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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997        Commission File No. 000-27582

                            CELLULARVISION USA, INC.
             (Exact name of Registrant as specified in its charter)

               Delaware                                      13-3853788
            (State or Other                               (I.R.S. Employer    
            Jurisdiction of                            Identification Number) 
           Incorporation or                            
             Organization)                             

                  140 58th Street, Suite 7E, Brooklyn, NY 11220
                    (Address of Principal Executive Offices)
                                 (718) 489-1200
                         (Registrant's telephone number)
        Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
value $.01 per share

      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 the 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. |_|

      The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was $30,058,455 on March 31, 1998, based on the
closing sale price of the Common Stock on the NASDAQ National Market system on
that date.

      The number of shares of Common Stock outstanding as of March 31, 1998 was
16,000,000.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

Sections of the Registrant's Definitive Proxy Statement (as defined in Part III
herein) for its Annual Meeting of Stockholders scheduled to be held in May 1998.

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                            CELLULARVISION USA, INC.
                                TABLE OF CONTENTS

                                     PART I

      Item 1     Business
      Item 2     Properties
      Item 3     Legal Proceedings
      Item 4     Submission of Matters to a Vote of Security Holders

                                     PART II

      Item 5     Market for Registrant's Common Equity and Related
                 Stockholder Matters
      Item 6     Selected Financial Data
      Item 7     Management's Discussion and Analysis of Financial
                 Condition and Results of Operations
      Item 7A    Quantitative and Qualitative Disclosures About Market Risk
      Item 8     Consolidated Financial Statements and Supplementary Data
      Item 9     Changes in and  Disagreements with Accountants on Accounting
                 and Financial Disclosure

                                    PART III

      Item 10    Directors and Executive Officers of the Registrant
      Item 11    Executive Compensation
      Item 12    Security Ownership of Certain Beneficial Owners and Management
      Item 13    Certain Relationships and Related Transactions

                                     PART IV

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

            The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Certain information included in
this Annual Report on Form 10-K for the year ended December 31, 1997 is
forward-looking, such as information relating to future capital expenditures and
the effects of future regulation and competition. Such forward-looking
information involves important factors that could significantly affect expected
results in the future and potentially cause them to differ from those expressed
in any forward-looking statements made by, or on behalf of, the Company. These
factors include, but are not limited to, uncertainties relating to economic
conditions, government and regulatory policies, pricing and availability of
equipment, technological developments and changes in the competitive environment
in which the Company operates. Each such forward-looking statement is qualified
by reference to the following cautionary statements.

            Changes in the factors set forth above may cause the Company's
results to differ materially from those discussed in the forward-looking
statements. The factors described herein are those that the Company believes are
significant to the forward-looking statements contained herein and reflect
management's subjective judgment as of the date hereof (which is subject to
change). However, not all factors which may affect such forward-looking
statements have been set forth. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
<PAGE>

                                     PART I

ITEM 1. BUSINESS

Overview

      CellularVision USA, Inc. (together with its operating subsidiary,
CellularVision of New York, L.P. ("CVNY"), the "Company") owns and operates a
broadband wireless telecommunications system in an area which includes New York
City under a 1,150 Megahertz ("MHz") commercial license from the Federal
Communications Commission (the "FCC"). The system is capable of providing
high-capacity broadband service for the "last mile" to a subscriber's home or
office, at what the Company believes is a substantially lower cost than other
competing delivery systems. The Company believes that the high-capacity and low
infrastructure cost of a rapidly-deployable, dependable broadband wireless
telecommunications system will facilitate the "bundled" offering of a number of
competitive telecommunications services to the New York market. The Company has
been operating a 49 channel subscription television system since 1992, and a
super-high-speed Internet access service since 1996.

      The Company's licensed service area is the New York Primary Metropolitan
Statistical Area ("PMSA"), a region which includes approximately 8.6 million
population in the 5 boroughs of New York City as well as the New York Counties
of Westchester, Rockland, and Putnam. During 1997, the Company expanded its
coverage of the market to include all of Brooklyn, and portions of Manhattan and
Queens. There are approximately 2.9 million people and 150,000 offices in the
areas served by the company's 15 operational transmitters, although the
availability of signal in particular localities varies depending upon a number
of factors.

      The FCC commercial operating license was awarded to the Company in
recognition of its efforts in developing and deploying Local Multipoint
Distribution Service (LMDS) technology, and for spearheading its regulatory
approval at the FCC. Also, the Company has an exclusive license to use the
CellularVision(TM) System in the New York area, or any other market in the
United States in which the Company obtains an FCC license to operate.

On September 23, 1997, the FCC renewed the Company's New York commercial license
authorizing the Company to operate in the 27.50-28.35, 28.35-28.50, 29.10-29.25
and 31.075-31.225 Gigahertz ("GHz") bands for a total capacity of 1,300 MHz
(1,150 MHz on a permanent basis and 150 MHz on a grandfathered basis; See "FCC
Regulation"). The Company's renewed license conforms in all respects to the LMDS
service rules adopted in the FCC's LMDS Rulemaking Proceeding. The License was
renewed for a ten-year term, which expires on February 1, 2006 (the ten-year
period commenced on February 1, 1996, the expiration date of the Company's
initial license term). The FCC's renewal of this license confirmed that the
Company would not be required to bid on, nor pay for, the New York PMSA 1,150
MHz license in the FCC LMDS auction. Moreover, with this license renewal, the
Company is now authorized to immediately offer the full panoply of LMDS services
the technology is permitted to offer, including video, voice and data services,
and may construct transmitters throughout the New York PMSA without seeking
prior FCC approval. The Company has negotiated an interconnection and resale
agreement with Bell Atlantic, the local exchange carrier, and has received
approval from the New York Public Service Commission to provide local telephone
service in the state of New York.


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<PAGE>

Business and Strategy

      The Company was formed in October 1995 to serve as a holding company for
two predecessor businesses. In February 1996, the Company consummated the
initial public offering (the "Initial Public Offering" or "IPO") of shares of
its common stock, par value $.01 per share (the "Common Stock").

      The Company's original service offering was residential subscription
television service in a portion of Brooklyn. Although residential subscription
television service still accounts for the majority of current customers and
revenues, the Company is in the early stages of a strategic plan to focus on
super-high-speed Internet access, and provide "bundled" packages of
super-high-speed Internet access, video and telephone service offerings. In
addition, it plans to develop two-way services (e.g., point-to-point, high-speed
data transmission, two-way video teleconferencing, etc.) for both business and
residential customers as the market is prepared to economically support them.

      At present, the Company provides the following service offerings:

      1. Super-High-Speed Internet Access: Delivery of 48,000 Kilobits per
         second (Kbps) access to the Internet for both business and residential
         customers using new super-high-speed Quaternary Phase Shift Keyed
         ("QPSK") modulation modems. Although actual downstream speeds are
         dependent upon the user's upstream capability, users with "standard"
         28.8 Kbps modems obtain downstream speeds of up to 1,544 Kbps, or more
         than a 50-fold improvement in speed, at only a slightly higher cost
         than their 28.8 Kbps service. Integrated Services Digital Network
         ("ISDN") users obtain downstream speeds of up to 6,000 Kbps, nearly a
         50-fold increase in speed, at about half the cost of their ISDN
         service. The Company believes that this new super-high-speed Internet
         access service represents a substantial advance in the
         price/performance, and hence value, provided to customers today.

      2. Residential subscription television service: Up to 49 of the most
         popular cable, off-air and premium channels, arrayed in a variety of
         value-oriented packages at prices ranging from $9.95 to $42.95 per
         month, each roughly 20%-30% lower than the comparable package from the
         franchised cable operator. The combination of better picture quality,
         higher customer service standards and lower price than provided by the
         franchised cable operator are key elements of the Company's competitive
         strategy for this service.

      The Company plans to focus its super-high-speed Internet access service on
under-served markets in the New York Metro area, where the Company believes
there is substantial pent-up demand for this service. Since the existing cable
infrastructure was built out to serve primarily residential customers, there is
no widely available, economical way for business users to obtain high-speed
Internet access service or business video services. Furthermore, the
construction needed to "cable" the business community is both costly and
time-consuming. CVUS' high-capacity Super Wireless system is a rapidly
deployable and economical solution to this problem.

      By mid-1998, the Company expects to launch a variety of new products that
will further enhance its current market-leading competitive position. These new
services are expected to include an offering that will allow the Company's
service using the new QPSK technology to operate as an overlay that can
"SuperCharge" (SM) an office network's Internet access, and provide
super-high-speed downstream Internet access at more advantageous prices than
those available today. The Company believes that the higher-speed offering using
QPSK technology, combined with reasonably-priced "SuperCharging" of office
networks, will provide substantial growth in the rapidly expanding business
Internet access market.

      Pending the availability of additional capital, the Company's longer-term
business strategy consists of the provision of additional services and increased
market penetration in the New York PMSA, and potential strategic partnering with
other LMDS service providers as LMDS service is deployed nationwide. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.") Subject to the foregoing, there
are five elements of the Company's longer-term strategy:

      1. Expand super-high-speed Internet access service in the New York market,
         as this represents an under-served market by the Company's competitors
      2. Continue to capture residential subscription television market share in
         the New York PMSA
      3. Seek out opportunities to partner with winning bidders in the FCC's
         LMDS auction as they begin to deploy their systems nationally to
         maximize the benefit of CVUS' LMDS operational knowledge and expertise
      4. Begin phased-in offering of telephone service, commencing with resale


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<PAGE>

      5. Introduce other broadband two-way services as the market is prepared to
         support them.

The telephony resale strategy is to enter the telephony market with minimal risk
and capital investment, while building up a base of customers and providing a
"bundled" offering of super-high-speed Internet access, video and telephony
services. The company believes this strategy will allow it to ultimately expand
the telephony offering to include facilities-based bypass of the local exchange
service. While this longer-term strategy is expected to be substantially more
lucrative from a financial perspective than strictly reselling telephony
services, the precise timing of this change and the related increase in margins
are not yet quantifiable.

The CellularVision(TM) System

      The Company's multichannel broadband wireless telecommunications system
operates in the 28 GHz frequency range. Prior to the development of the
Company's system, transmission of communications signals in the 28 GHz frequency
range was not commercially pursued apart from limited satellite applications
because technical impediments, such as intercell interference and rainfade, were
thought to be insurmountable. The Company's system eliminates or significantly
reduces these impediments through the placement of its cells and its unique
system architecture.

      Video or data signals transmitted through the Company's system, such as
television programming, are received by the system from satellite transponders,
terrestrial microwave facilities and/or studios at the LMDS Operations &
Communications Center (LOCC). Internet Access is obtained through dedicated T-3
lines connecting the LOCC to the Internet "backbone." Signals from the LOCC are
then transmitted via fiber optic cable to several "Hub Cell Sites." The signals
are then upconverted to the 28GHz frequency band and transmitted via
omnidirectional transmitters within the cell. Solid state point-to-point relays,
installed with the transmitters, are used to transmit signals to cells adjacent
to the Hub Cell Sites. The Company also deploys small solid-state repeaters to
transmit signals into shadowed areas. The signal is received at the subscriber's
premises by a small (approximately six and five-eighths inches square) flat
plate, high-gain antenna connected to a super-high-speed modem, local area
network (LAN) router, or one or more fully-addressable set-top converters.

Competitive Factors

      The Company's system has a number of attributes that the Company believes
should enhance its competitiveness:

      Low Cost Infrastructure. The Company believes that its system offers a low
cost, high quality and dependable alternative to franchised cable systems,
satellite systems, such as Direct Broadcast Satellite ("DBS"), and fiber optic
delivery systems. The Company believes that it has an infrastructure cost
advantage relative to these delivery systems which will permit it to offer
similar services at lower prices.

      Accurate, High-Speed Data Transmission. The system's high signal-to-noise
ratio enables it to transmit large volumes of data at least as accurately as
fiber optic systems. This capability enables it to support a high-speed,
broadband data network for Internet access and private data transmission
applications.

      Mitigation of the Multipath Phenomenon. Multipath is a phenomenon in
broadcast transmission which results in the reception of multiple signals at the
receiver (literally on multiple transmission paths) which can severely degrade
the picture and audio quality or cause undesirable levels of errors in digital
systems. Multipath can be a severe drawback in systems such as VHF/UHF
television and currently available Multichannel Multipoint Distribution Systems
("MMDS"), which use amplitude modulation (AM) and relatively broadbeam receive
antennas. The Company's system, which employs frequency modulation (FM) and
narrow beam receive antennas, can reject multipath degradation of the signal.
Because of this advantage, the Company believes that its service will be
relatively immune to the picture "ghosting" and other degradations that result
from multipath.

      High Quality Picture. The Company's system has been designed to deliver a
generally superior picture quality as compared to the quality generally
characteristic of franchised cable or current MMDS systems, which use AM
modulation.

      Dependability. As compared to franchised cable systems, the Company
believes that its system provides a highly reliable signal because there is no
network of cable, amplifiers or processing and filtering equipment between the
transmitter which serves the subscriber and the subscriber's household to
potentially break or malfunction, potentially causing a "black-


                                       5
<PAGE>

out" of large portions of the franchised area. The Company's transmitter
installations are fully redundant, with automatic fault detection and
switch-over to a back-up transmitter and an uninterruptable power supply
allowing continuous broadcasts during temporary local power outages.

      Compact Antenna. Unlike currently available MMDS systems, which require
rooftop mounted antennas of varying sizes up to three feet in diameter, or DBS
systems, which require an 18-inch outdoor dish aimed directly at a satellite
stationed low above the southern horizon, the Company's antennas, in many cases,
permit reception of signals when mounted inside the subscriber's window. This
substantially reduces the need for outdoor installations and the associated
in-building wiring, which the Company believes is necessary in many other
competing systems. Because of the system's ability to reach individual
subscribers without such wiring, the Company expects that its marketing efforts
will be simplified.

      Localized Programming and Advertising Options. The Company's channel
offerings can be localized on a cell-by-cell basis, permitting, for example,
channels targeted to demographic or linguistic groups in particular
neighborhoods, as well as micro-marketing. By comparison, cable operators
generally offer uniform programming throughout a geographic service area, and
DBS systems offer the same programming on a nationwide basis and generally do
not offer any local programming (except for certain instances in some rural
areas).

      Large Spectrum Grant and Efficient Spectrum Usage. The Company currently
has the right to use 1,150 MHz of spectrum on a permanent basis, one of the
largest blocks of spectrum ever awarded, and its system permits reuse of this
spectrum in each one of its cells. This may result in advantages over competing
technologies, such as MMDS systems, which typically have access to a maximum of
200 MHz of fragmented spectrum and use frequencies only once in a metropolitan
area. The Company believes that its spectrum-efficient system will enhance its
ability to provide localized programming and advertising options and,
eventually, to examine and address on a selective basis additional business
opportunities for two-way services.

Future Two-Way Broadband Services

      The Company expects that future implementations of its system could
support two-way services such as wireless local loop telephony, high-speed data
transmission, video teleconferencing (including distance learning and
telemedicine) and interactive television. The Company has demonstrated a
non-line-of-site, 28 GHz wireless telephone link and video-telephony link using
a prototype transceiver that supports such services.

      The Company believes that two-way services can be supported without
interference with its existing analog 49 channel broadband cellular television
system, and that this system will support digital compression technologies when
commercially viable, permitting a significant increase in the number of cable
channels and at the same time permitting enhanced two-way services. Nonetheless,
like any wireless system, the Company's operations will ultimately be subject to
total bandwidth constraints, and the Company intends to manage its service
offerings to focus on high-value-added telecommunications markets for which the
Company's technologies are best suited.

      While the Company is not technically prepared to begin offering any of
these services on a commercial basis, the Company believes its system ultimately
can be configured to support some or all of the following two-way services:

      Wireless local loop telephony. The Company's system may be adaptable to
support ordinary voice telephony, giving customers equipped with a two-way
antenna the ability to plug their television, their computer and their telephone
into the same specially adapted converter box, paying for all these services
with a single monthly bill. The Company believes deregulatory trends in the
telephone industry may make this type of alternate access service an
increasingly attractive business for the Company, either solely or through an
alliance with strategic partners. For this reason, the Company has negotiated an
interconnection and resale agreement with Bell Atlantic, the local exchange
carrier, and has received approval from the New York Public Service Commission
to provide local telephone service in the state of New York.

      High-speed data transmission. Given the low cost of build-out, the Company
believes its system provides an attractive method of linking wide area networks
on a primary or back-up basis and providing individuals and businesses with
high-speed data transmission.

      Video teleconferencing. The Company has demonstrated in tests the capacity
of its system to support full-duplex, full motion two-way video
teleconferencing. The system requires a standard video camera and a two-way
antenna/transceiver, and 


                                       6
<PAGE>

produces a quality of service attainable today on a commercial basis only
through expensive fiber optic cabling and/or broadband satellite linkages. Video
teleconferencing has a number of applications, including personal and business
communications, and specialized applications such as distance learning and
telemedicine.

      Interactive television. The Company expects that demand will exist in the
future for a communications medium that can support interactive television
programming such as interactive home shopping, mass audience participation
programs and sophisticated, multiplayer video games. The Company believes that
its system's technical characteristics of low-cost build-out (especially as
compared with the cost of laying fiber optic cable), high quality and two-way
capability ultimately can make it a leading technology supporting these
services.

Risk Factors

      Liquidity Risk; Need for Additional Financing; Risk of Substantial
Dilution. In the fourth quarter of 1997 and the first quarter of 1998, the
Company experienced a severe liquidity shortfall due to the postponement or
cancellation of several planned financing transactions, including a potential
syndication of a $40 million senior secured debt facility by Fleet National Bank
("Fleet"), which remains on hold and will be revisited during 1998. In April of
1998, the Company entered into several financing arrangements which, while
providing the Company with commitments to obtain sufficient funds to continue
its operations throughout the 1998 calendar year, provide for, or potentially
provide for, the issuance of equity securities at a discount from market prices
at the time of funding. Utilization of these sources of financing could,
therefore, result in substantial dilution to existing stockholders and, while
the Company intends to seek alternative sources of financing on more attractive
terms, there can be no assurance that such alternatives will be available prior
to the date that the Company's operations will require additional utilization of
these existing, potentially-dilutive financing commitments.

      The Company's operations continue to result in negative cash flows, and
repayment of existing indebtedness will require additional sources of liquidity
in the future. Therefore, the Company anticipates that its future financing
requirements will continue to be substantial. The Company intends to address
those requirements through a combination of strategic and financial investments,
but there can be no assurance that the Company will be successful in
implementing the necessary financing arrangements on favorable terms. The lack
of availability of additional capital could have a material adverse effect on
the Company's financial condition, operating results and prospects for growth.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.")

      New Industry and Technology Risks and Limitations. The Company's broadband
wireless telecommunications system utilizes a new technology with a limited
operating history whose system architecture remains subject to further
development and refinement. In the past, the Company has experienced a number of
technical difficulties, some of which have affected subscriber acceptance of the
Company's system. Additional technical issues may arise in the course of system
deployment that could adversely affect reception quality and coverage of the
Company's service area. In addition, the Company believes that a significant
percentage of the households in the New York PMSA will be located in "shadowed"
areas capable of receiving the transmitted signal only with the assistance of
small, low cost "repeaters," which are in the early stages of deployment. The
Company intends to deploy repeaters where such deployment is economically
justifiable. Two-Way Services will require the development and mass production
of appropriate equipment. There can be no assurance that such equipment will
become commercially available at a cost acceptable to the Company. While a
number of techniques, including digital compression and frequency reuse
technologies, can expand the effective capacity of the Company's system, the
Company's capacity to support high service volumes will ultimately be limited by
its total available bandwidth and limitations of the technology it employs.

      Limited Operations; Early Stage Company. Although the Company has been in
operation on a limited basis since 1992, its operations to date have been
limited to serving only a portion of its licensed service area, the New York
PMSA. Therefore, historical financial information is reflective of a company in
the early growth stage of its development. Prospective investors should be aware
of the difficulties encountered by enterprises in development, like the Company,
especially in view of the highly competitive nature of the telecommunications
industry and in view of the fact that the Company's broadband wireless
telecommunications system previously has been deployed only in a limited area.
(See "New Industry and Technology Risks and Limitations.")

      Ability to Manage Growth; Loss of Key Personnel. Successful implementation
of the Company's business plan will require the management of growth, which will
require the continued implementation and improvement of the Company's operating
and financial systems and controls. There can be no assurance that the systems
or controls currently in place or to be implemented will be adequate to manage
such growth, or that any steps taken to improve such systems and controls will
be 


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sufficient. The Company's success also depends in part upon attracting and
retaining the services of its management and technical personnel. The
competition for qualified personnel is intense. The Company recently suffered
the untimely loss of its President to a sudden illness, and has also recently
witnessed the departure of a key marketing officer and a key financial officer.
Although the duties of these individuals have been assumed by other corporate
officers, the Company believes that it would be advisable to bolster its
management ranks, although it recognizes that its present financial situation
will make recruitment of additional qualified personnel more difficult. There
can be no assurance that the Company will be able to retain its existing key
managerial and technical employees, or that it will be able to attract,
assimilate or retain other skilled managerial and technical personnel in the
future. The Company does not maintain "key person" life insurance policies on
any of its key personnel. (See "Employment Agreements.")

      Lack of Profitable Operations. The Company has recorded net losses and
negative operating cash flow in each period of its operations since inception,
and at December 31, 1997 had an accumulated deficit of approximately $47
million. Such losses and negative operating cash flow are attributable to the
start-up costs incurred in connection with the commercial roll-out of the
Company's system, and expenses incurred in connection with the LMDS rulemaking
proceeding. The Company expects to continue experiencing operating losses for at
least one year as a result of expansion within the New York PMSA. There can be
no assurance that the Company will be able to increase the number of its
super-high-speed Internet access and multichannel broadband cellular television
subscribers to the levels necessary to attain profitability in future years, or 
that the Company will succeed in commercializing any other possible applications
of the Company's system.

      Dependence Upon Sole-Source Suppliers. The Company currently purchases the
transmitter and customer premises equipment comprising the Company's system
either from sole-source third party suppliers for such equipment, or from CT&T,
which purchases it from such third party sole-source suppliers. In either case,
this reliance upon sole-source suppliers involves several risks, including
increased risk of inability to obtain adequate supplies of transmitters, receive
antennas, set-top converters and super-high-speed modems, and reduced control
over the pricing and delivery of such components. If the Company was unable to
obtain a sufficient supply of such components from current sources, it is likely
that the Company would experience a delay in developing alternative sources.
Inability to obtain adequate supplies of equipment could result in a delay in
providing service to new subscribers, which would adversely affect the Company's
operating results and could damage future marketing efforts. In addition, a
significant increase in the price of the requisite equipment would adversely
affect the Company's financial condition and operating results. Further, if any
of the equipment fails or fails to be supported by its vendors, it could be
necessary for the Company or CT&T to redesign substantial portions of such
equipment. Any of these events could have a material adverse effect on the
Company's financial condition and operating results.

      Government Regulation. The Company is subject to extensive regulation by
the FCC. Changes in the regulatory structure, such as permitting telephone
companies to enter the video marketplace in their service areas, which is an
element of the Telecommunications Reform Act of 1996 (the "Telecommunications
Reform Act"), could result in a potential significant source of competition that
could have a material adverse effect on the Company's operations. (See "FCC
Regulation" and "Industry Regulation.")

      Risk of Subscriber Acceptance and Service Cancellation. The success of the
Company's business strategy will depend upon consumer acceptance of the
Company's super-high-speed Internet access service and multichannel broadband
cellular television system. Subscriber acceptance could be adversely affected
by, among other things, customer loyalty to more established competitors,
unfamiliarity with the Company's system, and the fact that the Company is
currently offering fewer television channels than offered by many of its
franchised cable competitors. In addition, there can be no assurance that
technical problems will not impede or delay subscriber acceptance of the
Company's service. (See "New Industry and Technology Risks and Limitations.")

      Competition from Suppliers of Telecommunications Services. The
telecommunications industry and all of its segments are highly competitive. The
Company competes with franchised cable systems and also faces or may face
competition from several other sources, such as MMDS, Satellite Master Antenna
Television ("SMATV") systems, DBS, video service from telephone companies and
television receive-only satellite dishes. Moreover, the Telecommunications
Reform Act eliminates restrictions that prohibit local telephone exchange
companies from providing video programming in their local telephone service
areas and substantially reduces current and future regulatory burdens on
franchised cable systems, thus potentially resulting in significant additional
competition from local telephone companies and franchised cable systems.

      Pay television operators face competition from other sources of
entertainment, such as movie theaters and computer on-line services. Further,
premium movie services offered by cable television systems have encountered
significant 


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<PAGE>

competition from the home video industry. In areas where several off-air
television broadcasts can be received without the benefit of cable television,
cable television systems have experienced competition from such broadcasters.

      The Company expects to see competition for its super-high-speed Internet
access service from the existing Internet Service Provider (ISP) network. This
includes large companies like America On-Line and ATT World Net, as well as
smaller local ISPs like Walrus and IBS. These ISPs, however, do not currently
have the capacity to provide the same downstream speed as the Company. Future
competitors will include the cable operators with high-speed cable modems, the
telephone companies with Digital Subscriber Line ("XDSL") technology, and other
broadband wireless providers.

      Many actual and potential competitors have greater financial, marketing
and other resources than the Company. No assurance can be given that the Company
will be able to compete successfully.

      Potential Conflicts of Interest; Dependence on Technology Licensed from
CT&T. Shant S. Hovnanian, the Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, Bernard B. Bossard, Executive Vice
President, Chief Technical Officer and a Director of the Company, and Vahak S.
Hovnanian, a Director of the Company, (collectively, the "Founders") are 80%
controlling owners of CT&T. Philips, one of the three original corporate
investors (together with an affiliate of Bell Atlantic and an affiliate of J.P.
Morgan, the "Corporate Investors") in the Company, owns the remaining 20% of
CT&T. Mr. Bossard is permitted under the terms of his employment agreement with
the Company to devote a portion of his business time to other entities,
including CT&T, so long as he devotes such substantial portion of his working
time and efforts to the Company's affairs as the Company's Board of Directors
may reasonably require. Shant Hovnanian also may devote a portion of his
business time to CT&T and other related entities. Although his employment
agreement with the Company provides that he will devote substantially all of his
working time and efforts to the Company's affairs, pursuant to the agreement,
Mr. Hovnanian may devote such working time and efforts to CT&T and its
affiliates as the due and faithful performance of his obligations under the
agreement permits. CT&T and these individuals are parties to a number of
agreements with the Company, including the CT&T License Agreement and a reserved
channel rights agreement, which may from time to time present conflicts of
interest with the Company. (See "Notes to Consolidated Financial
Statements--Related Party Transactions," and "Employment Agreements.")

      In serving in their respective positions with the Company, the Founders
may experience conflicts of interest involving the Company and CT&T. As owner of
the name and mark "CellularVision," CT&T has the right to license the name and
mark "CellularVision," as well as the associated know-how and trade secrets, to
related or unrelated entities providing services similar to those provided by
the Company outside the New York BTA, for which it may receive a fee. The
Company may in the future be dependent upon CT&T's ability to enhance its
current technology and to respond to emerging industry standards and other
technological changes. (See "Notes to Consolidated Financial Statements--Related
Party Transactions.")

      Bell Atlantic has the right to designate one member of the Board of
Directors (the "Bell Atlantic Nominee"). To date, Bell Atlantic has not
exercised this right. Bell Atlantic currently provides Internet access service
in the New York metro area and is allowed, under the provisions of the
Telecommunications Reform Act, to provide video services which could compete
with video services offered by the Company.

      Risk of Patent Infringement; Intellectual Property Matters. Given the
rapid development of technology in the telecommunications industry, there can be
no assurance that certain aspects of the Company's system will not infringe on
the proprietary rights of others. The Company believes that if such infringement
were to exist based on the establishment of current or future proprietary rights
of others, it could obtain requisite licenses or rights to use such technology.
However, there can be no assurance that such licenses or rights could be
obtained on terms which would not have a material adverse effect on the Company.

      Control by Principal Stockholders. The Founders in the aggregate own
approximately 62.4% of the outstanding Common Stock. As a result, such
stockholders will have the power to elect all of the members of the Company's
Board of Directors, amend the Company's Certificate of Incorporation and By-Laws
and, subject to certain limitations imposed by applicable law, effect or
preclude fundamental corporate transactions involving the Company, including the
acceptance or rejection of any proposals relating to a merger of the Company or
an acquisition of the Company by another entity, in each case without the
approval of any of the Company's other stockholders. The Founders are parties to
a Stockholders' Agreement, dated as of January 12, 1996 (the "Stockholders'
Agreement"), which provides that the parties thereto, who collectively owned
69.2% of the shares of Common Stock outstanding upon the consummation of the
Initial Public Offering, will vote to elect each of the Founders to the
Company's Board of Directors, so long as such Founder owns 5% or more of the


                                       9
<PAGE>

shares of Common Stock outstanding on a fully diluted basis. Bell Atlantic has
the right to appoint the Bell Atlantic Nominee to the Company's Board of
Directors, so long as Bell Atlantic shall hold at least 1% of the shares of
Common Stock outstanding on a fully diluted basis. The parties to the
Stockholders' Agreement have also agreed not to vote to remove any Founder or
the Bell Atlantic Nominee so elected except for "cause" as defined in Section
141 of the Delaware General Corporation Law ("Delaware Law"). (See "Directors
and Executive Officers of the Registrant.")

      Potential Anti-Takeover Effect and Potential Adverse Impact on Market
Price of Certain Charter and Delaware Law Provisions. The Company's Certificate
of Incorporation and By-Laws, and the Delaware Law contain certain provisions
that could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of Common Stock. Certain of these
provisions allow the Company to issue preferred stock with rights senior to
those of the Common Stock and impose various procedural and other requirements
which could make it more difficult for stockholders to effect certain corporate
actions. The Company could issue a series of Preferred Stock that could,
depending upon the terms of such series, impede a merger, tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock. In
addition, Section 203 of the Delaware Law, which is applicable to the Company,
contains provisions that restrict certain business combinations with interested
stockholders, which may have the effect of inhibiting a non-negotiated tender
offer or other business combination.

Current Operations

      The Company's licensed service area is the New York PMSA, a region which
includes approximately 8.6 million population in the 5 boroughs of New York City
as well as the New York Counties of Westchester, Rockland, and Putnam. During
1997, the Company expanded its coverage of the market to include all of
Brooklyn, and portions of Manhattan and Queens. There are approximately 2.9
million people and 150,000 offices in the area serviced by the Company's 15
operational transmitters, although the availability of signal in particular
localities varies depending upon a number of factors. Four additional
transmitters are under construction.

      The Company's original headend has been fully operational since 1992 and
is currently being used to transmit programming to 11 operational cells located
in Brooklyn and Manhattan. During 1997, the Company constructed a new
state-of-the-art LMDS Operations & Communications Center (LOCC). Video or data
signals transmitted through the Company's system, such as television
programming, are received by the system from satellite transponders, terrestrial
microwave facilities and/or studios at the LOCC. Internet access is obtained
through dedicated T-3 lines connecting the LOCC to the Internet "backbone."
Signals from the LOCC are then transmitted via fiber optic cable to several "Hub
Cell Sites." The LOCC now serves 4 of the Company's 15 operational transmitters.
The Company expects to deliver services from the LOCC to all operational cell
site transmitters by the Summer of 1998.

      The Company began delivering a 500 Kbps high-speed Internet service in the
Summer of 1997. In late 1997, the Company introduced super-high-speed products,
capable of downstream speeds of 48,000 Kbps. The new product line includes
services for individual users as well as products to support the Local Area
Networks (LANs) found in most business offices.

      The Company participates in a marketing alliance with Bloomberg
Information Television (BIT). As part of the agreement, the Company delivers the
BIT programming to hundreds of terminals and PC screens in offices throughout
Manhattan. In return, Bloomberg provides marketing support through its sales
force, cross promotion spots and two minutes per hour of advertising time on BIT
made available to the Company.

      The Company offers subscribers a full range of local, basic and premium
programming choices. Since all of the Company's set-top converters are fully
addressable, the Company also offers regular pay-per-view movies and special
pay-per-view events. In addition, due to its system architecture, the Company
can vary programming and advertising on a cell-by-cell basis in order to appeal
to specific demographic groups. For example, the Company currently carries
Russian language programming targeted to the large Russian-speaking population
of the Brighton Beach area of Brooklyn, New York.


                                       10
<PAGE>

      The following table sets forth the Company's current channel line-up:

<TABLE>
<S>                          <C>                                <C>    
Encore*                      The Disney Channel                 The International Channel
Plex*                        CNBC                               Russian American Broadcasting*
Starz*                       MSNBC                              The Prevue Guide
Showtime*                    Headline News                      ESPN
The Movie Channel*           CNN                                Madison Square Garden Network
Flix*                        Bloomberg Information Television   MSG 2
HBO*                         The Weather Channel                MSG 3
Cinemax*                     Nickelodeon                        ESPN 2
Playboy Television*          TV Food Network                    SportsChannel
Pay Per View Movies          MTV                                WCBS
Pay Per View Special         VH-1                               WNBC
Pay Per View Events          E! Entertainment                   WNYW
USA Network                  Comedy Central                     WABC
TNT                          The Discovery Channel              WWOR
Turner Classic Movies        Court TV                           WPIX
WTBS                         Sci-Fi Channel                     WNET
Lifetime                     Univision (WXTV)
Arts & Entertainment         BET
</TABLE>

* Denotes premium programming.

Sales and Marketing

      Super-High-Speed Internet Services. The Company is presently offering its
super-high-speed Internet access service to both businesses and residential
subscribers in Brooklyn, Queens and Manhattan. The recent development of a
network application for the service now provides businesses a unique opportunity
for receiving a low cost, high-speed LAN solution for accessing the Internet.
The product offered under the name "SPEED (SM)" is being initially introduced to
Manhattan businesses through a controlled, targeted rollout, utilizing the
efforts of a professional in-house team of Internet Account Executives.
Additionally, subject to the availability of the requisite funding, the Company
may augment the efforts of the sales team through the selected use of New Media
advertisement and mass media branding campaigns. These highly visible campaigns
may include the use of print, radio and television advertising. Campaign
efficiencies will be maintained through the fostering of marketing
relationships, similar to the one in place with Bloomberg Information
Television, with other companies.

      Video Services. Due to the current de-emphasis of marketing video
services, the following elements of the Company's video services sales strategy
are indefinitely on hold. The Company's video sales strategy incorporates a
variety of targeted tactics. Direct mail is used as a response vehicle as well
as a softener for door-to-door sales. The Company utilizes telemarketing for
both acquisition and retention purposes. In addition to sales-related calls,
telemarketing representatives perform installation reminder calls, customer
research and welcome calls. As the build-out of its system continues, the
Company may augment current efforts with mass marketing programs, including
radio advertising and print media, to bring about increased awareness of its
quality and cost advantages. During this time, the Company may supplement its
direct sales force by marketing subscriber-installed units through consumer
electronics and telephone retail stores.

Customer Service

      The Company's prompt, courteous and effective customer service specialists
are central to differentiating the Company from competitors and attracting and
retaining subscribers. To offer superior customer service, the Company provides
a ratio of customer service specialists to subscribers significantly higher than
that currently offered by its subscription television competitors. The Company
offers same-day repair services, and customers' calls are handled 24-hours a
day.

      The Company's super-high-speed Internet customers receive additional care
from the "Level 2 Tech Support Team." First, the front line CSR works with a
subscriber to troubleshoot potential signal delivery issues, and, if necessary,
passes the customer on to the tech support group whose members are especially
selected and trained to diagnose computer related problems.


                                       11
<PAGE>

Year 2000

      The Company does not believe that the "Year 2000" presents significant
issues for CVUS. In 1997, the Company began the process of identifying and
resolving any potential Year 2000 issues. These efforts included, but were not
limited to, identification and review of internal operating systems and customer
services, and discussions with key suppliers to the business. While no material
issues have been identified to date, the Company believes that, if such issues
arise in the future, the majority of the effort and expense to remedy any
potential Year 2000 issues will be the responsibility of key vendors, such as
the providers of the Company's third party billing system or conditional access
systems.

Competition

      The telecommunications industry and all of its segments are highly
competitive. The Company competes with franchised cable systems and also faces
or may face competition from several other sources, such as MMDS, SMATV, DBS,
video service from telephone companies and television receive-only satellite
dishes. Moreover, the Telecommunications Reform Act eliminates restrictions that
prohibit local exchange companies ("LECs") from providing video programming in
their local telephone service areas and substantially reduces current and future
regulatory burdens on franchised cable systems, thus potentially resulting in
significant additional competition from local telephone companies and franchised
cable systems.

      Pay television operators face competition from other sources of
entertainment, such as movie theaters and computer on-line services. Further,
premium movie services offered by cable television systems have encountered
significant competition from the home video industry. In areas where several
off-air television broadcasts can be received without the benefit of cable
television, cable television systems have experienced competition from such
broadcasters.

      The Company expects to see competition for its super-high-speed Internet
service from the existing ISP network. This includes large companies like
America On-Line and ATT World Net, as well as smaller local ISPs like Walrus and
IBS. These ISPs, however, do not currently have the capacity to provide the same
downstream speed as the Company. Future competitors will include the cable
operators with high-speed cable modems, the telephone companies with XDSL
technology, and other broadband wireless providers.

      Many actual and potential competitors are significantly larger and have
greater financial, marketing and other resources than the Company. No assurance
can be given that the Company will be able to compete successfully with existing
competitors or new entrants in the market for high-speed Internet access,
subscription television or any of the two-way services that the Company may
offer in the future. Following are the Company's beliefs regarding the sources
of competition it currently encounters or believes that it may encounter in the
future for the provision of its current service offerings.

      Franchised Cable. The Company believes that its primary competition in
providing video programming to subscribers is from franchised cable operators.
In the New York PMSA, these operators include Time Warner Inc. ("Time Warner")
and Cablevision Systems Corporation ("Cablevision"), both of which are
significantly larger and have substantially greater financial resources than the
Company. The technology used by such operators is a cable system which transmits
signals from a headend, delivering local and satellite-delivered programming via
a distribution network consisting of amplifiers, cable and other components to
subscribers. Regular system maintenance is required due to flooding, temperature
changes and other events that may lead to equipment problems. To reduce these
problems, some traditional cable companies have begun installing hybrid
fiber-coaxial ("HFC") cable networks. Although HFC plants may substantially
remedy the transmission and reception problems currently experienced by coaxial
cable distribution plants, HFC systems will still be subject to outages
resulting from severed lines and failure of electronic equipment, and are very
expensive to install and maintain.

      The HFC rebuild is required to deliver high-speed data services via a
cable modem. At this time, both Time Warner and Cablevision have only introduced
cable modem products in systems that have been upgraded recently to at least 750
MHz capacity using fiber and coax. These systems limit the "node" size to not
more than 2000 homes to segregate the "return path," a key limitation in cable
systems. Time Warner recently announced a complete system upgrade for its
Manhattan and Queens properties. They have estimated a completion date of 2004.

      Franchised cable systems cost significantly more to build and to maintain
than the Company's system. Although the Company believes its headend equipment
costs are comparable to those of franchised cable systems, the installation of
cable and amplifiers required by franchised cable operators is considerably more
costly than the installation of transmitters and 


                                       12
<PAGE>

repeaters required by the Company's system. At present, the franchised cable
systems in the Company's service area offer 25 to 30 more channels than the
Company's system, although the Company believes that many of these channels
carry less frequently viewed programming. Moreover, the cellular architecture
used by the Company will permit it to vary its channel line-up on a cell-by-cell
basis, enabling it to offer the channels most in demand in individual segments
of the larger media market.

      The Telecommunications Reform Act contains a provision that would reduce
the regulatory burden on the Company's franchised cable competitors. See
"Industry Regulation-Telecommunications Reform Act."

      Multichannel Multipoint Distribution Service. MMDS "wireless cable"
systems such as CAI Wireless Systems, Inc. use microwave AM signals in the 2.5
to 2.7 GHz frequency band to transmit programming directly from a headend
located on top of a local vantage point to receive antennas currently up to
three feet in diameter and generally located on subscribers' rooftops. The
Company believes that smaller MMDS antennas may be under development. The
microwave signal is then converted to frequencies that can pass through
conventional coaxial cable to a set-top converter. Because of MMDS systems' use
of AM modulation techniques and a relatively broadbeam receive antenna, the
Company believes those systems are subject to a high degree of multipath
interference which can severely degrade the picture and audio quality or cause
undesirable error levels in digital transmissions. The Company's system, which
employs FM modulation and narrow beam receive antennas, can reject multipath
degradation of the signal. Because of this advantage, the Company believes that
its service will be relatively immune to the picture "ghosting" and other
degradations that result from multipath phenomena. The Company believes that
this latter characteristic, unless mitigated by future technical developments,
will limit MMDS suitability for service in large urban areas. MMDS also operates
with substantially less spectrum than the Company's 1,150 MHz allocation,
limiting its video channel capacity. MMDS systems must aggregate spectrum from
three separate blocks of spectrum in the 2.5 to 2.7 GHz frequency range, almost
70% of which spectrum is not available exclusively for wireless cable operations
and must be leased from and shared with educational licensees, in order to
provide a maximum 32 to 33 channels of video programming under current
technology. Therefore, as a result of MMDS limited spectrum and other technical
constraints, the Company believes that LMDS has a distinct advantage over MMDS
in providing viable competition in today's video programming marketplace.

      The incumbent New York City MMDS operator briefly attempted to sell a
"wireless cable modem" in the market. This effort was delayed by several
factors, including channel capacity, line of site limitations (particularly in
Manhattan), and reflections off the tall structures. CVUS, however, believes it
has established better coverage of the market through strategic placement of
transmitters and repeaters, as well as using the 28 GHz reflections, or bounces,
to reliably serve super-high-speed Internet customers.

      Satellite Master Antenna Television ("SMATV") Service. SMATV service
operators such as Liberty Cable, typically receive signals from satellites with
small satellite dishes located on a rooftop and then retransmit the signals by
wire to units within a building or complex of buildings. Additionally, the FCC
permits point-to-point delivery of video programming by SMATV operators with
microwave licenses in the 18 GHz frequency band, which allows operators to
realize economic efficiencies by linking multiple buildings from a common
headend without crossing public rights-of-way and avoiding the need for costly
headend facilities at each building served. SMATV operators delivering
programming in these manners are not required to obtain a franchise from local
authorities.

      Direct Broadcast Satellite ("DBS"). DBS service, which has recently been
introduced in the United States, consists of the transmission of a high-powered
signal from a satellite directly to the home user, who is able to receive the
signal on a relatively small (18 inch diameter) dish mounted on a rooftop or in
the yard. DBS service does not deliver local television broadcast stations
(except for certain instances in some rural areas) and requires the purchase of
receiving equipment at a significant cost to the subscriber. The leading DBS
provider currently requires its subscribers to invest in receiving equipment
which the Company believes currently retails for approximately $200, and pay up
to an additional $200 for installation. DBS system operators must also incur
costs related to satellite launches and satellite maintenance and repair. DBS
antennas in the United States must be aimed directly at a satellite stationed
low above the southern horizon, and are therefore not generally practical in
urban environments such as New York City where multiple dwellings may block this
line-of-sight.

      One DBS operator has a "high-speed" data product available today. The
download speed is limited to 400 Kbps, or less than one one-hundredth the speed
of the Company's modem, and has the same line of site issues faced by the DBS
video providers.


                                       13
<PAGE>

      Telephone Company Provision of Video Programming. The regulatory framework
that traditionally prohibited LECs from providing video programming directly to
subscribers in their telephone service areas is evolving rapidly to permit LECs
to play a broader role in the competitive video marketplace. In this regard, the
Telecommunications Reform Act repealed the telco-cable cross-ownership
restriction, and allows LECs several options for providing video services to
their telephone customers under various regulatory frameworks. Among other
things, under the Telecommunications Reform Act, LECs can provide video
programming to customers in their telephone service areas either as common
carriers, cable systems or "open video systems," an entirely new regulatory
framework. In March 1996, the FCC eliminated rules implementing the telco-cable
cross-ownership restriction, and commenced a rulemaking to implement the open
video systems framework in a way that will promote congressional goals of
flexible market entry, enhanced competition, diversity of programming choices
and increased consumer choice. In June 1996, the Commission adopted streamlined
certification and regulations under which LECs (and non-LECs) can operate as
open video systems providers under various conditions. On October 11, 1996, the
FCC certified the first open video system. Since that time, additional
certifications have been granted, including at least three within various
portions of the Company's New York PMSA.

      The poor condition of the telephone infrastructure in New York has limited
the growth of ISDN and T-1 access to the Internet. In addition, long lead times
for installation and high prices are typical for the high-end data users. This
is especially true in the outer boroughs where fiber upgrades have been very
slow to occur. There remains a possibility that over time the plant will be
upgraded and the promise of new technologies like XDSL will come true, but today
the market appears to look to the broadband provider as the most likely to
deliver high-speed data in the immediate future.

      While LEC delivery of video programming likely will require extensive
deployment of fiber optic transmission facilities and/or highly sophisticated
electronics at a substantial capital investment, LECs could provide a
significant source of competition in the future.

      Television Receive-Only Satellite Dishes. Satellite dishes are used by
individuals and commercial establishments for direct reception of video
programming that is also shown on franchised cable and wireless cable television
systems. Satellite dishes are generally more competitive in rural markets than
in urban areas, principally because rural subscribers do not have access to
franchised cable. Satellite dish service currently requires each subscriber to
purchase and install a seven-to-ten foot diameter satellite dish, at a cost in
excess of $3,000, although some operators have reduced those charges to as low
as $750 for limited offerings. Additionally, cable programming (e.g., ESPN, CNN,
HBO) is delivered "scrambled," requiring owners of satellite receivers to
purchase descrambling units and pay annual authorization fees directly to
programming suppliers. In addition, satellite systems generally do not deliver
local broadcast television stations (except for certain instances in some rural
areas).

FCC Regulation

      The Company's FCC Commercial License. In 1991, the FCC granted the Company
a fixed station commercial license pursuant to a waiver of the FCC's rules in
the Point-to-Point Microwave Radio Service, which authorized the Company to use
the 27.5-28.5 GHz frequency band to operate a multicell video delivery system
throughout the New York PMSA. The approximately 1,100 square mile New York PMSA
includes the five boroughs of New York City, and Putnam, Rockland and
Westchester counties. In its 1991 decision granting the Company's license, the
FCC authorized the location of the Company's first transmitter in Brighton
Beach, Brooklyn. In that decision, the FCC authorized a 24-channel video system,
which was modified by the FCC in March 1992 to permit the operation of a
49-channel system. In addition, on December 7, 1995, the FCC granted the
Company's 34 transmitter applications, conditional upon and subject to
conformance with the final actions taken by the FCC in the LMDS Rulemaking
proceeding. The initial commercial license was granted for a five-year term
rather than the general fixed service license term of ten years in order to
encourage the prompt deployment of the Company's system and expired in February
1996. A timely application for renewal of this fixed commercial station license
was filed on December 29, 1995.

      On September 23, 1997, the FCC renewed the Company's New York commercial
license authorizing the Company to operate in the 27.50-28.35, 28.35-28.50,
29.10-29.25 and 31.075-31.225 GHz bands for a total of 1,300 MHz. The Company's
renewed license conforms in all respects to the LMDS service rules adopted in
the FCC's LMDS Rulemaking Proceeding. The License was renewed for a ten-year
term which expires on February 1, 2006 (the ten-year period commenced on
February 1, 1996, the expiration date of the Company's initial license term).
The FCC's renewal of this license confirmed that the Company would not be
required to bid on, nor pay for, the New York PMSA license in the FCC LMDS
auction. Moreover, with this license renewal, the Company is now authorized to
immediately offer the full panoply of LMDS services the 


                                       14
<PAGE>

technology is permitted to offer, including video, voice and data services, and
may construct transmitters throughout the New York PMSA without seeking prior
FCC approval.

      FCC Regulations Pertaining to the Company's Use of the 28.35-28.50 and
29.10-29.25 GHz Bands. In the LMDS First Report and Order, the FCC grandfathered
the Company's continued operations in the 28.35-28.50 GHz band until the later
of July 22, 1998, or until the first Geostationary Orbit/Fixed Satellite Service
("GSO/FSS") satellite licensed to operate in the spectrum band is launched.
Additionally, under the provisions of the LMDS First Report and Order and the
LMDS Second Report and Order, the Company is immediately authorized to use 150
MHz at the 29.1-29.25 GHz band for hub-to-subscriber operations (see Infra, The
FCC's LMDS Rulemaking Proceedings for an explanation when LMDS two-way service
in this band may be allowed).

      Accordingly, at the conclusion of the grandfathered period, the Company
will be required to cease its operations in the 28.35-28.50 GHz spectrum thus
reverting to the 1,150 MHz spectrum allocation, in the 27.5-28.35, 29.1-29.25
and 31.075-31.225 GHz bands. This spectrum allocation is consistent with, and
equivalent to, the LMDS spectrum provided to all prospective LMDS "A Block"
licensees (see Infra, The FCC's LMDS Rulemaking Proceedings which details the
FCC's LMDS band plan). As a result, following the issuance of LMDS licenses
pursuant to the FCC's recently concluded nationwide LMDS auctions and until the
grandfather period expires, the Company will be the only commercial provider of
LMDS with 1,300 MHz of spectrum.

      The Company's Experimental License. The Company also holds an experimental
license which was granted by the FCC in 1988 and has been renewed for full
two-year terms on a bi-yearly basis. Other entities hold experimental licenses
for LMDS use throughout the United States. In August 1993, the FCC approved the
modification of this license to authorize two-way video, voice and data
transmissions with variable modulation and bandwidth characteristics. The FCC
granted the Company's most recent renewal application, effective September 1,
1997, for a new two-year license term. In addition, on December 11, 1997, the
Company filed a modification application with the FCC seeking an additional 150
MHz in the 31.075-31.225 GHz band in order to conform the license to the
Company's New York PMSA commercial license. This application was granted by the
FCC and a modified experimental license was issued effective January 1, 1998,
which now expires on January 1, 2000.

      The FCC's LMDS Rulemaking Proceedings. In response to a Petition for
Rulemaking and Petition for Pioneer's Preference filed by the Company in 1991,
the FCC adopted the LMDS First Notice of Proposed Rulemaking (LMDS First NPRM)
in December 1992, which proposed to redesignate the 27.5-29.5 GHz band for
point-to-multipoint use, and to license LMDS as a new service on a nationwide
basis with the issuance of two 1 GHz licenses per service area.

      On July 17, 1996, by unanimous vote, the FCC adopted the LMDS First Report
and Order and Fourth NPRM, which formally established a band plan and sharing
rules as previously proposed by the FCC in the LMDS Third NPRM. This plan
allocated to LMDS the 28 GHz frequency band nationwide, 850 MHz spectrum from
27.5-28.35 GHz on a primary basis for two-way LMDS transmissions, with an
additional non-contiguous 150 MHz from 29.1-29.25 GHz to be shared on a
co-primary basis with Mobile Satellite Service (MSS) systems. While the sharing
rules adopted for the 150 MHz limit LMDS to hub-to-subscriber transmissions due
to concerns about potential interference between LMDS and MSS, in the LMDS First
Report and Order the FCC stated that it will revisit that limitation if the LMDS
industry can demonstrate definitively that LMDS return links do not interfere
with MSS systems.

      Further, in the Fourth NPRM portion of the decision, in an effort to
provide additional spectrum for LMDS, the FCC proposed to allocate 300 MHz from
31.0-31.3 GHz on a primary basis for two-way LMDS use. The FCC reiterated the
potential value of LMDS as "real competition" in the local telephony and
multichannel video distribution markets, and stated that this additional
spectrum would provide consumers access to more choices in the new services and
innovative technologies.

      On March 13, 1997, the FCC adopted the LMDS Second Report and Order in
this proceeding, which established service, auction and eligibility rules for
LMDS. The FCC in the LMDS Second Report and Order allocated an additional 300
MHz in the 31 GHz band for LMDS and established two LMDS licenses per Basic
Trading Area ("BTA"): one license for 1,150 MHz ("A Block"), the other for 150
MHz ("B Block"), amounting to 1,300 MHz allocated to LMDS.

      Specifically, the A Block license consists of: 850 MHz in the 27.5-28.35
GHz band on a primary protected basis; 150 MHz in the 29.1-29.25 GHz band, at
the present time for LMDS hub-to-subscriber transmissions only, on a co-primary
basis with MSS systems; and 150 MHz in the 31.075-31.225 GHz band on a protected
basis. The B Block license consists of two 75 


                                       15
<PAGE>

MHz bands located at each end of the 300 MHz block in the 31.0-31.075 GHz and
31.225-31.3 GHz bands. B Block LMDS licensees will operate on a co-primary basis
with incumbent licensees already operating in the 31.0-31.075 GHz and
31.225-31.3 GHz bands. Finally, there are no regulatory restrictions preventing
the A and B Block licensees from being combined to create a 1,300 MHz LMDS
system.

      In order to encourage competition in the video and telephony markets, the
FCC decided to substantially restrict LECs and cable companies ("MSOs") from
acquiring the A Block LMDS license. Under the rules adopted in the LMDS Second
Report and Order, LECs and cable companies will be ineligible to acquire a 20%
or greater ownership interest in an A Block license in their service region for
a period of three years. An incumbent LEC or cable company is considered
`in-region' and, therefore, ineligible to acquire an A Block license, if 10% of
the BTA's population is within its authorized service area. This eligibility
restriction may be extended beyond the three-year period by the FCC based on a
determination that incumbent LECs or cable companies continue to have
substantial market power. Also, the eligibility restriction will be reexamined
by the FCC at the time of its biannual review, the first of which will take
place in the year 2000, to determine whether competition in the local telephone
and video distribution industries has increased sufficiently to make these
restrictions unnecessary. Finally, upon a showing of good cause by a petitioning
LEC or cable company, the FCC may waive the eligibility restriction on a
case-by-case basis. Cable companies and LECs will be able to hold the B Block
license in their service area, as there is no such eligibility restriction on
this LMDS license.

      Numerous LECs challenged the FCC's eligibility restrictions by filing
Petitions for Reconsideration with the FCC and seeking review in the D.C.
Circuit Court of Appeals. On February 3, 1998, the FCC adopted the LMDS Third
Order on Reconsideration which affirmed the rules adopted in the LMDS Second
Report and Order, including the LEC/MSO eligibility restriction. Further, the
D.C. Circuit Court of Appeals upheld the FCC's LEC/MSO eligibility restriction
on February 6, 1998.

      Congressional Elimination of the Pioneer's Preference Program. As noted
above, in the FCC's December 1992 LMDS First NPRM, the FCC tentatively granted
the Company's request for a Pioneer's Preference. This Pioneer's Preference
would have awarded the Company a license for the outer portion of the New York
BTA not included in the New York PMSA. Based on the 1993 Omnibus Budget
Reconciliation Act's revisions to the Pioneer's Preference program, had the
company been awarded a Pioneer's Preference, the Company would have received a
15% credit on the auction equivalent price of that outer portion of the New York
BTA. In the LMDS Second Report and Order, the FCC deferred action on the
Company's tentative Pioneer's Preference Award and instead ordered a "peer
review" process, whereby the FCC would select a panel of technical, non-FCC
experts to review the Company's technology and advise the FCC whether the
Pioneer's Preference should be granted.

      However, on August 5, 1997, the Balanced Budget Act of 1997 ("Budget Act")
was signed into law. Section 3002 of the Budget Act eliminated the FCC's
authority to award licenses through the Pioneer's Preference Program.
Accordingly, the Company's pending Pioneer's Preference application, along with
the Pioneer's Preference applications of numerous other companies, was dismissed
by the Commission on September 4, 1997. It is important to note that elimination
of the FCC's Pioneer's Preference Program, and the Company's Pioneer's
Preference application thereunder, does not affect the Company's existing
commercial license for the New York PMSA.

      LMDS Fifth Notice of Proposed Rulemaking. On March 13, 1997, along with
the LMDS Second Report and Order, the FCC also initiated the LMDS Fifth NPRM to
address the issues of disaggregation and partitioning which will enable an LMDS
licensee to assign a portion of its bandwidth or geographic service area to
another entity. The FCC tentatively concluded to allow disaggregation and
partitioning without imposing substantial regulatory requirements and issued the
Fifth NPRM to solicit public comment regarding the most effective way to
implement partitioning and disaggregation for LMDS licensees. On May 6, 1997,
the public comment cycle closed for the Fifth NPRM, and the FCC's final decision
on this matter remains pending.

      LMDS Auction. On July 30, 1997, the FCC announced its intent to commence
the nationwide licensing of LMDS through a spectrum auction starting December
10, 1997. On November 10, 1997, the FCC released a Public Notice announcing its
decision to postpone the LMDS auction from December 10, 1997 until February 18,
1998. The Commission granted this postponement to ensure the maximum
participation by small businesses, many of which had requested additional time
to secure financing in light of the elimination of installment payments. On
February 18, 1998, the LMDS auction commenced. On March 25, 1998, the LMDS
auction was concluded after 128 rounds of bidding. The FCC auctioned 864 of the
986 licenses up for bid, for a total net revenue of $578,663,029.

      Because the Company holds the spectrum for the A Block license in the New
York PMSA, this license was excluded


                                       16
<PAGE>

from the nationwide LMDS auction. Accordingly, the A Block license for the New
York BTA in the FCC LMDS Auction consisted only of that portion of the New York
BTA not included in the New York PMSA (i.e., suburban counties in New Jersey,
Eastern Pennsylvania, Southwestern Connecticut and on Long Island).

Industry Regulation

      General. Subsequent to the grant of the Company's commercial license in
1991, the FCC in 1992 commenced the LMDS rulemaking proceeding to develop rules
for the licensing of LMDS nationwide. With the release of the LMDS Second Report
and Order on March 13, 1997, establishing LMDS service, auction and eligibility
rules, and the LMDS Third Order on Reconsideration, which affirmed these rules,
the FCC's LMDS rulemaking is largely complete, except for the LMDS Fifth NPRM
which will determine the rules governing LMDS license partitioning and
disaggregation. The nationwide LMDS auctions commenced on February 18, 1998 and
concluded on March 25, 1998. LMDS licensees will be permitted to provide a
diverse range of services, including video, voice and data services.

      From a regulatory standpoint, the Company's subscription television
service currently offered in the New York PMSA is not treated as a "cable
system," as that term is defined by 47 U.S.C. ss. 522(7) and interpreted by the
FCC's rules and relevant decisions including the LMDS Second Report and Order.
The FCC formally recognized in the LMDS Second Report and Order, that as a
wireless service provider, an LMDS licensee providing video-programming services
is not subject to franchising or regulation as a cable system. As a result, the
Company is not required to comply with the FCC's onerous rules applicable to
franchised cable systems, including, among other things, rate regulation and the
requirement to obtain a franchise from local government authorities in order to
provide its video services.

      While the Company's video operations are not subject to the FCC's
requirements applicable to franchised cable systems, the FCC has the power to
issue, revoke, modify and renew licenses within the spectrum utilized by the
Company's subscription television service, subject to FCC and judicial case law
precedent, which relies on the equitable concept of renewal expectancy for any
FCC licensee who acts in accord with the terms of its license and seeks to serve
the public interest, convenience and necessity. The FCC also may approve changes
in the ownership of such licenses, regulate equipment used by the Company's
video operations, and impose certain equal employment opportunity and
retransmission consent requirements.

      1984 Cable Act. Under the Cable Communications Policy Act of 1984, as
amended by the Telecommunications Reform Act (the "1984 Cable Act"), "cable
systems" may not be operated without a franchise from applicable local
government authorities. Federal law exempts from the definition of a "cable
system" those systems that (i) use wire or cable within the premises of a single
building only; (ii) interconnect one or more buildings only through radio
facilities; or (iii) interconnect buildings, by cable or wire, provided that the
system does not use public rights-of-way. Such systems, therefore, are not
required to obtain franchises from applicable local government authorities and
are subject to fewer regulations than traditional franchised cable operators. As
the FCC has recognized in the LMDS Second Report and Order, an LMDS video
distribution system, such as that operated by the Company in the New York PMSA,
would not be considered a "cable system" since signals are transmitted to
subscribers by radio spectrum. Moreover, all transmission and reception
equipment associated with the Company's LMDS video distribution operations can
be located on private property, eliminating the need for utility poles and
dedicated easements.

      1992 Cable Act. On October 5, 1992, the U.S. Congress passed the 1992
Cable Act which imposes greater regulation on franchised cable operators and
permits regulation of cable service rates by local franchising authorities in
areas in which there is no "effective competition." The 1992 Cable Act, while
primarily known for regulating cable rates, also covers numerous other issues,
including (i) equal employment opportunity hiring policies; (ii) subscriber home
wiring ownership; (iii) compatibility of set-top converters with television
sets; (iv) carriage by private and franchise cable systems of local television
stations so-called "retransmission consent" and "must carry rules;" (v) customer
service standards; and (vi) non-discriminatory access to programming by Multiple
Video Programming Distributors ("MVPDs").

      The Company's operations will not be subject to the rate regulation and
"must carry" rules of the 1992 Cable Act which restrict the business practices
of franchised cable companies.

      Telecommunications Reform Act. On February 8, 1996, the Telecommunications
Reform Act of 1996 (the "Telecommunications Reform Act") was signed into law.
This landmark communications reform legislation significantly relaxes various
restrictions applicable to franchised cable operators and local and long
distance telephone providers. Among other things, the Telecommunications Reform
Act (i) allows Regional Bell Operating Companies ("RBOCs") to offer in-


                                       17
<PAGE>

region video services and long distance telephone service, subject to certain
requirements; (ii) preempts state laws, where applicable, allowing cable and
long distance telephone companies to offer local telephone service; and (iii)
amends the 1992 Cable Act to substantially deregulate cable rates.

      With regard to franchised cable operators, the Telecommunications Reform
Act also contains provisions that will reduce the regulatory burdens on
franchised cable systems by freeing them from rate regulation of the cable
programming services tier by March 31, 1999, or immediately for systems with
fewer than 50,000 subscribers. Under this new legislation, franchised cable
operators also will be allowed to offer special discounts to residents of
multiple dwelling units, thereby intensifying competition between franchised
cable and wireless operators.

      Retransmission Consent. Under the 1992 Cable Act, MVPDs, including the
Company's wireless LMDS video distribution system, are prohibited from carrying
local television signals without first obtaining the television station's
consent, commonly known as a station's "retransmission consent" right. The
Company has obtained all necessary retransmission consents.

      Program Access. The 1992 Cable Act also contains provisions designed to
ensure access by all MVPDs to programming on fair, reasonable and
non-discriminatory terms. The program access provisions prohibit vertically
integrated cable programmers, programmers in which a cable operator holds a five
percent or greater voting or non-voting ownership interest, a partnership
interest or has a common officer or director, from discriminating against MVPDs
in the prices they charge for programming. Moreover, the 1992 Cable Act's
program access provisions prohibit most exclusive dealing agreements that have
in the past enabled franchised cable operators to procure programming that is
unavailable to competitors. The program access provisions also prohibit
"non-price" discrimination by a programmer between competing MVPDs, including
the unreasonable refusal to sell programming to a class of video provider, or
refusing to offer particular terms to an individual video provider.

      On August 24, 1995, the FCC, acting on a complaint filed by the Company,
ordered SportsChannel Associates, a unit of Cablevision Systems Corporation
("SportsChannel"), to offer its sports programming to the Company on
non-discriminatory terms based on the FCC's finding that SportsChannel had
unreasonably refused to sell such programming. SportsChannel challenged the
FCC's decision by filing a Petition for Reconsideration and a Petition for Stay
pending FCC action on reconsideration, which the Company opposed. The FCC denied
the petition for Stay. Additionally, on March 12, 1996, the FCC affirmed its
decision in favor of the Company. In October 1995, the Company executed a
contract with SportsChannel, and now offers SportsChannel programming to its
subscribers.

      On December 18, 1997, the FCC, adopted a Memorandum Opinion and Order and
Notice of Proposed Rulemaking which proposed rules to strengthen enforcement of
its program access rules. Specifically, the FCC is seeking comment on several
issues including: (i) whether to adopt time limits for processing program access
complaints whereby the FCC would have to act on complaints within 90 days of
filing where no discovery is conducted, and 150 days where discovery is
conducted; (ii) whether to allow complainants the right to conduct discovery as
a matter of right in all program access complaints instead of allowing discovery
on a case-by-case basis; (iii) whether the Commission should impose forfeitures
for program access violations; and (iv) whether the program access rules should
apply to a programmer that has moved satellite-delivered programming to
terrestrial delivery in order to evade the program access rules.

      Compulsory Copyright License. Under federal copyright laws, permission
from a television program's copyright holder generally must be secured before
the video programming may be retransmitted. Cable systems, however, may obtain a
compulsory copyright license and retransmit local television broadcast
programming without securing the prior approval of the holders of the copyrights
for such programming, by filing reports and remitting semiannual royalty fee
payments to the Registrar of Copyrights.

      On January 1, 1994, the U.S. Copyright Office held that certain wireless
video programming distributors, such as satellite carriers and MMDS operators,
were not "cable systems" eligible for a compulsory copyright license.
Subsequently, the Congress enacted the Satellite Home Viewer Act of 1994, which
broadened the U.S. Copyright Office's "cable system" definition to include all
wireless cable operators, arguably making the Company eligible for a copyright
compulsory license. Accordingly, the Company has filed all necessary Statements
of Account with the Copyright Office.

      Restrictions on Over-the-Air Reception Devices. The Telecommunications
Reform Act directed the FCC to promulgate regulations to prohibit restrictions
that impair a viewer's ability to receive video programming services through


                                       18
<PAGE>

devices designed for over-the-air reception of television broadcast signals,
multichannel multipoint distribution service, or direct broadcast satellite
services. In a Report and Order released on August 6, 1996, the FCC established
a rule that prohibits restrictions impairing the installation, maintenance or
use of an antenna designed to receive numerous video programming services,
specifically including LMDS. However, the Commission limited the interim
applicability of this rule to antennas located on property within the exclusive
use or control of the antenna user where the user has a direct or indirect
ownership interest in the property. In a Further Notice of Proposed Rulemaking
that is ongoing, the FCC is requesting further comment on situations involving:
(i) property not under the exclusive use and control of a person who has a
direct or indirect ownership interest; and, (ii) residential or commercial
property subject to a lease agreement.

Equipment and Facilities

      The principal physical assets incorporated in the Company's system consist
of headend equipment (including satellite signal reception equipment,
demodulators, multiplexers and encoders), 28GHz transmitters, fiber optic
transmitters and receivers, repeaters and subscriber equipment, as well as
office space. The Company's LMDS Operations and Communications Center collects
and feeds video and data information from external sources such as satellites,
local television broadcast programming and Internet Service Providers into the
Company's distribution system. Lasers then transmit the signals, via fiber optic
cable, to Hub Cell Sites. At these cell sites, the signals are upconverted to
the 28GHz band and then transmitted directly to the subscriber's home or office
where they are received by an antenna connected to a set-top converter or a
modem installed in the subscriber's computer. The Company deploys repeaters to
service those shadowed areas not served directly from the cell sites.

      The unique feature of the Company's customer premises equipment is its
highly-directional, flat plate, window, roof or wall-mounted antenna
(approximately six and five-eighths inches square) which, based on its unique
characteristics and design, reduces the risk of theft of service. This antenna,
which is connected to and powered by a set-top converter, or super-high-speed
modem, makes reception of the Company's high-quality signal possible. The
Company's antenna permits indoor installations, in many cases, thereby avoiding
the costs involved in outdoor installations. All of the Company's set-top
converters are fully addressable, making pay-per-view services available to all
of its subscribers, and enabling the Company to control access to all of its
channels, further reducing the risk of theft of services. Subscribers are also
supplied with a hand-held, wireless remote control unit. The Company currently
obtains its customer premises equipment either from sole-source third party
suppliers or through CT&T, which also obtains it from such sole-source, third
party suppliers.

ITEM 2. PROPERTIES

      The Company leases 20,400 square feet of space at the Brooklyn Army
Terminal (BAT) for its Administrative, Sales, Marketing and Customer Care
departments. This space also houses the Company's new state-of-the-art headend
facility. The new headend, and fiber optic connections to CVNY transmitters,
went on line in January 1998. This upgrade has significantly improved the
system's signal quality and reliability. The Company also leases 8,500 square
feet at the BAT for warehouse and technical training space. These two leases
expire in 2004.

      When the Company expanded into the Queens area in September 1996, an
additional satellite office for installation, service and sales was leased. The
lease for 10,000 square feet expires in August 2004. The Company also leases one
New York City apartment for system demonstration and general corporate purposes.

      The Company leases approximately 3,250 square feet of indoor and outdoor
space on which it has constructed its original headend facility. These leases
expire in 1998 and 1999. Due to the completion of the Company's new
state-of-the-art headend in January, 1998, and the planned transfer of all
operations to it by the Summer of 1998, neither the original headend equipment
nor the foregoing leased space will be required thereafter.

      The Company leases approximately 100 square feet of space on each of 19
rooftops for its transmitters. These leases, several of which contain seven-year
renewal options, expire from 1999 to 2003. The Company is currently in final
negotiations for rooftop space on 4 additional sites in New York City. In
addition, the Company has letters of intent from landlords to lease space at 24
more sites throughout the New York PMSA. The Company believes that leased space
on rooftops in New York City and other locations in the New York PMSA will be
readily available to serve as additional transmitter sites.

ITEM 3. LEGAL PROCEEDINGS


                                       19
<PAGE>

      In February 1996, a suit was filed against the Company alleging that the
Company caused the U.S. Army to breach a contract with the plaintiff wherein the
plaintiff was to have an exclusive right to provide cable television services at
an army base located in Brooklyn New York. The suit alleges that by entering
into a franchise agreement with the Army which grants the Company the right to
enter the army base to build, construct, install, operate and maintain its
multichannel broadband cellular television system, the Company induced the Army
to breach its franchise agreement with the plaintiff and tortuously interfered
with said agreement. The Army has advised the Company that it has the right to
award the franchise to the Company and the Company is continuing to provide
service to the army base. The suit seeks $1 million in damages. On September 27,
1996, the Company served and filed a motion with the court seeking to end the
action by the granting of summary judgment. By memorandum and order dated
September 19, 1997, the court granted the motion to the extent that the case has
been dismissed against CellularVision USA, Inc. only. However, the court has
permitted the action to continue against CellularVision of N.Y., L.P. The
Company cannot make a determination at this time as to the possible outcome of
the action. In the event an adverse judgment is rendered, the effect could be
material to the Company's financial position and it could have a material effect
on operating results in the period in which the matter is resolved.

      In November 1995, a purported class action suit was filed against the
Company in New York State Supreme Court alleging that the Company had engaged in
a systematic practice of installing customer premises equipment in multiple
dwelling units without obtaining certain landlord or owner consents allegedly
required by law. On March 31, 1997, the Court issued an opinion holding that the
company has a right under, and in accordance with, New York law to install the
customer premises equipment and based on same, held that all allegations related
to a purported class be dismissed. As a result, the only part of the case that
remains is a claim for an alleged trespass and damage to one building because
customer premises equipment was allegedly installed without prior notice to the
landlord. This opinion was codified by the court in its orders dated May 29,
1997 and July 1, 1997 wherein plaintiff was granted an injunction preventing the
Company from performing cable installations at the one building on the condition
plaintiff post an undertaking in the amount of $5,000 on or before July 11,
1997. The second order provided that the injunction would be dissolved and
vacated upon plaintiff's failure to post the undertaking. Plaintiff has refused
and failed to post the undertaking, resulting in the vacatur and dissolution of
the injunction. Plaintiff has informed the court that it did not wish to proceed
with the action without class certification which resulted in the action being
dismissed by court decision and order dated August 7, 1997. However, plaintiff
has served a Notice of Appeal from the May 29, 1997 court order. If the appeal
is successful, it may result in the certification of the class and
re-institution of the lawsuit. It is unclear whether plaintiff will proceed with
the appeal. The Company believes, upon advice of counsel, that this suit is
likely to be resolved without a material adverse effect on the financial
position of the Company.

      Prior to 1992, Vahak and Shant Hovnanian were officers, directors and
principal shareholders of Riverside Savings Bank, a state-chartered savings and
loan association that entered receivership in 1991. In certain civil litigation
against the Hovnanians and others that ensued, which is pending in the U.S.
District Court for the District of New Jersey, the Resolution Trust Corporation
has alleged simple and gross negligence and breaches of fiduciary duties of care
and loyalty on the part of the defendants. The defendants have obtained
dismissal of certain allegations and intend to continue to vigorously defend the
action.

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

      The following two matters were submitted to, and voted upon by, the
stockholders in conjunction with the Annual Meeting of Stockholders held on May
7, 1997 in New York, New York:

      1. The election of seven members to the Board of Directors of the Company
         (the "Board") to serve until the next Annual Meeting of Stockholders to
         be held in 1998 (the "1998 Annual Meeting") or until their successors
         are duly elected.

      2. The appointment of independent auditors of the Company for the 1997
         fiscal year to serve until the 1998 Annual meeting or until their
         successors are duly elected.

      With respect to the election of directors, the Board, at the
recommendation of the Nominating Committee, designated seven Nominees for
election as directors to the Board to serve until the 1998 Annual Meeting or
until their successors are duly elected and qualified. The Board unanimously
recommended a vote "FOR" the election of the Nominees to the Board. The
stockholders approved the election of the seven Nominees to the Board by the
affirmative vote of a majority of the shares of Common Stock present, in person
or by proxy, and entitled to vote at the Annual Meeting.


                                       20
<PAGE>

      With respect to the appointment of independent auditors of the Company for
the 1997 fiscal year, the Board, upon the recommendation of the Audit Committee
of the Board, proposed that the stockholders appoint the firm of Coopers &
Lybrand L.L.P. (C&L) to serve as the independent auditors of the Company for the
1997 fiscal year until the 1998 Annual Meeting. C&L served as the Company's
independent auditors for the 1996 fiscal year. The Board unanimously recommended
a vote "FOR" the approval of the proposal. The stockholders approved the
appointment by the affirmative vote of a majority of the shares of Common Stock
present, in person or by proxy, at the Annual Meeting.


                                       21
<PAGE>

                                     PART II

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

      The Common Stock is listed for quotation on the NASDAQ National Market
system (the "NNM") under the symbol "CVUS." The following table sets forth high,
low and closing sale prices for the Common Stock for the fiscal quarters
indicated, as reported by the NNM.

                           High Sale         Low Sale          Closing Sale
                           ---------         --------          ------------
1996
----
First Quarter*               $15.750           $10.125             $11.000
Second Quarter                16.750             8.875              15.750
Third Quarter                 16.750             9.250              10.000
Fourth Quarter                 9.500             4.375               7.000


                           High Sale         Low Sale          Closing Sale
                           ---------         --------          ------------
1997
----
First Quarter                $11.875            $6.750              $9.000
Second Quarter                10.250             6.875               8.000
Third Quarter                  9.000             6.625               7.875
Fourth Quarter                 9.750             5.563               6.000


----------
*  Commencing February 8, 1996, the first day of public trading of the Common
   Stock, through March 31, 1996.

      On December 31, 1997, the last sale price of the Common Stock as reported
on the NNM was $6.00 per share. As of December 31, 1997, there were 81
registered shareholders of the Common Stock. During the year ended December 31,
1997, the Company did not make any sales of securities that were not registered
under the Securities Act of 1933, as amended (the "Securities Act").

      The Company has never declared or paid any cash dividends and does not
intend to declare or pay cash dividends on the Common Stock at any time in the
foreseeable future. Future earnings, if any, will be used to finance the
build-out of the Company's broadband wireless telecommunmications system in the
New York PMSA.


                                       22
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The selected consolidated financial data set forth below should be read
in conjunction with Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements of
the Company and related Notes thereto included elsewhere in this Report.

                                       Year Ended December 31,
                      ----------------------------------------------------------
                           1993        1994        1995      1996         1997
                           ----        ----        ----      ----         ----
                                (in thousands, except per share data)
Statement of
    Operations
Data:
Revenue ............   $     55    $     51    $  1,196    $  2,190    $  4,943
                       --------    --------    --------    --------    --------

Service Costs ......         24          39         603       1,175       2,314
Selling General and
    administrative .       1799       2,884       5,637      10,574      13,859
Management fees ....        250       1,546       2,699          --          --
Depreciation and
    amortization ...         73         188       1,376       2,258       3,881
                       --------    --------    --------    --------    --------
Total operating
    expenses .......      2,146       4,657      10,315      14,007      20,054
                       --------    --------    --------    --------    --------
Operating Loss .....     (2,091)     (4,606)     (9,119)    (11,817)    (15,111)
Net interest income
    (expense).......        100      (1,393)     (2,184)        186        (152)
                       --------    --------    --------    --------    --------
Net loss ...........   $ (1,991)   $ (5,999)   $(11,303)   $(11,631)    (15,263)
                       ========    ========    ========    ========    ========

Per Share
Basic loss per common
    share (1).......                          $   (0.91)    $ (0.75)    $ (0.95)

Weighted average
    common shares 
    outstanding (1)                          12,395,142  15,576,478  16,000,000

Diluted loss per
 common share (1)...                             $(0.91)     $(0.75)     $(0.95)

Weighted average
 common shares
 outstanding (1)....                         12,395,142  15,576,478  16,000,000

                                               December 31,
                           1993        1994        1995      1996         1997
                           ----        ----        ----      ----         ----
Balance Sheet Data:
Cash and short-term
    investments.....   $18,705     $12,544      $3,536     $19,600        $408
Working capital
    (deficiency)....    17,766      10,470      (1,647)     16,765      (7,029)
Net property and
    equipment.......       407       3,469       6,322      14,158      20,608
Total assets........    20,096      16,922      12,995      35,924      23,154
Total debt..........    15,000      16,756      18,871       6,260       7,495
Total liabilities...    16,115      18,861      26,314       8,972      11,464
Total equity
    (deficit).......     3,981      (1,939)    (13,319)     26,952      11,690

1) Historical loss per common share and weighted average common shares
   outstanding for the years ended December 31, 1993 and 1994 are not presented
   as they are not considered indicative of the on-going entity.


                                       23
<PAGE>

Summary of Quarterly Financial Data

                                                      Quarters Ended

<TABLE>
<CAPTION>
Year Ended 1997               March 31        June 30        Sept 30         Dec 31       Year End
<S>                         <C>            <C>            <C>            <C>           <C>         
Revenues                       851,630      1,105,833      1,396,403      1,589,344      4,943,210
Operating income (loss)     (3,607,286)    (3,848,435)    (3,754,521)    (3,900,834)   (15,111,076)
Net income (loss)           (3,541,895)    (3,863,620)    (3,815,006)    (4,042,141)   (15,262,662)
Per share - Basic                (0.22)         (0.24)         (0.24)         (0.25)         (0.95)
          - Diluted              (0.22)         (0.24)         (0.24)         (0.25)         (0.95)

<CAPTION>
Year Ended 1996               March 31        June 30        Sept 30         Dec 31       Year End
<S>                         <C>            <C>            <C>            <C>           <C>         
Revenues                       493,682        384,423        550,424        761,237      2,189,766
Operating income (loss)     (2,455,149)    (3,051,777)    (2,403,810)    (3,906,894)   (11,817,630)
Net income (loss)           (2,775,509)    (2,857,490)    (2,198,815)    (3,799,387)   (11,631,201)
Per share - Basic                (0.20)         (0.18)         (0.14)         (0.23)         (0.75)
          - Diluted              (0.20)         (0.18)         (0.14)         (0.23)         (0.75)
</TABLE>


                                       24
<PAGE>

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

      The following should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto and the other financial
information appearing elsewhere in this Report.

Information Relating to Forward-Looking Statements

      Management's Discussion and Analysis and other sections of this Annual
Report include forward-looking statements that reflect the Company's current
expectations concerning future results. The words "expects", "intends",
"believes", "anticipates", "likely", "will", and similar expressions identify
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements.

General

      The Company's licensed service area is the New York Primary Metropolitan
Statistical Area ("PMSA"), a region which includes approximately 8.6 million
population in the 5 boroughs of New York City as well as the New York Counties
of Westchester, Rockland, and Putnam. During 1997, the Company expanded its
coverage of the market to include all of Brooklyn, and portions of Manhattan and
Queens. There are approximately 2.9 million people and 150,000 offices in the
areas serviced by the Company's 15 operational transmitters, although the
availability of signal in particular localities varies depending upon a number
of factors.

      The infrastructure cost of the Company's system is significantly different
from that of a hard-wire cable company. The cost associated with infrastructure,
or the ability to "pass homes," is a relatively small portion of the Company's
total capital expenditure requirements. The predominant share of capital
expenditures required to build out the Company's system is related to customer
premises equipment, consisting of receive antennas, set-top converters and
computer modems, which are installed in the subscriber's home or office. Other
direct costs relating to subscriber installation include sales commissions and
installation costs. The Company capitalizes costs associated with subscriber
installation, including material and labor. These costs are then depreciated
over the shorter of the estimated average period that the subscribers are
expected to remain connected to the Company's system or five years. Installation
revenue, when charged to a subscriber, is recorded in current period revenue to
the extent of direct sales commissions and deferred thereafter.

Operations

      The focus of 1997 operations was the continued construction of the
CellularVision network infrastructure throughout the New York PMSA, the
development of new super-high-speed Internet access services and continued
subscriber growth. The Company deployed five additional transmitters in 1997,
bringing the current total to 15, serving all of Brooklyn, and parts of
Manhattan and Queens. Four additional transmitters are under construction.

      The Company's original headend has been fully operational since 1992 and
is currently being used to transmit programming to 11 operational cells located
in Brooklyn and Manhattan. During 1997 the Company constructed a new
state-of-the-art LMDS Operations & Communications Center (LOCC). Video or data
signals transmitted through the Company's system, such as television
programming, are received by the system from satellite transponders, terrestrial
microwave facilities and/or studios at the LOCC. Internet access is obtained
through dedicated T-3 lines connecting the LOCC to the Internet "backbone".
Signals from the LOCC are then transmitted via fiber optic cable to several "Hub
Cell Sites." The LOCC now serves 4 of the Company's 15 operational transmitters.
The Company expects to deliver services from the LOCC to all operational cell
site transmitters by the Summer of 1998.

      The Company is presently offering its super-high-speed Internet access
service to both businesses and residential subscribers in Brooklyn, Queens and
Manhattan. The recent development of a network application for the service now
provides businesses a unique opportunity for receiving a low cost,
super-high-speed LAN solution for accessing the Internet. The product offered
under the name "SPEED"(SM) is being initially introduced to Manhattan businesses
through a controlled, targeted rollout, utilizing the efforts of a professional
in-house team of Internet Account Executives. Additionally, subject to 


                                       25
<PAGE>

the availability of the requisite funding, the Company may augment the efforts
of the sales team through the selected use of New Media advertisement and mass
media branding campaigns. These highly visible campaigns may include the use of
print, radio and television. Campaign efficiencies will be maintained through
the fostering of marketing relationships already in place with a company such as
Bloomberg Information Television.

      During 1996 and 1997, sales and marketing efforts have included
door-to-door, direct mail and telemarketing campaigns. Since the launch of this
three-pronged approach in the second quarter of 1996, the Company's subscribers
and revenues have grown each month through the end of 1997. However, due to
capital conservation measures, which were implemented commencing in the third
quarter of 1997, and which have continued in place through the first quarter of
1998, the rate of subscriber base growth slowed somewhat during the second half
of 1997. In addition, following the decision to de-emphasize subscription
television service, and the related reduction in force on December 31, 1997, the
subscriber base has declined during the first quarter of 1998. Subscribers
totaled approximately 15,000 as of March 31, 1998, approximately a 20% increase
versus the 12,500 reported at this time in 1997 and a 19% reduction versus the
18,500 reported as of November 12, 1997. The Company expects that the overall
subscriber base will continue to decline in the immediate future, until the
growth in the super-high-speed Internet subscriber base is sufficient to offset
the expected losses in subscription television customers, or until the
full-scale marketing of subscription television service is resumed upon the
receipt of requisite funding.

            Twelve Months Ended December 31, 1997 Compared to Twelve Months
Ended December 31, 1996. Revenue increased $2,753,000 from $2,190,000 for twelve
months ended December 31, 1996 to $4,943,000 for the twelve months ended
December 31, 1997. The increase in revenue is due primarily to an increase in
subscribers.

      Operating expenses increased $6,047,000 from $14,007,000 for the twelve
months ended December 31, 1996 to $20,054,000 for the twelve months ended
December 31, 1997. This increase is primarily attributable to costs associated
with the Company's continued commercial roll-out, including service costs,
selling, general and administrative expenses, and depreciation and amortization.

      Service Costs increased $1,139,000 from $1,175,000 for the twelve months
ended December 31, 1996 to $2,314,000 for the twelve months ended December 31,
1997. Service costs are fees paid to providers of television programming and
royalties paid to CT&T under a license agreement between CT&T and CVNY (the
"CT&T License Agreement"). These costs increase as the subscriber count and
associated revenues increase.

      Selling, general and administrative expense increased $3,285,000 from
$10,574,000 for the twelve months ended December 31, 1996 to $13,859,000 for the
twelve months ended December 31, 1997. The increase in selling, general and
administrative expenses is primarily attributable to headcount-related costs (as
the Company's employee base rose from 104 at December 31, 1996 to 130 at
December 31, 1997. At year-end 1997, the Company elected to focus its immediate
efforts on bringing its high-speed Internet access service to market. Due to the
increased focus on such service, the Company de-emphasized its marketing efforts
related to selling subscription television service in the immediate future. In
conjunction with this action, on December 31, 1997, the Company reduced its
workforce by 43 people, most of whom worked in subscription television sales,
marketing and operations. In addition, during 1997, there were increases in
promotion and other sales-related expenses due to the increase in subscribers
and in rent expenses due to the addition of new facilities and cell sites.

      Depreciation and Amortization increased $1,623,000 from $2,258,000 for the
twelve months ended December 31, 1996 to $3,881,000 for the twelve months ended
December 31, 1997. The increase in depreciation and amortization costs is due
primarily to the purchase of customer premises equipment and leasehold
improvements at the Company's new state-of-the-art headend facility, customer
care center, and office complex.

      Interest expense decreased $304,000 from $1,105,000 for the twelve months
ended December 31, 1996 to $801,000 for twelve months ended December 31, 1997.
The decrease is due primarily to the repayment of the 1997 principal installment
of the Note to J.P. Morgan in June 1997. Interest income decreased $642,000 from
$1,292,000 for the twelve months ended December 31, 1996 to $650,000 for the
twelve months ended December 31, 1997. This decrease is primarily due to a
decrease in cash position as the Company continued to expend funds to build out
its network and increase its subscriber base.

      Net loss for the twelve months ended December 31, 1996 was $11,631,000
compared to a net loss of $15,263,000 for the twelve months ended December 31,
1997. This increase is due to increased service costs, selling general and
administrative expenses, and depreciation and amortization expense, partially
offset by increased revenues.


                                       26
<PAGE>

      Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended
December 31, 1995. Revenue increased $994,000 from $1,196,000 for the twelve
months ended December 31, 1995 to $2,190,000 for the twelve months ended
December 31, 1996. The increase in revenue is due to an increase in subscribers,
and a full year of premium and pay-per-view services, which were introduced in
April and June 1995, respectively.

      Operating expenses increased $3,692,000 from $10,315,000 for the twelve
months ended December 31, 1995 to $14,007,000 for the twelve months ended
December 31, 1996. This increase is attributable to costs associated with the
continued commercial roll-out, including service costs, selling, general and
administrative expenses, and depreciation and amortization, offset in part by
the elimination of management fees.

      Service costs increased $572,000 from $603,000 for the twelve months ended
December 31, 1995 to $1,175,000 for the twelve months ended December 31, 1996.
Service costs are fees paid to providers of television programming and royalties
paid to CT&T under a license agreement between CT&T and CVNY (the "CT&T License
Agreement"). These costs increase as the subscriber count and associated
revenues increase.

      Selling, general and administrative expense increased $4,937,000 from
$5,637,000 for the twelve months ended December 31, 1995 to $10,574,000 for the
twelve months ended December 31, 1996. The increase in selling, general and
administrative expenses is primarily attributable to headcount-related costs (as
the Company's employee base rose from 55 at December 31, 1995 to 104 at December
31, 1996), increased payments in equipment rentals and increased legal fees
associated primarily with the FCC rulemaking, offset in part by a decrease in
contractor sales, as part of the sales force was brought in-house.

      Management fees decreased $2,699,000 from $2,699,000 for the twelve months
ended December 31, 1995 to $0 for the twelve months ended December 31, 1996. The
decrease in management fees is attributable to the termination of a management
agreement with Bell Atlantic Corporation (the "Management Agreement") as of
December 31, 1995.

      Depreciation and amortization increased $882,000 from $1,376,000 for the
twelve months ended December 31, 1995 to $2,258,000 for the twelve months ended
December 31, 1996. The increase in depreciation and amortization costs is due
primarily to the purchase of customer premises equipment and equipment for the
Company's transmitter sites.

      Interest expense decreased $1,483,000 from $2,588,000 for the twelve
months ended December 31, 1995 to $1,105,000 for the twelve months ended
December 31, 1996. The decrease is due primarily to the conversion of
$10,000,000 of convertible exchangeable subordinated notes payable in
conjunction with the Company's Initial Public Offering. Interest income
increased $888,000 from $404,000 for the twelve months ended December 31, 1995
to $1,292,000 for the twelve months ended December 31, 1996. The increase is due
primarily to the interest earned on the proceeds from the Company's Initial
Public Offering in 1996.

      The net loss for the twelve months ended December 31, 1995 was $11,303,000
compared to a net loss of $11,631,000 for the twelve months ended December 31,
1996. This increase was due to increased service costs, selling, general and
administrative expenses, and depreciation and amortization expense, offset by
increased revenue and interest income and decreased management fees and interest
expense.

      Twelve Months Ended December 31, 1995 Compared to Twelve Months Ended
December 31, 1994. Revenue increased $1,145,000 from $51,000 for the twelve
months ended December 31, 1994 to $1,196,000 for the twelve months ended
December 31, 1995. The increase in revenue was attributable to an increase in
subscribers and the addition of premium and pay-per-view services during April
and June 1995, respectively.

      Operating expenses increased $5,658,000 from $4,657,000 for the twelve
months ended December 31, 1994 to $10,315,000 for the twelve months ended
December 31, 1995. This increase was primarily attributable to costs associated
with the commercial roll-out, including service costs, selling, general and
administrative expenses, management fees and depreciation and amortization.

      Service costs increased $564,000 from $39,000 for the twelve months ended
December 31, 1994 to $603,000 for the twelve months ended December 31, 1995.
Such costs, primarily fees paid to providers of television programming and
royalties paid to CT&T under the CT&T License Agreement, increased with the
growth in subscribers and revenues.


                                       27
<PAGE>

      Selling, general and administrative expenses increased $2,753,000 from
$2,884,000 for the twelve months ended December 31, 1994 to $5,637,000 for the
twelve months ended December 31, 1995. The increase in selling, general and
administrative expenses was primarily attributable to headcount-related costs
(as the Company's employee base rose from 13 at December 31, 1994 to 55 at
December 31, 1995), sales and marketing-related costs and increased legal costs
associated with the FCC licensing process.

      Management fees increased $1,153,000 from $1,546,000 for the twelve months
ended December 31, 1994 to $2,699,000 for the twelve months ended December 31,
1995. The increase in management fees was attributable to contractual increases
in amounts due to Bell Atlantic under the terms of the Management Agreement.
Other costs reimbursed under this agreement, primarily for salary and benefits,
were reflected in selling, general and administrative expenses and continued to
be incurred separately by the Company in 1996.

      Depreciation and amortization increased $1,188,000 from $188,000 for the
twelve months ended December 31, 1994 to $1,376,000 for the twelve months ended
December 31, 1995. The increase in depreciation and amortization costs was due
primarily to the purchase of customer premises equipment, equipment for three
transmitter sites and the build-out of the Company's customer
service/administrative facility.

      Interest expense increased $669,000 from $1,919,000 for the twelve months
ended December 31, 1994 to $2,588,000 for the twelve months ended December 31,
1995. This increase was due to increases in the prime interest rate along with
additional interest associated with the compounding of previously accrued
interest and principal on the Morgan Notes. In connection with the consummation
of the Initial Public Offering, $10 million of the $15 million principal amount
of the Morgan Notes was converted into Common Stock of the Company. Interest
accrued, in an amount proportionate to the amount of principal converted, from
the date of issue of such notes through the conversion date was irrevocably
waived and classified to additional paid-in capital. Interest income declined
$123,000 from $527,000 for the twelve months ended December 31, 1994, to
$404,000 for the twelve months ended December 31, 1995.

      The net loss for the twelve months ended December 31, 1994 was $5,999,000
compared to a net loss of $11,303,000 for the twelve months ended December 31,
1995. The increase in net loss was due primarily to increased operating expenses
and interest expense.

Liquidity and Capital Resources

      For the year ended December 31, 1997, the Company expended $10,081,000 on
operating activities. During the same period, capital expenditures were
$10,261,000, consisting primarily of the construction of the new headend and
LOCC, transmitter deployment and the purchase of customer premises equipment.

      In the fourth quarter of 1997 and the first quarter of 1998, the Company
experienced a severe liquidity shortfall due to the postponement or cancellation
of several planned financing transactions, including a potential syndication of
a $40 million senior secured debt facility by Fleet), which remains on hold and
will be revisited during 1998. In April of 1998, the Company entered into
several financing arrangements which, while providing the Company with
commitments to obtain sufficient funds to continue its operations throughout the
1998 calendar year, provide for, or potentially provide for, the issuance of
equity securities at a discount from market prices at the time of funding.
Utilization of these sources of financing could, therefore, result in
substantial dilution to existing stockholders and, while the Company intends to
seek alternative sources of financing on more attractive terms, there can be no
assurance that such alternatives will be available prior to the date that the
Company's operations will require additional utilization of its existing,
potentially-dilutive financing commitments.

      The Company's operations continue to result in negative cash flows, and
repayment of existing indebtedness will require additional sources of liquidity
in the future. Therefore, the Company anticipates that its future financing
requirements will continue to be substantial. The Company intends to address
those requirements through a combination of strategic and financial investments,
but there can be no assurance that the Company will be successful in
implementing the necessary financing arrangements on favorable terms. The lack
of availability of additional capital could have a material adverse effect on
the Company's financial condition, operating results and prospects for growth.

      On December 1, 1997, CVNY, a wholly-owned subsidiary of the Company,
entered into an agreement (the "Logimetrics Agreement") with Logimetrics, Inc.
("Logimetrics") pursuant to which CVNY assumed financial responsibility 


                                       28
<PAGE>

for certain equipment purchased through its affiliate, CT&T. In exchange,
Logimetrics agreed to continue servicing CVNY's equipment so long as CVNY
continues to meet its obligations under the Logimetrics Agreement. Pursuant to
the Logimetrics Agreement, CVNY issued and delivered a $2,621,695 Secured
Promissory Note to Logimetrics having a final maturity date of July 27, 1998.
Principal under such note was amortized and also subject to partial mandatory
prepayment upon the occurrence of certain events. On December 31, 1997,
Logimetrics sold its interest in the Secured Promissory Note to Newstart
Factors, Inc. ("Newstart"). On April 1, 1998, the Company and Newstart
restructured the terms of such note as discussed below.

      On January 21, 1998, the Company issued new Subordinated Exchange Notes,
in the aggregate principal amount of $1,191,147 (the "New Notes"), to the
holders (the "Holders") of the Company's Subordinated Exchange Notes (the
"Original Notes") held by an affiliate of J.P. Morgan, in exchange for $1
million in cash and as payment of $191,147 in respect of an interest payment due
on December 28, 1997. Also, in connection with the issuance of the New Notes,
the Holders waived certain defaults under the Original Notes. As consideration
for the purchase of the New Notes and the waiver of certain defaults under the
Original Notes, the Holders received a warrant to purchase 27,000 shares of the
Company's Common Stock at an exercise price of $0.01 per share.

      On April 1, 1998, the Company entered into separate financing agreements
with Proprietary Convertible Investment Group, Inc. ("Proprietary"), which is an
affiliate of CS First Boston, and Marion Interglobal Ltd. ("Marion"). Also on
such date, the Company entered into an agreement with Newstart to restructure
the Secured Promissory Note of CVNY held by Newstart.

      Pursuant to a Securities Purchase Agreement, dated April 1, 1998, between
the Company and Proprietary (the "Proprietary Purchase Agreement"), on April 6,
1998 the Company issued 3,500 shares of its Series A Convertible Preferred Stock
("Convertible Preferred Stock") to Proprietary for $3.5 million. Subject to
certain conditions, including the registration under the Securities Act of the
underlying shares of Common Stock, the Proprietary Purchase Agreement provides
for the issuance, at the Company's option, of an additional 3,500 shares of
Convertible Preferred Stock at a purchase price of $1,000 per share at any time
on or after June 15, 1998 and prior to December 31, 1998. The Proprietary
Purchase Agreement also provides for the issuance, at Proprietary's option, of
an additional 3,000 shares of Convertible Preferred Stock at a purchase price of
$1,000 per share during the three year period following April 6, 1998. The
Convertible Preferred Stock has a dividend rate of 4%, which may be paid in cash
or, at the option of the Company and subject to certain conditions, in stock.
The Convertible Preferred Stock may be converted into Common Stock of the
Company at any time at the option of the holder thereof at an initial conversion
price of $5.25 for the ninety day period following April 6, 1998. Following such
ninety-day period, or in the event that certain conditions are not satisfied
during such ninety-day period, the conversion price shall be the lesser of (i)
$5.25 and (ii) 88% of the lesser of (A) the average of the lowest sale prices
for the Common Stock on each of any three trading days during the twenty two
trading days occurring immediately prior to (but not including) the applicable
conversion date and (B) the average of the three lowest closing bid prices for
the Common Stock during the twenty two trading days occurring immediately prior
to (but not including) the applicable conversion date. In addition, the Company
has the right to redeem all the Convertible Preferred Stock outstanding in the
event that the closing bid price for the Common Stock is above $10 for twenty
two consecutive trading days at a price equal to 130% of (i) the stated value of
the Convertible Preferred Stock ($1,000 per share) plus (ii) accrued and unpaid
dividends thereon. The Convertible Preferred Stock is subject to mandatory
redemption upon the occurrence of certain events of default. In addition, the
Proprietary Purchase Agreement contains certain capital raising limitations
which could preclude certain equity-linked financing transactions in excess of
$6 million for a period of one year following the final issuance of Convertible
Preferred Stock under the agreement.

      Pursuant to a Securities Purchase Agreement, dated April 1, 1998, between
the Company and Marion (the "Marion Purchase Agreement"), on April 6, 1998, the
Company issued to Marion (i) a Warrant to purchase up to $2 million worth of


                                       29
<PAGE>

shares of Common Stock (the "Warrant Shares") and (ii) 110,000 shares of its
Common Stock. The shares of Common Stock were issued for nominal consideration
and the Warrant is exercisable (the "Exercisability Date") from and after the
earlier to occur of (i) the date on which there is an effective registration
statement under the Securities Act of 1933, as amended, relating to the resale
of the Warrant Shares and (ii) June 28, 1998. The Company has the right to cause
Marion to exercise the Warrant following the Exercisability Date. The exercise
price per share of Common Stock is the lesser of (i) 80% of the average closing
price of the Common Stock on the five trading days preceding the issuance of
such Common Stock and (ii) $3.20 per share, provided that such price will in no
event be less than $1.60 per share. The Company has the right to cancel the
Warrant at any time prior to the Exercisability Date. In the event that the
Company elects to cancel the aforementioned warrant, the Company does not
currently have capital available to make the scheduled June 30, 1998 payments to
the Holders of the Original Notes and the New Notes without raising additional
capital for this purpose. (See "Notes to Consolidated Financial Statements--Long
Term Notes.")

      Pursuant to a Letter Agreement, dated April 1, 1998, among the Company,
CVNY and Newstart (the "Newstart Agreement"), the parties agreed to restructure
the terms of CVNY's Secured Promissory Note (the "Original Note") on the
following terms: (i) the Company paid Newstart $500,000 from the proceeds of the
initial sale of Preferred Stock pursuant to the Proprietary Purchase Agreement,
(ii) the Original Note was amended and restated as a Secured Convertible
Promissory Note in the principal amount of $2,315,917 (the "New Note") and (iii)
the Company issued to Newstart a warrant to purchase 125,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share of Common Stock.
The New Note provides that CVNY will pay an additional $500,000 on or before the
earlier to occur of (i) the consummation by the Company of a financing
transaction yielding gross proceeds to the Company in excess of $2.5 million and
(ii) ninety days following April 1, 1998. In addition, CVNY has the right to
prepay the New Note in full at any time prior to October 1, 1998 at a price
equal to 125% of the outstanding principal amount. At the option of the holder,
the New Note may be converted in whole or in part at any time and from time to
time at a conversion price per share equal to 91% of the average of the lowest
trading price on each of the four trading days immediately prior to the
conversion notice, provided, however, that the holder may not convert more than
$500,000 in principal amount of the New Note in any calendar month. In the event
that Newstart has not exercised their option to convert the New Note by April 1,
1999, the Company is obligated to pay the remaining balance, including accrued
interest. The New Note is subject to acceleration upon the occurrence of certain
events of default.

      To effectuate the restructuring contemplated by the Newstart Agreement,
the Company and CVNY entered into an Agreement, dated April 1, 1998, with the
holders of the Company's Subordinated Exchange Notes (the "Subordinated Exchange
Notes Agreement") pursuant to which such holders consented to such
restructuring. In consideration for such consent, the Company granted such
holders warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $.01 per share of Common Stock.

      The Company has agreed to register the resale of the shares of Common
Stock issued, or to be issued, pursuant to the Proprietary Purchase Agreement,
the Marion Purchase Agreement, the Newstart Agreement and the Subordinated
Exchange Notes Agreement. The foregoing agreements are included as Exhibits to
this Form 10-K, and are incorporated by reference herein. The total number of
shares of CVUS Common Stock with registration rights under all the foregoing
agreements and under all warrants previously outstanding is estimated to be
approximately four million shares. Under certain circumstances the Company has
agreed to pay liquidated damages in the event that certain of such shares are
not registered within certain prescribed time periods.

      As a result of the foregoing financing agreements, the Company believes
that its committed sources of capital, coupled with internally generated funds,
will be adequate to satisfy minimum anticipated capital needs and operating
expenses for the remainder of 1998. However, additional funding would be
necessary for an accelerated expansion of the super-high-speed Internet access
service, restoration of the subscription television sales and marketing efforts
to achieve the Company's targeted 1998 subscriber levels, or to provide
telephony and other two-way services. Therefore, the Company expects to seek
additional financing during 1998. However, there can be no assurance that this
capital either will be available to the Company, or, if available, will be
provided on terms acceptable to the Company.
(See "Risk Factors.")

       The Company has recorded net losses and negative operating cash flow in
each period of its operations since inception. While such losses and negative
operating cash flow are attributable to the start-up costs incurred in
connection with the roll-out of the Company's system, the Company expects to
continue experiencing operating losses and negative cash flow for at least one
year as a result of its planned expansion within the New York PMSA.


                                       30
<PAGE>

      The Company is able to control the timing of deployment of capital
resources based on the variable cost nature of the business and the incremental
fixed cost per transmitter site constructed. The Company desires to pursue a
business strategy based on the resumption of rapid subscriber growth. However,
should capital conservation measures again be required, the Company may slow the
rate of subscriber growth or delay additional transmitter deployment, as was
done during the fourth quarter of 1997 and the first quarter of 1998, thereby
enabling the Company to operate for an extended period of time.

      Transmitter Deployment. The Company has leased space on 19 rooftops for
its transmitters, and believes that leased space on rooftops in New York City
and other locations in the New York PMSA will be readily available to serve as
additional transmitter sites. The Company is in negotiations for rooftop space
on four additional sites in New York City for transmitter deployment. The
Company is actively pursuing sites for its repeaters. The Company has letters of
intent from landlords to lease space at an additional 24 sites throughout the
New York PMSA.

      The average rental cost for existing transmitter sites is approximately
$1,000 per month. The average cost of a cell site, including a fully redundant
transmitter, leasehold improvements, an uninterruptable power supply and an
inter-cell relay is currently approximately $500,000. The final engineering of a
cell typically will require deployment of repeaters to provide signal to
shadowed areas. The number of repeaters required within a cell may vary
significantly based upon the topography of the cell and the location of the
transmitter. The Company anticipates the cost of cell engineering, on average,
to be $150,000 per cell.

      CT&T License Agreement. CT&T has licensed its proprietary LMDS technology
to CVNY pursuant to the CT&T License Agreement to permit the Company to
construct and operate its multichannel broadband cellular telecommunications
system and sell communications services on an exclusive basis in the New York
PMSA and the New York BTA, to the extent the Company holds or obtains a
commercial license for this territory. CT&T has also agreed to license its
technology to the Company in other BTAs in which the Company obtains LMDS
licenses. The economic terms and conditions of such licenses will be, in the
aggregate, at least as favorable as the terms of any other license granted by
CT&T within the United States. Under the CT&T License Agreement, the Company
pays CT&T a royalty currently equal to 7.5% of gross revenues on a quarterly
basis. The Company has also granted CT&T an exclusive, royalty-free license to
use any improvements the Company makes in the licensed technology. CT&T has the
right to sublicense its rights under the agreement with Philips Electronics N.V.
and its affiliates and the unrestricted right to sublicense its rights outside
the Company's service area to other parties. CT&T has also granted CVNY a
non-exclusive, royalty-free sublicense within the Company's licensed territory
for certain patents and know-how owned or controlled by Philips. The royalty
rate payable to CT&T may be reduced by operation of the above-mentioned "most
favored nation" clause, and is also subject to reduction in the event of
expiration, revocation or invalidation of certain CT&T patent rights. The term
of the CT&T License Agreement extends through the year 2028, subject to earlier
termination upon certain events. The license fees paid by the Company, pursuant
to the CT&T License Agreement were $324,000, $149,000 and $79,000 for the years
ended December 31, 1997, 1996 and 1995 respectively.

      Under the license agreement, CT&T may charge the Company a fee of up to
2.5% of the value of equipment purchased through CT&T, and the Company's ability
to procure capital equipment relating to its system from sources other than CT&T
had been limited. Pursuant to an amendment dated January 12, 1996, subject to
certain conditions and except for outstanding purchase orders, CVNY is under no
obligation to continue to purchase equipment or supplies from CT&T, although it
may continue to do so. The total amount of such equipment purchased from CT&T
for the years ended December 31, 1997 and 1996 was $1,467,000 and $6,198,000
respectively.

      During 1996, CT&T entered into certain purchase commitments on behalf of
CVNY for the manufacture of antennas, receivers, modems and transmitters. The
Company's obligations under these commitments totaled approximately $11.6
million, net of deposits of $3.4 million, at December 31, 1996. At December 31,
1997, the Company had outstanding long-term orders with CT&T for the purchase of
super-high-speed modems and set-top boxes aggregating approximately $3,208,000
(net of deposits) to be delivered to the Company during 1998 and 1999.

      Other Transactions with CT&T. As of December 31, 1997 and 1996, the
Company had amounts due from CT&T of approximately $181,000 and $760,000
respectively, which amounts represent the Company's allocation of costs to CT&T,
net of royalties. The Company and CT&T have agreed, as of the consummation of
the Incorporation Transactions, to apply royalties over and above $80,000 in
each calendar year otherwise due to CT&T to the outstanding amounts due from
CT&T, which will bear interest from and after such date at the rate of 6% per
annum. Effective upon the consummation of the Incorporation Transactions in
February 1996, the Company assumed all ongoing legal expenses of FCC counsel in
recognition


                                       31
<PAGE>

of the potential scope of the Company's operations outside the New York PMSA.
Prior to the Initial Public Offering, because of the common interest of the
Company and CT&T in the outcome of the FCC's LMDS rulemaking proceeding, the
Company and CT&T had shared equally the fees and disbursements of joint FCC
counsel. Prior to the consummation of the Incorporation Transactions, the
Company paid certain general and administrative expenses which were shared
equally with, and subsequently billed to, CT&T.

      Income Taxes. The Company's predecessors were established as partnerships
and as a corporation organized under Subchapter S (a "Subchapter S Corporation")
of the Internal Revenue Code of 1986, as amended (the "Code"). The partners or
Subchapter S Corporation stockholders, as applicable, are required to report
their share of the Company's losses in their respective income tax returns.

      The Company has been organized as a Subchapter C Corporation of the Code,
and, accordingly, is subject to federal and state income taxes. On December 31,
1997, the Company recorded a deferred tax asset of approximately $6.7 million,
primarily related to current year operating losses and differences between the
book and tax basis of the Company's investment in CVNY. Additionally, under the
provisions of Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes" ("SFAS 109"), the Company recorded an offsetting valuation
allowance of $6.7 million against the aforementioned tax asset since the Company
has no ability to carryback these losses and has a limited earnings history. The
Company believes this asset may be realized upon existence of sufficient taxable
income or other persuasive evidence as defined by SFAS No. 109.

             New Accounting Pronouncements. In February 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 specifies new
standards designed to improve the earnings per share (EPS) information provided
in financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents (CSEs) are not considered in computing basic EPS, (b)
eliminating the modified treasury stock method and the three percent materiality
provision, and (c) revising the contingent share provisions and the supplemental
EPS data requirements. SFAS No. 128 also makes a number of changes to existing
disclosure requirements. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company believes that its financial instruments as described in
Footnote 2 on Page 43 of this Form 10-K are not subject to material market risk.
The Company's financial instruments at December 31, 1997 and 1996 consist of
overnight reverse repurchase agreements and long-term debt. The carrying value
of each of these financial instruments approximates its market value, since the
overnight reverse repurchase agreements mature daily and the interest rate on
the long-term debt is a floating rate based on the prime rate, which
periodically adjusts.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The consolidated financial statements of the Company and related Notes
thereto and the financial information required to be filed herewith are included
on pages 36 to 59 and S-1 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE 
     
      None.


                                       32
<PAGE>

                                    PART III

      The information called for by Item 10, Directors and Executive Officers of
the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of
Certain Beneficial Owners and Management and Item 13, Certain Relationships and
Related Transactions, is hereby incorporated by reference to the corresponding
sections of the Registrant's definitive proxy statement (the "Definitive Proxy
Statement") for its Annual Meeting of Stockholders to be held in May 1998.


                                       33
<PAGE>

                                     PART IV

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

(a) Financial Statements and Financial Schedules

(1)   Consolidated Financial Statements                                Page(s)
                                                                       -------

      Report of Independent Accountants................................ 36   
      Consolidated Balance Sheets as of December 31, 1997 and                
      December 31, 1996................................................ 37   
      Consolidated Statements of Operations for the years ended              
      December 31, 1997, 1996 and 1995................................. 38   
      Consolidated Statements of Changes in Partners' Capital                
      and Stockholders' Equity  for the years ended December 31,             
      1997, 1996 and 1995.............................................. 39   
      Consolidated Statements of Cash Flows for the years ended              
      December 31, 1997, 1996 and 1995................................. 40-41
      Notes to Consolidated Financial Statements....................... 42-59
                                                                             
(2)   Financial Statement Schedule                                           
                                                                             
      Schedule II -- Valuation and Qualifying Accounts................. S-1  
                                                                        
(b) Reports on Form 8-K

(1)   The Company filed a Form 8-K dated July 7, 1997, announcing the
      appointment of Patrick J. Greaney as president, chief operating officer
      and a director of the Company.

(2)   The Company filed a Form 8-K dated December 1, 1997 providing specific
      information regarding the following:

      (i)   The issuance of a Secured Promissory Note in the amount of
            $2,621,695 on December 1, 1997 to Logimetrics Inc., an equipment
            supplier, in connection with an equipment purchase through an
            affiliate, CT&T;

      (ii)  The status of a syndication effort by Fleet National Bank with
            respect to a potential $40 million senior secured debt facility;

      (iii) The issuance on January 21, 1998 of new Subordinated Exchange Notes
            in the aggregate principal amount of $1,191,147, to the holders of
            the Company's original Subordinated Exchange Notes, and selected
            financial data summarizing the Company's financial position at that
            time;

      (iv)  The Company's intensified focus on its super-high-speed Internet
            access service as of December 31, 1997, and the related force
            reductions on that date associated with the de-emphasis of sales and
            marketing efforts related to subscription television service; and

      (v)   The selection of Gary MacGregor, CVNY Vice President of Sales and
            Marketing, to lead the Company's high-speed Internet access
            marketing efforts, following the resignation of Bruce Judson, former
            Chief Marketing Officer, who has left the Company.


                                       34
<PAGE>

(c) Exhibits

      (i)   Bruce Judson Employment Agreement

      (ii)  Patrick J. Greaney Employment Agreement

      (iii) Logimetrics Agreement and Logimetics Note dated December 1, 1997

      (iv)  Subordinated Exchange Note dated January 21, 1998

      (v)   Press Release dated January 22, 1998 announcing issuance of
            Subordinated Exchange Notes

      (vi)  Proprietary Purchase Agreement dated April 1, 1998

      (vii) Marion Purchase Agreement dated April 1, 1998

      (viii) Newstart Agreement dated April 1, 1998

      (ix)  Subordinated Exchange Notes Agreement dated April 1, 1998


                                       35
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of CellularVision USA, Inc.:

      We have audited the accompanying consolidated financial statements and the
financial statement schedule of CellularVision USA, Inc. (the "Company") listed
in Item 14(a) of this Form 10-K. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CellularVision USA, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1997, 1996 and 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.


                                                 Coopers & Lybrand, L.L.P.
New York, New York
April 15, 1998


                                       36
<PAGE>

                            CELLULARVISION USA, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                December 31,
                                                       ----------------------------
                        ASSETS                              1997            1996
                                                       ------------    ------------
<S>                                                    <C>             <C>         
Current assets:
     Cash and cash equivalents .....................   $    407,741    $ 19,600,070
     Accounts receivable, net of allowance for
       doubtful accounts of $290,984 and $124,370 ..      1,233,501         530,333
     Prepaid expenses and other ....................        112,058         255,800
     Due from affiliates ...........................        181,012         759,527

Total current assets ...............................      1,934,312      21,145,730
Property and equipment, net of accumulated
    depreciation of $5,277,052 and $2,753,841 ......     20,607,744      14,157,666
Intangible assets, net of accumulated
    amortization of $147,261 and $77,383 ...........        203,388         187,160
Debt placement fees ................................         65,590         181,069
Notes receivable from related parties ..............        171,245          91,275
Other noncurrent assets ............................        171,811         160,982
                                                       ------------    ------------
                  Total assets .....................   $ 23,154,090    $ 35,923,882
                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable ..............................   $  1,873,317    $    893,861
     Accrued liabilities ...........................      2,093,148       1,562,982
     Current portion of notes payable ..............      4,993,997       1,669,244
     Other current liabilities .....................          2,761         255,008
                                                       ------------    ------------
                  Total current liabilities ........      8,963,223       4,381,095

Notes payable ......................................      2,501,163       4,590,421
                                                       ------------    ------------
                  Total liabilities ................     11,464,386       8,971,516

Commitments and contingencies (Note 7)                           --              --
Stockholders' equity:
     Common Stock, ($.01 par value; 40,000,000
     shares authorized; 16,000,000 shares issued and
     outstanding as of December 31, 1997 and 1996) .        160,000         160,000
     Preferred Stock, ($.01 par value;
     20,000,000 shares authorized; none
     issued and outstanding) .......................             --              --

     Additional paid-in capital ....................     58,267,533      58,267,533
     Accumulated deficit ...........................    (46,737,829)    (31,475,167)
                                                       ------------    ------------
     Stockholders' equity ..........................     11,689,704      26,952,366
                                                       ------------    ------------
                  Total liabilities and
                      stockholders' equity .........   $ 23,154,090    $ 35,923,882
                                                       ============    ============
</TABLE>

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


                                       37
<PAGE>

                            CELLULARVISION USA, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                          For the Years Ended December 31,
                                   --------------------------------------------
                                        1997            1996            1995
                                   ------------    ------------    ------------
Revenue .......................... $  4,943,210    $  2,189,766    $  1,195,593
                                   ------------    ------------    ------------
Expenses:
     Service Costs ...............    2,314,435       1,174,619         602,995

     Selling, general and
       administrative ............   13,858,848      10,574,362       5,637,066

     Management fees .............           --              --       2,698,564

     Depreciation and amortization    3,881,004       2,258,415       1,376,140
                                   ------------    ------------    ------------
     Total operating expenses ....   20,054,287      14,007,396      10,314,765
                                   ------------    ------------    ------------
     Operating loss ..............  (15,111,076)    (11,817,630)     (9,119,172)
                                   ------------    ------------    ------------
Interest income ..................      649,843       1,291,516         403,914

Interest expense .................     (801,428)     (1,105,087)     (2,587,916)
                                   ------------    ------------    ------------
     Loss before provision for
     Income Taxes ................  (15,262,662)    (11,631,201)    (11,303,174)
                                   ------------    ------------    ------------
Provision for Income Taxes ......            --              --              --

       Net Loss .................. $(15,262,662)   $(11,631,201)   $(11,303,174)
                                   ============    ============    ============

Per Share
Basic loss per common share ...... $      (0.95)   $      (0.75)   $      (0.91)
                                   ============    ============    ============
Weighted average common shares
outstanding ......................   16,000,000      15,576,478      12,395,142
                                   ============    ============    ============

Diluted loss per common share .... $      (0.95)   $      (0.75)   $      (0.91)
                                   ============    ============    ============

Weighted average common shares
 outstanding .....................   16,000,000      15,576,478      12,395,142
                                   ============    ============    ============

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


                                       38
<PAGE>

                            CELLULARVISION USA, INC.

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                       AND STOCKHOLDERS' EQUITY (DEFICIT)

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

<TABLE>
<CAPTION>
                                                                                                                    Total
                                                                                                                 Partners'
                                                                                         Net                   Capital and
                                                                                  Unrealized                        Stock-
                                                                                     Gain on                      holders'
                                          Partners'      Common       Additional  Marketable        Deficit         Equity
                                            Capital       Stock  Paid-in Capital  Securities    Accumulated       (Deficit)
                                        -----------   ---------  ---------------  ----------    -----------    -----------
<S>                                     <C>           <C>         <C>             <C>         <C>             <C>         
 Balance, January 1, 1995...........      6,579,038         100                     22,574      (8,540,792)     (1,939,080)
      Distributions.................        (53,733)                                                               (53,733)
      Change in net
         unrealized gain on
         marketable securities......                                               (22,574)                        (22,574)
      Restatement of equity 
         to reflect issuance of
         Common Stock
         (12,385,142 shares)........       (123,851)    123,851                                                        -0-
      Net Loss......................                                                           (11,303,174)   (11,303,174)
                                        ------------  ---------                   --------    ------------    ------------
  Balance, December 31, 1995........      6,401,454     123,951                        -0-     (19,843,966)   (13,318,561)

      Conversion of Stock existing
         prior to IPO...............                       (100)                                                      (100)
      Common Stock issued at IPO
         (3,614,858 shares).........                     36,149                                                     36,149
      Conversion of Partners' Capital
         to Additional Paid-in
         Capital at IPO.............     (6,401,454)                6,401,454                                          -0-
      Additional paid-in capital....                               51,866,079                                   51,866,079
      Net Loss......................                                                           (11,631,201)    (11,631,201)
                                        ------------  ---------   -----------     --------    ------------    ------------
 Balance, December 31, 1996.........    $       -0-   $ 160,000   $58,267,533     $    -0-    $(31,475,167)   $ 26,952,366
                                        ============  =========   ===========     ========    ============    ============
      Net Loss......................             --         --            --           --      (15,262,662)    (15,262,662)
                                                                                               -----------    ------------
 Balance, December 31, 1997.........    $       -0-   $ 160,000   $58,267,533     $    -0-    $(46,737,829)   $ 11,689,704
                                        ============  =========   ===========     ========    ============    ============
</TABLE>

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


                                       39
<PAGE>

                            CELLULARVISION USA, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                          --------------------------------------------
                                                               1997            1996           1995
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>          
Cash flows from operating activities:
   Net loss ...........................................   $(15,262,662)   $(11,631,201)   $(11,303,174)
   Adjustments to reconcile net loss to net
       cash used in operating activities:
         Depreciation and amortization ................      3,881,004       2,258,415       1,376,140
         Amortization of placement fees ...............        115,479          98,783         189,507
         Provision for doubtful accounts ..............        550,290         351,839         202,108
         Stock option compensation expense ............             --         150,000              --
   Changes in assets and liabilities:
         Accounts receivable ..........................     (1,253,458)       (472,031)       (604,413)
         Prepaid expenses and other ...................        143,742         (26,997)       (204,232)
         Notes receivable from related parties ........        (79,970)        (91,275)             --
         Accounts payable and accrued liabilities .....      1,315,140       2,077,817         622,277
         Other current liabilities ....................       (252,247)        230,209          (8,382)
         Due from affiliates ..........................        578,515      (2,054,339)      3,203,046
         Accrued interest .............................        194,482           4,955       2,115,527
         Other noncurrent assets ......................        (10,829)         (2,388)        (57,340)
                                                          ------------    ------------    ------------
               Net cash used in operating activities ..    (10,080,514)     (9,106,213)     (4,468,936)
                                                          ------------    ------------    ------------
Cash flows from investing activities:
      Intangibles .....................................        (86,106)       (127,802)           (903)
      Property and equipment additions ................    (10,261,204)    (10,191,494)     (6,809,719)
      Proceeds from sale of property
         and equipment ................................             --         135,000       2,608,261
      Purchase of available-for-sale securities .......             --              --      (6,907,826)
      Maturities of available-for-sale securities .....             --              --      12,007,597
                                                          ------------    ------------    ------------
               Net cash provided by (used in) investing             
                  activities ..........................    (10,347,310)    (10,184,296)        897,410
                                                          ------------    ------------    ------------
Cash flows from financing activities:
      Distribution ....................................             --         (13,889)        (53,733)
      Proceeds from sale of stock .....................             --      41,850,000              --
      Proceeds from notes payable .....................      2,996,695              --              --
      Repayment of note payable .......................     (1,761,200)     (3,521,257)             --
      Deferred offering costs .........................             --      (2,960,629)        (99,862)
      Placement costs .................................             --              --        (159,696)
                                                          ------------    ------------    ------------
               Net cash provided by (used in) financing             
                  activities ..........................      1,235,495      35,354,225        (313,291)
                                                          ------------    ------------    ------------
               Net increase (decrease) in cash and
                  cash equivalents ....................    (19,192,329)     16,063,716      (3,884,817)
Cash and cash equivalents, beginning of period ........     19,600,070       3,536,354       7,421,171
                                                          ------------    ------------    ------------
Cash and cash equivalents, end of period ..............   $    407,741    $ 19,600,070    $  3,536,354
                                                          ============    ============    ============
</TABLE>

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


                                       40
<PAGE>

                            CELLULARVISION USA, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                     Year Ended December 31,
                                                --------------------------------
                                                1997            1996        1995
                                                ----            ----        ----
                                                                            
Supplemental Cash Flow                                                      
Disclosures:                                                                
                                                                            
  Cash paid for interest                                                    
  during period                              $ 611,900      $ 1,100,133       --
                                             =========      ===========     
                                                                            
  Cash paid for income taxes                                                
  during period                                     --              --        --
                                                                            
Noncash transactions:                                                       
                                                                            
  Common Stock issued for                                                   
  convertible                                                               
  debt                                              --      $12,731,450       --
                                                            ===========     
                                                                        
The accompanying notes are an integral part of these consolidated financial
statements.


                                       41
<PAGE>

                            CELLULARVISION USA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Background

      CellularVision USA, Inc. ("CVUS") was formed on October 3, 1995, as
described below, to combine the ownership of Hye Crest Management, Inc. ("HCM")
and CellularVision of New York, L.P. ("CVNY") which are companies under common
control (herein referred to on a consolidated basis as the "Company"). In July,
1996, HCM changed its name to CellularVision Capital Corporation ("CVCC").

      The Company owns and operates a broadband wireless telecommunications
system (the "System") within the 28 Gigahertz ("GHz") spectrum using Local
Multipoint Distribution Service ("LMDS") technology licensed from CellularVision
Technologies & Telecommunications, L.P. ("CT&T"), an affiliate of the Company.
The Federal Communications Commission's (the "FCC") final rules for LMDS
authorize the Company and future providers of LMDS to offer a variety of two-way
broadband services, such as wireless local loop telephony, high-speed data
transmission (including Internet access), video teleconferencing (including
distance learning and telemedicine) and interactive television. The initial
service territory licensed to the Company on a commercial basis is the New York
Primary Metropolitan Statistical Area ("PMSA"), encompassing New York City and
three suburban counties.

Predecessor Companies and Basis of Presentation

      The consolidated financial statements for the years ended December 31,
1997, 1996 and 1995 include the accounts of CVCC and CVNY. All significant
intercompany accounts and transactions have been eliminated in consolidation.
HCM and Suite 12 Group are collectively referred to herein as the "Predecessor."
Certain prior year amounts have been reclassified to conform to the current
year's presentation.

      Suite 12 Group was formed as a general partnership in 1986, and its
principal operations from 1986 until 1992 consisted of the development of the
LMDS technology licensed from CT&T for use by the Company in its System. The
accounts of Suite 12 Group included in the consolidated financial statements
consist primarily of legal and related costs associated with the FCC licensing
procedures and costs associated with the headend and transmitter facilities
which were subsequently contributed to the Company. The FCC commercial license
for use of the 28 GHz spectrum was obtained in 1991 by HCM. The build-out of the
headend and transmitter facilities began in January 1992, with service to the
first subscribers beginning in July 1992. In July 1993, the Predecessor, along
with Bell Atlantic Ventures XXIII, Inc. ("Bell Atlantic"), an indirect
wholly-owned subsidiary of Bell Atlantic Corporation, formed CVNY to market and
sell telecommunications services. Upon the inception of CVNY, Suite 12 Group
contributed an experimental license and certain equipment to CVNY in exchange
for a limited partnership interest, contributed its headend and certain other
equipment to HCM and contributed its LMDS technology to CT&T, which in turn
licensed the LMDS technology to CVNY. As such, these consolidated financial
statements present the Company as if it began operations on January 1, 1992, and
exclude all costs of Suite 12 Group related to the development of the LMDS
technology.


                                       42
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

      The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents consisted of the following:

                                             December 31,
                                      -------------------------
                                         1997           1996
                                      --------      -----------

     Cash in bank..................   $307,536      $   312,218

     Overnight reverse repurchase
     agreements....................    100,205       19,287,852
                                      --------      -----------

           Total...................   $407,741      $19,600,070
                                      ========      ===========

       Securities purchased under agreement to resell (reverse repurchase
agreements) result from transactions that are collateralized by U.S. Government
securities and are carried at the amounts for which the securities will
subsequently be resold. The overnight repurchase agreements are collateralized
by U.S. Government securities at approximately 130% of the investment amount.
The collateral securities are held by the Company's designated custodian.

      At December 31, 1997 and 1996, the Company had the majority of its cash
deposits with two banking institutions. The Company reviews the credit ratings
of its banking institutions on a regular basis.

Concentrations of Credit Risk

      Financial instruments that potentially could subject the Company to
concentrations of credit risk consist largely of trade accounts receivable. The
majority of the Company's current revenues are derived from the sale of
subscription television service, primarily to relatively low income residential
subscribers. The demographics of the subscriber base may tend to create credit
and collection issues. Nonetheless, the Company believes that its current
reserves for doubtful accounts are adequate to cover any potential failures to
collect from such customers.

Revenue Recognition

      Revenue is primarily derived from subscriber fees, billed one month in
advance, and recorded as revenue in the period in which the service is provided.
Deferred revenue associated with advance billings is recorded as a current
liability.

      Installation revenue is recognized as revenue to the extent of direct
selling costs incurred. The remainder is deferred and amortized to income over
the estimated average period that the subscribers are expected to remain
connected to the Company's System.

Property and Equipment

      Property and equipment, consisting of headend equipment, customer premises
equipment, transmitters, furniture and fixtures, and leasehold improvements, are
recorded at cost and depreciated on a straight-line basis over the estimated
useful lives of the assets, ranging from three to seven years. Fiber optic lines
are depreciated over an estimated service life of 40 years. Transmitters are not
depreciated until such assets are constructed or placed in service. Depreciation
on customer premises equipment commences the month following receipt of the
equipment. When assets are fully depreciated, it is the Company's policy to
remove the costs and related accumulated depreciation from its books and
records. Advance payments for customer premises equipment and transmitters
approximating $627,000 and $3,358,000 at December 31, 1997 and 1996,
respectively, are recorded as property and equipment.


                                       43
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The Company capitalizes subcontractor labor and materials incurred in
connection with the installation of customer premises equipment and depreciates
them over the shorter of the estimated average period that the subscribers are
expected to remain connected to the Company's System, or five years.

Intangible Assets

      The costs of field studies to determine line-of-sight transmission
capabilities are capitalized and amortized over five years by the straight-line
method. If a site is abandoned or deemed inoperable, all costs associated with
that site are charged to expense.

Income Taxes

      As a result of the consummation of the Incorporation Transactions (as
defined in Note 10), HCM's status as an S Corporation terminated, and the
Company and HCM became subject to federal and state income taxes. The Company
has adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). As required by SFAS No. 109, the Company is
required to provide for deferred tax assets or liabilities arising due to
temporary differences between the book and tax basis of assets and liabilities
existing at the time of the consummation of the Incorporation Transactions. As
of December 31, 1997, the Company recorded a deferred tax asset of $6.7 million
primarily related to operating losses and the difference between the book and
tax basis of the Company's investment in CVNY. An offsetting valuation allowance
of $6.7 million was established as the Company has no ability to carryback its
losses and has limited earnings history.

Debt Placement Fees

      Unamortized debt issuance costs are amortized over the term of the related
debt by the effective interest rate method.

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 liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of operating revenues and expenses during
the reporting periods. Actual results could differ from those estimates.


                                       44
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Fair Value of Financial Instruments

      Fair value is a subjective and imprecise measurement that is based on
assumptions and market data which require significant judgment and may only be
valid at a particular point in time.

      The Company's financial instruments at December 31, 1997 and 1996 consist
of overnight reverse repurchase agreements and long-term debt. The carrying
value of each of these financial instruments approximates its market value,
since the overnight reverse repurchase agreements mature daily and the interest
rate on the long-term debt is a floating rate based on the prime rate, which
periodically adjusts.

Deferred Offering Costs

      Expenses associated with the Initial Public Offering (as defined in Note
10) (e.g., legal fees, filing fees, accounting and printing costs) were
capitalized as deferred offering costs at December 31, 1995. Upon the successful
completion of the Initial Public Offering in 1996, such costs were deducted from
the proceeds of the Initial Public Offering and recorded as a reduction to
additional paid-in capital.

Earnings Per Share

      In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share". SFAS No. 128 specifies new standards designed to improve the
earnings per share (EPS) information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents (CSEs) are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. All earnings per share amounts for
all periods have been presented to conform to SFAS 128's requirements. Options
and warrants issued in 1996 and 1997 and outstanding at December 31, 1997 as
shown in Note 8 to the financial statements have been excluded from the diluted
loss per share in 1996 and 1997 because to include such securities would be
antidilutive. No options were issued in 1995.


                                       45
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

3. Property and Equipment

      Property and equipment consisted of the following:

                                                             December 31,
                                                     -------------------------
                                                         1997          1996
                                                     -----------   -----------
      Transmission and headend equipment .........    12,181,152   $ 4,240,899
      Customer premises equipment ................     7,373,321     6,891,570
      Leasehold improvements .....................     2,579,690       643,586
      Office equipment ...........................       892,057       768,487
      Equipment deposits .........................       627,108     3,357,864
      Capitalized installation costs .............     1,856,468     1,009,101
      Fiber Optics ...............................       375,000             0
                                                     -----------   -----------
      Total gross property and equipment .........    25,884,796    16,911,507
      Less--Accumulated depreciation .............     5,277,052     2,753,841
                                                     -----------   -----------
                  Total net property and equipment    20,607,744   $14,157,666
                                                     ===========   ===========

Depreciation expense was $3,811,000, $2,221,000 and $1,349,000 for the periods
ended December 31, 1997, 1996 and 1995 respectively.

4. FCC Matters

      The Company's FCC Commercial License. In 1991, the FCC granted the Company
a fixed station commercial license pursuant to a waiver of the FCC's rules in
the Point-to-Point Microwave Radio Service, which authorized the Company to use
the 27.5-28.5 GHz frequency band to operate a multicell video delivery system
throughout the New York PMSA. The 1,000-plus square mile New York PMSA includes
the five boroughs of New York City, and Putnam, Rockland and Westchester
counties. In its 1991 decision granting the Company's license, the FCC
authorized the location of the Company's first transmitter in Brighton Beach,
Brooklyn. In that decision, the FCC authorized a 24-channel video system, which
was modified by the FCC in March 1992 to permit the operation of a 49-channel
system. In addition, on December 7, 1995, the FCC granted the Company's 34
transmitter applications, conditional upon and subject to conformance with the
final actions taken by the FCC in the LMDS Rulemaking proceeding. The initial
commercial license was granted for a five-year term rather than the general
fixed service license term of ten years in order to encourage the prompt
deployment of the Company's system and expired in February 1996. A timely
application for renewal of this fixed commercial station license was filed on
December 29, 1995.

      On September 23, 1997, the FCC renewed the Company's New York commercial
license authorizing the Company to operate in the 27.50-28.35, 28.35-28.50,
29.10-29.25 and 31.075-31.225 GHz bands for a total of 1,300 MHz. The Company's
renewed license conforms in all respects to the LMDS service rules adopted in
the FCC's LMDS Rulemaking Proceeding. The License was renewed for a ten-year
term which expires on February 1, 2006 (the ten-year period commenced on
February 1, 1996, the expiration date of the Company's initial license term).
The FCC's renewal of this license confirmed that the Company would not be
required to bid on, nor pay for, the New York PMSA license in the FCC LMDS
auction. Moreover, with this license renewal, the Company is now authorized to
immediately offer the full panoply of LMDS services the technology is permitted
to offer, including video, voice and data services, and may construct
transmitters throughout the New York PMSA without seeking prior FCC approval.

      FCC Regulations Pertaining to the Company's Use of the 28.35-28.50 and
29.10-29.25 GHz Bands. In the LMDS First Report and Order, the FCC grandfathered
the Company's continued operations in the 28.35-28.50 GHz band until the 


                                       46
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

later of July 22, 1998, or until the first Geostationary Orbit/Fixed Satellite
Service ("GSO/FSS") satellite licensed to operate in the spectrum band is
launched. Additionally, under the provisions of the LMDS First Report and Order
and the LMDS Second Report and Order, the Company is immediately authorized to
use 150 MHz at the 29.1-29.25 GHz band for hub-to-subscriber operations (see
Infra, The FCC's LMDS Rulemaking Proceedings for an explanation when LMDS
two-way service in this band may be allowed).

      Accordingly, at the conclusion of the grandfathered period, the Company
will be required to cease its operations in the 28.35-28.50 GHz spectrum thus
reverting to the 1,150 MHz spectrum allocation, in the 27.5-28.35, 29.1-29.25
and 31.075-31.225 GHz bands. This spectrum allocation is consistent with, and
equivalent to, the LMDS spectrum provided to all prospective LMDS "A Block"
licensees (see Infra, The FCC's LMDS Rulemaking Proceedings which details the
FCC's LMDS band plan). As a result, following the issuance of LMDS licenses
pursuant to the FCC's recently concluded nationwide LMDS auctions and until the
grandfather period expires, the Company will be the only commercial provider of
LMDS with 1,300 MHz of spectrum.

      The Company's Experimental License The Company also holds an experimental
license which was granted by the FCC in 1988 and has been renewed for full
two-year terms on a bi-yearly basis. Other entities hold experimental licenses
for LMDS use throughout the United States. In August 1993, the FCC approved the
modification of this license to authorize two-way video, voice and data
transmissions with variable modulation and bandwidth characteristics. The FCC
granted the Company's most recent renewal application, effective September 1,
1997, for a new two-year license term. In addition, on December 11, 1997, the
Company filed a modification application with the FCC seeking an additional 150
MHz in the 31.075-31.225 GHz band in order to conform the license to the
Company's New York PMSA commercial license. This application was granted by the
FCC and a modified experimental license was issued effective January 1, 1998,
which now expires on January 1, 2000.

      The FCC's LMDS Rulemaking Proceedings. In response to a Petition for
Rulemaking and Petition for Pioneer's Preference filed by the Company in 1991,
the FCC adopted the LMDS First Notice of Proposed Rulemaking (LMDS First NPRM)
in December 1992, which proposed to redesignate the 27.5-29.5 GHz band for
point-to-multipoint use, and to license LMDS as a new service on a nationwide
basis with the issuance of two 1 GHz licenses per service area.

      On July 17, 1996, by unanimous vote, the FCC adopted the LMDS First Report
and Order and Fourth NPRM, which formally established a band plan and sharing
rules as previously proposed by the FCC in the LMDS Third NPRM. This plan
allocated to LMDS the 28 GHz frequency band nationwide, 850 MHz spectrum from
27.5-28.35 GHz on a primary basis for two-way LMDS transmissions, with an
additional non-contiguous 150 MHz from 29.1-29.25 GHz to be shared on a
co-primary basis with Mobile Satellite Service (MSS) systems. While the sharing
rules adopted for the 150 MHz limit LMDS to hub-to-subscriber transmissions due
to concerns about potential interference between LMDS and MSS, in the LMDS First
Report and Order the FCC stated that it will revisit that limitation if the LMDS
industry can demonstrate definitively that LMDS return links do not interfere
with MSS systems.

      Further, in the Fourth NPRM portion of the decision, in an effort to
provide additional spectrum for LMDS, the FCC proposed to allocate 300 MHz from
31.0-31.3 GHz on a primary basis for two-way LMDS use. The FCC reiterated the
potential value of LMDS as "real competition" in the local telephony and
multichannel video distribution markets, and stated that this additional
spectrum would provide consumers access to more choices in the new services and
innovative technologies.

      On March 13, 1997, the FCC adopted the LMDS Second Report and Order in
this proceeding, which established service, auction and eligibility rules for
LMDS. The FCC in the LMDS Second Report and Order allocated an additional 300
MHz in the 31 GHz band for LMDS and established two LMDS licenses per Basic
Trading Area ("BTA"): one license for 1,150 MHz ("A Block"), the other for 150
MHz ("B Block"), amounting to 1,300 MHz allocated to LMDS.

      Specifically, the A Block license consists of: 850 MHz in the 27.5-28.35
GHz band on a primary protected basis; 150 MHz in the 29.1-29.25 GHz band, at
the present time for LMDS hub-to-subscriber transmissions only, on a co-primary
basis with MSS systems; and 150 MHz in the 31.075-31.225 GHz band on a protected
basis. The B Block license consists of two 75 MHz bands located at each end of
the 300 MHz block in the 31.0-31.075 GHz and 31.225-31.3 GHz bands. B Block LMDS
licensees will operate on a co-primary basis with incumbent licensees already
operating in the 31.0-31.075 GHz and 31.225-31.3 GHz bands. Finally, there are
no regulatory restrictions preventing the A and B Block licensees from being
combined to 


                                       47
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

create a 1,300 MHz LMDS system.

      In order to encourage competition in the video and telephony markets, the
FCC decided to substantially restrict LECs and cable companies ("MSOs") from
acquiring the A Block LMDS license. Under the rules adopted in the LMDS Second
Report and Order, LECs and cable companies will be ineligible to acquire a 20%
or greater ownership interest in an A Block license in their service region for
a period of three years. An incumbent LEC or cable company is considered
`in-region' and, therefore, ineligible to acquire an A Block license, if 10% of
the BTA's population is within its authorized service area. This eligibility
restriction may be extended beyond the three-year period by the FCC based on a
determination that incumbent LECs or cable companies continue to have
substantial market power. Also, the eligibility restriction will be reexamined
by the FCC at the time of its biannual review, the first of which will take
place in the year 2000, to determine whether competition in the local telephone
and video distribution industries has increased sufficiently to make these
restrictions unnecessary. Finally, upon a showing of good cause by a petitioning
LEC or cable company, the FCC may waive the eligibility restriction on a
case-by-case basis. Cable companies and LECs will be able to hold the B Block
license in their service area, as there is no such eligibility restriction on
this LMDS license.

      Numerous LECs challenged the FCC's eligibility restrictions by filing
Petitions for Reconsideration with the FCC and seeking review in the D.C.
Circuit Court of Appeals. On February 3, 1998, the FCC adopted the LMDS Third
Order on Reconsideration which affirmed the rules adopted in the LMDS Second
Report and Order, including the LEC/MSO eligibility restriction. Further, the
D.C. Circuit Court of Appeals upheld the FCC's LEC/MSO eligibility restriction
on February 6, 1998.

      Congressional Elimination of the Pioneer's Preference Program. As noted
above, in the FCC's December 1992 LMDS First NPRM, the FCC tentatively granted
the Company's request for a Pioneer's Preference. This Pioneer's Preference
would have awarded the Company a license for the outer portion of the New York
BTA not included in the New York PMSA. Based on the 1993 Omnibus Budget
Reconciliation Act's revisions to the Pioneer's Preference program, had the
company been awarded a Pioneer's Preference, the Company would have received a
15% credit on the auction equivalent price of that outer portion of the New York
BTA. In the LMDS Second Report and Order, the FCC deferred action on the
Company's tentative Pioneer's Preference Award and instead ordered a "peer
review" process, whereby the FCC would select a panel of technical, non-FCC
experts to review the Company's technology and advise the FCC whether the
Pioneer's Preference should be granted.

      However, on August 5, 1997, the Balanced Budget Act of 1997 ("Budget Act")
was signed into law. Section 3002 of the Budget Act eliminated the FCC's
authority to award licenses through the Pioneer's Preference Program.
Accordingly, the Company's pending Pioneer's Preference application, along with
the Pioneer's Preference applications of numerous other companies, was dismissed
by the Commission on September 4, 1997. It is important to note that elimination
of the FCC's Pioneer's Preference Program, and the Company's Pioneer's
Preference application thereunder, does not affect the Company's existing
commercial license for the New York PMSA.

      LMDS Fifth Notice of Proposed Rulemaking. On March 13, 1997, along with
the LMDS Second Report and Order, the FCC also initiated the LMDS Fifth NPRM to
address the issues of disaggregation and partitioning which will enable an LMDS
licensee to assign a portion of its bandwidth or geographic service area to
another entity. The FCC tentatively concluded to allow disaggregation and
partitioning without imposing substantial regulatory requirements and issued the
Fifth NPRM to solicit public comment regarding the most effective way to
implement partitioning and disaggregation for LMDS licensees. On May 6, 1997,
the public comment cycle closed for the Fifth NPRM, and FCC's final decision on
this matter remains pending.

      LMDS Auction. On July 30, 1997, the FCC announced its intent to commence
the nationwide licensing of LMDS through a spectrum auction starting December
10, 1997. On November 10, 1997, the FCC released a Public Notice announcing its
decision to postpone the LMDS auction from December 10, 1997 until February 18,
1998. The Commission granted this postponement to ensure the maximum
participation by small businesses, many of which had requested additional time
to secure financing in light of the elimination of installment payments. On
February 18, 1998, the LMDS auction commenced. On March 25, 1998, the LMDS
auction was concluded after 128 rounds of bidding. The FCC auctioned 864 of the
986 licenses up for bid, for a total net revenue of $578,663,029.

      Because the Company holds the spectrum for the A Block license in the New
York PMSA, this license was excluded from the nationwide LMDS auction.
Accordingly, the A Block license for the New York BTA in the FCC LMDS Auction


                                       48
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

consisted only of that portion of the New York BTA not included in the New York
PMSA (i.e., suburban counties in New Jersey, Eastern Pennsylvania, Southwestern
Connecticut and on Long Island).

5. Related Party Transactions

CT&T License Agreement

      In July 1993, CVNY entered into a license agreement with CT&T for use of
certain patented technologies owned by CT&T and for CT&T know-how related to the
LMDS technology. The license agreement grants to CVNY the right to utilize the
licensed LMDS technology to construct and operate its system and sell
communications services on an exclusive basis within the New York PMSA and the
New York BTA (to the extent the Company holds or obtains a commercial license
for this territory). CT&T has also agreed to license the LMDS technology to the
Company in other BTAs in which the Company obtains LMDS licenses. The economic
terms and conditions of such licenses will be, in the aggregate, at least as
favorable as the terms of any other license granted by CT&T within the United
States. Under the license agreement, the Company pays CT&T a royalty currently
equal to 7.5% of gross revenues on a quarterly basis. The license will remain in
effect until either the expiration, revocation or invalidation of CT&T patent
rights directly related to the operation of the Company's system, or the year
2028, subject to earlier termination upon the occurrence of certain events. The
license fees were $324,000, $149,000 and $79,000 for the years ended December
31, 1997, 1996 and 1995 respectively.

       Under the license agreement, CT&T may charge the Company a fee of up to
2.5% of the value of equipment purchased through CT&T, and the Company's ability
to procure capital equipment relating to its system from sources other than CT&T
had been limited. Pursuant to an amendment dated January 12, 1996, subject to
certain conditions and except for outstanding purchase orders, CVNY is under no
obligation to continue to purchase equipment or supplies from CT&T, although it
may continue to do so. The total amount of such equipment purchased from CT&T
for the years ended December 31, 1997 and 1996 was $1,467,000 and $6,198,000
respectively. CT&T entered into certain purchase commitments during 1996 on
behalf of CVNY for the manufacture of antennas, receivers, modems and
transmitters totaling approximately $11.6 million, net of deposits of $3.4
million, at December 31, 1996. At December 31, 1997, the Company had outstanding
long-term orders with CT&T for the purchase of super-high-speed modems and
set-top boxes aggregating approximately $3,208,000, net of deposits of $627,000,
to be delivered to the Company during 1998 and 1999.

Other Transactions with CT&T

      In the past, CVNY paid certain legal, general and administrative expenses
on behalf of CT&T. The total of such expenditures for the year ended December
31, 1995 was $612,000. Similarly, CVNY reimbursed certain legal, general and
administrative expenses paid by CT&T. The total expenditures for the year ended
December 31, 1995 was $268,000. Commencing on January 1, 1996 there were no such
payments or reimbursements as the Company and CT&T now pay their own
expenditures. In addition, all "joint use" costs which resulted in benefits to
both parties (e.g., salaries and benefits for the limited personnel performing
functions for both entities, office rent and related expenses, office equipment
and supplies) were allocated to the respective parties on a cost-causative
basis. The Company also paid in cash to CT&T an annual royalty amount which
totaled $80,000 for each of the years ended December 31, 1997, 1996 and 1995.

      As of December 31, 1997 and 1996, the Company had amounts due from CT&T of
approximately $181,000 and $760,000 respectively, which amounts represent the
Company's allocation of costs to CT&T, net of royalties. The Company and CT&T
have agreed, as of the consummation of the Incorporation Transactions, to apply
royalties over and above $80,000 in each calendar year otherwise due to CT&T to
the outstanding amounts due from CT&T, which will bear interest from and after
such date at the rate of 6% per annum. Effective upon the consummation of the
Incorporation Transactions in February 1996, the Company assumed all ongoing
legal expenses of FCC counsel in recognition of the potential scope of the
Company's operations outside the New York PMSA. Prior to the Initial Public
Offering, because of the common interest of the Company and CT&T in the outcome
of the FCC's LMDS rulemaking proceeding, the Company and CT&T had shared equally
the fees and disbursements of joint FCC counsel. Prior to the consummation of
the Incorporation Transactions, the Company paid certain general and
administrative expenses which were shared equally with, and subsequently billed
to, CT&T.


                                       49
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The Founders are parties to an agreement with CVNY, pursuant to which they
have the nontransferable right to require CVNY to make available 60 MHz of
continuous spectrum per polarization in the spectrum awarded to CVNY by the FCC
for the purpose of providing certain programming (other than telephony, two-way
voice or data communication services) developed by them.

Management Agreement

      In July 1993, CVNY entered into a management agreement with Bell Atlantic
(the "Management Agreement") pursuant to which Bell Atlantic, under the control
and direction of the Board of Directors of the Company, performed certain
operational and technical functions including, without limitation, installation,
engineering and network operations, accounting, procurement, business planning,
marketing, government relations and related services in order to develop the
commercial infrastructure necessary to deploy the LMDS technology licensed from
CT&T. The Company exercised its option to terminate the Management Agreement
with Bell Atlantic on September 30, 1995, effective December 31, 1995. The terms
of the agreement were for five years and provided for management fees at agreed
upon scheduled amounts, a percentage of gross revenue, 0.5% of aggregate average
Bell Atlantic equity from the preceding quarters, and reimbursement of
salary-related and benefit-related costs incurred by Bell Atlantic. Since
January 1, 1996, the Company has been responsible for hiring all of its own
employees, including senior management, and administering its own services.

      For the year ended December 31, 1995 CVNY incurred $2,699,000, of
management fees from Bell Atlantic. The reimbursed costs are included in
selling, general and administrative expenses, and total $1,949,000 for the year
ended December 31, 1995. For the years ended December 31, 1997 and 1996, there
are no costs as the management agreement was terminated by CVNY at the end of
1995.

Bell Atlantic Senior Convertible Note

      Effective December 1, 1995, the Company entered into a senior convertible
note agreement with Bell Atlantic which converted outstanding fees and related
interest thereon due to Bell Atlantic under the Management Agreement, totaling
approximately $3.5 million, to a senior convertible note (the "Bell Atlantic
Note"). Interest accrued on the Bell Atlantic Note at a per annum rate equal to
the lesser of (a) Morgan's prime lending rate plus 3% or (b) 12%. Interest was
compounded monthly. Principal plus accrued interest would have been payable as
follows: one-third of the outstanding balance would have been payable on June
30, 1997, one-third of the then outstanding balance would have been payable on
June 30, 1998 and the remaining balance would have been payable on June 30,
1999.

      In February 1996, from the proceeds of the Initial Public Offering, the
Company paid Bell Atlantic approximately $3.5 million due under the Bell
Atlantic Note, together with approximately $100,000 of accrued interest thereon,
and $675,000 in fees accrued during the fourth quarter of 1995 under the
Management Agreement.

Other Transactions

      CVNY has entered into agreements with certain executives of CVNY and the
Company to loan them money for the purpose of purchasing Common Stock of the
Company. The amount due to CVNY is $171,245 and $91,275 at December 31, 1997 and
1996, respectively.

      An affiliate of certain directors of HCM provided administrative, legal
and operational functions to CVNY during 1995. The costs for these services
aggregated $94,000 for the year ended December 31, 1995. There were no related
costs for the years ended December 31, 1997 and 1996.

      In July 1993, CVNY entered into compensation and consulting agreements,
aggregating $480,000 annually plus 0.291% of gross revenues, with certain
executive officers and directors of CVNY which were terminated upon the
consummation of the Incorporation Transactions (as defined in Note 10). These
officers and directors are also partners in CT&T.


                                       50
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      CVNY has entered into an agreement with the International CellularVision
Association ("ICVA"), whose members include licensees of CT&T's proprietary LMDS
technology and other interested members, to fund, along with all other members
of ICVA, operating expenses of ICVA. CVNY funded $264,000, $287,000 and $179,000
of such expenses for the years ended December 31, 1997, 1996 and 1995
respectively. The Company also subleases certain office space for ICVA on a
month-to-month basis, which is included in the foregoing totals. As of December
31, 1997, the monthly charge was $2,930. Congressman Rinaldo , a director of the
Company, serves as President of ICVA at an annual salary of $200,000.

6. Long-term Notes

      On December 29, 1993, CVNY issued convertible exchangeable subordinated
notes aggregating $15,000,000 ("Convertible Notes"). Interest on the Convertible
Notes was at a floating rate equal on any given date to the prime rate plus 4%
per annum, subject to a minimum of 8% per annum and a maximum of 12% per annum.

      A portion of the notes was subject to mandatory and automatic conversion
into shares of Common Stock upon the consummation of a public offering pursuant
to a registration statement on Form S-1 with minimum aggregate proceeds of $35
million (a "qualified public offering").

      Prior to the exchange of the notes, interest was accrued quarterly and
added to the principal balance and treated as principal. For the year ended
December 31, 1995, $2,116,000 of accrued interest was added to principal.

      In conjunction with the Initial Public Offering that occurred in 1996, $10
million of Convertible Notes and the associated accrued interest of
approximately $2.7 million was converted into shares of Common Stock and
recorded primarily as Additional Paid in Capital. Also, in conjunction with the
IPO and effective December 15, 1995 the remaining $5 million of Convertible
Notes and approximately $1.3 million of accrued interest was converted into
Exchange Notes. The Exchange Notes bear interest at the prime rate plus 6% per
annum, subject to a minimum of 10% and a maximum of 15% per annum. Interest on
the Exchange Notes is payable quarterly and began on March 28, 1996.

      On June 30, 1997, the first principal repayment on the Exchange Notes of
approximately $1,669,000 was made as scheduled. The remaining scheduled
repayment dates in respect of the Exchange Notes are as follows:


         Date                            Amount Payable
         ----                            --------------
     June 30, 1998...... 5/11 of the aggregate outstanding principal balance
     April 30, 1999..... Remaining amount outstanding

      On January 21, 1998, the Company issued new Subordinated Exchange Notes,
in the aggregate principal amount of $1,191,147 (the "New Notes"), to the
holders (the "Holders") of the Company's Subordinated Exchange Notes (the
"Original Notes") held by an affiliate of J.P. Morgan in exchange for $1 million
in cash and as payment of $191,147 in respect of an interest payment due on
December 28, 1997. Also, in connection with the issuance of the New Notes, the
Holders waived certain defaults under the Original Notes. The interest rate on
the New Notes is identical to the rate on the Original Notes. As consideration
for the purchase of the New Notes and the waiver of certain defaults under the
Original Notes, the Holders received a warrant to purchase 27,000 shares of the
Company's Common Stock at an exercise price of $0.01 per share. The scheduled
repayment dates in respect of the New Notes are as follows:

     Date                Amount Payable

     June 30, 1998       5/11 of the aggregate outstanding principal balance
     April 30, 1999      Remaining amount outstanding

The combined amounts of repayments due under both the Original Notes and the New
Notes approximate $2.6 million on June 30, 1998 and $3.2 million on April 30,
1999.


                                       51
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7. Commitments and Contingencies

      On December 15, 1995, the Company entered into two sale and leaseback
transactions totaling approximately $2.6 million which reflected the net book
value of assets sold on that date. Accordingly, there was no gain or loss
recorded on these transactions. The minimum lease term for each piece of
equipment under the sale and leaseback facility in the amount of $1.1 million is
36 months, with a renewal period of an additional twelve months. The minimum
lease term for each piece of equipment under the sale and leaseback facility in
the amount of $1.5 million is 48 months, with a renewal period of an additional
twelve months. Rental payments are due monthly in advance. The Company has a
firm commitment under the first of these sale and leaseback facilities for
additional lease financing in the amount of $400,000. In connection with these
sale and leaseback facilities, the Company issued to the lessors warrants to
purchase an aggregate of 20,000 shares of common stock, par value $.01 per share
(the "Common Stock"), of the Company at the initial public offering price of
$15.00 per share.

      On December 1, 1997, CVNY, a wholly-owned subsidiary of the Company,
entered into an agreement (the "Logimetrics Agreement") with Logimetrics, Inc.
("Logimetrics") pursuant to which CVNY assumed financial responsibility for
certain equipment purchased through its affiliate, CT&T. In exchange,
Logimetrics agreed to continue servicing CVNY's equipment so long as CVNY
continues to meet its obligations under the Logimetrics Agreement. Pursuant to
the Logimetrics Agreement, CVNY issued and delivered a $2,621,695 Secured
Promissory Note to Logimetrics having a final maturity date of July 27, 1998.
Principal under such Note is subject to partial mandatory prepayment upon the
occurrence of certain events. On December 31, 1997, Logimetrics sold their
rights pursuant to the Logimetrics Agreement to Newstart Factors, Inc. On April
1, 1998, the Company entered into an agreement with Newstart to restructure the
Secured Promissory Note of CVNY held by Newstart. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital resources.")

      In addition, the Company has entered into several operating lease
arrangements for automobiles, office equipment and rent expiring at various
dates.

      At December 31, 1997, future minimum rental and lease payments due are as
follows:

                  1998................................ $2,457,000   
                  1999................................  1,601,000   
                  2000................................    998,000   
                  2001................................    743,000   
                  2002................................    682,000   
                  Thereafter..........................    907,000   
                                                       ----------   
                    Total............................. $7,388,000   
                                                       ==========   
                                                       
      Rent expense was approximately $730,000, $432,000 and $180,000 for the
years ended December 31, 1997, 1996 and 1995 respectively.

      CT&T entered into certain purchase commitments during 1996 on behalf of
CVNY for the manufacture of antennas, receivers, modems and transmitters, which
totaled approximately $11.6 million (net of deposits) at December 31, 1996. At
December 31, 1997, the Company had outstanding long-term orders with CT&T for
the purchase of super-high-speed modems and set-top boxes aggregating
approximately $3,208,000 (net of deposits) to be delivered to the Company during
1998 and 1999.

      The Company has entered into a series of non-cancelable agreements to
purchase entertainment programming for rebroadcast which expire through the year
2001. The agreements generally require monthly payments based upon the number of
subscribers to the Company's system, subject to certain minimums. Total
programming costs, including but not limited to, the aforementioned minimums
were approximately $1,990,000, $1,026,000 and $510,000 for the years ended


                                       52
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

December 31, 1997, 1996 and 1995, respectively.

      The Company obtained an irrevocable standby letter of credit in April
1995, in the amount of $90,000, for which no amounts have been drawn upon. The
standby letter of credit expires December 1, 1999, and collateralizes the
Company's programming rebroadcast agreement with one of its programming
providers. The fair value of this standby letter of credit is estimated to be
the same as the contract value based on the nature of the fee arrangement with
the issuing bank.


                                       53
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. Stock Options and Warrants

      In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for employee stock-based compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees. Under this statement, the Company has the option of either
charging against income the estimated fair value of stock-based compensation, or
in lieu of a direct charge, disclosing the effect on earnings and earnings per
share as if the charge had been applied. The Company has elected to follow the
disclosure-only alternative and to continue to account for its stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 and
its related interpretations.

      In October 1995, the Board of Directors of the Company adopted the
CellularVision 1995 Stock Incentive Plan (the "Plan") which provides for the
grant of non-qualified and incentive stock options. The Plan has reserved
1,250,000 authorized, but unissued, shares of common stock for issuance of both
Qualified Incentive Stock Options and Non-Qualified Stock Options to employees,
officers and directors of the Company. The minimum purchase price in the case of
non-qualified stock options granted under the Plan is the par value of the
Common Stock, and in the case of incentive stock options granted under the Plan
is the fair market value, as defined in the Plan, of the Common Stock on the
date the option is granted. The vesting period and expiration dates of any
option granted may vary.

      The purpose of the Plan is to attract and motivate able persons to remain
with the Company and its Subsidiaries by providing a means whereby employees,
directors and consultants of the Company and its Subsidiaries can acquire and
maintain Common Stock ownership, or be paid incentive compensation measured by
reference to the value of Common Stock, thereby strengthening their commitment
to the welfare of the Company and its Subsidiaries and promoting a common
identity of interest between stockholders and these employees, directors and
consultants.

      As of January 1, 1996, there were no outstanding options. During 1996, a
total of 213,700 non-qualified stock options were granted and 13,000 options
were terminated, leaving a balance of 200,700 options outstanding as of December
31, 1996. All such options were granted at prices at or above the market price
per share on the date of grant, and all have ten-year terms. Exercise price per
share ranges from $9.875 to $15.00. The weighted average exercise price at
December 31, 1996 was $11.46 per share.

      During 1997, a total of 495,000 non-qualified stock options were issued to
officers and directors of the Company, and 447,550 stock options were
terminated, leaving a balance of 248,150 options outstanding as of December 31,
1997. All such options were granted at the market price on the date of the
grant, and all have ten-year terms. Exercise price per share of stock options
granted in 1997 ranges from $7.00 to $9.25. The weighted average exercise price
of outstanding options at December 31, 1997 was $9.98 per share.

      During 1997, in connection with employment agreements with two former
officers and one current officer of the Company, non-qualified stock options to
purchase an aggregate of 490,000 shares of Common Stock were issued pursuant to
the Plan. The options, which have a ten-year term, were granted at exercise
prices ranging from $7.00 to $9.25 per share. Of the 490,000 options, 30,000
options became exercisable on September 30, 1997, 25,000 became exercisable on
October 16, 1997, and 25,000 became exercisable on December 31, 1997. Following
the resignation of an officer of the Company in 1997 and the death of an officer
in 1997, 410,000 options lapsed and were canceled. The estate of the officer
that died may exercise 30,000 options that vested prior to the officer's death
until the expiration of such options on June 1, 2007.

      On May 7, 1997 the Company granted options to each director who is not
employed by the Company or any of its affiliates options to purchase 1,000
shares of Common Stock upon his re-election to the Board of Directors at the
Company's Annual Meeting of Stockholders held on the aforementioned date. A
total of 5,000 options were granted to directors on May 7, 1997. The options
have a ten-year term and were immediately exercisable at an exercise price of
$8.00, the market price per share on the date of the grant.


                                       54
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      During 1997, a total of 37,550 options issued to employees and directors
in 1996 and 1997 were canceled due to cessation of services rendered to the
Company. At December 31, 1997, 1996, and 1995 there were 1,001,850, 1,049,300
and 1,250,000 shares available for future grants, respectively.

      Since the exercise price of all stock options granted to employees under
the 1995 Plan in 1997 and 1996 was equal to the closing price of the Common
Stock on the NASDAQ on the date of grant, no compensation expense has been
recognized by the Company for its stock-based compensation plans during those
years. Compensation expense would have been $398,000 in 1997 and $1,297,000 in
1996, had compensation cost for stock options awarded in 1997 and 1996 under the
Company's stock option agreements been determined based upon the fair value at
the grant date consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock-Based Compensation," and the Company's pro forma net loss
and earnings per share would have been a net loss of $15,651,000 and $0.98 loss
per share in 1997 and $12,928,000 and $0.83 loss per share for 1996.

      The stock options were valued using the Black-Scholes option pricing
model. Key assumptions used in valuing the options granted during 1997 for the
purpose of determining the foregoing compensation expense included: risk free
interest rates of 6.2%-6.6%, an expected life of five years and a volatility
factor of 80%.

      At December 31, 1997, the Company or its affiliates had issued warrants to
purchase up to 190,862 shares of Common Stock. These additional warrants were
issued in 1995. At December 31, 1997, an aggregate (i) up to 113,256 shares were
issuable by the Company, and (ii) 77,606 shares were issuable by Vahak S.
Hovnanian from his Common Stock holdings. The warrants issued by the Company
have a ten-year term and are exercisable at a price per share ranging from
$12.50 to $15.03. The holders of all outstanding warrants have registration
rights in respect of the shares of Common Stock issuable upon exercise.

9. Employment Agreements

      The Company has entered into an employment agreement with Mr. Shant S.
Hovnanian, dated October 18, 1995. The agreement provides that Mr. Hovnanian
will act as President and Chief Executive Officer of the Company and will devote
substantially all of his working time and efforts to the Company's affairs.
Pursuant to the agreement, Mr. Hovnanian may devote such working time and
efforts to CT&T and its affiliates as the due and faithful performance of his
obligations under the agreement permits. The agreement has a one year term and
provides for an annual salary of $250,000, effective February 7, 1996. Upon the
expiration of the initial employment term on February 7, 1997, the agreement
provides for automatic extensions on a month-to-month basis, unless terminated
by either party upon 30 days advance written notice. Mr. Hovnanian is continuing
to serve as Chairman, President and CEO pursuant to the terms of this employment
agreement.

      The Company has also entered into an employment agreement with the
inventor of the LMDS technology licensed from CT&T, Mr. Bernard B. Bossard,
dated October 18, 1995. The agreement provides that Mr. Bossard will act as
Executive Vice President and Chief Technical Officer of the Company and will
devote such substantial portion of his time and effort to the affairs of the
Company as the Company's Board of Directors reasonably requires. The agreement
has a three year term and provides for an annual salary of $170,000, and the use
of an automobile and the Company's New York City apartment effective February 7,
1996.

      The Company has entered into an employment agreement with Mr. Charles N.
Garber, dated July 31, 1996. The agreement provides that Mr. Garber will serve
as Chief Financial Officer of the Company and Vice President - Finance of CVNY,
effective as of July 15, 1996. The agreement has a three year initial term and
provides for an annual salary of $175,000, a signing bonus of $50,000, a
relocation allowance of $50,000, an annual bonus of no less than $50,000 subject
to review based on executive's attainment of performance goals established by
the Compensation Committee, 25,000 options exercisable at the market value as of
the agreement date, a monthly commuting allowance of $350, and a bonus of
$50,000 upon completion of a financing by the Company or CVNY in excess of $50
million. The agreement also provides that Mr. Garber's compensation shall be
reviewed for a potential increase no less frequently than annually.


                                       55
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The Company has entered into an employment agreement with Mr. John Walber,
dated January 1, 1997. The agreement provides that Mr. Walber will continue to
serve as Vice President of CVUS and as President and Chief Operating Officer of
CVNY. The agreement has an initial term of two years and provides for an annual
salary of $195,000, a monthly commuting expense allowance of $1,500, an annual
bonus in the amount of up to $195,000 based on the executive's attainment of
certain performance goals. Pursuant to the terms of this agreement, Mr. Walber
was granted 50,000 options to purchase CVUS shares at the market value as of the
effective date of the agreement. On December 31, 1997, 25,000 options are
exercisable, and the remaining 25,000 options will become exercisable on
December 31, 1998.

10. Initial Public Offering

Initial Public Offering

      The Company filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (the "Registration Statement") in connection
with the initial public offering (the "Initial Public Offering") of 3,333,000
shares of Common Stock, including 333,000 shares sold by certain existing
shareholders of the Company. The initial public offering price per share of
Common Stock was $15.00. The Registration Statement was declared effective on
February 7, 1996 and the Initial Public Offering was consummated on February 13,
1996. The net proceeds to the Company from the Initial Public Offering, after
deducting underwriting discounts and commissions of $1.05 per share and
approximately $2 million in other expenses, were $39,850,000.

      Immediately prior to the Initial Public Offering, the Company effected the
following events (collectively, the "Incorporation Transactions"): (i) $10
million principal amount of the convertible exchangeable subordinated notes was
converted into 4,547 shares of Common Stock pursuant to their conversion
provisions, (ii) the Company issued an aggregate of 93,180 shares of Common
Stock to the stockholders of HCM (the "Founders") in exchange for all
outstanding capital stock of HCM, and the holders of certain partnership
interests of CVNY in exchange for all of their partnership interests in CVNY,
and (iii) the Company effected a 133.0236284-for-1 stock split of the
outstanding shares of Common Stock and issued an aggregate of 13,000,000 shares
of Common Stock to the holders thereof. As a result of the consummation of the
Incorporation Transactions, the Company is the sole stockholder of HCM, the
managing general partner of CVNY, and CVNY continues to carry on its business as
an indirect wholly owned subsidiary of the Company. In December 1995, the FCC
approved the pro forma transfer of control of HCM from the Founders to the
Company. The capital stock of the Company consists of Common Stock, $.01 par
value, 40,000,000 shares authorized, and 16,000,000 shares issued and
outstanding immediately prior to the Initial Public Offering. The Company has
also authorized 20,000,000 shares of Preferred Stock, $.01 par value. No shares
of Preferred Stock had been issued as of December 31, 1997. (See "Note 12 -
Subsequent Events.")

      Stockholders' equity has been restated at December 31, 1995 to give
retroactive recognition to the stock split of the 93,180 shares of Common Stock
issued to the stockholders of HCM.

11. Legal Proceedings

      In February 1996, a suit was filed against the Company alleging that the
Company caused the U.S. Army to breach a contract with the plaintiff wherein the
plaintiff was to have an exclusive right to provide cable television services at
an army base located in Brooklyn New York. The suit alleges that by entering
into a franchise agreement with the Army which grants the Company the right to
enter the army base to build, construct, install, operate and maintain its
multichannel broadband cellular television system, the Company induced the Army
to breach its franchise agreement with the plaintiff and tortuously interfered
with said agreement. The Army has advised the Company that it has the right to
award the franchise to the Company and the Company is continuing to provide
service to the army base. The suit seeks $1 million in damages. On September 27,
1996, the Company served and filed a motion with the court seeking to end the
action by the granting of summary judgment. By memorandum and order dated
September 19, 1997, the court granted the motion to the extent that the case has
been dismissed against CellularVision USA, Inc. only. However, the court has
permitted the action to continue against CellularVision of N.Y., L.P. The
Company cannot make a determination at this time as to the possible outcome of
the action. In the


                                       56
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

event an adverse judgment is rendered, the effect could be material to the
Company's financial position and it could have a material effect on operating
results in the period in which the matter is resolved.

      In November 1995, a purported class action suit was filed against the
Company in New York State Supreme Court alleging that the Company had engaged in
a systematic practice of installing customer premises equipment in multiple
dwelling units without obtaining certain landlord or owner consents allegedly
required by law. On March 31, 1997, the Court issued an opinion holding that the
company has a right under, and in accordance with, New York law to install the
customer premises equipment and based on same, held that all allegations related
to a purported class be dismissed. As a result, the only part of the case that
remains is a claim for an alleged trespass and damage to one building because
customer premises equipment was allegedly installed without prior notice to the
landlord. This opinion was codified by the court in its orders dated May 29,
1997 and July 1, 1997 wherein plaintiff was granted an injunction preventing the
Company from performing cable installations at the one building on the condition
plaintiff post an undertaking in the amount of $5,000 on or before July 11,
1997. The second order provided that the injunction would be dissolved and
vacated upon plaintiff's failure to post the undertaking. Plaintiff has refused
and failed to post the undertaking, resulting in the vacatur and dissolution of
the injunction. Plaintiff has informed the court that it did not wish to proceed
with the action without class certification which resulted in the action being
dismissed by court decision and order dated August 7, 1997. However, plaintiff
has served a Notice of Appeal from the May 29, 1997 court order. If the appeal
is successful, it may result in the certification of the class and
re-institution of the lawsuit. It is unclear whether plaintiff will proceed with
the appeal. The Company believes, upon advice of counsel, that this suit is
likely to be resolved without a material adverse effect on the financial
position of the Company.

      Prior to 1992, Vahak and Shant Hovnanian were officers, directors and
principal shareholders of Riverside Savings Bank, a state-chartered savings and
loan association that entered receivership in 1991. In certain civil litigation
against the Hovnanians and others that ensued, which is pending in the U.S.
District Court for the District of New Jersey, the Resolution Trust Corporation
has alleged simple and gross negligence and breaches of fiduciary duties of care
and loyalty on the part of the defendants. The defendants have obtained
dismissal of certain allegations and intend to continue to vigorously defend the
action.

12. Subsequent Events

On January 21, 1998, the Company issued new Subordinated Exchange Notes, in the
aggregate principal amount of $1,191,147 (the "New Notes"), to the holders (the
"Holders") of the Company's Subordinated Exchange Notes (the "Original Notes")
in exchange for $1 million in cash and as payment of $191,147 in respect of an
interest payment due on December 28, 1997. Also, in connection with the issuance
of the New Notes, the Holders waived certain defaults under the Original Notes.
As consideration for the purchase of the New Notes and the waiver of certain
defaults under the Original Notes, the Holders received a warrant to purchase
27,000 shares of the Company's Common Stock at an exercise price of $0.01 per
share.

      On March 31, 1998, CVNY reduced its staff by 13 full-time equivalent
employees. These reductions were in subscription television operations staff,
and included part-time and full-time Customer Service Representatives and
Dispatchers. This downsizing resulted in a current CVNY employee count of 55,
which brings the customer support staff in line with current subscriber counts
and lack of subscriber growth. In addition, this reduction was needed as part of
the overall plan to assure that committed sources of financing will be
sufficient to fund operations throughout calendar year 1998. The Company
believes that, subject to the availability of requisite funding, these positions
can be quickly restored upon the resumption of a high growth strategy in the
subscription television portion of its business.

      On April 1, 1998, the Company entered into financing agreements with
Proprietary Convertible Investment Group, Inc. ("Proprietary"), which is an
affiliate of CS First Boston, and Marion Interglobal Ltd. ("Marion"). Also on
such date, 


                                       57
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the Company entered into an agreement with Newstart to restructure the Secured
Promissory Note of CVNY held by Newstart.

      Pursuant to a Securities Purchase Agreement, dated April 1, 1998, between
the Company and Proprietary (the "Proprietary Purchase Agreement"), on April 6,
1998 the Company issued 3,500 shares of its Series A Convertible Preferred Stock
("Convertible Preferred Stock") to Proprietary for $3.5 million. Subject to
certain conditions, including the registration under the Securities Act of the
underlying shares of Common Stock, the Proprietary Purchase Agreement provides
for the issuance, at the Company's option, of an additional 3,500 shares of
Convertible Preferred Stock at a purchase price of $1,000 per share at any time
on or after June 15, 1998 and prior to December 31, 1998. The Proprietary
Purchase Agreement also provides for the issuance, at Proprietary's option, of
an additional 3,000 shares of Convertible Preferred Stock at a purchase price of
$1,000 per share during the three year period following April 6, 1998. The
Convertible Preferred Stock has a dividend rate of 4%, which may be paid in cash
or, at the option of the Company and subject to certain conditions, in stock.
The Convertible Preferred Stock may be converted into Common Stock of the
Company at any time at the option of the holder thereof at an initial conversion
price of $5.25 for the ninety day period following April 6, 1998. Following such
ninety-day period, or in the event that certain conditions are not satisfied
during such ninety-day period, the conversion price shall be the lesser of (i)
$5.25 and (ii) 88% of the lesser of (A) the average of the lowest sale prices
for the Common Stock on each of any three trading days during the twenty two
trading days occurring immediately prior to (but not including) the applicable
conversion date and (B) the average of the three lowest closing bid prices for
the Common Stock during the twenty two trading days occurring immediately prior
to (but not including) the applicable conversion date. In addition, the Company
has the right to redeem all the Convertible Preferred Stock outstanding in the
event that the closing bid price for the Common Stock is above $10 for twenty
two consecutive trading days at a price equal to 130% of (i) the stated value of
the Convertible Preferred Stock ($1,000 per share) plus (ii) accrued and unpaid
dividends thereon. The Convertible Preferred Stock is subject to mandatory
redemption upon the occurrence of certain events of default. In addition, the
Proprietary Purchase Agreement contains certain capital raising limitations
which could preclude certain equity-linked financing transactions in excess of
$6 million for a period of one year following the final issuance of Convertible
Preferred Stock under the agreement.

      Pursuant to a Securities Purchase Agreement, dated April 1, 1998, between
the Company and Marion (the "Marion Purchase Agreement"), on April 6, 1998, the
Company issued to Marion (i) a Warrant to purchase up to $2 million worth of
shares of Common Stock (the "Warrant Shares") and (ii) 110,000 shares of its
Common Stock. The shares of Common Stock were issued for nominal consideration
and the Warrant is exercisable (the "Exercisability Date") from and after the
earlier to occur of (i) the date on which there is an effective registration
statement under the Securities Act of 1933, as amended, relating to the resale
of the Warrant Shares and (ii) June 28, 1998. The Company has the right to cause
Marion to exercise the Warrant following the Exercisability Date. The exercise
price per share of Common Stock is the lesser of (i) 80% of the average closing
price of the Common Stock on the five trading days preceding the issuance of
such Common Stock and (ii) $3.20 per share, provided that such price will in no
event be less than $1.60 per share. The Company has the right to cancel the
Warrant at any time prior to the Exercisability Date. In the event that the
Company elects to cancel the aforementioned warrant, the Company does not
currently have capital available to make the scheduled June 30, 1998 payments to
the Holders of the Original Notes and the New Notes without raising additional
capital for this purpose. (See "Notes to Consolidated Financial Statements--Long
Term Notes.")

      Pursuant to a Letter Agreement, dated April 1, 1998, among the Company,
CVNY and Newstart (the "Newstart Agreement"), the parties agreed to restructure
the terms of CVNY's Secured Promissory Note (the "Original Note") on the
following terms: (i) the Company paid Newstart $500,000 from the proceeds of the
initial sale of Preferred Stock pursuant to the Proprietary Purchase Agreement,
(ii) the Original Note was amended and restated as a Secured Convertible
Promissory Note in the principal amount of $2,315,917 (the "New Note") and (iii)
the Company issued to Newstart a warrant to purchase 125,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share of Common Stock.
The New Note provides that CVNY will pay an additional $500,000 on or before the
earlier to occur of (i) the consummation by the Company of a financing
transaction yielding gross proceeds to the Company in excess of $2.5 million and
(ii) ninety days following April 1, 1998. In addition, CVNY has the right to
prepay the New Note in full at any time prior to October 1, 1998 at a price
equal to 125% of the outstanding principal amount. At the option of the holder,
the New Note may be converted in whole or in part at any time and from time to
time at a conversion price per share equal to 91% of 


                                       58
<PAGE>

                            CELLULARVISION USA, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the average of the lowest trading price on each of the four trading days
immediately prior to the conversion notice, provided, however, that the holder
may not convert more than $500,000 in principal amount of the New Note in any
calendar month. The New Note is subject to acceleration upon the occurrence of
certain events of default.

      To effectuate the restructuring contemplated by the Newstart Agreement,
the Company and CVNY entered into an Agreement, dated April 1, 1998, with the
holders of the Company's Subordinated Exchange Notes (the "Subordinated Exchange
Notes Agreement") pursuant to which such holders consented to such
restructuring. In consideration for such consent, the Company granted such
holders warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $.01 per share of Common Stock.

      The Company has agreed to register the resale of the shares of Common
Stock issued, or to be issued, pursuant to the Proprietary Purchase Agreement,
the Marion Purchase Agreement, the Newstart Agreement and the Subordinated
Exchange Notes Agreement. The foregoing agreements are included as Exhibits to
this Form 10-K, and are incorporated by reference herein. The total number of
shares of CVUS Common Stock with registration rights under all the foregoing
agreements and under all warrants previously outstanding is estimated to be
approximately four million shares. Under certain circumstances the Company has
agreed to pay liquidated damages in the event that certain of such shares are
not registered within certain prescribed time periods.

      As a result of the foregoing financing agreements, the Company believes
that its committed sources of capital, coupled with internally generated funds,
will be adequate to satisfy minimum anticipated capital needs and operating
expenses for the remainder of 1998. However, additional funding would be
necessary for an accelerated expansion of the super-high-speed Internet access
service, restoration of the subscription television sales and marketing efforts
to achieve the Company's targeted 1998 subscriber levels, or to provide
telephony and other two-way services. Therefore, the Company expects to seek
additional financing during 1998. However, there can be no assurance that this
capital either will be available to the Company, or, if available, will be
provided on terms acceptable to the Company. (See "Risk Factors.")


                                       59
<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in New York, New York
on April 15, 1998.

                                      CELLULARVISION USA, INC.


                                      /s/ Shant S. Hovnanian
                                      ------------------------------------------
                                          Shant S. Hovnanian
                                          President, Chief Executive Officer and
                                          Chairman of the Board of Directors

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

       Signature                     Title                             Date
       ---------                     -----                             ----

/s/ Shant S. Hovnanian    President and Chief Executive           April 15, 1998
-----------------------   Officer and Chairman of the   
Shant S. Hovnanian        Board of Directors            
                          
/s/ Charles N. Garber     Chief Financial Officer                 April 15, 1998
-----------------------
Charles N. Garber         

/s/ Bernard B. Bossard    Executive Vice President,               April 15, 1998
-----------------------   Chief Technical Officer and Director    
Bernard B. Bossard        

/s/ Vahak S. Hovnanian    Director                                April 15, 1998
-----------------------
Vahak S. Hovnanian        

/s/ Bruce G. McNeill      Director                                April 15, 1998
-----------------------
Bruce G. McNeill          

/s/ Roy H. March          Director                                April 15, 1998
-----------------------
Roy H. March              

/s/ Matthew J. Rinaldo    Director                                April 15, 1998
-----------------------
Matthew J. Rinaldo        


                                       60
<PAGE>

                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

              For the Years Ended December 31, 1995, 1996 and 1997

<TABLE>
<CAPTION>
                                           Balance at   Charged to
                                           Beginning    Costs and                  Balance at end 
             Description                   of Period    Expenses       Deductions    of Period
             -----------                   ---------    --------       ----------    ---------
<S>                                       <C>           <C>           <C>           <C>        
1997
   Allowance for doubtful accounts.....   $   124,370   $   550,290   $   383,676   $   290,984
                                          ===========   ===========   ===========   ===========
1996
   Allowance for doubtful accounts.....   $   133,730   $   351,839   $   361,199   $   124,370
                                          ===========   ===========   ===========   ===========
1995
   Allowance for doubtful accounts.....   $     2,402   $   202,108   $    70,780   $   133,730
                                          ===========   ===========   ===========   ===========
</TABLE>


                                       S-1