1996 and 1997

                           TWELVE MONTHS ENDED DECEMBER 31, 1995

ACS Ohio..........................  January 1, 1995 to September 29, 1995
The Company and Certain Assets of
Atlantic Microsystems, Inc........  September 30, 1995 to December 31, 1995
</TABLE>

    Period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance
due to the acquisition of MetroCable and Metro Satellite on March 9, 1994 by ACS
Ohio and the subsequent acquisition of ACS Ohio on September 29, 1995 by CAI.
ACS Ohio had no operations prior to March 9, 1994, when it acquired MetroCable
and Metro Satellite in a stock acquisition accounted for under the purchase
method of accounting. MetroCable commenced operations on June 4, 1993 as
successor in interest to Cablevision. Metro Satellite had been in operation for
several years prior to its acquisition. As a result of the acquisitions,
financial information for periods through March 8, 1994, periods from March 9,
1994 through September 29, 1995 and periods subsequent to September 29, 1995 is
presented on a different cost basis and, therefore, such information is not
comparable.

   YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

    REVENUE.  Revenue primarily consists of monthly fees paid by subscribers for
basic programming, premium programming and equipment rental. Revenues were $26.9
million in 1997 compared to $22.7 million in 1996, an increase of 18.5% The
increase in revenue for the periods presented is primarily due to average
subscribers increasing to approximately 65,390 for 1997 (excluding 2,070
subscribers relating to the Story City, Iowa market of which CS assumed
operational control as of December 30, 1997) compared to approximately 54,375
for the prior year period, an increase of 20.3%. The increase in subscriber
levels is attributed to the February 23, 1996 Contributions and the USA Wireless
Acquisition. The increase in revenue attributed to subscriber growth was
partially offset by a decrease in average recurring revenue per subscriber to
approximately $34.31 from approximately $34.85 for the comparable prior year
period.

                                       17
<PAGE>
    SYSTEMS OPERATIONS.  Systems operations primarily include programming costs,
channel lease payments, transmitter site and tower rentals, and other costs of
providing service. Programming costs (with the exception of minimum payments)
and channel lease payments (with the exception of certain fixed payments) are
variable expenses which generally increase as the number of subscribers
increases. Systems operations was $15.0 million for 1997 compared to $13.3
million in 1996, an increase of 12.7%. The increase in systems operations for
1997 compared to the prior year period is primarily due to the increase in the
subscriber base brought about by the February 23, 1996 Contributions and the USA
Wireless Acquisition, and, to a lesser extent, costs associated with the
preparations to launch digital video and high speed Internet access services in
Dallas, with no comparable amount in 1996.

    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses ("SG&A") was $15.8 million in 1997 compared to $14.0 million in 1996,
an increase of 12.8%. The increase in SG&A for 1997 compared to the prior year
period is principally due to (i) increased costs associated with the
preparations for the anticipated launch of digital video and high speed Internet
access services in Dallas, Texas totaling $1.7 million in 1997, with no
comparable amount in 1996 (ii) non-recurring severance payments to former
executives totaling approximately $1 million in 1997 with no comparable amounts
in 1996 (See ITEM 11. EXECUTIVE COMPENSATION), and (iii) certain costs
associated with the subscriber base brought about by the February 23, 1996
Contributions and the USA Wireless Acquisition. The aforementioned increase in
SG&A was partially off-set by a decrease in SG&A at the operating system level
of approximately $2.0 million. The decrease in SG&A at the operating system
level is principally due to the Company implementing a no-growth strategy in its
analog markets pending deployment of digital technology.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment, goodwill and other intangible assets. Depreciation
and amortization expenses was $26.9 million in 1997 compared to $20.3 million in
1996, an increase of 32.5%. The increase in depreciation and amortization
expense in 1997 is attributed to current year acquisitions of property,
equipment and intangible assets totaling approximately $27.5 million.

    OPERATING LOSS.  The Company generated operating losses of $30.8 million in
1997 compared to $24.8 million in 1996, a 24.1% increase. Consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA") was a negative
$3.9 million in 1997 compared to a negative $4.4 million in 1996, a 12.3%
favorable increase. The increase in the Company's operating loss is primarily
due to incremental net operating costs associated with the February 23, 1996
Contributions and the USA Wireless Acquisition and increased systems operations,
SG&A, depreciation and amortization. The favorable increase in negative EBITDA
during 1997 is attributed to EBITDA at the analog system level improving to $6.0
million in 1997 from $1.3 million in 1996, partially offset by an increase in
non-recurring SG&A at the corporate level and start-up costs associated with the
preparations to launch digital video and high speed Internet access services in
Dallas, Texas, with no comparable amounts in 1996.

    INTEREST INCOME.  Interest income was $5.5 million in 1997 compared to $6.6
million in 1996. The Company consummated a private placement of $400.0 million
of the Old Discount Notes on February 23, 1996, resulting in net proceeds of
$219.7 million (net of debt issuance costs of $9.8 million, but prior to certain
distributions made in connection with the Participation Agreement--See NOTE 2 TO
CONSOLIDATED FINANCIAL STATEMENTS). The Old Discount Notes were subsequently
exchanged for the New Discount Notes. See ITEM 1. BUSINESS--GENERAL. The
decrease in interest income is primarily due a decrease in the average invested
balance, partially offset by cash equivalents being invested for a shorter
period in 1996 compared to 1997.

    INTEREST EXPENSE.  Interest expense was $32.0 million in 1997 compared to
$25.0 million in 1996. Interest expense during the year ended December 31, 1997
included (i) non-cash interest and accretion of deferred debt issuance costs of
$30.4 million related to the New Discount Notes and (ii) non-cash interest

                                       18
<PAGE>
of $1.1 million relating to the Heartland Long-Term Note issued by the Company
in connection with the February 23, 1996 Contributions and $0.4 million relating
to the BTA auction payable. Interest expense during the year ended December 31,
1996 included non-cash interest and accretion of deferred debt issuance costs of
$23.5 million related to the New Discount Notes and $1.5 million, primarily
relating to the Heartland Long-Term Note.

    EQUITY IN LOSSES OF AFFILIATES.  The Company's equity in net operating
losses of affiliates was $1.3 million in 1997. Equity in losses of affiliates
during 1997 represent losses from TelQuest Satellite Services LLC in which the
Company acquired a 25% interest, Television Interactiva del Norte, S.A de C.V.
in which the Company has an approximate 39% interest and Television Inalambrica,
S.A. de C.V. in which the Company has an approximate 49% interest. The Company
acquired its 25% interest in TelQuest Satellite Services LLC on August 4, 1997.
The Company acquired its interest in the other two companies in September 1997.
See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--TELQUEST AND
ACQUISITIONS OF FOREIGN INTERESTS FROM HEARTLAND.

    OTHER INCOME.  Other Income is primarily comprised of a gain on sale of
assets. On May 27, 1997 the Company sold to BellSouth Corporation, pursuant to
the July 25, 1996 purchase agreement, certain assets for approximately $16.4
million, resulting in a gain of approximately $0.7 million. See ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--ATLANTA SUBURBS MARKET.

    INCOME TAX BENEFIT.  As discussed more fully in Note 9 to the Consolidated
Financial Statements, the Company recognized income tax benefits related to the
Company's losses before income taxes of $5.4 million in 1997, compared to $14.6
million for the comparable prior year periods. The Company recognized income tax
benefits to the extent of future expected reversals of existing taxable
temporary differences.

    NET LOSS.  The Company has recorded net losses since inception. The Company
incurred net losses of $52.6 million during 1997 compared to $28.5 million
during the prior year period. As previously discussed, although the Company's
total revenue increased 18.5% from 1996 to 1997, the Company's net losses have
increased due to increased SG&A, system operations, depreciation and
amortization and interest expense. The Company expects to continue to incur net
losses throughout 1998 and beyond.

   YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

    REVENUES.  Revenues were $22.7 million in 1996 compared to $8.4 million in
1995, an increase of 170.2% The increase in revenues for the periods presented
is primarily due to the increase in subscribers brought about by the February
23, 1996 Contributions. The Company had 11 systems in operation at December 31,
1996 compared to one system (Cleveland, Ohio) in operation at December 31, 1995.

    OPERATING EXPENSE.  Operating expenses were $47.5 million in 1996 compared
to $12.4 million for 1995. The $35.1 million increase is attributable to
increases in systems operations of $10.4 million (1996-- $13.3 million;
1995--$2.9 million), increases in selling, increases in general and
administrative expenses of $9.3 million (1996--$13.9 million; 1995--$4.6
million) and increases in depreciation and amortization expense of 15.5 million
(1996--$20.3 million; 1995--$4.8 million). These increases are primarily due to
increases in the subscriber base and subscriber equipment resulting from the
February 23, 1996 Contributions, and an increase in the Company's corporate and
executive staff to support the Company's overall growth.

    INTEREST EXPENSE.  Interest expense was $25.0 million in 1996 compared to
$0.2 million in 1995. Interest expense during the year ended December 31, 1996
included (i) non-cash interest and accretion of deferred debt issuance costs of
$23.5 million related to the New Discount Notes and (ii) other non-cash interest
of $1.5 million primarily relating to the Heartland Long-Term Note.

                                       19
<PAGE>
    NET LOSS.  The Company has recorded net losses since inception. The Company
incurred net losses of $28.5 million during 1996 compared to $3.1 million in
1995. As previously discussed, although the Company's total revenue increased
170.2% from 1996 to 1997, the Company's net losses have increased due to
increased SG&A, system operations, depreciation and amortization and interest
expense.

LIQUIDITY AND CAPITAL RESOURCES

    The wireless cable television business is a capital intensive business.
Funds are required for the lease or acquisition of channel rights, the
acquisition of wireless cable systems, the construction of system Headend and
transmission equipment, the conversion of analog systems to digital technology,
and start-up costs related to the commencement of operations and subscriber
installation costs. To date, the primary source of capital of the Company has
been from the net proceeds from the sale of the Old Discount Notes. The Company
intends to finance its future capital requirements through a combination of the
issuance of debt and equity securities, the disposition of wireless cable
systems that are inconsistent with the Company's business strategy, the
incurrence of loans and the assumption of debt and other liabilities in
connection with acquisitions.

    During 1997, the Company's strategy has been to conserve capital pending (i)
the implementation of digital video compression technology and (ii) the launch
of the Company's high speed Internet access product. The Company's principal
vendor for digital equipment, General Instrument, is currently working to
resolve certain system integration problems with respect to the digital Headend
and converter boxes for its proposed digital video system. Based on its own
analysis and advice from its equipment vendors, the Company believes that these
system integration issues will be resolved. The Company now expects the launch
of a compressed digital video product to occur during the second quarter of
1998.

    The Company has entered into an agreement with General Instrument pursuant
to which the Company agreed to purchase up to 200,000 digital converter boxes
and other digital equipment over the three year term. The Company may cancel its
minimum purchase obligation of 200,000 units by paying a $5 per box cancellation
fee. The Company's anticipated 1998 payments for converter boxes represent a
significant financial commitment and have been included in the Company's
estimates of capital expenditures for 1998. See ITEM 1. BUSINESS--SERVICE
OFFERINGS AND MARKETING.

    For 1998, the Company has budgeted approximately $45.2 million in capital
expenditures, including approximately $13.1 million for digital subscriber
installations, $9.3 million for analog subscriber installations, $2.6 million
for Headend and transmission equipment, $0.9 million relating to the build-out
of markets to accommodate a new line of business, Internet access, $3.7 million
to begin conversion of the Company's San Antonio analog markets to a hybrid
digital format, and $15.6 for strategic investments in items such as channel
capacity. The level of capital expenditures incurred for customer installations
is primarily variable and dependent on the customer installation activities of
the Company. Therefore, actual customer installation expenditures may be more or
less than the Company's estimate. Further significant capital expenditures for
customer installations are expected to be incurred by the Company in 1999 and
subsequent years. For 1999, the Company has budgeted approximately $50.0 million
of additional capital expenditures. Based upon the Company's current operating
plans, the Company believes that its available cash will provide sufficient
funds to meet its needs through the first quarter of 1999.

    The Company expects to launch its first digital video market in the second
quarter of 1998 in Dallas, depending on the availability of digital equipment
and the successful integration and construction of the necessary infrastructure.
The Company will commit additional resources to its marketing efforts with
respect to its Internet access business. In addition, the Company began
converting its analog system in San Antonio, Texas to a hybrid digital format.
The Company is evaluating its other markets to determine where and when to
convert existing analog markets to digital or offer hybrid digital services in
conjunction with existing or planned analog services. However, in the interim,
the Company intends to minimize capital expenditures in its analog markets.

                                       20
<PAGE>
    The key components of a new digital Headend system are (1) the compression
center, (2) the transmitter site and, (3) repeater sites and microwave or other
links, as necessary. The Company estimates that the launch of a new digital
wireless cable system in a typical market will require capital expenditures for
the compression center of approximately $1.3 million and approximately $1.3
million for the transmitter site, based on utilizing satellite services such as
offered by TelQuest Satellite Services LLC (see NOTE 3 TO CONSOLIDATED FINANCIAL
STATEMENTS). The capital expenditures associated with facilities vary
significantly by market as do capital expenditures associated with microwave and
other links. In total, with a satellite services solution, a new digital system
is estimated to cost approximately $3.3 million. Without a satellite services
solution, a new digital system is estimated to cost approximately $6.0 million.
The capital expenditures associated with acquiring and installing each digital
subscriber in a single family residence are estimated at approximately $700,
based on a one terminal configuration. Also, the capital expenditures required
to modify an existing analog Headend to offer a hybrid digital service are
estimated to range from $100,000 to $800,000 depending upon the number of local
digitized channels required.

    The Company's Dallas/Fort Worth system is ultimately expected to require
additional repeater sites and the construction of an additional transmitter site
in Fort Worth. The capital associated with a typical high power repeater site is
estimated at approximately $800,000. In total, the capital expenditures
estimated for the buildout of the Dallas/Fort Worth market are $7.5 million,
inclusive of the compression center, transmitter site costs, repeater sites,
microwave links, building and towers and warehouse and lab equipment.
Approximately $1.6 million of the remaining total Headend cost is budgeted for
1998.

    The Company estimated that the launch of a new analog wireless cable system
in a typical market requires aggregate capital expenditures of less than
$750,000. The incremental capital associated with acquiring and installing each
analog subscriber is estimated at $350, based on a one terminal configuration.

    Although each of the Company's analog operating systems has incurred
operating losses since inception, seven of the ten operating systems (excluding
Story City, Iowa which the Company assumed control of effective December 30,
1997) achieved positive earnings before interest, taxes, depreciation, and
amortization ("EBITDA") in 1997 compared to three systems in 1996. EBITDA is a
financial measure commonly used in the industry but is not intended to represent
cash flows, as determined in accordance with GAAP, as an indicator of operating
performance. EBITDA should not be considered a substitute for measures of
performance prepared in accordance with GAAP. The combined cash flow from
operating activities of the Company's analog operating systems has to date been
insufficient to cover the combined operating expenses of such systems. Until
sufficient cash flow is generated from operations, the Company will utilize its
current capital resources and may seek external sources of funding to satisfy
its capital needs. There can be no assurance that the Company will be able to
secure its capital requirements on terms and conditions satisfactory to the
Company. Accordingly, in the event the Company is unable to secure funding for
capital requirements on satisfactory terms and conditions, the ability of the
Company to develop and expand operations and satisfy its indebtedness would be
materially adversely affected.

    Cash provided by operations was $3.1 million in 1997, $2.4 million in 1996
and $2.1 in 1995. The increase in cash provided by operating activities during
1997 was primarily due to a $4.7 million increase in EBITDA in the analog
markets from $1.3 million in 1996 to $6.0 million in 1997, partially offset by
increasing corporate SG&A costs and certain costs associated with the activities
preparing for the launch of digital video and high speed Internet access
services in Dallas, Texas. The decrease in cash provided from operations in 1996
was due to increased corporate SG&A associated with an increase in the Company's
corporate and executive staff to support the Company's overall growth.

    Net cash used in investing activities was $24.2 million in 1997, $27.3
million in 1996 and $5.8 million in 1995. Cash used in investing activities
primarily relates to the acquisition and installation of subscriber receive-site
equipment, the acquisition of certain wireless cable channel rights, the
investments in assets held for sale, the investment in equity affiliates,
partially offset by the sale of wireless cable channel rights which are not a
part of the Company's strategic plan. The decrease in cash used in investing
activities

                                       21
<PAGE>
during 1997 is primarily due to the proceeds from the assets held for sale
partially off-set by the investment in equity affiliates and restricted cash
with no comparable amounts in the corresponding prior year period. The increase
in cash used in investing activities during 1996 is attributed to the
acquisition of certain intangible assets and the issuance of notes to affiliates
in 1996 with no comparable amounts in 1995. Additionally, the acquisition and
installation of subscriber equipment increased to $13.2 million in 1996 from
$5.8 million in 1996 principally due to increased subscriber levels resulting
from the February 23, 1996 Contributions.

    Net cash used in financing activities was $17.5 million in 1997. Net cash
provided from financing activities was $137.7 million in 1996 and $3.2 million
in 1995. As discussed more fully in Note 6 of the notes to the Consolidated
Financial Statements, cash used in financing activities during 1997 is primarily
attributed to the repayment of $2.1 million of indebtedness related to the USA
Wireless Acquisition and the repayment of approximately $15 million of the
Heartland Long-Term Note. As discussed more fully in Note 6 of the notes to the
Consolidated Financial Statements, cash provided by financing activities during
the year ended December 31, 1996 primarily represents the net proceeds from the
sale of the Old Discount Notes reduced by cash distributed in connection with
the February 23, 1996 Contributions, the repayment of a $25.0 million note to
Heartland, payments on the BTA auction payable and the payment of certain notes
associated with the USA Wireless Acquisition. Net cash provided by financing
during the year ended December 31, 1995 is related to advances from CAI and ACS
Ohio.

    In 1996, the FCC conducted the BTA Auction of available commercial wireless
cable spectrum in 487 BTAs and six additional BTA-like geographic areas around
the country. CAI was the high bidder for 32 BTA authorizations, for a total of
$48.8 million of which $12.6 million relates to the Company's markets, including
$6.0 million of BTA licenses that were conveyed to Bell South (see "Operational
and Planned Markets"). Heartland was the high bidder for 93 BTA authorizations,
for a total of $19.8 million of which $4.2 million relates to the Company's
markets. Pursuant to the Participation Agreement, CAI and Heartland are
obligated to convey to the Company, at their cost, and the Company has agreed to
purchase, any rights acquired in the BTA Auction relating to the Company's
markets. The FCC has approved the assignment of all of CAI's BTAs to the Company
other than the BTAs relating to the Stockton and Cleveland markets. The Company
and Heartland have entered into a BTA Lease and Option Agreement pursuant to
which Heartland leases to the Company 10 BTAs and portions of four additional
BTAs purchased by Heartland. The Company has the option to purchase the leased
BTAs. In connection with the agreement, the Company's right to certain BTAs
reverted back to Heartland in exchange for corresponding decrease in the BTA
payable. As of December 31, 1997, the Company's obligation relating to BTAs are
approximately $0.6 million to CAI, $3.5 million to Heartland and $0.3 million to
unaffiliated entities.

INCOME TAX MATTERS

    The Company and its subsidiaries have net operating loss carryforwards
("NOL's") at December 31, 1997, for income tax purposes totaling approximately
$39.4 million which begin to expire in 2010. Approximately $9.0 of these NOL's
are subject to annual limitation and the separate return limitation year rules.
See NOTE 9 TO CONSOLIDATED FINANCIAL STATEMENTS.

INFLATION

    Management does not believe that inflation has a material impact on the
Company's results of operations. Management believes it will be able to increase
customer rates to keep pace with inflationary increases in costs without a
significant decline in the number of customers.

                                       22
<PAGE>
THE YEAR 2000 ISSUE

    The Company is in the process of assessing issues relating to what is
generally referred to as the Year 2000 Issue. As of the date of this report, the
Company has not determined whether it has a material Year 2000 Issue. Based on
preliminary information, the Company believes that it will be able to implement
successfully the systems and programming changes necessary to address the Year
2000 Issue, and does not expect the cost of such changes to have a material
impact on the Company's financial position, results of operation or cash flows
in future periods.

FORWARD LOOKING INFORMATION AND RISK FACTORS

    The Company or its representatives may make forward looking statements, oral
or written, including statements in this Report's Management's Discussion and
Analysis of Financial Condition and Results of Operations, press releases and
filings with the Commission, regarding estimated future operating results,
planned capital expenditures (including the amount and nature thereof) and the
Company's financing plans, if any, related thereto, increases in subscribers and
the Company's financial position and other plans and objectives for future
operations. There can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected effects on its business or operations. Among
the factors that could cause actual results to differ materially from the
Company's expectations are general economic conditions, competition, government
regulations and other factors set forth among the risk factors noted below or in
the description of the Company's business in Item 1 of this Report, as well as
factors contained in the Company's other securities filings.

    Generally, forward looking statements include words or phrases such as
"management believes," the "Company anticipates," the "Company expects" and
words and phrases of similar import. Forward looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995.

    All subsequent oral and written forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any of
these statements.

    SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT.  As of December 31, 1997,
the Company had outstanding indebtedness of approximately $288.3 million. For
the years ended December 31, 1996 and December 31, 1997, earnings were
insufficient to cover fixed charges by $43.2 million and $58.0 million,
respectively. The ability of the Company to meet its debt service requirements
will depend upon achieving significant and sustained growth in the Company's
cash flow. The Company currently anticipates that working capital and revenues
generated from the operation of its wireless cable systems should be sufficient
to make principal and interest payments on the Company's indebtedness as they
become due. However, there can be no assurance that the Company's operations
will generate sufficient cash flow to pay such obligations. The Company's
ability to generate such cash flow is subject to a number of risks and
contingencies. Accordingly, there can be no assurance as to whether or when the
Company's operations will become profitable or whether the Company will have
sufficient resources to meet its debt service obligations as they become due.

    The degree to which the Company is leveraged could have important
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional equity or debt financing in the future for working
capital, capital expenditures, product development, acquisitions, general
corporate purposes or other purposes may be materially limited or impaired; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness; and
(iii) the Company's high degree of leverage may make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business and economic
conditions.

                                       23
<PAGE>
    LACK OF PROFITABLE OPERATIONS; LIMITED BUSINESS HISTORY.  The wireless cable
systems and assets that the Company has acquired have experienced operating
losses. The Company expects to realize additional operating and net losses on a
consolidated basis while it develops and expands its wireless cable systems.
There can be no assurance that the Company will be able to develop or expand its
wireless cable systems or that it or its individual subsidiaries will achieve
profitability in future years.

    The Company has a limited operating history. Given the Company's limited
operating history, there is no assurance that the Company will be able to
achieve operating income and to compete successfully in the subscription
television industry.

    NEED FOR ADDITIONAL FINANCING FOR CAPITAL EXPENDITURES AND OPERATIONS.  The
Company's business requires substantial investment to finance capital
expenditures and operating expenses for subscriber growth and systems
development. The Company has budgeted capital expenditures of approximately
$45.2 million for 1998. The Company believes that working capital and revenues
generated from operations will provide sufficient funds to meet its needs for
approximately the next twelve months. Capital expenditures in excess of such
resources may be financed, in whole or in part, by the Company through debt or
equity financings, subscriber equipment lease financings, joint ventures or
other arrangements. There is no assurance that any additional financing
necessary to expand the build-out of the Company's wireless cable systems or to
acquire new systems will be available on satisfactory terms and conditions, if
at all. Further, there is no assurance the Company could obtain additional
capital within the limitations of the Indenture governing the terms of the New
Discount Notes. Additional debt could result in a substantial portion of the
Company's cash flow from operations being dedicated to the payment of principal
and interest on such indebtedness, may render the Company more vulnerable to
competitive pressures and economic downturns and could impose restrictions on
the Company's operations. To the extent that future financing requirements are
satisfied through the issuance of equity securities, the Company's stockholders
could experience dilution. Failure to obtain additional financing could
adversely affect the growth of the Company and its ability to compete
successfully in the subscription television industry.

    HIGHLY COMPETITIVE INDUSTRY.  The subscription television industry is highly
competitive. The Company's principal subscription television competitors in each
market are traditional hard-wire cable, DBS service providers and private cable
operators. Hard-wire cable companies generally are well-established and known to
potential customers and have significantly greater financial and other resources
than the Company. Premium movie services offered by cable television systems
have encountered significant competition from the home video cassette recorder
industry. In areas where several local off-air VHF/ UHF broadcast channels can
be received without the benefit of subscription television, cable television
systems also have faced competition from the availability of broadcast signals
generally and have found market penetration to be more difficult. Legislative,
regulatory and technological developments may result in additional and
significant competition, including competition from local telephone companies
and LMDS, the proposed new wireless service for which spectrum will be auctioned
by the FCC in 1998.

    Digital capability is essential for wireless to compete with hard-wire
cable, which in its current analog state offers between 35 to 60 channel
offerings depending on a given market. With the deployment of digital
technology, hard-wire cable is expected to offer over 100 channels. In addition,
within each market, the Company initially must compete with others to acquire,
from the limited number of wireless cable channels issued or issuable, rights to
a minimum number of wireless cable channels needed to establish a commercially
viable system. Aggressive price competition or the passing of a substantial
number of presently unpassed households by any existing or new subscription
television service could have a material adverse effect on the Company's results
of operations and financial condition.

    New and advanced delivery technologies for the subscription television
industry, including digital compression, fiber optic networks, DBS transmission
and LMDS, are in various stages of development. These technologies are being
developed and supported by entities, such as hard-wire cable companies,
telephone long distance companies, RBOCs and other large telecommunications
companies, that have

                                       24
<PAGE>
significantly greater financial and other resources than the Company. These new
technologies could have a material adverse effect on the demand for wireless
cable services. There can be no assurance that the Company will be able to
compete successfully with existing hard-wire cable competitors or new entrants
in the market for subscription television services.

    The Company will also face intense competition from other providers of data
transmission services if the Company implements, on a commercial basis, such
services (which it plans to do in Dallas, as of the date hereof). Such
competition is increased due to the fact that the MMDS spectrum has not
traditionally been utilized to deliver such alternative services, and consumer
acceptance of such services delivered via MMDS technology is unknown at this
time. Many of the existing providers of data transmission services, such as
regional telephone companies, have significantly greater financial and other
resources than the Company. There can be no assurance that there will be
consumer demand for alternative uses of the MMDS spectrum such as data
transmission services, including Internet access, that the Company will be able
to compete successfully against other providers of such services or that the
Company will be able to achieve profitability from such services in future
years.

    NEW APPLICATIONS OF THE MMDS SPECTRUM.  The Company is pursuing alternative
uses of its MMDS spectrum, many of which uses rely on technology that is
currently being developed by the Company and other MMDS operators and vendors.
There can be no assurance that such technology development will continue, or
that it will result in technologically-viable MMDS systems. Additionally,
alternative uses of MMDS spectrum have not been commercially deployed in any
meaningful manner to date by any MMDS operator. There can be no assurance that
such alternative uses can be deployed in a commercially reasonable manner, that
such uses will gain consumer acceptance, or that alternative uses of the MMDS
spectrum can be developed into a profitable business by the Company.

    COMPETITIVE PRESSURES OF RAPID CHANGES IN TECHNOLOGY.  The wireless cable
industry and the subscription television industry in general are subject to
rapid and significant changes in technology which may increase competitive
pressures on the Company or require capital investments to remain competitive
that are beyond the Company's resources at the time. Because of the rapid and
high level of technological change in the industry in which the Company
competes, the effect of technological changes on the businesses of the Company
cannot be predicted.

    DIGITAL TECHNOLOGY NOT COMMERCIALLY AVAILABLE.  Currently, wireless cable
companies can offer up to 33 6 MHz channels of educational and commercial
programming. The ability to offer substantially more programming utilizing
existing wireless channel capacity is dependent on effectively applying digital
technology. FCC approval is required before the Company's wireless cable systems
can be converted to digital technology. The FCC has issued a Declaratory Ruling
and Order which effectively established interim rules to govern the transition
from analog to digital technology. The FCC has yet to commence a rulemaking
proceeding to adopt permanent rules. There can be no assurance as to what
permanent rules and policies the FCC will adopt to govern the use of digital
technology, which such rules and policies will be adopted, or the Company's
ability to comply with those rules and policies. It is anticipated that digital
technology will be commercially available in sufficient production in 1998. It
is also expected that the cost of digital equipment will exceed the cost of
analog equipment. There can be no assurance, however, that digital converter
boxes and other equipment necessary to implement digital technology, including
satellite delivery of digital signals, will be available on this timetable.
Conversion from current analog technology to digital technology will not take
place in all markets simultaneously. The Company intends to begin the build out
and conversion of some of its markets using digital technology in 1998.

                                       25
<PAGE>
    LAUNCH OF DIGITAL SYSTEMS.  The Company intends to launch digital video and
devote additional resources to Internet access services in its Dallas market in
the second quarter of 1998. The ability of the Company to successfully launch
these services is dependent upon several factors, including, without limitation,
the availability of adequate facilities and equipment to support a digital MMDS
system, as well as the receipt of requisite regulatory approvals. The Company
was granted a series of related modification applications requesting authority
to operate a 50 watt digital video system in Dallas; certain modification
applications remain pending. The FCC has granted MMDS licensees the authority to
offer one-way Internet access (using a traditional telephone line return path)
without any further regulatory hurdles. The Company has received from the FCC
developmental authority for two-way flexible use of two channels in its Dallas
market, on a test basis; such authority expires on April 11, 1998, but a request
for renewal will be filed prior to such date. There can be no assurance that the
Company will be granted authority with respect to any of its remaining
applications or that the commercial deployment of any new products for which
authority has been or will be granted will be successful. Further, there can be
no assurance that, even if such tests of two-way flexible use of the MMDS
spectrum are successful and permanent authority is granted by the FCC to the
Company, that two-way flexible use could be successfully deployed in a
commercial manner, and if so deployed, would be profitable.

    In order for the Company to launch a digital subscription television service
in any market in which it now has or may in the future have a digital MMDS
transport system, the Company must have access to pre-digitized, compressed
programming. The Company has entered into an agreement with TelQuest Satellite
Services LLC which the Company believes will be able to provide it with the
pre-digitized, compressed programming necessary to launch digital subscription
television in Dallas. See ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS--TELQUEST. If, however, that company is unable to assure delivery
to CS with sufficient digital programming to launch a digital subscription
television service, the Company would have to construct its own digital
compression center. The Company estimates the cost of constructing a digital
compression center to be approximately $6.0 million, based on information
available to the Company as of the date hereof. Access to pre-digitized,
compressed programming, either through a third party provider or construction of
a digital compression center, must be secured for each market in which CS
desires to launch a digital subscription television service.

    RESTRICTIONS IMPOSED BY GOVERNMENT AND COMMUNITY REGULATION.  The wireless
cable industry is regulated by the FCC. The FCC governs, among other things, the
issuance, renewal, assignment, transfer and modification of licenses necessary
for wireless cable systems to operate and the time afforded to licensees to
construct their facilities. The FCC requires fees for certain applications and
licenses, and mandates that certain amounts of educational, instructional or
cultural programming be transmitted over certain of the channels used by the
Company's existing and proposed wireless cable systems. In the 50 largest
markets, the FCC has authorized up to 33 channels (constituting a spectrum
bandwidth of 198 MHz) primarily for wireless cable transmission of video
programming. In smaller markets, the FCC has authorized up to 33 channels
(constituting a spectrum bandwidth of 196 MHz). Up to 13 MMDS channels can be
licensed by the FCC to commercial operators for full-time usage without
programming restrictions. The remaining ITFS channels typically are authorized
for educational purposes, although excess capacity can be leased to wireless
cable operators, subject to certain programming restrictions. Licenses for both
MMDS and ITFS channels are granted based upon applications filed with the FCC.
FCC approval also is required for assignment of existing licenses or transfer of
control of license holders. The FCC imposes restrictions and conditions upon the
use, control and operation of channels. FCC licenses are limited in duration and
subject to renewal procedures. While current FCC rules are intended to promote
development of a competitive subscription television industry, the statutes,
rules and regulations affecting the subscription television industry could
change, and any future changes in FCC rules, regulations, policies or procedures
could have a negative impact on the industry as a whole, and on the Company in
particular.

    In addition, wireless cable operators are subject to regulation by the FAA
with respect to construction of transmission towers and to certain local zoning
regulations affecting construction of towers and other

                                       26
<PAGE>
facilities. There also may be restrictions imposed by local authorities,
neighborhood associations and other similar organizations limiting the use of
certain types of reception equipment used by the Company. Future changes in the
foregoing regulations or any other regulations applicable to the Company could
have a material adverse effect on the Company's results of operations and
financial condition.

    DEPENDENCE ON CHANNEL LEASES AND LICENSES; NEED FOR LICENSE
EXTENSIONS.  ITFS licenses generally are granted for a term of 10 years and are
subject to renewal by the FCC. MMDS licenses generally will expire on May 1,
2001. FCC licenses also specify construction deadlines which, if not met, could
result in the loss of the license. Requests for additional time to construct a
channel may be filed and are subject to review pursuant to FCC rules. Certain of
the Company's ITFS channel rights are subject to pending extension requests and
it is anticipated that additional extensions will be required. There can be no
assurance that the FCC will grant any particular extension request or license
renewal request. For most of its channel rights, the Company is dependent upon
leases of transmission capacity with various third-party license holders. The
Company's channel leases typically cover four ITFS channels and/or one to four
MMDS channels each. Under the rules of the FCC, the term of leases for ITFS
channels, which constitute up to 20 of the 33 available wireless channels within
any major wireless cable market, may not exceed 10 years. There is no such
restriction on MMDS leases. Following the expiration of the initial term of a
lease for ITFS channels, the leases under which the Company operates generally
provide that, for a specified period of time, which is typically one year, the
ITFS license holders may negotiate for the lease of channel capacity for one or
more additional renewal terms with only the Company or its sublessor. In
addition, if a renewal agreement is not reached within a specified time during
which only the Company or its sublessor has the use of the channel capacity, the
Company will thereafter typically have, for an additional specified period of
time, a right of first refusal to match any competing offers from one or more
third parties. Because the ITFS license holders have generally received their
FCC licenses within the last 10 years, the Company and other similarly situated
entities in the industry have had little or no experience negotiating renewals
of ITFS channel lease agreements. The Company anticipates, however, that it will
be able to negotiate additional renewals with either the incumbent license
holder, or with successor license holders, although there is no assurance that
it will be successful in doing so. The MMDS channel leases held by the Company
generally grant the Company the right to renew the channel lease. All ITFS and
MMDS channel leases are dependent upon the continued validity of the
corresponding FCC license. The Company anticipates that upon the expiration of
the current license terms, all such FCC licenses will be renewed following
completion of the FCC review process, although there is no assurance that such
renewal applications will be granted. The termination of or failure to renew a
channel license or lease (due to a breach by the Company or its lessor,
cancellation of the license held by a third party lessor for failure to timely
construct and/or perfect the wireless cable facility or otherwise) or the
failure to grant an application for an extension of the time to construct an
authorized station, would result in the Company being unable to deliver
programming on such channel(s) unless it were able to lease excess capacity from
a successor license holder. Such a termination or failure could have a material
adverse effect on the Company. In addition, the anticipated conversion to
digital technology and the use of channels for services other than video may
require renegotiation of the Company's channel leases, and there is no assurance
that such renegotiated leases will be on terms as favorable as the Company's
current leases.

    UNCERTAINTIES OF A NEW INDUSTRY.  While wireless cable television is not a
new technology, it is a new industry with a limited operating history. Many
difficulties and uncertainties are normally associated with new industries, such
as lack of consumer acceptance, difficulty in obtaining financing, increasing
competition, advances in technology and changes in laws and regulations. There
can be no assurance that the wireless cable industry will develop or continue as
a viable or profitable industry.

    DEPENDENCE ON KEY INDIVIDUALS.  The success of the Company is largely
dependent on the experience and knowledge of its executive officers. The loss of
the services of one or more of these individuals and the Company's inability to
attract and retain other key members of the Company's management could have a
material adverse effect upon the Company.

                                       27
<PAGE>
    CABLE SUBSCRIBER CONVERSION.  In each of the principal markets serviced by
the Company there is or will be significant competition for households that are
presently subscribers of hard-wire cable services. There can be no assurance
that the Company will be able to attract to its services existing cable
customers, who for a variety of reasons may be reluctant to shift from their
present cable service.

    NO ASSURANCE THAT THE COMPANY WILL MANAGE GROWTH EFFECTIVELY.  If the
Company grows rapidly it may experience a significant strain on its management,
operating and financial resources. The Company's ability to manage growth
effectively will require it to continue to implement and improve its operating
and financial systems and to expand, train and manage its employee base. These
demands are expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. Managing
growth is especially challenging for a company with limited financial resources,
and the failure to effectively manage growth could have a material adverse
effect on the Company's operations. Further, the Company has been created by
combining various wireless cable systems from several different companies, and
may in the future acquire additional wireless cable systems, and there can be no
assurance that such systems can be integrated efficiently into the existing
business.

    IMPACT OF 1996 ACT.  The Act could have a material impact on the wireless
cable industry and the competitive environment in which the Company operates.
The 1996 Act is intended to result in comprehensive changes to the regulatory
environment for the telecommunications industry as a whole. The legislation
intends to, among other things, substantially reduce regulatory authority over
cable rates. Another provision of the 1996 Act will afford hard-wire cable
operators greater flexibility to offer lower rates to certain of their
subscribers, and would thereby permit cable operators to offer discounts on
hard-wire cable service to the Company's subscribers or prospective subscribers.
The legislation will permit telephone companies to enter the video distribution
business, subject to certain conditions. The entry of telephone companies into
the video distribution business, with greater access to capital and other
resources, could provide significant competition to the wireless cable industry,
including the Company. In addition, the legislation will afford relief to DBS by
exempting DBS providers from local restrictions on reception antennas and
preempting the authority of local governments to impose certain taxes.

    CONTROL BY CAI AND HEARTLAND.  In connection with the Contribution Closing
(described in ITEM 1. BUSINESS--GENERAL) Heartland and CAI entered into a
Stockholders' Agreement (as defined) which, among other matters, provides that
at all times prior to the Common Stock becoming publicly traded or a sale by CAI
of all or substantially all of its Common Stock of the Company, CAI will own
more shares of Common Stock than any other stockholder and will maintain
operational control of the Company. The Stockholders' Agreement also provides
that CAI and Heartland will vote their shares of Common Stock in favor of a
board of directors comprised of four members designated by CAI and three members
designated by Heartland, thereby enabling CAI and Heartland to effectively elect
and control the Company's Board of Directors. Most major decisions require the
affirmative approval of at least 70% (seven of nine members) of the Directors of
the Company so that neither CAI nor Heartland can unilaterally control major
decisions affecting the Company.

    HOLDING COMPANY STRUCTURE.  The Company is considering the transfer of
ownership of the wireless cable television assets comprising the Company's
markets to wholly owned subsidiaries. If such a transfer is effected, the assets
of the Company would consist of the outstanding shares of capital stock of such
subsidiaries. The Company would then rely on dividends and other advances and
transfers of funds from its subsidiaries to provide the funds necessary to meet
its debt service obligations. The ability of such subsidiaries to pay such
dividends and make such advances and transfers is subject to applicable state
laws regulating the payment of dividends. Claims of creditors of the Company's
subsidiaries, including general creditors and lenders, generally have priority
as to the assets of such subsidiaries over the claims of the Company and the
holders of the Company's outstanding indebtedness.

                                       28
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    The Company's Consolidated Financial Statements required by this item are
included on the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1.

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

    None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    The following table sets forth certain information as of the date of this
report with respect to the those persons who are currently serving as directors
and executive officers of the Company.

<TABLE>
<CAPTION>
NAME                                         AGE                                   POSITION
---------------------------------------      ---      ------------------------------------------------------------------
<S>                                      <C>          <C>
Jared E. Abbruzzese(1).................          43   Chairman of the Board
Alan Sonnenberg........................          46   Vice Chairman of the Board
David Webb.............................          51   President, Chief Executive Officer and Director
Frank H. Hosea.........................          47   Senior Vice President and Chief Operating Officer
Thomas W. Dixon........................          50   Senior Vice President of Corporate Strategy and Business
                                                        Development
George Parise..........................          36   Acting Chief Financial Officer
James P. Ashman(2).....................          43   Director
Robert D. Happ(1)(2)...................          57   Director
D. Michael Sitton......................          47   Director
Carroll D. McHenry(1)..................          54   Director
Marjean Henderson(2)...................          47   Director
</TABLE>

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

(1) Member of the Compensation Committee. The Compensation Committee determines
    the compensation to be paid by the Company to its officers and determines
    the stock options to be granted by the Company to employees.

(2) Member of the Audit Committee. The Audit Committee assists the Board of
    Directors in fulfilling its responsibilities with respect to the Company's
    accounting and financial reporting activities.

    Jared E. Abbruzzese has been Chairman of the Board of Directors since the
Company's formation in February 1996. Mr. Abbruzzese has been the Chairman,
Chief Executive Officer and a director of CAI since its formation in 1991. From
August 1992 until September 1993, Mr. Abbruzzese served in various capacities
for the prior operator of a wireless cable system in Albany, New York. Mr.
Abbruzzese served as President of The Diabetes Institute Foundation in Virginia
Beach, VA from October 1988 until August 1991.

    Alan Sonnenberg has been Vice Chairman of the Board of Directors of the
Company since May 1996 and was President of the Company from February 1996 to
May 1996. Mr. Sonnenberg was a director of CAI from September 29, 1995 until his
resignation on November 1, 1997. Mr. Sonnenberg served as President of CAI from
September 29, 1995, upon the acquisition of ACS Enterprises by CAI, until
February 23, 1996, when he became President of the Company. From 1988 until
September 29, 1995, Mr. Sonnenberg was Chairman of the Board of Directors and
Chief Executive Officer of ACS Enterprises. Mr. Sonnenberg also served as
President of ACS Enterprises from 1987 until September 29, 1995. Since 1989, Mr.
Sonnenberg has been a director of the Wireless Cable Association International,
Inc.

    David Webb has been President, Chief Executive Officer and a director of the
Company since January 22, 1997. From the Company's formation on February 23,
1996 until January 22, 1997, Mr. Webb

                                       29
<PAGE>
served as a Vice Chairman of the Board of Directors of the Company. Mr. Webb is
a co-founder of Heartland and was a director of Heartland from its formation in
1990 until March 1997. From the formation of Heartland in 1990 until January 22,
1997, Mr. Webb held the positions of President and Chief Executive Officer of
Heartland. Mr. Webb is also a director of the Wireless Cable Association, Inc.

    Frank H. Hosea has been Senior Vice President and Chief Operating Officer
since January 1997. Prior to January, Mr. Hosea held the position of Senior Vice
President of Digital Operations from October 1996 to January 1997 and was Vice
President of Operations prior to October 1996. Prior to joining the Company, Mr.
Hosea served as Vice President of Sales Field Marketing of KBLCOM, Inc., a
division of Houston Industries and TimeWarner for 6 years. Mr. Hosea served as
Corporate Director of Field Operations for Warner Communications for two years
prior to joining KBLCOM, Inc.

    Thomas W. Dixon has been Senior Vice President of Corporate Strategy and
Business Development since January 1997. From the Company's formation in
February 1996 to January 1997, Mr. Dixon was Senior Vice President of Operations
of the Company. Prior to joining the Company, Mr. Dixon served as Senior Vice
President of Heartland. He began advising Heartland as an Operations Consultant
in March 1992 and joined Heartland in September 1993. From 1985 to March 1992,
Mr. Dixon was employed as Vice President/Marketing for LDS, a long distance
telephone company.

    George Parise has been the Acting Chief Financial Officer since November,
1997. Mr. Parise also serves as Senior Vice President-Finance for CAI which he
joined in April, 1996. Prior to his employment at CAI, Mr. Parise was employed
by Bell Atlantic Corporation, most recently as CFO of CellularVision of New York
(a joint venture which launched and operated the Local Multipoint Distribution
Service system in Brooklyn, New York). Mr. Parise is a Certified Public
Accountant and was employed by Ernst & Young, formerly Ernst & Whinney, prior to
joining Bell Atlantic Corporation.

    James P. Ashman has been a director of the Company since the Company's
formation in February 1996. Mr. Ashman has been Executive Vice President and
Chief Financial Officer of CAI since December 1995 and a director of CAI since
March 1994. Prior to his appointment as Executive Vice President and Chief
Financial Officer, Mr. Ashman was Senior Vice President and Treasurer of CAI,
positions he held since September 1994. From November 1992 to September 1994, he
was a senior advisor of, and independent consultant affiliated with, Carolina
Barnes Capital, Inc. ("CBC"), a registered broker dealer. CBC served as
financial advisor to CAI from January 1993 until September 1994. Mr. Ashman was
Vice President of Richter & Co., Inc. from June 1990 to November 1992.

    Robert D. Happ has been a director of the Company since the Company's
formation in February 1996 and a director of CAI since September 1995. Mr. Happ
had been the Managing Partner of the Boston, Massachusetts office of KPMG Peat
Marwick LLP from 1985 until his retirement in 1994. Mr. Happ is also a director
of Galileo Corporation and Cambridgeport Bank.

    D. Michael Sitton has been a director of the Company since May 1996. Mr.
Sitton has been President of Sitton Properties & Co., LLC since 1995. Prior to
that, Mr. Sitton was the Executive Vice President of Sitton Motor Lines, Inc., a
company he co-founded in 1979.

    Carroll D. McHenry has been a director of the Company since May 1997. Mr.
McHenry is Chairman of the Board, President and Chief Executive Officer of
Heartland. He served as Acting Chief Financial Officer of Heartland from April,
1997 until August 1997. For the prior five years, Mr. McHenry was a senior
executive at Alltel, Inc., a national communications holding company, most
recently serving as President of Alltel's Communications Service Group, and
serving as President of Alltel Mobile Communications, Inc., from July 1992 to
May 1995. From 1991 to 1992, Mr. McHenry was Vice President of Cellular Business
Development at Qualcomm, Inc. From 1989 to 1991, Mr. McHenry was President,
Chief Executive Officer and Chairman of the Board of Celluland, Inc., a
franchiser of cellular telephone stores. From 1980 to 1989, Mr. McHenry served
in various capacities with Mobile Communications Corporation

                                       30
<PAGE>
of America ("MCCA") and as President and Chief Executive Officer of American
Cellular Communications, a joint venture between MCCA and BellSouth. Mr. McHenry
is a director of Wireless One, Inc.

    Marjean Henderson has been a director since March 1998 when she replaced
Allen Wheeler, who resigned in February 1998. Ms. Henderson is the Senior Vice
President and Chief Financial Officer of Heartland. Prior to joining Heartland
in August, 1997, Ms. Henderson was Senior Vice President and Chief Financial
Officer for Panda Energy International, Inc., a global energy company that
develops, constructs and finances domestic and international cogeneration
facilities through public project debt financing. From 1993 to 1995, Ms.
Henderson was Senior Vice President, Chief Financial Officer and Treasurer for
Nest Entertainment Inc., an entertainment company that produced home videos and
feature length movies, and sells its video series on a subscription basis
through direct marketing, direct selling, telemarketing and infomercials.

ITEM 11.  EXECUTIVE COMPENSATION.

    The following table sets forth certain summary information concerning the
compensation paid or awarded to the Company's Chief Executive Officer and the
other executive officers receiving compensation in excess of $100,000 for the
year ended December 31, 1997 (the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                       ANNUAL COMPENSATION
                                                 ----------------------------------------------------------------
                                                                                       SECURITIES
                                                                                       UNDERLYING
                                                                        OTHER ANNUAL    OPTIONS/      ALL OTHER
NAME AND PRINCIPAL POSITION                        SALARY      BONUS    COMPENSATION     SARS(#)    COMPENSATION
-----------------------------------------------  ----------  ---------  -------------  -----------  -------------
<S>                                              <C>         <C>        <C>            <C>          <C>
David E Webb, President and Chief Executive
  Officer(1)...................................  $  161,538          0       (2)          200,000              0
Alan Sonnenberg, Vice Chairman(3)..............  $  141,538          0       (2)                0    $   500,000
Thomas W. Dixon, Senior Vice President of
  Corporate Strategy and Business
  Development..................................  $  140,000  $  48,767       (2)           32,000              0
Frank H. Hosea, Senior Vice President and Chief
  Operating Officer............................  $  141,623  $  40,833       (2)           56,000              0
Jeffrey A. Kupp, Senior Vice President and
  Chief Financial Officer(4)...................  $   99,230  $  10,000       (2)           48,000              0
</TABLE>

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

(1) Mr. Webb became President and Chief Executive Officer of the Company
    effective January 22, 1997.

(2) Other annual compensation, including Company-provided vehicle or allowances,
    life insurance, or membership dues, less than the lesser of 10% of total
    annual salary and bonus or $50,000 is not presented.

(3) Mr. Sonnenberg entered into a Separation Agreement with the Company in
    connection with the termination of his employment agreement. See ITEM 11.
    EXECUTIVE COMPENSATION--EMPLOYMENT AGREEMENTS below.

(4) Mr. Kupp resigned effective October 30, 1997.

COMPENSATION OF DIRECTORS

    Directors who are not officers of the Company are paid an annual fee of
$5,000 and a fee of $625 per meeting attended (including committee meetings),
plus out-of-pocket expenses. Officers who also serve as directors do not receive
fees for serving as directors.

                                       31
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

    The following table provides information on options to purchase Common Stock
of the Company granted during the fiscal year ended December 31, 1997 to the
persons named in the Summary Compensation Table above.

                           OPTION/SAR GRANTS IN 1997

<TABLE>
<CAPTION>
                                               INDIVIDUAL GRANTS
                               -------------------------------------------------              POTENTIAL REALIZABLE
                                                      PERCENT OF                                VALUE AT ASSUMED
                                    NUMBER OF            TOTAL                                ANNUAL RATES OF STOCK
                                   SECURITIES        OPTIONS/SARS                              PRICE APPRECIATION
                               UNDERLYING OPTIONS/    GRANTED TO     EXERCISE OR                 FOR OPTION TERM
                                  SARS GRANTED       EMPLOYEES IN    BASE PRICE   EXPIRATION  ---------------------
NAME                           (NUMBER OF SHARES)        1997          ($/SH)        DATE       5%($)      10%($)
-----------------------------  -------------------  ---------------  -----------  ----------  ---------  ----------
<S>                            <C>                  <C>              <C>          <C>         <C>        <C>
David E. Webb................         200,000                40%           6.50    01/22/07     817,563   1,372,103
Alan Sonnenberg..............               0                N/A            N/A      N/A            N/A         N/A
Thomas W. Dixon..............          32,000               6.4%           6.50    04/02/07     130,810     219,537
Frank H. Hosea...............          24,000               4.8%           6.50    01/02/07      98,108     164,562
                                       32,000               6.4%           6.50    04/02/07     130,810     219,537
Jeffrey A. Kupp(1)...........          32,000               6.4%           6.50    01/06/07     130,810     219,537
                                       16,000               3.2%           6.50    04/02/07      65,405     109,768
</TABLE>

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

(1) Mr. Kupp resigned effective October 30, 1997

    Potential realizable value is based on the assumption that the price of the
Company's Common Stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the ten-year option term. The
values are calculated in accordance with the rules promulgated by the Commission
and do not reflect the Company's estimate of future stock price appreciation.

AGGREGATE OPTION/SAR EXERCISES IN 1997 AND FISCAL YEAR-END OPTION/SAR VALUES

    No executive officer named in the Summary Compensation Table exercised
options to purchase Common Stock in 1997. The following table sets forth certain
information with regard to the outstanding options to purchase Common Stock as
of the end of the year ended December 31, 1997 for the persons named in the
Summary Compensation Table above.

<TABLE>
<CAPTION>
                                                                 NUMBER OF SECURITIES
                                                                      UNDERLYING
                                                                      UNEXERCISED        VALUE OF UNEXERCISED IN-
                                                                  OPTIONS/SARS AT FY-   THE-MONEY OPTIONS/SARS AT
                                                                  END(#) EXERCISABLE/   12/31/97 ($) EXERCISABLE/
NAME                                                                 UNEXERCISABLE            UNEXERCISABLE
---------------------------------------------------------------  ---------------------  --------------------------
<S>                                                              <C>                    <C>
David E. Webb..................................................     50,000/150,000                 (1)
Alan Sonnenberg................................................        172,044/0                  (1)(2)
Thomas W. Dixon................................................      61,736/24,000                 (1)
Frank H. Hosea.................................................      17,333/48,607                 (1)
Jeffrey A. Kupp(3).............................................           0/0                      (1)
</TABLE>

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

(1) The Company's Common Stock is not publicly traded, and no market exists for
    its Common Stock. Accordingly, no estimate is made regarding the value of
    unexercised in-the-money options.

(2) Pursuant to the Separation Agreement discussed in Executive
    Compensation--Employment Agreements below, Mr. Sonnenberg has the option to
    cancel the options in consideration for payment of $500,000.

(3) Mr. Kupp resigned effective October 30, 1997.

                                       32
<PAGE>
EMPLOYMENT AGREEMENTS

    Each of Messrs. Webb, Hosea and Dixon have entered into employment contracts
with the Company providing for among other things (i) payment of annual base
salary of $150,000, $140,000 and $140,000, respectively, (ii) three year
employment terms, (iii) automobile allowances and (iv) certain insurance
benefits. Each contract provides that in the event the employee is terminated
for any reason other than Cause (as defined in the contract) the employee shall
receive severance in an amount equal to the greater of (i) their then base
salary payable in twelve equal monthly installments and (ii) the then base
salary which would have been payable for the balance of the term payable in
equal monthly installments. Mr. Webb's annual base salary was increased to
$225,000 at a meeting of the Board of Directors held September 4, 1997 and his
contract amended accordingly.

    On September 4, 1997, the Board of Directors of the Company approved an
agreement (the "Separation Agreement") with Alan Sonnenberg, the Company's Vice
Chairman of the Board of Directors, to terminate Mr. Sonnenberg's Employment
Agreement dated as of February 23, 1996. Pursuant to the Separation Agreement,
Mr. Sonnenberg received a lump sum payment of $500,000 and acknowledgment by the
Company of the vesting of Mr. Sonnenberg's options (the "Option") to purchase
172,044 shares of common stock under the 1996 CS Wireless Systems, Inc.
Incentive Stock Plan (the "Plan") at an exercise price of $6.50 per share. On
the first anniversary of the date of the Separation Agreement, Mr. Sonnenberg
shall have the option, provided the Company's common stock is not then publicly
traded and the price per share quoted on any applicable exchange or
over-the-counter is greater than $9.50, to (i) hold the Options, in which event
the Options shall be exercisable until the five-year anniversary of the
Separation Agreement in accordance with the Plan, or (ii) deliver written notice
("Election Notice") to the Company of his election to cancel all, but not part
of, the Options in consideration for payment by the Company of $500,000 (less
applicable taxes); upon delivery of such payment, the Options shall lapse
without further action.

    Effective June 17, 1997, the Company reached final settlement of all claims
and matters related to the previously announced termination of employment of
Lowell Hussey, the Company's former president and Chief Executive Officer,
including settlement of litigation commenced by Mr. Hussey in the United States
District Court for the District of Oregon. Pursuant to the settlement, Mr.
Hussey received (i) payments totaling $500,000, which amount includes $300,000
paid at the time of termination, (ii) reimbursement of certain expenses, (iii)
permission to retain certain office furniture and (iv) acknowledgement by the
Company of the vesting of Mr. Hussey's options to purchase 161,291 shares of the
Company's common stock at an option price of $6.50 per share. The options
represent one half of the options originally granted to Mr. Hussey in February
1996, which vested in 36 equal monthly installments, and are exercisable at any
time for a term of five (5) years from the date of the Agreement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The following table sets forth certain information as of March 19, 1998
regarding the beneficial ownership of the Common Stock of the Company by (a)
each person that is the beneficial owner of more than five percent of the Common
Stock of the Company, (b) the directors of the Company, (c) the Chief

                                       33
<PAGE>
Executive Officer and the Named Executive Officers of the Company, and (d) all
directors and executive officers of the Company as a group:

<TABLE>
<CAPTION>
                                                                                       NUMBER OF SHARES
                                                                                         COMMON STOCK
                                                                                         BENEFICIALLY     PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER                                                         OWNED           CLASS
-------------------------------------------------------------------------------------  -----------------  -----------
<S>                                                                                    <C>                <C>
CAI Wireless Systems, Inc. ..........................................................       6,421,166(1)         60%
  18 Corporate Woods Blvd., 3rd Floor
  Albany, New York 12211
Heartland Wireless Communications, Inc ..............................................       3,836,035(2)         36%
  200 Chisholm Place, Suite 200
  Plano, Texas 75075
Jared E. Abbruzzese .................................................................         --                   *
  18 Corporate Woods Blvd., 3rd Floor
  Albany, New York 12211
James P. Ashman .....................................................................         --                   *
  18 Corporate Woods Blvd., 3rd Floor
  Albany, New York 12211
Robert D. Happ ......................................................................         --                   *
  20 Old Road
  Weston, Massachusetts 02193
D. Michael Sitton ...................................................................         --                   *
  2727 E. 32nd St., Suite 4
  Joplin, Missouri 64804
Alan Sonnenberg .....................................................................         172,044(3)        1.6%
  15 West Street Road, Suite A-100
  Westminster, Pennsylvania 18974
Carroll D. McHenry ..................................................................         --                   *
  200 Chisholm Place, Suite 200
  Plano, Texas 75075
Marjean Henderson ...................................................................         --                   *
  200 Chisholm Place, Suite 200
  Plano, Texas 75075
David Webb ..........................................................................          50,000(3)           *
  200 Chisholm Place, Suite 200
  Plano, Texas 75075
Thomas W. Dixon .....................................................................          61,736(3)           *
  200 Chisholm Place, Suite 202
  Plano, Texas 75075
Frank H. Hosea ......................................................................          17,333(3)           *
  200 Chisholm Place, Suite 202
  Plano, Texas 75075
All directors and executive officers of the Company as a group (11 persons)..........         301,113(3)        2.8%
</TABLE>

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

*   Less than 1%.

(1) MMDS Holdings II, Inc., an affiliate of Bell Atlantic Corporation ("Bell
    Atlantic"), and NYNEX MMDS Holding Company, an affiliate of NYNEX
    Corporation ("NYNEX") (collectively, the "BANX Affiliates"), were each
    issued 500,000 shares of the Company's Common Stock in connection with the
    Contribution Closing, which collectively represented a 9.57% equity interest
    in the Company (prior to dilution), in exchange for non-cash consideration.
    On February 17, 1998, CAI consummated a series of transactions with, among
    others, the BANX Affiliates whereby CAI acquired BANX's

                                       34
<PAGE>
    entire equity interest in the Company. The equity interests of CAI in the
    Company have been pledged as collateral for certain obligations of CAI to
    its senior secured lender.

(2) Includes 257,201 shares issued to Heartland with respect to a true-up
    adjustment pursuant to the Participation Agreement.

(3) Includes shares of Common Stock issuable upon the exercise of stock options
    granted by the Company which are exercisable currently or within 60 days.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    TELQUEST.  On August 4, 1997 the Company acquired a 25% ownership interest
in TelQuest Satellite Services LLC ("TelQuest"), for consideration of an initial
contribution of $2.5 million in cash (payable in quarterly installments
beginning August 1997) and, through a lease, up to $2.5 million in equipment. At
December 31, 1997 the Company's recorded investment in TelQuest was $3.8
million. TelQuest was formed to provide digital video programming signals
through its satellite service. The Company has entered into a ten-year
Affiliation Agreement with TelQuest through which the Company will receive
TelQuest's satellite service as well as other services offered by TelQuest.
TelQuest's other members are TelQuest Communications, Inc. and CAI. Both CAI and
TelQuest Communications, Inc. are affiliated entities. The Company advanced
TelQuest the sum of $110,000 in November of 1997, which advance was subsequently
repaid with interest. Mr. Abbruzzese, the Company's Chairman, holds, through
various affiliates, the majority interest in TelQuest Communications, Inc. and
is Chairman and CEO of CAI.

    ACQUISITION OF FOREIGN INTERESTS FROM HEARTLAND.  On September 29, 1997, the
Company acquired 39% of the voting common stock of Television Interactiva del
Norte, S.A. de C.V. ("Telinor") from Heartland for cash proceeds of $915,000 and
assumption of a cash call obligation in the amount of $145,000. The Company also
purchased from Heartland two unsecured promissory notes payable by Telinor for
approximately $2.6 million, including accrued interest. The two notes were
immediately restructured into one unsecured note accruing interest at 12% and
maturing on September 21, 2002. Additionally, the Company consummated another
transaction with the principal stockholders of Telinor whereby the Company
purchased 49% of the voting stock of Television Inalambrica, S.A. de C.V.
("Television") for cash in the amount of $1.0 million and committed to (i) loan
Television up to the sum of $5.0 million in cash or (ii) finance an equivalent
amount in sales of the Company's equipment to Television. The funds committed
have been deposited into escrow pending disbursement or reduction of the
required escrow amount through equipment sales to Television. As of December 31,
1997, approximately $5.0 million is held in escrow pursuant to this agreement.
As of December 31, 1997, the Company's recorded Investment in Telinor and
Television was $4.6 million, including the notes purchased. Telinor and
Television were formed to develop wireless cable television systems providing
subscription television services in Mexico.

    BANX AFFILIATES TRANSACTIONS.  MMDS Holdings II, Inc., an affiliate of Bell
Atlantic, and NYNEX MMDS Holding Company, an affiliate of NYNEX, were each
issued 500,000 shares of Common Stock, which collectively represented a 9.57%
equity interest in the Company (prior to dilution), in exchange for non-cash
consideration. On February 17, 1998, CAI consummated a series of transactions
with, among others, the BANX Affiliates whereby CAI acquired BANX's entire
equity interest in the Company. The equity interests of CAI in the Company have
been pledged as collateral for ceratin obligations of CAI to its senior secured
lender.

    HEARTLAND NOTE OBLIGATION.  The Heartland Long-Term Note: (i) is in the
principal amount of $15 million and has a final maturity date that is 10 years
and one day after the Contribution Closing; (ii) bears interest at an annual
rate of 10% until the first anniversary of the Contribution Closing and 15%
thereafter; and (iii) requires that all of the net proceeds received by the
Company from the sale of assets be applied to the repayment of the Heartland
Long-Term Note. Substantially all of the proceeds from the sale of the Atlanta
Suburbs Market (see below) were applied to the Heartland Long-Term Note.

                                       35
<PAGE>
    ATLANTA SUBURBS MARKET.  On July 17, 1996, CS acquired from Heartland all of
the outstanding stock of Heartland Wireless Georgia Properties, Inc., a Georgia
corporation ("Heartland Georgia") that was a wholly-owned subsidiary of
Heartland. Heartland Georgia owns (i) certain leases and licenses for wireless
cable frequency rights for wireless cable channels transmitting in Adairsville,
Powers Crossroads and Rutledge, Georgia (the "Atlanta Suburbs Markets") and (ii)
leases for four tower sites. The purchase price was $7.2 million. On May 22,
1997, the Company consummated the sale to Bell South Corporation of the leases
for the Atlanta Suburbs Markets and four tower sites, as well as the BTA license
relating to Atlanta, Georgia, and other assets and reimbursable expenses for
approximately $16.4 million, resulting in a gain of approximately $0.7 million.
The Company subsequently paid to Heartland approximately $15 million from the
sales proceeds.

    CHARLOTTE, NORTH CAROLINA BASIC TRADING AREA.  CAI was the high bidder for
the Charlotte BTA in the BTA Auction. CAI is obligated to convey to the Company,
at cost, its rights to the Charlotte BTA. The Company reimbursed CAI for the
Charlotte BTA in 1996. The Company will also have the right to develop an
additional seven channels, depending on interference considerations in the
Charlotte market as a result of its ownership of the Charlotte BTA.

    Pursuant to the terms of the Participation Agreement, each of CAI and
Heartland, as the case may be, is subject to a true-up adjustment, calculated in
accordance with the provisions of the Participation Agreement, in the event that
the number of channels available to the Company in any market contributed by
such party is less than 16. The true-up adjustment for any such channel
deficiency may be satisfied by the deficient party delivering to the Company
either (i) cash, (ii) a 5-year promissory note, (iii) shares of the Company's
stock, or (iv) any combination of the foregoing. CAI has been notified by
Heartland that it believes there is a potential channel deficiency arising out
of the number of channels delivered by CAI in connection with its contribution
of assets relating to the Charlotte, North Carolina market. CAI believes that it
has delivered 13 of the 16 required channels, and expects to be able to deliver
at least three additional channels in Charlotte, North Carolina from
applications currently pending at the FCC in satisfaction of its obligations.
Heartland has advised CAI that it believes that CAI has delivered only six
channels relating to the Charlotte market. CAI has disputed Heartland's
position; Heartland and CAI are in discussions regarding the issues.

    STORY CITY, IOWA OPERATING MARKET.  The Company entered in a letter of
intent in 1996 pursuant to which Heartland agreed to acquire the wireless cable
operating system in Story City (also known as Radcliffe), Iowa, and wireless
cable assets in Scottsbluff, Nebraska and Kalispell, Montana currently held by
the Company for an aggregate of approximately $3.9 million. The Company received
the Story City system and Scottsbluff and Kalispell assets in connection with
the USA Wireless Acquisition. Heartland terminated the letter of intent and,
effective December 30, 1997, the Company assumed operational control of the
markets. The Company reimbursed Heartland in 1998 for approximately $300,000 in
capital expenditures.

    PARENT COMPANY REIMBURSEMENTS AND PURCHASES.  The Company reimbursed CAI in
1996 in the amount of $12 million for payments made by CAI to the FCC in
connection with the BTA Auction with respect to the Company's markets. The
Company has reimbursed Heartland in the amounts approximately $1.1 million in
1996 and $161,120 in 1997, including interest for payments made by Heartland in
connection with the BTA Auction. Additionally, the Company purchased from CAI
various equipment for which it paid approximately $3.4 million during 1997.
Additionally, the Company paid CAI approximately $436,000 for services rendered
during 1997 and 1996.

    INSTALLATION CONTRACTING.  In September 1997, the Company entered into an
Installation Contractor Agreement with ACS Telecommunications Systems, Inc.
("ACS") whereby ACS agreed to provide installation contractor services in the
Dallas, Texas vicinity and such other markets as mutually agreed upon. The
Agreement has a term of two years. In addition to Dallas, ACS has provided
services for the Company in the majority of the Company's operating markets. In
1997, the Company paid $988,000 to ACS pursuant to the Agreement. Mr.
Sonnenberg, a director of the Company, is the principal stockholder of ACS.

                                       36
<PAGE>
    CONSULTING SERVICES.  Effective January 13, 1998, the Company entered into a
six month services contract with Wireless Digital Net, Inc. ("Digital Net")
pursuant to which Digital Net performs sales and marketing functions on behalf
of the Company with respect to hospitals, schools and libraries. Digital Net is
to be paid approximately $35,000 per month. Anne Dixon, wife of Thomas W. Dixon,
owns 23% of Digital Net and serves as President.

    TELEDIST SYSTEMS LLC.  TeleDist Systems LLC ("TeleDist") has assisted the
Company and Heartland in connection with certain marketing activities conducted
at Wal-Mart stores. The Company has paid approximately $105,000 in beta
development charges to TeleDist in lieu of affiliation fees for rights to 21
markets. Mr. Sitton, a director of the Company, is a director of and equity
owner in TeleDist.

    HEARTLAND LEASE.  The Company subleases approximately 10,000 square feet of
office space in Plano, Texas from Heartland. Pursuant to the sublease, which
expires in April 2003, the Company pays Heartland approximately $192,500 per
annum plus certain operating costs.

                                    PART IV

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

(a) The following documents are filed as a part of this Annual Report on Form
    10-K.

    1.  Consolidated Financial Statements:

       See Index to Consolidated Financial Statements at Item 8.

    2.  Consolidated Financial Statement Schedules:

       Schedule II--Valuation and Qualifying Accounts for the Year Ended
       December 31, 1997.

    All other Financial Statement Schedules have been omitted because (i) the
required information is not present in amounts sufficient to require submission
of the schedule, (ii) the information required is included in the Consolidated
Financial Statements or the Notes thereto, or (iii) the information required in
the Schedules is not applicable to the Company.

    3.  Exhibits:

<TABLE>
<C>          <S>
       3.1   Amended and Restated Certificate of Incorporation of the Company(1)
       3.2   Bylaws of the Company(1)
       4.1   Indenture dated as of February 15, 1996 between the Company and Fleet
             National Bank of Connecticut (including the form of 11 3/8% Senior Discount
             Notes and 11 3/8% Series B Senior Discount Notes due 2006 as Exhibit A and
             Exhibit B, respectively, thereto)(1)
      10.1   Participation Agreement dated as of December 12, 1995 among the Company, CAI
             and Heartland(2)
      10.2   Amendment No. 1 to Participation Agreement dated as of February 22, 1996
             among the Company, CAI and Heartland(3)
      10.3   Employment Agreement dated as of February 22, 1996 between the Company and
             Thomas W. Dixon(1)
      10.4   Stock Option Agreement dated as of March 19, 1996 between the Company and
             Thomas W. Dixon(1)
      10.5   Stock Option Agreement dated as of March 19, 1996 between the Company and
             John R. Bailey(1)
      10.6   Amended and Restated 1996 CS Wireless Systems, Inc. Incentive Stock Plan(4)
</TABLE>

                                       37
<PAGE>
<TABLE>
<C>          <S>
      10.7   Common Share Registration Rights Agreement dated as of February 15, 1996
             between the Company and the Initial Purchasers(1)
      10.8   Stockholders' Agreement dated as of February 23, 1996 among the Company, CAI
             and Heartland(1)
      10.9   Market Protection Agreement dated as of February 23, 1996 between the
             Company and Heartland(1)
      10.10  Promissory Note of the Company in the principal amount of $15,000,000 to the
             order of Heartland(1)
      10.11  Administrative Service Agreement dated as of February 23, 1996 between the
             Company and Heartland(1)
      10.12  Employment Agreement between Frank H. Hosea and the Company(5)
      10.13  Employment Agreement between David Webb and the Company(6)
      10.14  Settlement Agreement and General Release between the Company and Lowell
             Hussey(7)
      10.15  MMDS Affiliation Agreement dated August 4, 1997 between the Company and
             TelQuest Satellite Services LLC(8)
      10.16  Separation Agreement dated August 16, 1997 between the Company and Alan
             Sonnenberg(9)
      10.17  Form of Director and Officer Indemnity Agreement(10)
      10.18  Amendment to Employment Agreement between David Webb and the Company.+
      10.19  Installation Contractor Agreement+
      12.0   Computation of Ratio of Earnings to Fixed Charges+
      21     Subsidiaries of the Company+
      27.1   Financial Data Schedule--Year Ended December 31, 1997+
      27.2   Restated Financial Data Schedule--Year Ended December 31, 1996 and Quarter
             Ended September 30, 1996+
      27.3   Restated Financial Data Schedule--Quarters Ended March 31, June 30 and
             September 30, 1997+
</TABLE>

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

+   Filed herewith.

(1) Incorporated by reference to Item 16 of the Company's Registration Statement
    on Form S-1, File No. 333-3288.

(2) Incorporated by reference Exhibit 2.1 to the Current Report on Form 8-K
    dated December 12, 1995 (0-22888) of CAI Wireless Systems, Inc. ("CAI").

(3) Incorporated by reference Exhibit 2.1 to the Current Report on Form 8-K
    dated March 8, 1996 (0-22888) of CAI.

(4) Incorporated by reference to Exhibit 10.1 to the Company's Current Report on
    Form 8-K filed August 11, 1997.

(5) Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report
    on Form 10-Q filed for the quarter ended March 31, 1997.

(6) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
    on Form 10-Q filed for the quarter ended March 31, 1997.

(7) Incorporated by reference to Exhibit 10.8 to the Company's Current Report on
    Form 8-K filed June 26, 1997.

                                       38
<PAGE>
(8) Incorporated by reference to Exhibit 10.1 to the Company's Current Report on
    Form 8-K filed August 29, 1997

(9) Incorporated by reference to Exhibit 10.1 to the Company's Current Report on
    Form 8-K filed September 11, 1997.

(10) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
    on Form 10-Q filed for the quarter ended September 30, 1997.

(b) Reports on Form 8-K.

    During the three-month period ended December 31, 1997, the Company filed
    the following Current Reports on Form 8-K:

    (1) Current Report on Form 8-K filed October 27, 1997 with respect to Item
       5.

    (2) Current Report on Form 8-K filed November 7, 1997 with respect to Item
       5.

                                       39
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized, as of March 30, 1998.

<TABLE>
<S>                             <C>  <C>
                                CS WIRELESS SYSTEMS, INC.
                                REGISTRANT

                                By:                /s/ DAVID WEBB
                                     -----------------------------------------
                                                     David Webb
                                       PRESIDENT, CHIEF EXECUTIVE OFFICER AND
                                       DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
</TABLE>

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of March 30, 1998 by the following persons on
behalf of the Registrant and in the capacities indicated.

        /s/ JARED E. ABBRUZZESE                     /s/ JOHN M. LUND
--------------------------------------------------------------------------------
          Jared E. Abbruzzese                         John M. Lund
         CHAIRMAN OF THE BOARD           VICE PRESIDENT FINANCE AND CONTROLLER
                                             (PRINCIPAL FINANCIAL OFFICER)

          /s/ JAMES P. ASHMAN                    /s/ D. MICHAEL SITTON
----------------------------------------
                                        ----------------------------------------
            James P. Ashman                        D. Michael Sitton
                DIRECTOR                                DIRECTOR

           /s/ ROBERT D. HAPP                     /s/ ALAN SONNENBERG
----------------------------------------
                                        ----------------------------------------
             Robert D. Happ                         Alan Sonnenberg
                DIRECTOR                       VICE CHAIRMAN OF THE BOARD

         /s/ MARJEAN HENDERSON                       /s/ DAVID WEBB
----------------------------------------
                                        ----------------------------------------
           Marjean Henderson                           David Webb
                DIRECTOR                       PRESIDENT, CHIEF EXECUTIVE
                                                  OFFICER AND DIRECTOR

          /s/ CARROLL MCHENRY
----------------------------------------
            Carroll McHenry
                DIRECTOR

                                       40
<PAGE>
                           CS WIRELESS SYSTEMS, INC.
                               ITEMS 8 AND 14(A)
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                             ---------
<S>                                                                                                          <C>
CS Wireless Systems, Inc. and Subsidiaries:
  Independent Auditors' Report.............................................................................        F-2
  Consolidated Balance Sheet as of December 31, 1996 and 1997..............................................        F-3
  Consolidated Statement of Operations for the years ended December 31, 1996 and 1997......................        F-4
  Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996 and 1997............        F-5
  Consolidated Statement of Cash Flows for the years ended December 31, 1996 and 1997......................        F-6
  Notes to Consolidated Financial Statements...............................................................        F-7

CS Wireless Systems, Inc. and Subsidiaries (formerly ACS Ohio, Inc.) and certain assets of Atlantic
  Microsystems, Inc.:
  Report of Independent Auditors...........................................................................       F-23
  Combined Balance Sheet as of December 31, 1995...........................................................       F-24
  Combined Statement of Operations and Accumulated Deficit for the period from September 30, 1995 to
    December 31, 1995......................................................................................       F-25
  Combined Statement of Cash Flows for the period from September 30, 1995 to December 31, 1995.............       F-26
  Notes to Combined Financial Statements...................................................................       F-27

ACS Ohio, Inc. and Subsidiaries:
  Report of Independent Auditors...........................................................................       F-34
  Consolidated Balance Sheets as of December 31, 1994 and September 29, 1995...............................       F-35
  Consolidated Statements of Operations and Accumulated Deficit for the period from March 9, 1994 (date of
    inception) to December 31, 1994 and for the period from January 1, 1995 to September 29, 1995..........       F-36
  Consolidated Statements of Cash Flows for the period from March 9, 1994 (date of inception) to December
    31, 1994 and for the period from January 1, 1995 to September 29, 1995.................................       F-37
  Notes to Consolidated Financial Statements...............................................................       F-38
</TABLE>

                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders

CS Wireless Systems, Inc.:

    We have audited the accompanying consolidated balance sheets of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

                                          KPMG PEAT MARWICK LLP

Dallas, Texas
March 13, 1998

                                      F-2
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                               DECEMBER 31, 1997

                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                               1997        1996
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
                                                      ASSETS
Current assets:

  Cash and cash equivalents...............................................................  $   74,564  $  113,072
  Restricted cash (note 3)................................................................       5,030      --
  Subscriber receivables, less allowance for doubtful accounts of $257 and $418 in 1997
    and 1996, respectively................................................................       1,026       1,079
  Prepaid expenses and other..............................................................         939       2,199
                                                                                            ----------  ----------
    Total current assets..................................................................      81,559     116,350
Property and equipment, net (note 4)......................................................      50,519      42,955
License and leased license investment, net of accumulated amortization of $16,159 and
  $7,681 in 1997 and 1996, respectively...................................................     170,689     172,953
Goodwill, net of accumulated amortization of $7,707 and $3,938 in 1997 and 1996,
  respectively............................................................................      48,243      52,011
Assets held for sale (note 2).............................................................      --          19,366
Investments in and loans to equity affiliates (note 3)....................................       8,503      --
Debt issuance costs, net of accumulated amortization of $1,286 and $530 in 1997 and 1996,
  respectively............................................................................       8,260       9,016
Other assets, net.........................................................................       2,930       1,586
                                                                                            ----------  ----------
                                                                                            $  370,703  $  414,237
                                                                                            ----------  ----------
                                                                                            ----------  ----------
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses, including payable to affiliates of $282 and
    $1,215 in 1997 and 1996, respectively (note 5)........................................  $    8,652  $    6,655
  Current portion of long-term debt (note 6)..............................................         217       3,194
  Current portion of BTA auction payable to affiliates including accrued interest payable
    (note 6)..............................................................................       1,122         646
  Deferred revenues.......................................................................         628         656
  Other current liabilities...............................................................         895         387
                                                                                            ----------  ----------
    Total current liabilities.............................................................      11,514      11,538
Long-term debt, excluding current portion (note 6)........................................     283,686     268,180
BTA auction payable to affiliates, excluding current portion (note 6).....................       3,274       4,256
Deferred income taxes (note 9)............................................................      --           5,429
                                                                                            ----------  ----------
    Total liabilities.....................................................................     298,474     289,403
                                                                                            ----------  ----------
Stockholders' equity (notes 2 and 8):
  Preferred stock, $.01 par value; authorized 5,000,000 shares, no shares issued and
    outstanding...........................................................................      --          --
  Common stock, $.001 par value; authorized 40,000,000 shares, issued and outstanding
    10,702,609 and 10,445,408 shares in 1997 and 1996, respectively.......................          11          10
  Additional paid-in capital..............................................................     154,557     154,558
  Accumulated deficit.....................................................................     (82,299)    (29,734)
  Treasury stock, at cost; 2,103 shares in 1997...........................................         (40)     --
    Total stockholders' equity............................................................      72,229     124,834
Commitments and contingencies (notes 7 and 11)
                                                                                            ----------  ----------
                                                                                            $  370,703  $  414,237
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                           1997           1996
                                                                                       -------------  ------------
<S>                                                                                    <C>            <C>
Revenues.............................................................................  $      26,920  $     22,738
                                                                                       -------------  ------------

Operating expenses:
  Systems operations.................................................................         14,976        13,258
  Selling, general and administrative................................................         15,849        13,934
  Depreciation and amortization......................................................         26,858        20,345
                                                                                       -------------  ------------
    Total operating expenses.........................................................         57,683        47,537
                                                                                       -------------  ------------
    Operating loss...................................................................        (30,763)      (24,799)
                                                                                       -------------  ------------

Other income (expense):
  Interest expense...................................................................        (31,995)      (24,959)
  Interest income....................................................................          5,469         6,600
  Equity in losses of affiliates (note 3)............................................         (1,349)      --
  Other..............................................................................            644       --
                                                                                       -------------  ------------
    Other income (expense), net......................................................        (27,231)      (18,359)
                                                                                       -------------  ------------
    Loss before income taxes.........................................................        (57,994)      (43,158)

Income tax benefit (note 9)..........................................................          5,429        14,631
                                                                                       -------------  ------------
    Net loss.........................................................................  $     (52,565) $    (28,527)
                                                                                       -------------  ------------
                                                                                       -------------  ------------

Basic and diluted loss per common share..............................................  $       (4.94) $      (3.06)
                                                                                       -------------  ------------
                                                                                       -------------  ------------

Weighted average basic and dilutive shares outstanding...............................     10,639,190     9,170,169
                                                                                       -------------  ------------
                                                                                       -------------  ------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                     COMMON STOCK         ADDITIONAL
                               -------------------------   PAID-IN     DIVISION   ACCUMULATED    TREASURY
                                  SHARES       AMOUNT      CAPITAL      EQUITY      DEFICIT        STOCK       TOTAL
                               ------------  -----------  ----------  ----------  ------------  -----------  ----------
<S>                            <C>           <C>          <C>         <C>         <C>           <C>          <C>
Balance, December 31, 1995...         1,000   $       1   $   15,950  $   45,572   $   (1,207)   $  --       $   60,316
Contributions to Company
  (note 2)...................     9,999,000           9      131,503     (45,572)      --           --           85,940
Issuance of common stock
  pursuant to Unit Offering
  (note 6)...................       110,000      --              800      --           --           --              800
Issuance of common stock in
  acquisition (note 2).......       335,408      --            6,305      --           --           --            6,305
Net loss.....................       --           --           --          --          (28,527)      --          (28,527)
                               ------------         ---   ----------  ----------  ------------         ---   ----------
Balance, December 31, 1996...    10,445,408          10      154,558      --          (29,734)      --          124,834
Contribution to
  Company--true-up adjustment
  (note 2)...................       257,201           1           (1)     --           --           --           --
Treasury stock purchases
  (note 2)...................       --           --           --          --           --              (40)         (40)
Net loss.....................       --           --           --          --          (52,565)      --          (52,565)
                               ------------         ---   ----------  ----------  ------------         ---   ----------
Balance, December 31, 1997...    10,702,609   $      11   $  154,557  $   --       $  (82,299)   $     (40)  $   72,229
                               ------------         ---   ----------  ----------  ------------         ---   ----------
                               ------------         ---   ----------  ----------  ------------         ---   ----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                               1997        1996
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
Cash flows from operating activities:
  Net loss................................................................................  $  (52,565) $  (28,527)
  Adjustments to reconcile net loss to net cash provided by operating activities:
    Deferred income tax benefit...........................................................      (5,429)    (14,631)
    Depreciation and amortization.........................................................      26,858      20,345
    Accretion on discount notes and amortization of debt issuance costs...................      30,395      23,483
    Non-cash interest expense on other long term debt.....................................       1,524       1,275
    Gain on sale of assets, net...........................................................        (644)     --
  Equity in losses of affiliates..........................................................       1,349      --
    Changes in assets and liabilities, net of effects of contributions, acquisitions and
      assets held for sale:
      Subscriber receivables, net.........................................................          63        (115)
      Prepaid expenses and other..........................................................          41        (345)
      Accounts payable, accrued expenses and other liabilities............................       1,545         928
                                                                                            ----------  ----------
        Net cash provided by operating activities.........................................       3,137       2,413
                                                                                            ----------  ----------

Cash flows from investing activities:
  Purchases of property and equipment.....................................................     (22,685)    (13,243)
  Additions to intangible assets..........................................................      (4,329)     (3,816)
  Subscriber acquisition, net of property and equipment...................................        (448)     --
  Investment in assets held for sale......................................................        (943)     (8,766)
  Proceeds from sale of assets............................................................      16,350      --
  Issuance of notes.......................................................................      --          (1,510)
  Investment in restricted cash...........................................................      (5,030)     --
  Investment in equity affiliates.........................................................      (6,555)     --
  Other...................................................................................        (540)         81
                                                                                            ----------  ----------
        Net cash used in investing activities.............................................     (24,180)    (27,254)
                                                                                            ----------  ----------

Cash flows from financing activities:
  Proceeds from long-term debt............................................................         500      --
  Payments of capital lease obligations...................................................         (95)       (198)
  Payments on long-term debt..............................................................     (17,870)    (45,125)
  Proceeds from Unit Offering.............................................................      --         229,484
  Debt issuance costs.....................................................................      --          (9,793)
  Cash distributed pursuant to Contributions (note 2).....................................      --         (36,639)
                                                                                            ----------  ----------
        Net cash (used in) provided by financing activities...............................     (17,465)    137,729
                                                                                            ----------  ----------
Increase (decrease) in cash and cash equivalents..........................................     (38,508)    112,888
Cash and cash equivalents at beginning of year............................................     113,072         184
                                                                                            ----------  ----------
Cash and cash equivalents at end of year..................................................  $   74,564  $  113,072
                                                                                            ----------  ----------
                                                                                            ----------  ----------
Cash paid for interest....................................................................  $      263  $      114
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) DESCRIPTION OF BUSINESS

    CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS Wireless")
develop, own and operate a network of wireless cable television systems
providing subscription television services. The Company has a portfolio of
wireless cable channel rights in various markets in the United States. The
Company currently has systems in operation in eleven markets. Systems in other
markets are currently under construction and development by the Company.

    Wireless cable television is a new industry within the highly competitive
subscription television industry. The Company's principal subscription
television competitors in each of its markets are traditional hard-wire cable
companies, direct broadcast satellite, private cable companies and other
alternate methods of distributing and receiving television transmissions.
Hard-wire cable companies generally are well-established and known to potential
customers and have significantly greater financial and other resources than the
Company. As the telecommunications industry continues to evolve, the Company may
face additional competition from new providers of entertainment and data
services. In addition, until the Company can increase its channels offered
through the deployment of digital compression technology, the Company's existing
competitors have more channels to offer subscribers. There can be no assurance
that the Company will be able to compete successfully with existing or potential
competitors in the subscription television industry.

    The growth of the Company's business requires substantial continuing
investment to finance capital expenditures related to subscriber growth and
system development. Capital expenditures planned for 1998 and beyond will be
primarily targeted to the deployment of digital technology and subscriber growth
in digital markets. The Company believes that its cash and cash equivalents and
cash generated from operations will be sufficient to fund the Company's
operations and expansion at least through the first quarter of 1999. Additional
funds will be necessary to continue the deployment of digital technologies and
complete the launch/conversion, build-out and expansion of all of the Company's
wireless cable systems and to bring such systems to a mature state. These
activities may be financed in whole or in part through debt or equity offerings,
joint ventures, the sale and/or exchange of existing wireless cable channel
rights, or other arrangements. There can be no assurance that the Company will
achieve positive cash flow from operations, that the Company will consummate the
sale of any wireless cable channel rights or that sufficient debt or equity
financing will be available to the Company. In addition, subject to restrictions
under its outstanding debt, the Company may pursue other opportunities to
acquire additional wireless cable channel rights and businesses that may utilize
the capital currently expected to be available for its current markets. The
amount and timing of the Company's future capital requirements will depend upon
a number of factors, including programming costs, equipment costs, marketing
costs, staffing levels, subscriber growth and competitive conditions, many of
which are beyond the control of the Company. Failure to obtain any required
additional financing could materially affect the growth, cash flow or
earnings/losses of the Company.

(B) PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.

                                      F-7
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    The accompanying consolidated financial information for the period from
January 1, 1996 through February 23, 1996 reflects the combined financial
position and results of operations for the Company's wireless cable system
serving the Cleveland, Ohio market, which is comprised of the accounts of the
Company and certain assets of Atlantic Microsystems, Inc. For the period
subsequent to February 23, 1996, the Company's consolidated financial statements
include the results of operations of the entities contributed to the Company on
February 23, 1996 (see note 2).

    On September 29, 1995, ACS Enterprises, Inc. (including ACS Ohio, Inc., the
predecessor of the Company and a wholly-owned subsidiary of ACS Enterprises,
Inc.) was acquired by CAI Wireless Systems, Inc. ("CAI") in a business
combination accounted for as a purchase. As a result of the acquisition,
financial information related to the Company and its predecessor for the periods
through September 29, 1995 and periods subsequent to September 29, 1995 is
presented on a different cost basis and, therefore, such information is not
comparable.

(C) PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost, including all direct labor costs
of new customer installations. Depreciation and amortization of property and
equipment are computed using the straight-line method over the estimated useful
lives of the assets. Repairs and maintenance costs are charged to expense when
incurred; renewals and betterments are capitalized.

(D) LICENSE AND LEASED LICENSE INVESTMENT

    License and leased license investment includes costs incurred to acquire
and/or develop wireless cable channel rights. Costs incurred to acquire channel
rights issued by the Federal Communications Commission ("FCC") are deferred and
amortized ratably over estimated useful lives of 15 years beginning with
inception of service in each respective market. As of December 31, 1997 and
1996, approximately $54.8 million and $63.1 million, respectively, of the
license and leased license investment was not yet subject to amortization.

(E) GOODWILL

    Goodwill represents excess purchase price of acquisitions over identifiable
tangible and intangible assets. Goodwill is amortized ratably over an estimated
useful life of 15 years beginning with the acquisition of the market.

    The Company assesses the recoverability of goodwill by determining whether
the amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.

(F) OTHER ASSETS

    Other assets includes a non-compete agreement with a former officer and
certain other intangible assets totaling approximately $2,085,000 and $1,090,000
at December 31, 1997 and 1996, respectively, net

                                      F-8
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of accumulated amortization of approximately $486,000 and $166,000,
respectively. These assets are being amortized over an estimated useful life of
5 years or the respective lives of the underlying agreements.

(G) LONG-LIVED ASSETS

    The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.

    The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both could be reduced in
the future due to changes in, among other things, technology, government
regulation, available financing or competition. As a result, the carrying
amounts of long-lived assets, including goodwill, could be reduced by amounts
which would be material to the consolidated financial statements.

(H) INCOME TAXES

    Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the total of tax payable for the period and the
change during the period in deferred tax assets and liabilities.

(I) REVENUE RECOGNITION

    Revenues from subscribers are recognized in the period of service.

(J) SYSTEMS OPERATIONS

    Systems operations expenses consist principally of programming fees, channel
lease costs, tower rental and other costs of providing service.

    In 1997, the Company, CAI and Heartland Wireless Communications, Inc., a
related party (see note 2) and a third party wireless cable provider formed
Wireless Enterprises, LLC ("Wireless Enterprises"). Wireless Enterprises is a
programming cooperative that negotiates programming and marketing services with
suppliers of programming. In 1997, the Company paid approximately $5,397,000 to
Wireless Enterprises for programming and other administrative services.

                                      F-9
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) STATEMENT OF CASH FLOWS

    For purposes of the statements of cash flows, the Company considers
temporary cash investments purchased with original maturities of three months or
less and which are available for use in operations to be cash equivalents. The
Company had cash equivalents of $75,352,000 and $112,208,000 at December 31,
1997 and 1996, respectively.

(L) INVESTMENTS IN AFFILIATES

    Investments in affiliates are accounted for under the equity method. Under
this method, the investment originally recorded at cost is adjusted to recognize
the Company's share of net earnings or losses of the affiliate as they occur.
The Company's share of net earnings or losses of affiliates includes the
amortization of purchase adjustments.

(M) NET LOSS PER COMMON SHARE

    In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" ("SFAS No.
128"). SFAS No. 128 revised the previous calculation methods and presentations
of earnings per share and requires that all prior-period earnings (loss) per
share data be restated. The Company adopted SFAS No. 128 in the fourth quarter
of 1997 as required by this Statement. In accordance with SFAS No. 128, the
Company has presented basic loss per share, computed on the basis of the
weighted average number of common shares outstanding during the year, and
diluted loss per share, computed on the basis of the weighted average number of
common shares and all dilutive potential common shares outstanding during the
year. All prior period loss per share amounts have been restated in accordance
with this Statement.

    The potentially dilutive effect of the Company's stock options has not been
considered in the computation of diluted net loss per common share since their
effect would be antidilutive.

(N) STOCK OPTION PLAN

    On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. Under APB
Opinion No. 25, compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise price.

(O) USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and

                                      F-10
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

(P) RECLASSIFICATIONS

    Certain reclassifications have been made to prior year's consolidated
financial statements to conform to the current year presentation.

(2) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS

(A) CONTRIBUTIONS TO COMPANY

    On February 23, 1996, CAI and Heartland Wireless Communications, Inc.
("Heartland") contributed to the Company (the "Contributions") certain wireless
cable television assets comprising various markets in the United States. In
connection with the Contributions, CAI and Heartland received approximately 5.4
million and 3.6 million shares, respectively, of the Company's newly-issued
common stock. In addition, CAI received approximately $750,000 in cash and
Heartland received approximately $30.9 million in cash, a nine-month note for
$25 million (the "Heartland Short-Term Note") and a 10-year note for $15 million
(the "Heartland Long-Term Note"). The Heartland Short-Term Note was repaid on
March 1, 1996 with a portion of the net proceeds from the Unit Offering (see
note 5).

    Additionally, in connection with the Contributions, MMDS Holdings II, Inc.,
an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company, an affiliate of
NYNEX, each received 500,000 shares of common stock of the Company for certain
non-cash consideration.

    The consummation of the Contributions has been accounted for at CAI's and
Heartland's historical cost basis, reduced by the amount of cash and notes
distributed to CAI and Heartland in connection with the Contributions. A
substantial portion of the net assets contributed by Heartland were purchased by
Heartland on February 23, 1996. Accordingly, Heartland's cost basis with respect
to such net assets was determined based on Heartland's allocation of the
purchase price to the net assets acquired and liabilities assumed. On November
8, 1996, the Company distributed an additional $5 million in cash to Heartland
as part of the equity true-up per the provisions of the agreement governing the
contributions. Effective March 31, 1997, an additional 257,201 shares of common
stock of the Company were issued to Heartland in satisfaction of certain
post-closing adjustments. The net assets contributed to the Company consist

                                      F-11
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(2) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
primarily of plant and equipment and various wireless cable channel rights. The
following is a summary of the net assets contributed to the Company on February
23, 1996 (in thousands):

<TABLE>
<S>                                                                 <C>
Working capital...................................................  $    (141)
Plant and equipment, net..........................................     25,755
License and leased license investment and goodwill................    144,340
Deferred income taxes.............................................     (6,982)
Other liabilities.................................................       (393)
                                                                    ---------
                                                                      162,579
Cash and notes distributed to CAI and Heartland...................     76,639
                                                                    ---------
Net assets contributed............................................  $  85,940
                                                                    ---------
                                                                    ---------
</TABLE>

(B) ACQUISITIONS

    On July 17, 1996, the Company acquired from Heartland (i) leases and
licenses for wireless cable channel rights in Adairsville, Powers Crossroads and
Rutledge, Georgia (the "Atlanta (suburbs) Markets") and (ii) leases for four
tower sites. The purchase price was $7.2 million in cash.

    On October 11, 1996, the Company acquired all of the issued and outstanding
common stock ("USA Common Stock") of USA Wireless Cable, Inc. ("USA") (the "USA
Wireless Acquisition") in a transaction accounted for under the purchase method.
USA owned wireless cable rights and related assets in certain Midwest markets,
including but not limited to the Effingham, Kansas; Wellsville, Kansas;
Radcliffe, Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and Rochester,
Minnesota markets (the "USA Markets"). At the effective time of the USA Wireless
Acquisition, the outstanding shares of USA Common Stock were converted into
rights to receive an aggregate $17,635,000 of which approximately $6,305,000 was
paid in the form of CS Wireless common stock and approximately $11,330,000 of
indebtedness and payables assumed by the Company. In connection with this
acquisition, the Company extended two notes receivable to affiliates of USA. A
note receivable for $1,260,000 with an interest rate of 12% was settled in
February 1997 (see note 6), and a note receivable for $250,000 with an interest
rate of 12% was due August 1997; however the Company has extended the maturity
date to July 1, 1998.

    In conjunction with the USA Acquisition, the Company entered into a letter
of intent with Heartland, pursuant to which Heartland would acquire the wireless
cable operating system in Radcliffe, Iowa, and wireless cable channel rights in
Scottsbluff, Nebraska and Kalispell, Montana held by the Company for an
aggregate purchase price of approximately $3.9 million. Accordingly, the
carrying amount of such assets of $3.9 million was classified as assets held for
sale in the accompanying consolidated balance sheet at December 31, 1996.
Heartland operated and maintained each of these markets, as applicable under a
Management Agreement through December 30, 1997.

    In December 1997, Heartland notified the Company that it was withdrawing its
offer to purchase these rights and assets under the terms of the letter of
intent. Accordingly, the Company has reclassified the tangible and intangible
assets previously held for sale as operating assets in the accompanying
consolidated financial statements at December 31, 1997. The Company was
required, according to the

                                      F-12
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(2) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
terms of the Management Agreement, to reimburse Heartland for certain capital
expenditures made by Heartland on behalf of the Radcliffe system, which amounted
to approximately $300,000.

    The acquisitions discussed above were accounted for as purchases.
Accordingly, the accompanying consolidated financial statements include the
results of operations of the acquired entities from the dates of acquisition. A
summary of the net assets acquired follows:

<TABLE>
<S>                                                                 <C>
Working capital...................................................  $  (1,155)
Property and equipment............................................      1,354
Assets held for sale..............................................     11,800
Intangible assets.................................................     13,959
Deferred tax liability............................................     (2,333)
Notes payable assumed.............................................    (10,120)
                                                                    ---------
  Total purchase price............................................  $  13,505
                                                                    ---------
                                                                    ---------
</TABLE>

(C) DISPOSITION AND EXCHANGE

    On May 22, 1997 the Company sold to BellSouth Corporation, pursuant to the
July 25, 1996 purchase agreement, (i) certain leases and licenses for wireless
cable channel rights in the Atlanta Markets and leases for four tower sites;
(ii) the BTA license relating to Atlanta, Georgia and (iii) certain other assets
and reimbursable expenses for approximately $16.4 million, resulting in a gain
of approximately $0.7 million.

    On September 3, 1997, pursuant to an agreement dated as of November 6, 1996,
the Company consummated an exchange with Peoples Choice TV Corp. of wireless
cable channel rights and related assets in Salt Lake City, Utah for wireless
cable channel rights and related assets in Kansas City, Missouri. This
transaction was accounted for as a non- monetary exchange and, accordingly, the
recorded amounts of the assets relinquished were allocated to the assets
acquired. In connection with this transaction, the Company exchanged the rights
to the BTA license in Salt Lake City with related indebtedness of approximately
$330,000 for the rights to a BTA license in Kansas City with related
indebtedness of approximately $216,000.

(D) PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)

    Summarized below is the unaudited pro forma information for the year ended
December 31, 1996 as if the Contributions and acquisitions discussed above had
been consummated as of the beginning of 1996, after giving effect to certain
adjustments, including amortization of intangibles and income tax effects.

<TABLE>
<S>                                                                 <C>
Revenues..........................................................  $  24,202
Net loss..........................................................    (30,024)
Net loss per common share.........................................      (3.27)
</TABLE>

                                      F-13
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(2) CONTRIBUTIONS/ACQUISITIONS AND DISPOSITIONS (CONTINUED)
    The pro forma financial information has been prepared for comparative
purposes only and does not purport to indicate the results of operations which
would actually have occurred had the contributions and acquisitions been made at
the beginning of the period indicated, or which may occur in the future.

(3) INVESTMENTS IN AND LOANS TO AFFILIATES

    On August 4, 1997 the Company acquired a 25% ownership interest in TelQuest
Satellite Services LLC ("TelQuest"), for consideration of an initial
contribution of $2.5 million in cash (payable in quarterly installments
beginning August 1997) and, through a lease, up to $2.5 million in equipment.
The Company made quarterly payments of approximately $1,394,000 during 1997. As
part of the contributions, the Company converted a $200,000 note receivable from
TelQuest entered into during March 1997 into an investment in TelQuest of
$211,000. TelQuest was formed to provide digital video programming signals
through its satellite service. The Company has entered into a ten-year
Affiliation Agreement with TelQuest through which the Company will receive
TelQuest's satellite service as well as other services offered by TelQuest.
TelQuest's other members are TelQuest Communications, Inc. and CAI. Both CAI and
TelQuest Communications, Inc. are affiliated entities. The carrying value of the
Company's investment in and advances to TelQuest is approximately $3,842,000 at
December 31, 1997. The Company's share of TelQuest's net losses for the year
ended December 31, 1997 is $1,107,000.

    On September 29, 1997, the Company acquired 39% of the voting common stock
of Television Interactiva del Norte, S.A. de C.V. ("Telinor") from Heartland for
cash proceeds of $915,000 and assumption of a cash call obligation in the amount
of $145,000. The Company also purchased from Heartland two unsecured promissory
notes payable by Telinor for $2.56 million, including accrued interest. The two
notes were immediately restructured into one unsecured note accruing interest at
12% and maturing on September 21, 2002. Additionally, the Company consummated
another transaction with the principal stockholders of Telinor whereby the
Company purchased 49% of the voting stock of Television Inalambrica, S.A. de
C.V. ("Television") for cash in the amount of $1.0 million and committed to (i)
loan Television up to $5.0 million in cash or (ii) finance an equivalent amount
in sales of the Company's equipment to Television. The funds committed have been
deposited into escrow pending disbursement or reduction of the required escrow
amount through equipment sales to Television. As of December 31, 1997
approximately $5.0 million is held in escrow pursuant to this agreement. Telinor
and Television were formed to develop wireless cable television systems
providing subscription television services in Mexico. The Company has incurred
additional costs of approximately $405,000 on behalf of Telinor and Television.
The carrying value of the Company's investments in and advances to Telinor and
Television, including the Company's note receivable of $2.56 million is
approximately $4,661,000 at December 31, 1997. The Company's share of Telinor's
and Television's net losses for the year ended December 31, 1997 is
approximately $173,000.

    The Company's investments in TelQuest, Telinor and Television exceeds its
equity in the underlying net assets by a total of approximately $1,841,000.
These excess amounts are being amortized over 10 years, which represents the
estimated useful life of the underlying assets of TelQuest, Telinor and
Television. This amortization aggregated approximately $69,000 during 1997 and
is included in the Company's share of losses in the accompanying consolidated
statement of operations for the year ended December 31, 1997.

                                      F-14
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(4) PROPERTY AND EQUIPMENT

    Property and equipment consists of the following at December 31, 1997 and
1996:

<TABLE>
<CAPTION>
                                                                                  ESTIMATED
                                                            1997       1996      USEFUL LIFE
                                                          ---------  ---------  -------------
<S>                                                       <C>        <C>        <C>
Subscriber premises equipment and installation costs....  $  52,656  $  41,367   2 to 7 years
Transmission equipment and system construction costs....     16,035      8,825   5 - 10 years
Office furniture and equipment..........................      4,106      1,995        5 years
Leasehold improvements..................................      1,016        613        5 years
                                                          ---------  ---------
                                                             73,813     52,800
Less accumulated depreciation and amortization..........     23,294      9,845
                                                          ---------  ---------
                                                          $  50,519  $  42,955
                                                          ---------  ---------
                                                          ---------  ---------
</TABLE>

(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

    Accounts payable and accrued expenses consist of the following at December
31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                               1997       1996
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Accounts payable...........................................................  $   4,680      1,921
Accrued programming and licenses...........................................      1,319        776
Accrued personnel costs....................................................      1,247      1,064
Other......................................................................      1,406      2,894
                                                                             ---------  ---------
                                                                             $   8,652      6,655
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

(6) LONG-TERM DEBT

    Long-term debt consists of the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Senior Notes..........................................................  $  281,266  $  251,637
Heartland Long-Term Note..............................................       2,069      16,275
BTA auction payable to affiliates.....................................       4,396       4,902
Acquisition note......................................................      --           3,000
Capital leases and other..............................................         568         462
                                                                        ----------  ----------
  Total long-term debt................................................     288,299     276,276
Less current portion..................................................       1,339       3,840
                                                                        ----------  ----------
                                                                        $  286,960  $  272,436
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

                                      F-15
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(6) LONG-TERM DEBT (CONTINUED)
SENIOR NOTES

    On February 23, 1996, the Company consummated a private placement of 100,000
units (the "Unit Offering" or "Units") consisting of $400 million aggregate
principal amount of 11 3/8% Senior Discount Notes due 2006 ("Senior Notes") and
110,000 shares of common stock of the Company. The Senior Notes will mature on
March 1, 2006. The issue price of the Senior Notes represents a yield to
maturity of 11 3/8% per annum computed on a semi-annual bond equivalent basis.
Cash interest on the Senior Notes will not be payable prior to March 1, 2001.
Commencing September 1, 2001, cash interest on the Senior Notes will be payable
on March 1 and September 1 of each year at a rate of 11 3/8% per annum.
Including amounts attributable to the common stock, the issuance of the Units
resulted in net proceeds to the Company of approximately $219.7 million after
underwriting discounts and other debt issuance costs aggregating approximately
$9.8 million. For financial reporting purposes, the shares of common stock were
valued at $800,000.

    The Senior Notes were issued pursuant to an Indenture which contains certain
restrictive covenants and limitations. Among other things, the Indenture limits
the incurrence of additional indebtedness, limits the making of restricted
payments (as defined) including the declaration and/or payment of dividends,
places limitations on dividends and other payments by the Company's
subsidiaries, prohibits the Company and its subsidiaries from engaging in any
business other than the transmission of video, voice and data and related
businesses and services, and places limitations on liens, certain asset
dispositions and merger/sale of assets activity.

HEARTLAND LONG-TERM NOTE

    In connection with the Contributions on February 23, 1996, Heartland
received the Heartland Long-Term Note. The Heartland Long-Term Note has a final
maturity date that is 10 years and one day after the closing after the
Contributions. The interest rate on the Heartland Long-Term Note increases from
10% to 15% if the Heartland Long-Term Note is not repaid within one year of
issuance, with interest accruing and added to the balance annually. No cash
interest will be paid on the Heartland Long-Term Note until after the Senior
Notes (see above) have been paid in full. During 1997, the Company made a
payment of approximately $15 million on the Heartland Long-Term Note with a
portion of the proceeds from the disposition of assets and wireless channel
rights in Atlanta (see note 2 (c)).

BTA AUCTION PAYABLE TO AFFILIATES

    The FCC recently concluded auctions for the award of initial commercial
wireless cable licenses for "Basic Trading Areas" or "BTAs" (the "BTA Auction").
Pursuant to an agreement among CAI, Heartland and the Company, CAI and Heartland
are obligated to convey to the Company, at their cost, and the Company has
agreed to purchase, any rights acquired in the BTA Auction relating to the
Company's markets, as well as certain other BTAs. CAI and Heartland were the
winning bidders in the amount of approximately $17.9 million with respect to
BTAs that will be conveyed to the Company. As of December 31, 1997, the
accompanying consolidated balance sheet reflects a BTA auction payable to CAI,
Heartland and other unaffiliated entities of approximately $643,000, $3,543,000
and $210,000, respectively, representing the remaining unpaid balances with
respect to BTAs to be conveyed to the Company. The BTA auction payable to
Heartland bears interest at 9.5% and will be paid over a 10-year period

                                      F-16
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(6) LONG-TERM DEBT (CONTINUED)
commencing in the fourth quarter of 1996. The Company is required to make
quarterly interest-only payments for the first two years and quarterly payments
of principal and interest over the remaining eight years.

    During 1997, the Company exchanged and returned to Heartland certain of its
rights to BTA licenses, resulting in a decrease of $614,000 in license costs and
the corresponding BTA payable.

ACQUISITION NOTE

    In connection with the acquisition of USA (note 2(b)), the Company assumed a
note payable of $3,000,000 with an interest rate of 12%. In February 1997, the
Company settled this note payable, a note receivable for $1,260,000 (see note
2(b)) and working capital adjustments for a cash payment of $2,103,000.

    The Company is currently highly leveraged, and it is expected to continue to
have a high level of debt for the foreseeable future. As a result of its
leverage and in order to repay existing indebtedness, the Company will be
required to generate substantial operating cash flow. The ability of the Company
to meet these requirements will depend on, among other things, prevailing
economic conditions and financial, business and other factors, some of which are
beyond the control of the Company.

    Aggregate maturities of long-term debt as of December 31, 1997 for the five
years ending December 31, 2002 and thereafter are as follows:

<TABLE>
<S>                                                                 <C>
1998..............................................................  $     995
1999..............................................................        562
2000..............................................................        462
2001..............................................................        405
2002..............................................................        445
Thereafter........................................................    285,430
</TABLE>

(7) LEASES AND FCC LICENSES

    The Company is dependent on leases with third parties for most of its
wireless cable channel rights. Under FCC rules, the base term of each lease
cannot exceed the term of the underlying FCC license. FCC licenses for wireless
cable channels generally must be renewed every ten years, and there is no
automatic renewal of such licenses. The use of such channels by the lessors is
subject to regulation by the FCC and, therefore, the Company's ability to
continue to enjoy the benefits of these leases is dependent upon the lessors'
continuing compliance with applicable regulations. The remaining initial terms
of most of the Company's channel leases range from 5 to 10 years, although
certain of the Company's channel leases have initial terms expiring in the next
several years. Most of the Company's leases provide that the lessor may
negotiate lease renewals with only the Company and, if a renewal agreement is
not reached within a specified time, grant the Company a right of first refusal
to match any competing offers. Although the Company does not believe that the
termination of or failure to renew a single channel lease would adversely affect
the Company, several of such terminations or failures in one or more markets
that the Company actively serves could have a material adverse effect on the
Company. Channel rights lease agreements generally require payments based on the
greater of specified minimums or amounts based

                                      F-17
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(7) LEASES AND FCC LICENSES (CONTINUED)
upon various subscriber levels. Additionally, FCC licenses also specify
construction deadlines, which, if not met, could result in the loss of the
license. Requests for additional time to construct may be filed and are subject
to review pursuant to FCC rules.

    Payments under the channel rights lease agreements generally begin upon the
completion of construction of the transmission equipment and facilities and
approval for operation pursuant to the rules and regulations of the FCC.
However, for certain leases, the Company is obligated to begin payments upon
grant of the channel rights. Channel rights lease expense was approximately
$1,883,000 and $1,810,000 for the years ended December 31, 1997 and 1996,
respectively.

    The Company also has certain operating leases for office space, equipment
and transmission tower space. Rent expense incurred in connection with other
operating leases was approximately $941,000 and $950,000 for the years ended
December 31, 1997 and 1996, respectively.

    Future minimum lease payments due under channel rights leases and other
noncancellable operating leases at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                             CHANNEL       OTHER
                                                                             RIGHTS      OPERATING
YEAR ENDING DECEMBER 31,                                                     LEASES       LEASES
-------------------------------------------------------------------------  -----------  -----------
<S>                                                                        <C>          <C>
1998.....................................................................   $   3,048        1,028
1999.....................................................................       3,441          880
2000.....................................................................       3,536          743
2001.....................................................................       3,607          674
2002.....................................................................       3,636          655
</TABLE>

(8) STOCKHOLDERS' EQUITY

(A) PREFERRED STOCK

    The Company has authorized 5,000,000 shares of preferred stock which can be
issued in series with varying preferences and conversion features as determined
by the Board of Directors of the Company. At December 31, 1997, no shares of
preferred stock were issued.

(B) STOCK OPTIONS

    In 1996, the Company established the CS Wireless Systems, Inc. Incentive
Stock Plan ("Stock Plan") which provides for the issuance of stock options to
officers and other key employees of the Company and its subsidiaries. The Stock
Plan makes available for issuance 1,500,000 shares of common stock. Options
issued under the Stock Plan have varying vesting periods as provided in separate
stock option agreements and generally carry an expiration date of ten years
subsequent to the date of issuance. Options issued are required to have an
exercise price of not less than fair market value of the Company's common stock
on the date of grant.

    The Company applies APB Opinion No. 25 in accounting for its Stock Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company

                                      F-18
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(8) STOCKHOLDERS' EQUITY (CONTINUED)
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Net loss:
  As reported.........................................................  $  (52,565) $  (28,527)
  Pro forma...........................................................     (54,418)    (29,404)

Basic and diluted loss per common share:
  As reported.........................................................  $    (4.94) $    (3.06)
  Pro forma...........................................................       (5.11)      (3.21)
</TABLE>

    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996: dividend yield of 0%; risk-free
interest rate of 6.0% and an expected life of 5 years.

    Following is a summary of activity in the employee option plan discussed
above for the years ended December 31, 1996 and 1997:

<TABLE>
<CAPTION>
                                                            1997                     1996
                                                   -----------------------  ----------------------
                                                                WEIGHTED                WEIGHTED
                                                                 AVERAGE                 AVERAGE
                                                                EXERCISE                EXERCISE
                                                     SHARES       PRICE      SHARES       PRICE
                                                   ----------  -----------  ---------  -----------
<S>                                                <C>         <C>          <C>        <C>
Outstanding at beginning of year.................     655,161   $    9.40      --       $  --
Granted..........................................     833,335        6.50     655,161        9.40
Exercised........................................      --          --          --          --
Canceled.........................................    (589,635)       9.14      --          --
                                                   ----------       -----   ---------       -----
Outstanding at end of year.......................     898,861   $    6.88     655,161   $    9.40
                                                   ----------       -----   ---------       -----
                                                   ----------       -----   ---------       -----
Options exercisable at year end..................     536,818                 367,049
                                                   ----------               ---------
                                                   ----------               ---------
Weighted average fair value of options granted
  during the year................................  $     6.50               $    9.40
                                                   ----------               ---------
                                                   ----------               ---------
</TABLE>

    During 1997, the Company repriced 333,335 vested options from $9.40 per
share to $6.50 per share. The resulting exercise price is based on the estimated
fair value of the Company on the date of the

                                      F-19
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(8) STOCKHOLDERS' EQUITY (CONTINUED)
repricing. Accordingly, no compensation expense was recorded as a result of the
option repricing. The following table summarizes information about stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING
                                --------------------------------------     OPTIONS EXERCISABLE
                                               WEIGHTED                 -------------------------
                                   NUMBER       AVERAGE     WEIGHTED       NUMBER      WEIGHTED
                                OUTSTANDING    REMAINING     AVERAGE    EXERCISABLE     AVERAGE
                                AT DECEMBER   CONTRACTUAL   EXERCISE    AT DECEMBER    EXERCISE
EXERCISE PRICE                    31, 1997       LIFE         PRICE       31, 1997       PRICE
------------------------------  ------------  -----------  -----------  ------------  -----------
<S>                             <C>           <C>          <C>          <C>           <C>
$6.50.........................      781,335    9.1 years    $    6.50        91,999    $    6.50
                                ------------  -----------       -----   ------------       -----
                                ------------  -----------       -----   ------------       -----
$9.40.........................      321,826    8.2 years    $    9.40       444,819    $    9.40
                                ------------  -----------       -----   ------------       -----
                                ------------  -----------       -----   ------------       -----
</TABLE>

(9) INCOME TAXES

    The Company recognized deferred income tax benefits of $5,429,000 and
$14,631,000 for the year ended December 31, 1997 and 1996 consists of a deferred
tax benefit.

    Total income tax benefit for the year ended December 31, 1997 and 1996
differed from the amount computed by applying the U.S. federal statutory income
tax rate of 35% to loss before income taxes as a result of the following:

<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Computed "expected tax" benefit.......................................  $  (19,827) $  (15,105)
  Amortization of goodwill............................................       1,394       1,260
  State income taxes..................................................      (1,133)       (863)
  Adjustment to prior year deferred taxes.............................      (2,019)     --
  Increase in valuation allowance.....................................      16,082      --
  Other, net..........................................................          74          77
                                                                        ----------  ----------
                                                                        $   (5,429) $  (14,631)
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

                                      F-20
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(9) INCOME TAXES (CONTINUED)
    The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are presented below:

<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards....................................  $   14,596  $    7,152
  Noncash interest....................................................      19,736       8,493
  Investments in affiliates...........................................         499      --
  Property and equipment..............................................       1,443      --
  Other...............................................................      --              45
                                                                        ----------  ----------
    Total gross deferred tax assets...................................      36,274      15,690
  Less valuation allowance............................................     (16,082)     --
                                                                        ----------  ----------
                                                                            20,192      15,690
                                                                        ----------  ----------
Deferred tax liabilities:
  License and leased license investment...............................      20,143      20,977
  Property and equipment..............................................      --             142
  Other...............................................................          49      --
                                                                        ----------  ----------
    Total deferred tax liabilities....................................      20,192      21,119
                                                                        ----------  ----------
    Net deferred tax liability........................................  $   --      $    5,429
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

    Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rate in effect to the gross amounts of temporary differences
and other tax attributes, such as net operating loss carryforwards. Deferred tax
assets and liabilities relating to state income taxes are not material.

    In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon these
considerations, the Company has recognized deferred tax assets to the extent
such assets can be realized through future reversals of existing taxable
temporary differences.

    At December 31, 1997, the Company has net operating loss carryforwards
available of approximately $39,446,000 which begin to expire in 2010.
Approximately $8,955,000 of the net operating loss carryover is subject to an
annual limitation and the separate return limitation year rules.

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS

    The fair value of the Senior Notes at December 31, 1997 was approximately
$96.0 million (carrying amount of $281.2 million) and is based on market quotes
obtained from dealers. The carrying amounts of the Heartland Long-Term Note, the
Acquisition Note and the BTA auction payables approximate fair value as these
notes bear interest at current market rates.

                                      F-21
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1997 AND 1996

                  (TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short maturity of these
instruments.

(11) COMMITMENTS AND CONTINGENCIES

    The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through 2000.
The agreements generally require monthly payments based upon the number of
subscribers to the Company's systems, subject to certain minimums.

    The Company has signed a definitive agreement to purchase from approximately
$55,607,000 to $67,894,000 in total value, depending on the period of
acquisition, of digital subscriber premises equipment with deliveries over a
three-year period ending in March 2000. The contract includes certain
cancellation penalties of up to approximately $1 million which if incurred could
be material to the Company. The Company has purchased approximately $3,813,000
in equipment under this agreement through December 31, 1997.

    The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material adverse
effect on the Company's consolidated financial position, operating results or
liquidity.

                                      F-22
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
CAI WIRELESS SYSTEMS, INC.

    We have audited the accompanying combined balance sheet of CS Wireless
Systems, Inc. and subsidiaries (formerly ACS Ohio, Inc.) and certain assets of
Atlantic Microsystems, Inc. as of December 31, 1995 and the related combined
statements of operations and accumulated deficit and cash flows for the period
from September 30, 1995 to December 31, 1995. 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 audit.

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

    In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of CS Wireless
Systems, Inc. and subsidiaries (formerly ACS Ohio, Inc.) and certain assets of
Atlantic Microsystems, Inc. at December 31, 1995, and the combined results of
their operations and their cash flows for the period from September 30, 1995 to
December 31, 1995, in conformity with generally accepted accounting principles.

                                          /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
April 1, 1996

                                      F-23
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

                             COMBINED BALANCE SHEET

                               DECEMBER 31, 1995
                           (000S, EXCEPT SHARE DATA)

<TABLE>
<S>                                                                                  <C>
                                            ASSETS
Current assets:
  Cash.............................................................................  $     184
  Accounts receivable, less allowance for doubtful accounts of $138................        370
  Other current assets.............................................................         35
                                                                                     ---------
Total current assets...............................................................        589
Plant and equipment, net...........................................................     12,220
Wireless channel rights, net.......................................................     29,500
Goodwill, net......................................................................     33,379
                                                                                     ---------
                                                                                     $  75,688
                                                                                     ---------
                                                                                     ---------

                                    LIABILITIES AND EQUITY

Current liabilities:
  Capital lease obligations........................................................  $      52
  Accounts payable and accrued expenses............................................      2,286
  Customer deposits and billings received in advance...............................        398
                                                                                     ---------
Total current liabilities..........................................................      2,736
Capital lease obligations..........................................................         60
Due to CAI Wireless Systems, Inc...................................................      1,831
Deferred income taxes..............................................................     10,745
Equity:
  Preferred Stock--par value $.01 per share, authorized 5,000,000, none issued.....     --
  Common stock--par value $.001 per share, authorized 40,000,000, issued 1,000
    shares.........................................................................          1
  Additional paid-in capital.......................................................     15,950
  Divisional equity................................................................     45,572
  Accumulated deficit..............................................................     (1,207)
                                                                                     ---------
Total equity.......................................................................     60,316
                                                                                     ---------
                                                                                     $  75,688
                                                                                     ---------
                                                                                     ---------
</TABLE>

                            See accompanying notes.

                                      F-24
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

            COMBINED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT

          FOR THE PERIOD FROM SEPTEMBER 30, 1995 TO DECEMBER 31, 1995
                         (000S, EXCEPT PER SHARE DATA)

<TABLE>
<S>                                                                                 <C>
Revenues:
  Pay television revenues.........................................................  $   2,301
Expenses:
  Programming and license fees....................................................        795
  Marketing.......................................................................        222
  General and administrative, including $151,000 to CAI Wireless Systems, Inc.....      1,086
  Depreciation and amortization...................................................      1,796
                                                                                    ---------
                                                                                        3,899
                                                                                    ---------
                                                                                       (1,598)
Interest expense, net.............................................................         (2)
                                                                                    ---------
Loss before tax benefit...........................................................     (1,600)
Benefit from income taxes.........................................................        393
                                                                                    ---------
Net loss..........................................................................  $  (1,207)
Accumulated deficit:
  Beginning of period.............................................................     --
                                                                                    ---------
  End of period...................................................................  $  (1,207)
                                                                                    ---------
                                                                                    ---------
Per share data:
Net loss per common share.........................................................  $  (1,207)
                                                                                    ---------
                                                                                    ---------
Weighted average common shares outstanding........................................      1,000
                                                                                    ---------
                                                                                    ---------
</TABLE>

                            See accompanying notes.

                                      F-25
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

                        COMBINED STATEMENT OF CASH FLOWS

          FOR THE PERIOD FROM SEPTEMBER 30, 1995 TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                                                                                          (000S)
                                                                                                         ---------
<S>                                                                                                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...............................................................................................  $  (1,207)
Adjustments to reconcile net loss to net cash used in operating activities:
  Deferred income taxes................................................................................       (393)
  Depreciation and amortization........................................................................      1,796
  Changes in assets and liabilities:
    Accounts receivable................................................................................        (24)
    Other operating assets.............................................................................         14
    Accounts payable and accrued expenses..............................................................       (887)
    Other operating liabilities........................................................................        (37)
                                                                                                         ---------
Net cash used in operating activities..................................................................       (738)
                                                                                                         ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................................................................     (1,037)
                                                                                                         ---------
Net cash used in investing activities..................................................................     (1,037)
                                                                                                         ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations..................................................................         (2)
Advances from CAI Wireless Systems, Inc................................................................      1,831
                                                                                                         ---------
Net cash provided by financing activities..............................................................      1,829
                                                                                                         ---------
Net increase in cash...................................................................................         54
Cash, beginning of period..............................................................................        130
                                                                                                         ---------
Cash, end of period....................................................................................  $     184
                                                                                                         ---------
                                                                                                         ---------
</TABLE>

                            See accompanying notes.

                                      F-26
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                               DECEMBER 31, 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

    CS Wireless Systems, Inc. (CS) (formerly ACS Ohio, Inc.), a wholly-owned
subsidiary of CAI Wireless Systems, Inc. (CAI), operates a wireless subscription
television system in Cleveland, Ohio through its two subsidiaries (MetroCable,
Inc. and Metropolitan Satellite Corporation). CS was incorporated in December
1993 and remained dormant until March 1994 when CS, through its parent, ACS
Enterprises, Inc. (ACS) acquired its two subsidiaries. CAI acquired ACS on
September 29, 1995 (see Note 7). The wireless channel rights and goodwill
associated with the Cleveland system were transferred to Atlantic Microsystems,
Inc. (AMI), a wholly owned subsidiary of CAI, upon CAI's acquisition of ACS
Ohio, Inc. and have been included in the accompanying combined financial
statements. The assets presented herein have been contributed by CAI into a
joint venture with Heartland Wireless Communications, Inc. (Heartland) in
accordance with a Participation Agreement which closed on February 23, 1996 (see
note 8).

PRINCIPLES OF COMBINATION

    The combined financial statements include the accounts of CS and its two
subsidiaries and certain assets of AMI (the Company). All material intercompany
accounts and transactions have been eliminated in combination.

USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

REVENUE RECOGNITION

    Subscriber revenue is recognized at the time payments are due. Customer
payments received in advance of the due date are classified as deferred income.
Bad debt expense was approximately $108,000 for the period from September 30,
1995 to December 31, 1995 (1995).

PLANT AND EQUIPMENT

    Plant and equipment are carried at historical cost if purchased or
constructed by the Company, or allocated cost if acquired as part of a business
acquisition. Depreciation is calculated on the straight-line method for
financial and tax reporting purposes. Costs of maintenance and repairs are
charged to income as incurred; significant renewals and betterments are
capitalized. The Company capitalizes subcontractor and internal labor and
overhead incurred to construct and install its television reception and
transmission equipment.

    Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Materials and supplies are
carried at the lower of cost, determined on the weighted average method (which
approximates the first-in, first-out method), or market.

    The common stock and additional paid-in capital represent the equity
contribution of CAI into CS Wireless Systems, Inc. The Divisional equity
represents the Company's permanent investment in AMI.

                                      F-27
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AUTHORIZED SHARES

    In December 1995, the Company increased its authorized shares of common
stock from 1,000 to 40,000,000 and changed the par value per share from $1 to
$.001. The Company also authorized 5,000,000 shares of Preferred Stock with a
par value of $.01 per share.

GOODWILL AND WIRELESS CHANNEL RIGHTS

    Goodwill consists of costs of acquired businesses in excess of fair market
value allocated to specific assets. Goodwill is amortized on a straight-line
basis over its estimated useful life of fifteen years. Wireless channel rights
are being amortized over fifteen years.

    The carrying value of the goodwill and wireless channel rights are reviewed
on an ongoing basis. If the review indicates that these assets are not
recoverable, as determined based on undiscounted future cash flows, the
Company's carrying value of these assets is reduced to its estimated fair value.
No such reduction to these assets was made in 1995.

LOSS PER SHARE

    Loss per share is based on the average number of common shares outstanding
during the period.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

    Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is
effective for fiscal years beginning after December 15, 1995. The Company will
adopt the standard, as required on January 1, 1996. Management believes that the
adoption will not have a material effect on the Company's financial position or
results of operations.

2. PLANT AND EQUIPMENT

    Plant and equipment consisted of the following (000s):

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,    LIFE
CLASSIFICATION                                                             1995       (YEARS)
---------------------------------------------------------------------  ------------  ---------
<S>                                                                    <C>           <C>
Vehicles.............................................................   $       12           3
Office and computer..................................................          530           5
Transmission equipment...............................................          806          10
Television and other equipment.......................................       10,794      2 to 7
Materials and Supplies...............................................          976     2 to 10
                                                                       ------------  ---------
                                                                            13,118
Less accumulated depreciation........................................         (898)
                                                                       ------------
                                                                        $   12,220
                                                                       ------------
                                                                       ------------
</TABLE>

                                      F-28
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1995

2. PLANT AND EQUIPMENT (CONTINUED)
    Capitalized overhead costs were approximately $164,000 in 1995. Depreciation
expense was approximately $727,000 in 1995.

3. GOODWILL AND WIRELESS CHANNEL RIGHTS

    Goodwill consisted of the following (000s):

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                                      1995
                                                                                  ------------
<S>                                                                               <C>
Costs of acquired businesses in excess of fair market values allocated to
  specific assets...............................................................   $   33,945
Less accumulated amortization...................................................         (566)
                                                                                  ------------
                                                                                   $   33,379
                                                                                  ------------
                                                                                  ------------
</TABLE>

    Wireless channel rights consisted of the following (000s):

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                                      1995
                                                                                  ------------
<S>                                                                               <C>
Wireless channel rights.........................................................   $   30,000
Less accumulated amortization...................................................         (500)
                                                                                  ------------
                                                                                   $   29,500
                                                                                  ------------
                                                                                  ------------
</TABLE>

4. DUE TO CAI WIRELESS SYSTEMS, INC.

    The Due to CAI Wireless Systems, Inc. amount included in the balance sheet
represents a balance as the result of various transactions between the Company
and CAI. The $1,831,000 balance at December 31, 1995 is classified as a
long-term liability in the accompanying Combined balance sheet because it is not
expected to be repaid within the upcoming twelve months (see Note 8).

    The Company utilizes various CAI personnel such as accounting staff and
certain officers as well as administrative functions including professional
services. For these services, the Company was charged $151,000 in 1995.

5. LEASES

    The Company is the licensee of one of the Federal Communications Commission
("FCC") licensed channels available in the Cleveland area, and leases
twenty-four of the remaining thirty-two FCC licenses.

    Generally, channel leases provide for monthly rentals based on subscriber
revenue, or the number of subscribers served by the channels being leased. These
amounts were between $0.025 to $0.04 per subscriber per channel per month.
Additionally, certain leases provide for minimum lease payments which do not
significantly increase the total channel license fees payable under the leases
at the present level of subscribers being served. Pursuant to FCC rules, leases
for channel usage cannot extend beyond ten years. Each lease generally provides
for renewal options, or for the parties to negotiate renewals in good faith.

                                      F-29
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1995

5. LEASES (CONTINUED)
    A summary of channel lease terms at December 31, 1995 is as follows:

<TABLE>
<CAPTION>
                                                          LEASE               EXTENSION
CHANNELS                        LESSOR                  EXPIRATION              TERMS
------------------  ------------------------------  ------------------  ----------------------
<S>                 <C>                             <C>                 <C>
A1................  Parma Board of Education        January 2005        CAI 10-year option
A2-C4.............  Etamc                           April 2002          Auto 5-year option
D1-D4.............  Rockne Educ. Telev.             March 2005          CAI 10-year option
E1-E4.............  Lawrence Brandt                 August 2012         Unspecified
F1-F4.............  Krisar, Inc.                    August 1998         CAI 10-year option
H2................  Via./Net Cos.                   December 1995       Auto 5-year option
</TABLE>

    Expense incurred under channel lease agreements aggregated approximately
$57,000 in 1995. The Company leases its transmitter tower. This lease expires in
June 2005 and provides for monthly lease payments of $5,500.

    All of the above leases are accounted for as operating leases.

    The Company leases office space, automobiles, trucks, and office equipment.
The office space, trucks, and certain office equipment leases have also been
classified as operating leases. The leases covering the remaining office
equipment are classified as capital leases.

    Plant and equipment includes the following capitalized values and
accumulated amortization for property under capital leases (000s):

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                                       1995
                                                                                  ---------------
<S>                                                                               <C>
Office and computer.............................................................     $     142
Less accumulated amortization...................................................            (6)
                                                                                         -----
                                                                                     $     136
                                                                                         -----
                                                                                         -----
</TABLE>

                                      F-30
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1995

5. LEASES (CONTINUED)
    The following is a schedule of the present value of future minimum capital
lease payments and the future minimum operating lease payments with initial or
remaining terms in excess of one year.

<TABLE>
<CAPTION>
                                                                             CAPITAL     OPERATING
                                                                             LEASES       LEASES
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
1996.....................................................................   $      64    $     382
1997.....................................................................          63          336
1998.....................................................................           9          296
1999.....................................................................      --              296
2000.....................................................................      --              296
2001 and beyond..........................................................      --              960
                                                                                -----   -----------
Total minimum lease payments.............................................         136    $   2,566
                                                                                -----   -----------
                                                                                -----   -----------
Less amount representing interest........................................         (24)
                                                                                -----   -----------
Present value of minimum lease payments..................................   $     112
                                                                                -----   -----------
                                                                                -----   -----------
</TABLE>

    Expense incurred under non-channel operating leases approximated $48,000 in
1995.

6. INCOME TAXES

    The Company and its wholly-owned subsidiaries are included in the
consolidated federal tax return of CAI. The Company had no current state or
federal income tax expenses for the period from September 30, 1995 to December
31, 1995.

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as calculated on a stand-alone
basis were as follows (000s):

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,  DECEMBER 31,
                                                                      1995           1995
                                                                  -------------  ------------
<S>                                                               <C>            <C>
Deferred tax liabilities:
  Basis difference on property and equipment....................    $     577     $      527
  Gain on transfer of wireless channel rights...................       11,519         11,335
                                                                  -------------  ------------
Total deferred tax liabilities..................................       12,096         11,862
Deferred tax assets:
  Net operating loss carryforwards..............................          855          1,106
  Other.........................................................          103             11
                                                                  -------------  ------------
Total deferred tax assets.......................................          958          1,117
                                                                  -------------  ------------
Net deferred tax liabilities....................................    $  11,138     $   10,745
                                                                  -------------  ------------
                                                                  -------------  ------------
</TABLE>

                                      F-31
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1995

6. INCOME TAXES (CONTINUED)
    The Company has available net operating loss carryforwards of approximately
$2,764,000 for tax reporting purposes to offset future taxable income, the
primary difference from financial reporting losses being the difference in the
basis of wireless channel rights and in depreciation methods for financial and
tax reporting purposes. The net operating loss carryforwards expire through
2010.

7. SYSTEM ACQUISITION

    Effective September 30, 1995, CAI consummated the acquisition of 100% of the
outstanding common stock of ACS Enterprises, Inc. (ACS) for $232,000,000 of CAI
common stock and cash.

    CAI allocated the purchase price, based upon estimated fair values of assets
and liabilities at the date of acquisition to each of the markets acquired in
the acquisition. The purchase price allocation to the Cleveland market was as
follows (000s):

<TABLE>
<S>                                                                <C>
Operating assets.................................................  $     525
Plant and equipment..............................................     12,024
Goodwill.........................................................     33,945
Wireless channel rights..........................................     30,000
Liabilities......................................................    (14,971)
                                                                   ---------
Net assets acquired..............................................  $  61,523
                                                                   ---------
                                                                   ---------
</TABLE>

    Plant and equipment from the acquisition consist primarily of customer
acquisition costs (material, installation labor and overhead). These costs are
being depreciated over their estimated useful lives of two to seven years.

    Goodwill and wireless channel rights acquired in the acquisition are being
amortized on a straight-line basis over fifteen years.

8. SUBSEQUENT EVENT

    On February 23, 1996, CAI and Heartland contributed the assets and
liabilities of certain wireless subscription television systems to the Company
in for certain consideration. CAI's ownership of the Company, which operates the
subscriber television system in Cleveland, OH, was diluted from 100% to
approximately 54%. Additionally, CAI contributed the Charlotte, NC, Bakersfield,
CA and Stockton/ Modesto, CA systems for 5,421,166 shares of common stock of the
Company. Heartland contributed the Minneapolis, MN, Dayton, OH, San Antonio, TX,
Fort Worth, TX, Grand Rapids, MI, Kansas City (suburbs), MO, Dallas, TX, and
Salt Lake City, UT systems for $28.3 million in cash, $25 million in the form of
a short term note, $15 million in the form of a long term note and 3,578,834
shares of common stock of the Company.

    In order to attract and retain highly qualified persons, the Company adopted
the 1996 CS Wireless Systems, Inc. Incentive Plan (the "Plan") to be effective
as of February 23, 1996, subject to shareholder approval within twelve months of
the effective date. The Board of Directors of the Company designated a committee
to administer the Plan. The Plan provides for the grant of incentive stock
options (qualifying under Section 422 of the Internal Revenue Code),
non-qualfied stock options, stock appreciation rights,

                                      F-32
<PAGE>
                   CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
                           (FORMERLY ACS OHIO, INC.)
               AND CERTAIN ASSETS OF ATLANTIC MICROSYSTEMS, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1995

8. SUBSEQUENT EVENT (CONTINUED)
performance shares and restricted stock or any combination of the foregoing, as
the committee may determine. Terms and conditions, including vesting provisions,
exercise periods and forms of award, are determined by the committee at the
grant date. Shares available for the Plan is limited to 752,688. The Plan will
terminate on February 22, 2006. In March 1996, options were granted to four
persons, aggregating 645,161 shares subject to those options with a $9.40 per
share exercise price. The options vest monthly over 24 to 36 months and the
exercise periods end on December 31, 2005 or February 22, 2006.

    Additionally, MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and
NYNEX MMDS Holding Company, an affiliate of NYNEX, each received 500,000 shares
of common stock of the Company, for non-cash consideration.

    Concurrent with the contributions of the wireless subscription television
systems and issuance of common stock to CAI, Heartland, MMDS Holdings II, Inc.
and NYNEX MMDS Holdings Company, the Company completed the issuance of 100,000
units consisting of $400,000,000 11 3/8% Senior Discount Notes due 2006 and
110,000 shares of common stock. The net proceeds of the issuance of the units
was approximately $221,000,000, net of discounts and expenses of approximately
$9,000,000. These notes contain covenants restricting the incurrence of
additional debt and limit the ability of the Company to pay dividends or redeem
capital stock. The Company cannot declare or pay dividends.

    Net assets held for sale consist of an operating wireless cable system in
Bakersfield, California and wireless cable channel rights in Stockton/Modesto,
California, which the Company expects to sell by the end of 1996. For financial
reporting purposes, the net assets held for sale are recorded at the lower of
the carrying amount of fair value less cost to sell. In addition, the Company is
not depreciating or amortizing such net assets while they are held for sale.

    As of March 31, 1996, the Company's registration statement had not yet been
declared effective by the Commission. Subsequent to June 24, 1996, the Company
will be required to pay additional interest on the outstanding Senior Notes. The
amount of additional interest will increase by an additional 0.50% per annum for
each subsequent 90-day period until such obligations are complied with, up to a
maximum amount of additional interest of 2.00% per annum.

                                      F-33
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
CAI Wireless Systems, Inc.

    We have audited the accompanying consolidated balance sheets of ACS Ohio,
Inc. and subsidiaries as of December 31, 1994 and September 29, 1995 and the
related consolidated statements of operations and accumulated deficit and cash
flows for the period from March 9, 1994 (date of inception) to December 31, 1994
and for the period from January 1, 1995 to September 29, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ACS Ohio, Inc. and subsidiaries at December 31, 1994 and September 29, 1995, and
the consolidated results of their operations and their cash flows for the period
from March 9, 1994 (date of inception) to December 31, 1994 and for the period
from January 1, 1995 to September 29, 1995, in conformity with generally
accepted accounting principles.

                                              /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
April 1, 1996

                                      F-34
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           (000'S, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,  SEPTEMBER 29,
                                                                                          1994          1995
                                                                                      ------------  -------------
<S>                                                                                   <C>           <C>
                                                     ASSETS
Current assets:
  Cash..............................................................................   $      710     $     130
  Accounts receivable, less allowance for doubtful accounts of $113 and $9 in 1995
    and 1994, respectively..........................................................          177           346
  Other current assets..............................................................           56            49
                                                                                      ------------  -------------
Total current assets................................................................          943           525
Plant and equipment, net............................................................       10,015        12,275
Channel acquisition costs, net......................................................        1,299         1,203
Goodwill, net.......................................................................        7,484         7,092
                                                                                      ------------  -------------
                                                                                       $   19,741     $  21,095
                                                                                      ------------  -------------
                                                                                      ------------  -------------

                                      LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
  Current maturities of capital lease obligations...................................   $       81     $      81
  Accounts payable and accrued expenses.............................................          810         3,344
  Customer deposits and billings received in advance................................          436           435
                                                                                      ------------  -------------
Total current liabilities...........................................................        1,327         3,860
Capital lease obligations...........................................................          164           144
Due to ACS Enterprises, Inc.........................................................        2,226         3,591
Deferred income taxes...............................................................          649        --
Stockholder's equity:
  Common stock--par value $1 per share, authorized and issued 1,000 shares..........            1             1
  Additional paid-in capital........................................................       15,950        15,950
  Accumulated deficit...............................................................         (576)       (2,451)
                                                                                      ------------  -------------
Total stockholder's equity..........................................................       15,375        13,500
                                                                                      ------------  -------------
                                                                                       $   19,741     $  21,095
                                                                                      ------------  -------------
                                                                                      ------------  -------------
</TABLE>

                            See accompanying notes.

                                      F-35
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT

                         (000'S, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    PERIOD FROM
                                                                                   MARCH 9, 1994     PERIOD FROM
                                                                                     (DATE OF      JANUARY 1, 1995
                                                                                    INCEPTION)      TO SEPTEMBER
                                                                                  TO DECEMBER 31,        29,
                                                                                       1994             1995
                                                                                  ---------------  ---------------
<S>                                                                               <C>              <C>
Revenues:
  Pay television revenues.......................................................     $   4,332        $   6,170
Expenses:
  Programming and license fees..................................................         1,239            2,107
  Marketing.....................................................................           221              471
  General and administrative....................................................         1,994            2,863
  Depreciation and amortization.................................................         1,571            3,020
                                                                                       -------     ---------------
                                                                                         5,025            8,461
                                                                                       -------     ---------------
                                                                                          (693)          (2,291)
Interest expense, net...........................................................           (62)            (233)
                                                                                       -------     ---------------
Loss before income taxes........................................................          (755)          (2,524)
Benefit from income taxes.......................................................           179              649
                                                                                       -------     ---------------
Net loss........................................................................     $    (576)       $  (1,875)
Accumulated deficit:
  Beginning of period...........................................................        --                 (576)
                                                                                       -------     ---------------
  End of period.................................................................     $    (576)       $  (2,451)
                                                                                       -------     ---------------
                                                                                       -------     ---------------
Per share data:
  Net loss per common share.....................................................     $    (576)       $  (1,875)
                                                                                       -------     ---------------
                                                                                       -------     ---------------
Weighted average common shares outstanding......................................         1,000            1,000
                                                                                       -------     ---------------
                                                                                       -------     ---------------
</TABLE>

                            See accompanying notes.

                                      F-36
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                    (000'S)

<TABLE>
<CAPTION>
                                                                                    PERIOD FROM
                                                                                   MARCH 9, 1994     PERIOD FROM
                                                                                     (DATE OF      JANUARY 1, 1995
                                                                                    INCEPTION)      TO SEPTEMBER
                                                                                  TO DECEMBER 31,        29,
                                                                                       1994             1995
                                                                                  ---------------  ---------------
<S>                                                                               <C>              <C>
Cash flows from operating activities
  Net loss......................................................................     $    (576)       $  (1,875)
  Adjustments to reconcile net loss to net cash provided by operating
    activities:
    Deferred income taxes.......................................................          (179)            (649)
    Depreciation and amortization...............................................         1,571            3,020
    Changes in assets and liabilities:
      Accounts receivable.......................................................           104             (169)
      Other operating assets....................................................            73                7
      Accounts payable and accrued expenses.....................................           438            2,534
      Other operating liabilities...............................................          (184)              (1)
                                                                                       -------          -------
Net cash provided by operating activities.......................................         1,247            2,867
                                                                                       -------          -------
Cash flows from investing activities
  Capital expenditures..........................................................        (2,608)          (4,792)
  Purchase of Channel rights....................................................          (519)          --
                                                                                       -------          -------
  Net cash used in investing activities.........................................        (3,127)          (4,792)
                                                                                       -------          -------
Cash flows from financing activities
  Payments of capital lease obligations.........................................           (32)             (20)
  Advances from ACS Enterprises, Inc............................................         2,226            1,365
                                                                                       -------          -------
  Net cash provided by financing activities.....................................         2,194            1,345
                                                                                       -------          -------
  Net (decrease) increase in cash...............................................           314             (580)
Cash, beginning of period.......................................................           396              710
                                                                                       -------          -------
Cash, end of period.............................................................     $     710        $     130
                                                                                       -------          -------
                                                                                       -------          -------
</TABLE>

                            See accompanying notes.

                                      F-37
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

    ACS Ohio, Inc. (the "Company") was formed on March 9, 1994 upon the purchase
of two related companies that together comprise the wireless cable system
serving the Cleveland, Ohio metropolitan area and is a wholly owned subsidiary
of ACS Enterprises, Inc. ("ACS"). ACS is a wholly owned subsidiary of CAI
Wireless Systems, Inc. (see Note 8). The consolidated financial statements
include the accounts of ACS Ohio, Inc. and its wholly owned subsidiaries,
MetroCable, Inc. ("MetroCable") and Metropolitan Satellite, Inc. ("Metro
Satellite"). All material intercompany balances and transactions within ACS
Ohio, Inc. have been eliminated in consolidation.

USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those esimates.

REVENUE RECOGNITION

    Subscriber revenue is recognized at the time payments are due. Customer
payments received in advance of the due date are classified as deferred income.
Bad debt expense was approximately $263,000 and $85,000 for the period from
January 1, 1995 to September 29, 1995 (1995) and for the period from March 9,
1994 to December 31, 1994 (1994), respectively.

PLANT AND EQUIPMENT

    Plant and equipment are carried at historical cost if purchased or
constructed by the Company, or at allocated cost if acquired as part of a
business acquisition. Depreciation is calculated on the straight-line method for
financial and tax reporting purposes. Costs of maintenance and repairs are
charged to income as incurred; significant renewals and betterments are
capitalized. The Company capitalizes subcontractor and internal labor and
overhead incurred to construct and install its television reception and
transmission equipment.

    Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Materials and supplies are
carried at the lower of cost, determined on the weighted average method (which
approximates the first-in, first-out method), or market.

GOODWILL AND CHANNEL ACQUISITION COSTS

    Goodwill consists of costs of acquired businesses in excess of fair market
value allocated to specific assets. Goodwill is amortized on a straight-line
basis over its estimated useful life of fifteen years. Channel acquisition costs
are being amortized over ten years.

LOSS PER SHARE

    The carrying value of the goodwill and channel acquisition costs is reviewed
on an ongoing basis. If the review indicates that these assets are not
recoverable, as determined based on undiscounted future cash flows, the
Company's carrying value of these assets is reduced to its estimated fair value.
No such reduction was made in 1995 or 1994.

                                      F-38
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Loss per share is based on the average number of common shares outstanding
during the period.

RECLASSIFICATION

    Certain prior year amounts have been reclassified to conform to the 1995
presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

    Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" is
effective for fiscal years beginning after December 15, 1995. The Company will
adopt the standard, as required on January 1, 1996. Management believes that the
adoption will not have a material effect on the Company's financial position or
results of operations.

2. PLANT AND EQUIPMENT

    Plant and equipment consisted of the following (000s):

<TABLE>
<CAPTION>
                                                        DECEMBER 31,  SEPTEMBER 29,    LIFE
CLASSIFICATION                                              1994          1995        (YEARS)
------------------------------------------------------  ------------  -------------  ---------
<S>                                                     <C>           <C>            <C>
Vehicles..............................................   $      172     $     185            3
Office and computer...................................          558           682            5
Transmission equipment................................          748           846           10
Television and other equipment........................        8,792        13,167       2 to 7
Materials and supplies................................          839           727      2 to 10
                                                        ------------  -------------  ---------
                                                             11,109        15,607
Less accumulated depreciation.........................       (1,094)       (3,332)
                                                        ------------  -------------
                                                         $   10,015     $  12,275
                                                        ------------  -------------
                                                        ------------  -------------
</TABLE>

    Capitalized overhead costs were approximately $266,000 and $447,000 in 1994
and 1995, respectively. Depreciation expense was approximately $1,063,000 and
$2,482,000 in 1994 and 1995.

3. GOODWILL AND CHANNEL ACQUISITION COSTS

    Goodwill consisted of the following (000s):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,   SEPTEMBER 29,
                                                                      1994           1995
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Costs of acquired businesses in excess of fair market values
  allocated to specific assets..................................    $   7,472      $   7,472
Organization and other costs....................................          408            411
                                                                       ------         ------
                                                                        7,880          7,883
Less accumulated amortization...................................         (396)          (791)
                                                                       ------         ------
                                                                    $   7,484      $   7,092
                                                                       ------         ------
                                                                       ------         ------
</TABLE>

                                      F-39
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. GOODWILL AND CHANNEL ACQUISITION COSTS (CONTINUED)
    Channel acquisition costs consisted of the following (000s):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,   SEPTEMBER 29,
                                                                      1994           1995
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Licenses........................................................    $   1,000      $   1,000
Channel rights..................................................          397            406
                                                                       ------         ------
                                                                        1,397          1,406
Less accumulated amortization...................................          (98)          (203)
                                                                       ------         ------
                                                                    $   1,299      $   1,203
                                                                       ------         ------
                                                                       ------         ------
</TABLE>

4. DUE TO ACS ENTERPRISES, INC.

    The Due to ACS Enterprises, Inc. amount included in the balance sheet
represents a balance as the result of various transactions between the Company
and ACS. The balance is primarily the result of the Company's participation in
ACS' cash management system, wherein cash infusions needed to meet current
operating requirements and for capital expenditures accrue interest at rates
established by ACS, which approximates ACS' external borrowing costs. Interest
charged on this balance was approximately $51,000 and $212,000 in 1994 and 1995,
respectively. The balances at December 31, 1994 and September 29, 1995 of
$2,226,000 and $3,591,000 are classified as long-term liabilities in the
accompanying consolidated balance sheet because the balances are not expected to
be repaid within the upcoming twelve months (see Note 8).

    The Company utilizes various ACS personnel such as accounting staff and
certain officers as well as administrative functions including professional
services. It is ACS' policy to charge these expenses and all other central
operating costs, first on the basis of direct usage when identifiable, with the
remainder allocated among ACS' subsidiaries based on the average of respective
percentages of revenues, payroll costs, and average assets. For these services,
the Company was charged $38,000 and $76,000 in 1994 and 1995, respectively.

5. LEASES

    The Company is the licensee of one of the Federal Communications Commission
("FCC") licensed channels available in the Cleveland area, and leases
twenty-four of the remaining thirty-two FCC licenses.

    Generally, channel leases provide for monthly rentals based on subscriber
revenue, or the number of subscribers served by the channels being leased. These
amounts were between $0.025 to $0.04 per subscriber per channel per month.
Additionally, certain leases provide for minimum lease payments which do not
significantly increase the total channel license fees payable under the leases
at the present level of subscribers being served. Pursuant to FCC rules, leases
for channel usage cannot extend beyond ten years. Each lease generally provides
for renewal options, or for the parties to negotiate renewals in good faith.

                                      F-40
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. LEASES (CONTINUED)
    A summary of channel lease terms at September 29, 1995 is as follows:

<TABLE>
<CAPTION>
                                                          LEASE               EXTENSION
CHANNELS                        LESSOR                  EXPIRATION              TERMS
------------------  ------------------------------  ------------------  ----------------------
<S>                 <C>                             <C>                 <C>
A1................  Parma Board of Education        January 2005        ACS 10-year option
A2-C4.............  Etamc                           April 2002          Auto 5-year option
D1-D4.............  Rockne Educ. Telev.             March 2005          ACS 10-year option
E1-E4.............  Lawrence Brandt                 August 2012         Unspecified
F1-F4.............  Krisar, Inc.                    August 1998         ACS 10-year option
H2................  Via./Net Cos.                   December 1995       Auto 5-year option
</TABLE>

    Expense incurred under channel lease agreements aggregated approximately
$153,000 and $85,000 in 1995 and 1994, respectively. The Company leases its
transmitter tower. This lease expires in June 2005, and provides for monthly
lease payments of $5,500.

    All of the above leases are accounted for as operating leases.

    The Company leases office space, automobiles, trucks, and office equipment.
The office space, and certain office equipment leases have also been classified
as operating leases. The leases covering trucks and the remaining office
equipment are classified as capital leases.

    Plant and equipment includes the following capitalized values and
accumulated amortization for property under capital leases (000s):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,     SEPTEMBER 29,
                                                                       1994             1995
                                                                  ---------------  ---------------
<S>                                                               <C>              <C>
Office and computer.............................................     $     105        $     159
Vehicles........................................................           172              172
                                                                         -----            -----
                                                                           277              331
Less accumulated amortization...................................           (24)             (82)
                                                                         -----            -----
                                                                     $     253        $     249
                                                                         -----            -----
                                                                         -----            -----
</TABLE>

    The following is a schedule of the present value of future minimum capital
lease payments and the future minimum operating lease payments with initial or
remaining terms in excess of one year.

<TABLE>
<CAPTION>
                                                                             CAPITAL     OPERATING
                                                                             LEASES       LEASES
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
1996.....................................................................   $     127    $     316
1997.....................................................................         111          300
1998.....................................................................          22          296
1999.....................................................................      --              296
2000.....................................................................      --              296
2001 and beyond..........................................................      --            1,033
                                                                                -----   -----------
Total minimum lease payments.............................................         260    $   2,537
Less amount representing interest........................................         (35)
                                                                                -----
Present value of minimum lease payments..................................   $     225
                                                                                -----
                                                                                -----
</TABLE>

                                      F-41
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. LEASES (CONTINUED)
    Expense incurred under non-channel operating leases approximated $172,000
and $143,000 in 1994 and 1995, respectively.

6. INCOME TAXES

    The Company and its wholly-owned subsidiaries are included in the
consolidated federal tax return of ACS. The Company had no current state or
federal income tax expenses for 1995 and 1994.

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as calculated on a stand-alone
basis were as follows (000s):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,    SEPTEMBER 29,
                                                                       1994            1995
                                                                  ---------------  -------------
<S>                                                               <C>              <C>
Deferred tax liabilities--
Basis difference on property and equipment......................     $     726       $     577
Deferred tax assets:
  Net operating loss carryforwards..............................            60             855
  Other.........................................................            17             103
                                                                         -----          ------
Total deferred tax assets.......................................            77             958
                                                                         -----          ------
Valuation allowance for deferred tax assets.....................        --                (381)
                                                                         -----          ------
Net deferred tax liabilities....................................     $     649       $  --
                                                                         -----          ------
                                                                         -----          ------
</TABLE>

    The Company has available net operating loss carryforwards of approximately
$2,138,000 for tax reporting purposes to offset future taxable income, the
primary difference from financial reporting losses being the difference in
depreciation methods for financial and tax reporting purposes. The net operating
loss carryforwards expire in 2010.

7. SYSTEM ACQUISITION

    On March 9, 1994, ACS purchased the two related companies that together
comprised the wireless cable system serving the Cleveland, Ohio metropolitan
area for a total of $16,000,000. ACS formed ACS Ohio, Inc. to purchase 100% of
MetroCable, an Ohio corporation, for approximately $8,600,000 cash, and 100% of
MetroSatellite, an Ohio corporation, for approximately $7,400,000 cash.

    The above acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the results of these entities have been
consolidated with ACS since March 9, 1994.

                                      F-42
<PAGE>
                        ACS OHIO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. SYSTEM ACQUISITION (CONTINUED)
    The Company allocated the purchase price, based upon estimated fair values
of assets and liabilities at the date of acquisition, as follows (000s):

<TABLE>
<S>                                                                  <C>
Operating assets...................................................  $     806
Plant and equipment................................................      8,206
Goodwill...........................................................      7,472
Other intangibles..................................................      1,287
Liabilities........................................................     (1,820)
                                                                     ---------
Net assets acquired................................................  $  15,951
                                                                     ---------
                                                                     ---------
</TABLE>

    Plant and equipment from the acquisition consist primarily of customer
acquisition costs (material, installation labor, and purchase price premium).
These costs are being depreciated over their estimated useful lives of two to
seven years.

    Goodwill acquired in the acquisitions is being amortized on a straight-line
basis over fifteen years.

8. SUBSEQUENT EVENTS

    Effective at the close of business on September 29, 1995, a definitive
merger agreement between ACS and CAI Wireless Systems, Inc. ("CAI") was
consummated wherein CAI acquired 100% of the outstanding common stock of ACS for
$232,000,000 of CAI common stock and cash.

    On February 23, 1996, CAI and Heartland contributed the assets and
liabilities of certain wireless subscription television systems to CS Wireless
Systems, Inc. ("CS Wireless") in for certain consideration. CAI's ownership of
CS Wireless, which operates the subscriber television system in Cleveland, OH,
was diluted from 100% to approximately 54%. Additionally, CAI contributed the
Charlotte, NC, Bakersfield, CA and Stockton/Modesto, CA systems for 5,420,166
shares of common stock of the Company. Heartland contributed the Minneapolis,
MN, Dayton, OH, San Antonio, TX, Fort Worth, TX, Grand Rapids, MI, Kansas City
(suburbs), MO, Dallas, TX and Salt Lake City, UT systems for $28.3 million in
cash, $25 million in the form of a short term note, $15 million in the form of a
long term note and 3,578,834 shares of common stock of CS Wireless.

    Additionally, MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and
NYNEX MMDS Holding, an affiliate of NYNEX, each received 500,000 shares of
common stock of CS Wireless, for non-cash consideration.

    Concurrent with the contributions of the wireless subscription television
systems and issuance of common stock to CAI, Heartland, MMDS Holdings II, Inc.
and NYNEX MMDS Holdings Company, CS Wireless completed the issuance of 100,000
units consisting of $400,000,000 11 3/8% Senior Discount Notes due 2006 and
110,000 shares of common stock. The net proceeds of the issuance of the units
was approximately $221,000,000, net of discounts and expenses of approximately
$9,000,000.

                                      F-43
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders

CS Wireless Systems, Inc.:

    Under the date of March 13, 1998, we reported on the consolidated balance
sheets of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for the years then ended, which are included in the Company's
annual report on Form 10-K. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule as listed in the index at item 14(a)2. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audit.

    In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

                                          KPMG Peat Marwick LLP

Dallas, Texas
March 13, 1998
<PAGE>
                                                                     SCHEDULE II

                           CS WIRELESS SYSTEMS, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  ADDITIONS
                                                                       --------------------------------
                                                         BALANCE AT      CHARGED TO
                                                        BEGINNING OF      COSTS AND       CHARGED TO                   BALANCE AT
                     DESCRIPTION                           PERIOD         EXPENSES           OTHER        WRITEOFFS   END OF PERIOD
------------------------------------------------------  -------------  ---------------  ---------------  -----------  -------------
<S>                                                     <C>            <C>              <C>              <C>          <C>
Year ended December 31, 1996:
  Allowance for doubtful accounts.....................    $     138             971           --               (691)          418
                                                              -----             ---              ---            ---           ---
                                                              -----             ---              ---            ---           ---
Year ended December 31, 1997:
  Allowance for doubtful accounts.....................    $     418             847           --               (738)          257
                                                              -----             ---              ---            ---           ---
                                                              -----             ---              ---            ---           ---
</TABLE>