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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

For the fiscal year ended December 31, 1996        Commission File No. 000-27582

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

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

                    505 Park Avenue, New York, New York 10022
                    (Address of Principal Executive Offices)
                                 (212) 751-0900
                         (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/A or
any amendment to this Form 10-K/A. ( )

         The  aggregate  market value of the Registrant's  Common Stock held by
nonaffiliates  of the Registrant was $50,461,000 on March 26, 1997, 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 26, 1997
was 16,000,000.

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                      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 1997.

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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 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/A for the year ended  December  31,  1996 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 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.





                                       (i)
<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
multichannel  broadband cellular television system in an area which includes New
York City under a 1,000 MHz commercial  license from the Federal  Communications
Commission  (the "FCC").  The Company has been operating a 49-channel  broadband
cellular  television  system in portions  of  Brooklyn on a limited  basis since
1992.  In  December  1995,  the FCC  granted  the  Company 34  applications  for
additional  commercial  transmitter  sites.  In 1996,  the Company  expanded its
subscription  television  services  to  cover  approximately  one-third  of  its
licensed service area, the 8.3 million population, New York Primary Metropolitan
Statistical  Area  ("PMSA"),  a region  consisting  of New York  City and  three
suburban counties.  Currently, there are approximately 2.9 million people in the
area covered by the Company's ten operational  transmitters in Brooklyn,  Queens
and Manhattan.  The Company  intends to have 17 transmitters in operation by the
end of 1997, which are expected to give it access to subscribers throughout most
of the New York PMSA. The Company's  transmitter  permits are conditional  upon,
and  subject  to  conformance  with the final  FCC  rules  for Local  Multipoint
Distribution Service ("LMDS").

         On March 13, 1997, the FCC released its Second Report and Order,  Order
on Reconsideration,  and Fifth Notice of Proposed Rulemaking ("Second Report and
Order")  which  adopted  the  service,  auction  and  eligibility  rules for the
nationwide licensing of LMDS. The FCC stated in the Second Report and Order that
it will commence  processing  the Company's  renewal  application by placing the
application  on Public  Notice not later  than 30 days after the March 13,  1997
release date of the Second  Report and Order.  The new LMDS  service  rules will
apply to this renewal  application.  As a result of its deployment efforts since
1992, and based on the license  renewal  expectancy  earned by the Company,  the
Company believes the renewal application should be granted promptly by the FCC.

          The  FCC's  rules for LMDS set forth in the  Second  Report  and Order
authorize the Company,  upon receiving its license renewal, and future providers
of LMDS  services  in other  areas,  to offer a  variety  of  two-way  broadband
services,  such as  wireless  local  loop  telephone  services,  high-speed data
transmission  (including  Internet access),  video  teleconferencing  (including
distance learning and telemedicine)  and interactive  television  (collectively,
"two-way  services").  The Company believes that future  implementations  of its
multichannel broadband cellular  telecommunications system will not only support
these two-way services,  but also be able to accommodate  additional  television
channel capacity through the use of digital compression and other techniques, if
and  when  the  costs  of such  technologies  make  implementation  commercially
feasible. In addition, the FCC rules for LMDS provide for the granting,  through
a  competitive  auction  process,  of licenses to offer these  services in Basic
Trading Areas ("BTAs")  throughout the United States. The Company believes that,
as a result of the licenses awarded through this proposed auction process, a new
segment of the  telecommunications  industry will emerge based upon the multiple
uses for this wide band of  spectrum.  The  Company  expects  to bid in the LMDS
auctions, alone or in partnership with others, to expand its operations to other
territories,  thus  leveraging  the  experience  and  expertise  it has obtained
through  operation of its existing LMDS system,  presently  the only  commercial
operation of LMDS in the United States.  The Company  believes it will be in the
forefront of this new industry segment due to its early  operational start date,
its unique LMDS operating  experience,  and its existing  commercial  license to
serve the nation's largest media market.

     In addition,  pursuant to the Company's Pioneer's  Preference request,  the
FCC may grant the  Company  the option to purchase  on a  discounted  basis,  an
expansion of its existing licensed territory to include the entire New York BTA,
a region  consisting of the New York PMSA and 18 additional  counties located in
New  York,  New  Jersey,   Connecticut  and  Pennsylvania,   which  would  bring
approximately 8.9 million  additional people into the Company's service area. In
the 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. The Company believes, based on the 1994 General Agreement on Tariffs
and Trade ("GATT") legislation and the FCC's prior determinations not to subject
parties to peer review whose Pioneer's Preference applications were accepted for
filing  before  September  1,  1994,  that  this  is an  unnecessary  regulatory
requirement.  The Company is currently  seeking FCC clarification on this issue.
Accordingly,  there can be no  assurance  that the FCC will grant the  Company's
Pioneer's Preference.




<PAGE>




Company History

         Hye Crest Management, Inc., a predecessor of the Company ("Hye Crest"),
was formed in 1988 by Messrs.  Shant S. Hovnanian,  Bernard B. Bossard and Vahak
S.  Hovnanian,   directors  of  the  Company  (the  "Founders").  Prior  to  the
consummation of the Incorporation  Transactions (as defined below),  each of the
Founders held one-third of the outstanding  capital stock of Hye Crest. In 1991,
Hye Crest  received  permission  from the FCC to commence  commercial  broadcast
operations  using the LMDS  technology  developed  by Suite 12 Group,  which was
formed in 1986 and is also owned by the Founders in equal shares  ("Suite  12").
From 1986  through  1992,  Suite  12's  principal  operations  consisted  of the
development  of the LMDS  technology.  Hye Crest began service to subscribers in
1992.  Suite 12  permitted  Hye Crest to use  certain  patent  rights,  the LMDS
technology,   and  head-end  and  transmitter  equipment  supporting  commercial
broadcast  operations under an informal  arrangement that was formalized in 1993
when (i) Suite 12  conveyed  that  equipment  to Hye Crest,  and (ii) Suite 12's
successor,  CellularVision  Technology  &  Telecommunications,   L.P.  ("CT&T"),
entered into a license  agreement (the "CT&T License  Agreement") with CVNY. The
Founders  collectively  own 80%, and a subsidiary of Philips  Electronics  North
America  Corporation  ("Philips") holds 20%, of the outstanding equity interests
of CT&T.

         CVNY was formed in 1993 and initially financed by the Founders to carry
on  the  business  of  Hye  Crest  and  commercialize  a  multiple-use  cellular
telecommunications service in the New York PMSA, beginning in the Brighton Beach
area of  Brooklyn.  Hye Crest  contributed  all of its  operations  and  assets,
including its FCC commercial  license,  to CVNY in exchange for managing general
partnership  interests  constituting more than 90% of CVNY's  outstanding equity
interests.  For  regulatory  reasons which are no longer  applicable,  Hye Crest
temporarily  held  title  to  the  head-end  facilities,  which  have  now  been
transferred to CVNY. Suite 12 contributed an FCC experimental license to CVNY in
exchange for limited partnership  interests.  In July 1993, a subsidiary of Bell
Atlantic  Corporation  ("Bell  Atlantic")  became the Company's  first corporate
investor.  From 1993 to 1995,  Bell  Atlantic  also  provided  certain  start-up
operational  and management  services to the Company.  In October 1993,  Philips
purchased an equity  interest in the Company from its Founders,  and in December
1993,  investment funds managed by affiliates of J.P. Morgan & Co.  Incorporated
("Morgan"  and,  together  with  Bell  Atlantic  and  Philips,   the  "Corporate
Investors") invested in the Company.

         The  Company was formed in October  1995 to serve as a holding  company
for 100% of both Hye Crest and CVNY. 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").  Immediately
prior to the Initial  Public  Offering,  the Company  consummated  the following
events (collectively,  the "Incorporation  Transactions"):  (i) Morgan converted
$10 million  principal amount of the $15 million principal amount of convertible
exchangeable  subordinated  notes of CVNY (the "Morgan Notes") into 4,547 shares
of Common  Stock and  exchanged  $5  million  principal  amount,  together  with
interest  accrued  thereon as of December 15,  1995,  for  non-convertible  debt
securities (the "Morgan Exchange Notes") of the Company, (ii) the Company issued
an  aggregate  of 93,180  shares of Common Stock to the Founders in exchange for
all outstanding  capital stock of Hye Crest,  and to Bell Atlantic,  Philips and
Suite 12 in exchange for all of their respective  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  Incorporation
Transactions,  the Company is the sole  stockholder  of Hye Crest,  which has no
independent  business,  and CVNY is a wholly owned subsidiary of the Company and
continues to carry on its business.  In December  1995, the FCC approved the pro
forma transfer of control of CVNY from Hye Crest to the Company.  In July, 1996,
Hye Crest changed its name to CellularVision Capital Corporation.

Business Strategy

         The  Company's  strategy  for  successful  operation  is based upon the
following principles:

         Capture New York Cable Television  Market Share. The Company intends to
capture  a  significant  portion  of the 8.3  million  population  New York PMSA
subscription   television   market  by  instituting  a  mass  marketing  program
highlighting the Company's dependable,  high quality picture and low prices. The
Company  currently offers 49 of the most popular cable and broadcast  television
channels at prices 20% to 30% less than its franchised cable competitors.

         The  Company's  prompt,   courteous  and  effective   customer  service
specialists  are central to  differentiating  the Company from  competitors.  At
present, the Company's average response time to a phone call is under 10 seconds
and


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over 90% of calls are answered within 30 seconds, a response time that is better
than industry  standards.  The Company  offers  same-day  repair  services,  and
customers' calls are handled 24-hours a day.

         Expand Business Class Market in New York. The Company has implemented a
strategy which brings business-oriented  television programming to workplaces in
the New York City  business  and  financial  community  where  cable  television
connections  are now  unavailable or not  economically  viable.  The Company has
formed  a  strategic  cross  promotion   alliance  with  Bloomberg   Information
Television  (BIT). The Company  currently  markets a 14 channel "Business Class"
service,  featuring BIT and other popular news and business channels, to offices
in Lower and Mid-town Manhattan.

         Expand  Service  Territory;  Pursue  New  Markets.  Depending  upon the
confirmation of the Company's tentative Pioneer's  Preference and prices paid at
the LMDS  auctions  for other BTA  licenses,  the  Company  plans to expand  its
service  area to  include  the  entire New York BTA,  adding  approximately  8.9
million people to its service area. Under its tentative Pioneer's Preference, if
granted, the Company would have the exclusive right to extend its license to add
this  additional  territory at a 15% discount from the average price paid at the
LMDS auctions for licenses in comparable  service  areas.  The FCC has permitted
broadband Personal  Communications Services Pioneer's Preference awardees to pay
for their  licenses  over five years,  with interest only payments for the first
two years,  at an interest rate equal to the five-year  U.S.  Treasury Note plus
2.5  percent.  The Company  believes  that it will be  permitted  to pay for its
Pioneer's  Preference license, if granted,  under similar terms,  although there
can be no  assurance  that this will be the case.  If the FCC does not grant the
Company's  Pioneer's  Preference,  the  FCC  can be  expected  to  auction  this
remaining  portion of the New York BTA and the  Company  may then  acquire  this
remaining service area at auction.

         Introduce Two-Way Broadband  Services.  The Company expects to be among
the first LMDS operators to introduce two-way  services,  such as wireless local
loop  telephone  services,  high-speed  data  transmission  (including  Internet
access), video  teleconferencing  (including distance learning and telemedicine)
and  interactive  television,  which services were  authorized by the FCC in the
rules for LMDS adopted in the Second Report and Order.

         In 1996 the Company demonstrated the first high-speed wireless modem to
the New York market.  Field  trials of a 500 Kbps modem began in September  1996
and have been  successfully  completed.  The $200 product operates at data rates
approximately  20  times  faster  than  conventional   28.8  Kbps  modems,   and
approximately  4 times faster than ISDN. The Company  recently  began  marketing
trials that will continue until the expected commercial launch later in 1997.

The CellularVision (TM) System

         The  Company's   multichannel   broadband  cellular  television  system
operates  in  the 28 GHz  frequency  range.  Prior  to  the  development  of the
Company's system,  transmission of communication 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,  telephone  services  ("telephony") 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 a  head-end.  Signals  from the  head-end  are then  transmitted  to
omnidirectional  transmitters  or a  small  number  of  broad-beam  transmitting
antennas (each, a  "transmitter")  located in each adjacent cell which, in turn,
transmits the signals to subscribers within the cell. Point-to-point relays (the
"relays"),  which  are  installed  with the  transmitter,  are used to  transmit
signals to cells not adjacent to the  head-end.  The Company then 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 one or
more fully-addressable  set-top converters.  One remote control unit is provided
with each set-top converter.

Competitive Advantages

         The  Company's  system has a number of  significant  cost and technical
attributes that the Company believes will affect its competitiveness:




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<PAGE>


          Low Cost Infrastructure. The Company believes that its system offers a
low cost,  high quality and  dependable  alternative  to both  franchised  cable
systems and satellite systems,  such as Direct Broadcast Satellite ("DBS").  The
Company believes that it can consistently offer  substantially the same services
at  significantly  lower  prices  than  franchised  cable  systems  because  the
Company's  system  does  not  require  the  extensive  networks  of  cables  and
amplifiers  or the  constant  maintenance  and  repair  of  system  architecture
inherent in such systems. DBS systems have a lower cost per household passed but
involve the expense  associated with high-powered  direct broadcast  satellites.
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.  In
addition,  subscribers are required to pay monthly  charges  comparable to cable
rates.  By  comparison,  the  Company's  subscribers  have  to  pay  up to a $50
installation fee, all or a portion of which may be waived during promotions, and
monthly charges that are significantly lower than cable rates.

     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   Multichannel   Multipoint
Distribution Service ("MMDS") systems. In a franchised cable system, each time a
television  signal passes  through an amplifier,  some measure of noise is added
which  results in a grainier  picture.  As a result,  franchised  cable  picture
quality generally  degrades  significantly  depending on the distance the signal
travels  from the head-end to the  subscriber.  Current MMDS systems lack the FM
video fidelity  associated  with the Company's  system and the Company  believes
that these systems are also generally subject to perceptible  interference.  The
Company's  system,  by contrast,  has been designed to deliver its subscribers a
video  picture  without  perceptible  interference  under most  conditions.  The
superior   quality  of  the  Company's   system  is  particularly   striking  on
large-screen  and  projection  televisions,  which amplify the  distortions  and
graininess characteristic of other transmission technologies.

         Dependability.  As compared to franchised  cable  systems,  the Company
believes that its system  provides a highly  reliable signal because there is no
cable,  amplifiers or processing and filtering equipment between the transmitter
which serves the subscriber and the subscriber's  household to potentially break
or  malfunction.  Failure  of any  one of  these  components  in the  chain  may
"black-out" large portions of franchised cable systems, and diagnosis and repair
efforts  involve a network  consisting of hundreds of miles of cable and related
relay equipment, in contrast to the Company's simpler subscriber/cell alignment.
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,
eliminating the need for outdoor installations.

         The  Company  believes  that  these  antennas,  in many  cases,  permit
delivery of its services to the apartment  buildings and office towers which are
characteristic of much of its service  territory  without extensive  in-building
wiring.  This wiring is necessary not only in the case of franchised  cable, but
also with wireless technologies such as MMDS, Satellite Master Antenna ("SMATV")
service  and  DBS,  whose  signals  require  a  direct   line-of-sight   to  the
transmitter, and, consequently, in a densely populated urban environment such as
New York City,  generally  require rooftop antenna  installation in apartment or
office  buildings  and  internal  wiring of the  building to deliver  service to
subscribers.  Because the Company believes that its system will in many cases be
able to be installed  for an  individual  subscriber  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.  In  comparison,  cable  operators
generally offer uniform  programming  throughout a geographic  service area, and
DBS systems offer the same  programming  on a nationwide  basis and do not offer
any local programming.




                                       4
<PAGE>


         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  MMDS systems,  which use AM modulation and
relatively  broadbeam receive antennas.  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.

         Large  Spectrum  Grant  and  Efficient   Spectrum  Usage.  The  Company
currently has the right to use 1,000 MHz of spectrum,  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 as are permitted by the FCC in the Second Report and Order. The
Company,  consistent with the rules adopted in the Second Report and Order, will
have  exclusive  access to an  additional  150 MHz of 31 GHz  spectrum  once its
current New York PMSA license is renewed,  bringing its total  spectrum grant to
1,150 MHz.

Future Two-Way Broadband Services

         The  Company  expects  that future  implementations  of its system will
support two-way 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 Company's
system can support two-way  communication  by inserting  communication  channels
between  the  Company's  49  polarized  video  channels  and  transmitting  such
communication channels in the opposite polarization.  An alternative approach to
this configuration can be achieved through separation of the two-way services in
a separate band assigned to LMDS in the higher frequencies. In the Second Report
and Order, the FCC adopted flexible rules for LMDS that will expand the range of
services that the Company is authorized to offer to its  subscribers  to include
two-way  services.  Implementation  of such services will be predicated upon the
availability  of the  requisite  two-way  LMDS  equipment,  which the  Company's
suppliers and other third parties  currently have under  development and, in the
case of interactive video, upon the emergence of available programming.

         The  Company  believes  that it  will  have a  substantial  competitive
advantage in providing these services to certain markets because of its inherent
ability to access many sites  without  the cost of  installing  and  maintaining
telephone  or  fiber  optic  lines in a  crowded  metropolitan  environment,  or
accessing and wiring  individual  buildings.  This advantage will be enhanced in
the case of potential two-way customers who are already multichannel  television
subscribers.  Thus,  residential  subscribers  may  be  offered  an  upgrade  to
telephony services,  interactive television and high-speed data access services,
such as the Internet,  and business  subscribers who have subscribed to Business
Class Service, a package of video, voice and data services,  may be offered high
speed broadband links for private data networks.

         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. A commercial version is currently under development. The
other  hardware  necessary to support  two-way  services  would consist of minor
modifications  to  off-the-shelf  equipment  such as switches and  converters to
permit existing input devices other than television sets, such as telephones and
computers, to be connected to the system.

         The Company  believes  that two-way  services can be supported  without
interference with its existing analog 49-channel multichannel 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. Because the



                                       5
<PAGE>


Company's offerings of two-way services could potentially be locally tailored on
a  cell-by-cell  basis,  various  combinations  of  two-way  services  could  be
deployed.

         While the  Company  is not  currently  authorized  to  provide  two-way
services,  and may not be  technically  prepared to begin  offering any of these
services on a commercial basis upon receiving authorization to do so (which will
occur upon  renewal of its New York PMSA  license),  the  Company  believes  its
system can be  configured to support,  and intends to offer,  some or all of the
following two-way services:

         Wireless local loop telephony. The Company's system could be adapted to
support  ordinary  voice  telephony,  giving  customers  equipped with a two-way
antenna the ability to plug both their  television and their  telephone into the
same specially  adapted  converter  box,  paying for both services with a single
monthly bill. Calls would be switched either at a site co-located with the local
telephone  company,  or at a private  switching  facility.  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 commenced  negotiations with NYNEX, the local exchange carrier,  for
an  interconnection  and  resale  agreement,  and has  begun  preparation  of an
application  to the state  authorities  for the  necessary  approvals to provide
local telephone service.

         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, including Internet access.

         Video  teleconferencing.  The  Company  has  demonstrated  in tests the
capacity  of its  system to  support  full-duplex,  full  motion  two-way  video
teleconferencing, and is evaluating the purchase of equipment that would support
such a service among its subscribers within its service territory in the future.
The  Company  intends  to select a  transmission  standard  that will  permit an
interface  with  video  teleconferencing  systems  in other  areas.  The  system
requires a standard video camera and a two-way antenna/transceiver, and 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 can make it a leading technology supporting these services.

Current Operations

         The  Company is licensed  by the FCC to conduct  operations  in the New
York PMSA and,  based on the  FCC's  December  1995  grant of the  Company's  34
applications  for additional  commercial  transmitter  sites,  intends to deploy
additional  transmitters that will give it access to subscribers throughout most
of the  New  York  PMSA  by  the  end of  1997.  These  grants  are  subject  to
modification  to  conform  with the FCC's  final  rules for LMDS.  According  to
industry estimates, the New York PMSA includes approximately 8.3 million people,
of which the Company believes a large proportion will be capable of being served
by the Company's system. In addition,  if the FCC grants the Company a Pioneer's
Preference,  under the FCC's most recent proposal,  the Company would be allowed
to expand its service  area to include the entire New York BTA, of which the New
York PMSA is a part, by paying a fee  representing  the  difference  between the
value of a  license  to serve  the New York BTA and the  value of the  Company's
current commercial license to serve the New York PMSA, subject to a 15% discount
from the  average  auction  price  paid at the LMDS  auctions  for  licenses  in
comparable  service areas.  See  "--Industry  Regulation."  The expansion of the
Company's  licensed  territory  to include  all of the New York BTA would  bring
approximately 8.9 million additional people into its service area.

         In the  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. The Company believes,  based on the 1994
GATT  legislation and the FCC's prior  determinations  not to subject parties to
peer review whose  Pioneer's  Preference  applications  were accepted for filing
before September 1, 1994, that this is an unnecessary


                                       6
<PAGE>


regulatory  requirement.  The Company is currently  seeking FCC clarification on
this issue.  Accordingly,  there can be no assurance that the FCC will grant the
Company's Pioneer's Preference.

         The  Company's  head-end has been fully  operational  since 1992 and is
currently being used to transmit programming to the 10 operational cells located
in  Brooklyn,   Queens  and  Manhattan.   In  1996,  the  Company  expanded  its
subscription  television  services to cover  one-third of its  licensed  service
area, the 8.3 million  population New York PMSA, a region consisting of New York
City and three suburban counties. Currently, there are approximately 2.9 million
people in the area covered by the  Company's 10  operational  transmitters.  The
Company intends to have 17  transmitters in operation by the end of 1997,  which
are expected to give it access to  subscribers  throughout  most of the New York
PMSA. The Company's  transmitter  permits are subject to modification to conform
with the final rules for LMDS.

         The Company has leased space on 15 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
over 50 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 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.

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

Marketing

         Presently  the  Company's  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,  consisting  of an  in-house  sales  force
complemented by  subcontractors.  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  intends  to  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


                                       7
<PAGE>


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 as its
subscriber  base  expands,  the  Company  intends to provide a ratio of customer
service  specialists  to  subscribers  significantly  higher than that currently
offered by its  subscription  television  competitors.  Presently,  the  Company
offers  same-day repair services and,  customers'  calls are handled  24-hours a
day.

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   of   1996   (the
"Telecommunications  Reform  Act"),  which was passed by the U.S.  Congress  and
signed  into  law  by  President   Clinton  on  February  8,  1996,   eliminates
restrictions  that prohibit local  telephone  exchange  companies from providing
video  programming  in their local  telephone  service areas,  thus  potentially
resulting in significant additional competition from local telephone companies.

         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.  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.

         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,  TCI and Cablevision,
all 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  head-end,   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  cable  networks.
Although hybrid  fiber-coaxial  plants may substantially remedy the transmission
and reception  problems  currently  experienced  by coaxial  cable  distribution
plants,  hybrid fiber-coaxial systems will still be subject to outages resulting
from severed lines and failure of electronic  equipment,  and are very expensive
to install and maintain.

         Franchised  cable  systems  cost  significantly  more to  build  and to
maintain than the Company's  system.  Although the Company believes its head-end
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 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 head-end
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. The


                                      8
<PAGE>


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's suitability for service in large urban
areas.  MMDS also operates with  substantially  less spectrum than the Company's
1,000 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's 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.

         Satellite  Master Antenna Service  ("SMATV").  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  head-end
without crossing public  rights-of-way and avoiding the need for costly head-end
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 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  practicable in urban environments such as New York City
where multiple dwellings may block this line-of-sight.

         Telephone   Company  Provision  of  Video   Programming.   The  current
regulatory  framework that traditionally  prohibited local telephone  companies,
also  known  as  local  exchange  companies   ("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  three  within
various portions of the Company's New York PMSA.

         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


                                       9
<PAGE>


"scrambled,"  requiring owners of satellite  receivers to purchase  descrambling
units and pay annual  authorization fees directly to programming  suppliers.  In
addition, satellite systems do not deliver local broadcast television stations.

Regulatory History

         The  Company's  FCC  Licenses.   The  Company  holds  a  fixed  station
commercial license pursuant to a waiver of the FCC's rules in the Point-to-Point
Microwave Radio Service granted by the FCC in January 1991 which  authorizes 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,  and  set  forth a  procedure  for the  filing  of  additional
applications  for authority to operate  additional  transmitters  throughout the
Company's  authorized  service  area.  The January  1991  decision  authorized a
24-channel video system and was modified in March 1992 to authorize 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 Company's  license is the only commercial  license for this service
granted by the FCC.  This  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  throughout its  authorized  service
area,  and expired in February  1996. A timely  application  for renewal of this
fixed commercial  station license was filed on December 29, 1995. The FCC stated
in the Second  Report and Order that it will commence  processing  the Company's
renewal  application by placing the  application on Public Notice not later than
30 days after the March 13, 1997 release date of the Order. The new LMDS service
rules  will  apply  to  this  renewal  application.  While  the  Company  has an
expectation of a renewal of this license,  as a result of its deployment efforts
since  1992 and the FCC's  adoption  of a renewal  expectancy  provision  in the
Second  Report  and  Order,  there is no  guarantee  that the FCC will renew the
license.

         Under the FCC's rules, a license  automatically stays in effect pending
FCC  action  on  a  timely  filed   renewal   application.   In  addition,   the
Communications Act of 1934 (the "Communications  Act") provides procedures under
which any party in  interest  may file a Petition to Deny the renewal of a fixed
point-to-point  microwave license by setting forth specific  allegations of fact
sufficient to show that the  petitioner is a party in interest and that grant of
the  renewal  application  would be prima  facie  inconsistent  with the  public
interest, convenience and necessity. While the Company is not aware of any facts
or  circumstances  to  justify  the filing of such a  petition,  there can be no
assurance  that such a petition will not be filed,  or to predict the outcome of
the FCC's deliberations on any such petition in advance.

         In the  First  Report  and Order the FCC  grandfathered  the  Company's
continued  operations in the 27.5-28.5 GHz spectrum (which the Company currently
is licensed to use) for a period of two years from the release date of the First
Report and Order, July 22, 1996, or until the first GSO/FSS  satellite  intended
to operate in the  28.35-28.50  GHz band is launched,  whichever  occurs  later.
Additionally, under the grandfather provision adopted by the FCC, the Company is
authorized  to  use  the  newly   designated  150  MHz  at  29.1-29.25  GHz  for
hub-to-subscriber  operations during the grandfathered period, thus allowing the
Company  currently to use 1,150 MHz in the New York PMSA.  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  maintaining  its  1,000  MHz  spectrum
allocation,  at 27.5-28.35 GHz and 29.1-29.25  GHz, along with an additional 150
MHz in the 31 GHz band,  subject to license  renewal,  as  explained  below.  In
addition,  the  Second  Report  and Order  confirms  that the FCC will allow the
renewed  license  to  conform  to  the  final  rules  for  LMDS,  including  the
authorization  of the  Company  to  offer  the  panoply  of  LMDS  services  the
technology is expected to offer.

         The Company  also holds an  experimental  license  authorizing  limited
market  tests 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  outside  of the New York BTA as  well.  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.  On
June 30,  1995,  the  Company  filed a timely  application  for  renewal  of its
experimental  license which had an expiration date of September 1, 1995. The FCC
granted the renewal application, effective September 1, 1995, for a new two-year
license  term.  In  addition,  on November 26,  1996,  the Company  filed for an
experimental  license  in the  31.0-31.3  GHz in the New  York  BTA in  order to
conduct limited market studies of various  packages of video,  telephony  and/or
data  services  delivered  through  31 GHz  LMDS  technology.  This  application
currently is pending before the FCC.



                                       10
<PAGE>



         The FCC's LMDS  Rulemaking  Proceedings.  The  subscription  television
service currently offered by the Company in New York is one example of a diverse
range of telecommunications services including two-way video, telephony and data
services,  which  could  be  supported  by the  Company's  system  in the 28 GHz
frequency  band.  This range of  services  developed  by the  Company  using the
technology  licensed  from  CT&T has  become  known as LMDS.  In  response  to a
Petition  for  Rulemaking  and Petition for  Pioneer's  Preference  filed by the
Company  in 1991,  the FCC  adopted  a Notice  of  Proposed  Rulemaking,  Order,
Tentative Decision and Order on Reconsideration ("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.  At that time,  the FCC also
tentatively granted the Company's request for a Pioneer's  Preference,  by which
the Company  would be awarded a license  for the  service  area of its choice in
recognition  of its  significant  efforts  in  developing  the  innovative  LMDS
technology.

         On July 17, 1996, by unanimous  vote,  the FCC adopted the First Report
and Order and Fourth NPRM,  which  formally  established a band plan and sharing
rules as previously  proposed by the FCC in the 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 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 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.  The FCC  proposed  to license the 850 MHz and 150 MHz
blocks of 28 GHz  spectrum,  together  with the 300 MHz of 31 GHz  spectrum as a
single,  1.3 GHz block of  spectrum  for LMDS  licenses.  The Fourth NPRM sought
additional comment on whether local exchange carriers and cable operators should
be permitted to hold an LMDS license in their service areas.

          In the First Report and Order, the FCC explicitly  recognized the role
of the Company as the only  commercial  Licensee  of LMDS in the United  States.
Moreover, the FCC stated "its intention to facilitate the development of LMDS in
New York and the rest of the nation," and noted that `permitting  CellularVision
to proceed with its business plan and existing system design in the contiguous 1
GHz for which it was originally  licensed will help ensure a seamless transition
for  CellularVision's  customers  as LMDS is licensed  pursuant to the band plan
implemented in the Report and Order." Accordingly,  demonstrating its commitment
to the  Company's  build-out  of its system in the New York  PMSA,  in the First
Report and Order the FCC grandfathered the Company's continued operations in the
27.5-28.5  GHz spectrum  (which the Company  currently is licensed to use) for a
period of two years from the release  date of the First  Report and Order,  July
22,  1996,  or until the first  GSO/FSS  satellite  intended  to  operate in the
28.35-28.50 GHz band is launched,  whichever occurs later.  Additionally,  under
the grandfather  provision  adopted by the FCC, the Company is authorized to use
the newly designated 150 MHz at 29.1-29.25 GHz for hub-to-subscriber  operations
during the  grandfathered  period,  thus  allowing the Company  currently to use
1,150 MHz in the New York PMSA. 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  maintaining its 1000 MHz spectrum  allocation,  at 27.5-28.35 GHz
and 29.1-29.25 GHz, along with an additional 150 MHz in the 31 GHz band, subject
to license renewal, as explained below.

         On March 13, 1997,  the FCC adopted the LMDS Second Report and Order in
this proceeding, which includes service, auction and eligibility rules for LMDS,
and  addresses  the proposed  allocation of 300 MHz in the 31 GHz band for LMDS.
This Second Report and Order largely  concludes the LMDS  rulemaking  proceeding
except for undecided issues regarding the  implementation of disaggregation  and
partitioning,  which is subject to a Fifth  Notice of Proposed  Rulemaking.  FCC
officials have stated their intent to commence the nationwide  licensing of LMDS
through spectrum auctions by the summer of 1997.

         The FCC in the Second  Report and Order  provides for two LMDS licenses
per BTA:  one license for 1,150 MHz,  the other for 150 MHz,  amounting to 1,300
MHz allocated to LMDS. In addition to the non-contiguous 1 GHz of 28


                                       11
<PAGE>


GHz  spectrum  allocated  to LMDS in the First  Report  and  Order,  the FCC has
allocated an  additional  300 MHz in the 31 GHz band for LMDS,  150 MHz of which
will be allocated to one LMDS  license,  the other 150 MHz will be combined with
the 1,000 MHz in the 28 GHz band.

         The 1,150 MHz license  will consist 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  Mobile  Satellite  Service  (MSS)  systems;  and  150  MHz  in  the
31.075-31.225 GHz band on a protected basis. The 150 MHz license will consist 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 on a protected basis. LMDS licenses  operating in this
bifurcated  31 GHz band will be required to afford  interference  protection  to
incumbent  licensees.  Also,  this second 150 MHz block can be combined with the
1,150 MHz license to create a 1.3 GHz LMDS system.

         In order to encourage  competition in the video and telephony  markets,
the FCC  decided  to  substantially  restrict  LECs  and  cable  companies  from
acquiring  the 1,150 MHz LMDS  license.  Under the rules  adopted  in the Second
Report and Order,  LECs and cable  companies will be ineligible to acquire a 20%
or greater  ownership  interest  in an 1,150 MHz LMDS  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 1,150 MHz
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
examined  by the FCC at the time of its annual  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 bid on the 150
MHz license in their service area, as there is no such  eligibility  restriction
on this LMDS license.

     In order to encourage small businesses to enter the LMDS industry,  the FCC
has  adopted  several  opportunity   enhancing  measures  for  qualifying  small
businesses.  The FCC will define a "small  business" as an entity whose  average
annual gross revenues,  together with controlling  principals and affiliates for
the three preceding years does not exceed $40 million.  A small business will be
entitled  to a 25%  bidding  credit.  Small  businesses  are  also  entitled  to
installment  payments  at an interest  rate based on the rate for U.S.  Treasury
obligations  of maturity  equal to the license term (10 years) fixed at the time
of licensing,  plus 2.5%. Payments shall include interest only for the first two
years and payments of interest and principal  amortized over the remaining eight
years.  The  rate of  interest  on  ten-year  US  Treasury  obligations  will be
determined  by taking the coupon rate of interest on ten-year US Treasury  notes
most  recently  auctioned  by  the  Treasury   Department  before  licenses  are
conditionally  granted.  Moreover,  entities with gross  revenues  exceeding $40
million but not exceeding $75 million,  will be entitled to a 15% bidding credit
and the same ten-year  repayment plan as small  businesses  except  interest and
principal will be amortized over the whole ten-year period.

         The FCC also  initiated a Fifth Notice of Proposed  Rulemaking  ("Fifth
NPRM") to  address  the issues of  disaggregation  and  partitioning  which will
enable a 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.

         In the  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. The Company believes,  based on the 1994
GATT  legislation and the FCC's prior  determinations  not to subject parties to
peer review whose  Pioneer's  Preference  applications  were accepted for filing
before  September 1, 1994, that this is an unnecessary  regulatory  requirement.
The Company is currently seeking FCC  clarification on this issue.  Accordingly,
there  can be no  assurance  that the FCC will  grant  the  Company's  Pioneer's
Preference.

         Based on the Second Report and Order, wherein the FCC confirmed that it
will commence  processing the Company's  commercial license renewal  application
for the New York PMSA within 30 days of the March 13, 1997 release of the Order,
the outcome of the  Pioneer's  Preference  award has no impact on the  Company's
license to operate in the New York PMSA. As previously  stated by the FCC in the
Third NPRM,  the Pioneer's  Preference  would apply only to the outer portion of
the New York BTA not covered by the Company's  existing license for the New York
PMSA. If the


                                       12
<PAGE>


Company  ultimately  is awarded the Pioneer's  Preference,  the Company would be
licensed  to use the  portion  of the New York  BTA  outside  the New York  PMSA
pursuant to the FCC's band segmentation plan (i.e.,  27.5-28.35 GHz,  29.1-29.25
GHz and 30.0-30.3 GHz). While the remainder of the New York BTA would be awarded
to the Company without being subject to a spectrum auction, under the FCC's most
recent proposal the Company would have the exclusive right to extend its license
to add the  portion of the New York BTA not  included in the  1,000-plus  square
mile area  covered by the  Company's  existing  license for the New York PMSA by
paying a fee representing the difference between the value of a license to serve
the New York BTA and the value of the Company's  current  commercial  license to
serve the New York PMSA,  subject to a 15% discount  from the average price paid
at the LMDS auctions for licenses in comparable service areas. In addition,  the
FCC is  considering  the  adoption  of  conditions  on the  Company's  Pioneer's
Preference  similar  to those  placed on the  Pioneer's  Preferences  granted to
Personal  Communications  Service  licensees.  If adopted,  these conditions may
require the Company to construct the system subject to the Pioneer's  Preference
using  substantially  the same  technology  upon which its Pioneer's  Preference
award is based.

Industry Regulation

         General.  The proprietary LMDS technology  licensed by the Company from
CT&T has been repeatedly recognized formally by the FCC as a pioneering wireless
communications innovation, opening a previously underutilized frequency band for
terrestrial   applications.   At  present,   the  Company  is  the  only  entity
commercially licensed by the FCC to transmit multichannel services in the 28 GHz
frequency band.  Moreover,  the unique LMDS technology is capable of providing a
diverse range of services, including interactive,  high-quality video, telephony
and data services.  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 Second
Report  and  Order on  March  13,  1997  providing  LMDS  service,  auction  and
eligibility  rules,  the LMDS rulemaking is largely  completed and FCC officials
have stated that auctions for LMDS  licenses  nationwide  could  commence by the
summer of 1997.

         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 42 U.S.C.  ss. 522(7) and interpreted by the
FCC's rules and relevant decisions including the Second Report and Order. As the
FCC has  formally  recognized  in the Second  Report  and  Order,  as a wireless
service provider,  the 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.

         Telecommunications  Reform Act. On February 8, 1996,  President Clinton
signed  into law the  Telecommunications  Reform  Act,  landmark  communications
reform legislation that 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-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.




                                       13
<PAGE>


         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  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.

         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,  and 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.

         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.



                                       14
<PAGE>



         Restrictions on Over-the-Air  Reception Devices. The Telecommunications
Act of 1996 directed the FCC to promulgate  regulations to prohibit restrictions
that impair a viewer's  ability to receive video  programming  services  through
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 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, 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  presently  obtains its  customer  premises
equipment through CT&T. CT&T obtains the customer premises equipment it supplies
to the Company from sole-source, third party suppliers.

         The  principal  physical  assets of the  Company's  system  consist  of
head-end   equipment    (including   satellite   signal   reception   equipment,
demodulators, multiplexers and encoders), transmitters, repeaters and subscriber
equipment, as well as office space. The Company's head-end facility collects and
feeds  voice,   video  and  data  information  from  external  sources  such  as
satellites,  local  television  broadcast  programming and  Information  Service
Providers into the Company's  system,  which  transmits the signals from cell to
cell. The cells transmit the Company's signal directly to the subscriber's  home
or office where it is received by an antenna  connected to a set-top  converter.
The  Company  deploys  repeaters  to  service  those  shadowed  areas not served
directly from the cell sites.


ITEM 2.  PROPERTIES

         The Company subleases approximately 9,800 square feet for its executive
offices in  Manhattan  pursuant  to a sublease  which  expires in July 1999.  In
addition,   the  Company  leases   approximately   9,350  square  feet  for  its
administrative,  customer service and warehouse needs in Brooklyn, New York. The
Company's lease for such facility  terminates in May 1999. In November 1996, the
Company  entered into a lease for an  additional  20,400 square feet of space at
its  Brooklyn  location.  This space will be utilized  for the addition of a new
head-end  facility and for the  expansion  of the Company as the  employee  base
increases. This lease expires in October 2004.

         In addition,  as 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 head-end  facility.  These leases
expire in 1998 and 1999.

          The Company  anticipates  that the 17 transmitters it plans to have in
operation by the end of 1997 will give it access to subscribers  throughout most
of the New York PMSA. The Company leases  approximately 100 square feet of space
on each of fifteen 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 four additional  sites in
New York City. In addition,  the Company has letters of intent from landlords to
lease space at a total of 24 additional sites


                                       15
<PAGE>


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

         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 multi-channel  broadband cellular television system, the Company induced the
Army to breach its franchise agreement with the plaintiff.  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 at the army base.  The suit seeks $1
million in damages and is in its preliminary  stages.  The Company cannot make a
determination  at this time as to the possible  outcome of the action or whether
the case  will go to trial.  A summary  judgment  motion  has been  filed by the
Company and is currently  pending,  requesting  that the court dismiss the case.
The Company does not believe that in the event an adverse  judgment is rendered,
the effect would be material to the  Company's  financial position, but 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.  The Suit seeks  injunctive  relief and $4 million in punitive
damages. The Company believes,  based upon advice of counsel,  that this suit is
likely  to be  resolved  without a  material  adverse  effect  on the  financial
position of the Company,  but could have a material effect on operating  results
in the period in which the matter is resolved.

         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.  Although this action is still in its
preliminary   stages,   the  defendants  have  obtained   dismissal  of  certain
allegations and intend to continue to vigorously defend the action.


ITEM 4.  SUBMISSION  OF MATTERS TO VOTE OF SECURITY HOLDERS

                                      None

                                     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.

<TABLE>
<CAPTION>
<S>                            <C>                       <C>                        <C>
1996                           High Sale                 Low Sale                   Closing Sale
----                           ---------                 --------                   ------------

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




                                       16
<PAGE>


         On  December  31,  1996,  the last sale price of the  Common  Stock as
reported on the NNM was $7.00 per share. As of December 31, 1996,  there were 41
registered  shareholders of the Common Stock. During the year ended December 31,
1996, 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  multichannel broadband cellular television system in
the New York PMSA.




                                       17
<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.

<TABLE>
<CAPTION>


                                                               Year Ended December 31,
                                 ------------------------------------------------------------------------------------
                                          1992             1993            1994            1995             1996
                                          ----             ----            ----            ----             ----
                                                        (in thousands, except per share data)
Statement of Operations
Data:
<S>                                       <C>             <C>             <C>             <C>               <C>
Revenue........................            $2               $55             $51           $1,196            $2,190
Service cost...................             3                24              39              603             1,175
Selling general and
administrative.................           499             1,799           2,884            5,637            10,574
Management fees................            -                250           1,546            2,699              -
Depreciation and
amortization...................            51                73             188            1,376             2,258
                                           --                --             ---            -----             -----
Total operating expenses.......           553             2,146           4,657           10,315            14,007
                                          ---             -----           -----           ------            ------
Operating loss.................          (551)           (2,091)         (4,606)          (9,119)          (11,817)
Net interest income (expense)               -               100          (1,393)          (2,184)              186
                                           ---              ---          -------          -------              ---
Net loss.......................         $(551)          $(1,991)        $(5,999)        $(11,303)         $(11,631)
                                        ======          ========        ========        =========         =========


Loss per common share (1)......                                                          $ (0.91)         $  (0.75)

Weighted average common shares
outstanding(1).................                                                       12,395,142        15,576,478
</TABLE>
<TABLE>
<CAPTION>

                                                                     December 31,
                                          ----------------------------------------------------------------------
                                          1992         1993              1994              1995             1996
                                          ----         ----              ----              ----             ----
Balance Sheet Data:
<S>                                       <C>          <C>             <C>                <C>              <C>
Cash and short- term
investments....................           $14          $18,705         $12,544            $3,536           $19,600
Working capital
(deficiency)...................           (34)          17,766          10,470            (1,647)           16,765
Net property and equipment.....           353              407           3,469             6,322            14,158
Total assets...................           559           20,096          16,922            12,995            35,924
Total debt.....................            -            15,000          16,756            18,871             6,260
Total liabilities..............           239           16,115          18,861            26,314             8,972
Total equity (deficit).........           320            3,981          (1,939)          (13,319)           26,952

</TABLE>
1)  Historical  loss per  common  share  and  weighted  average  common  shares
    outstanding  for the years ended  December  31,  1992, 1993 and 1994 are not
    presented as they are not considered indicative of the on-going entity.






                                      18
<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 owns a multichannel broadband cellular television system in
an area which includes New York City under a 1,000 MHz  commercial  license from
the FCC.  The Company  has been  operating  its  49-channel  broadband  cellular
television  system in portions of  Brooklyn on a limited  basis since 1992.  The
December 1995 grant by the FCC of the Company's 34  applications  for additional
commercial transmitter sites has now put the Company in a position to expand its
subscription television services to cover most of the 8.3 million population New
York PMSA, a region  consisting  of the five boroughs of New York City and three
suburban counties.  Currently, there are approximately 2.9 million people in the
area covered by the Company's ten  commercially  operational  transmitters.  The
Company intends to have 17  transmitters in operation by the end of 1997,  which
are expected to give it access to  subscribers  throughout  most of the New York
PMSA. The Company's recently granted  transmitter  permits are conditional upon,
and subject to, conformance with the final FCC rules for LMDS.

         The  cost  structure  of the  build-out  of  the  Company's  system  is
significantly  different from that of a hard-wire cable company, which typically
incurs  substantial  amounts of debt during  infrastructure  build-out,  without
offsetting revenues. 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 a receive antenna and set-top converter which are installed in the
subscriber's  home  or  office.   Other  direct  costs  relating  to  subscriber
installation  include  sales  commission  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  1996   operations   was  the   construction   of  the
CellularVision  system  throughout  the New York PMSA and  continued  subscriber
growth. The Company deployed eight additional transmitters in 1996, bringing the
current total to ten serving all of Brooklyn, and parts of Manhattan and Queens.
Five additional  transmitters are under  construction and the Company expects to
have 17  transmitters  in operation by the end of 1997. The Company expects that
these  transmitters,  with the deployment of repeaters to service shadowed areas
within each cell,  will cover over 85% of the 8.3 million  population in the New
York PMSA.

         Sales and  marketing  efforts  include  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. The subscribers as of March 24, 1997, totaled  approximately 12,500, more
than triple the number reported at this time in 1996.

          As significant  market areas (i.e.,  boroughs) are passed, the Company
will  incorporate  mass  media into its  marketing  plan.  Television  and radio
advertising will follow a newspaper strategy designed to increase CellularVision
brand  awareness.  The Company has introduced its "Business  Class Service" in a
series of  advertisements  running in The Wall  Street  Journal and The New York
Times.




                                       19
<PAGE>


          "Business  Class  Service"  is a  package  of  video,  voice  and data
services  developed  for  delivery  to  TVs  and  PCs in  New  York's  financial
institutions  and  corporations.  Business  Class  Service  includes 14 news and
business  oriented video channels,  data services  including high-speed Internet
access,  and future two-way services like telephony and video  teleconferencing.
In 1996,  the Company  announced a strategic  marketing  alliance with Bloomberg
Information  Television.  As  a  result,  the  Company  now  delivers  Bloomberg
Information Television to hundreds of computer screens in Manhattan.

         The Company was among the first to offer high-speed Internet access. In
1996 the Company  demonstrated  the first  high-speed  wireless modem to the New
York market.  Field trials of a 500 Kbps modem began in September  1996 and have
been   successfully   completed.   The  $200  product  operates  at  data  rates
approximately  20  times  faster  than  conventional   28.8  Kbps  modems,   and
approximately  4 times faster than ISDN. The Company  recently  began  marketing
trials that will continue until the expected commercial launch later in 1997.

         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), and increased payments in equipment rentals and 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.  The Company expects that
its legal costs  associated with FCC matters will vary dependent upon the timing
and resolution of matters such as the recently approved transmitter applications
and the pending final FCC rules for LMDS.  CT&T paid 50% of all such legal costs
through the date of the  consummation of the Initial Public  Offering,  at which
time the Company  assumed all ongoing  legal  expenses  relating to FCC matters.
Following the build-out of its network of  transmitters,  the Company intends to
implement a variety of mass marketing  programs  which the Company  expects will
result in an increase in total sales and marketing expenses.

         Management  fees decreased  $2,699,000  from  $2,699,000 for the twelve
months ended 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.




                                       20
<PAGE>


          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 is 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  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.

         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  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.

         Twelve  Months Ended  December 31, 1994 Compared to Twelve Months Ended
December 31, 1993.  Revenues decreased $4,000 from $55,000 for the twelve months
ended  December  31, 1993 to $51,000 for the twelve  months  ended  December 31,
1994. This decrease was attributable to subscriber  attrition during the testing
phase of the Company's operations.

         Operating expenses increased  $2,511,000 from $2,146,000 for the twelve
months  ended  December  31,  1993 to  $4,657,000  for the twelve  months  ended
December 31, 1994. This increase was primarily attributable to costs associated


                                       21
<PAGE>


with  commercial  roll-out,   including  selling,   general  and  administrative
expenses, management fees and depreciation and amortization.

         Selling,  general and administrative expenses increased $1,085,000 from
$1,799,000  for the twelve months ended  December 31, 1993 to $2,884,000 for the
twelve  months ended  December 31,  1994.  The increase in selling,  general and
administrative  expenses was primarily  attributable to headcount-related  costs
(as the  Company's  employee  base rose from two at  December  31, 1993 to 13 at
December 31, 1994),  sales and marketing  related  expenses and increased  legal
expenses.  Legal  expenses  increased  in  connection  with the LMDS rule making
proceeding, the Company's transmitter applications,  litigation regarding access
to programming and an action to protect certain trade secrets.

         Management  fees  increased  $1,296,000  from  $250,000  for the twelve
months  ended  December  31,  1993 to  $1,546,000  for the twelve  months  ended
December  31,  1994.  The  increase  in  management  fees  was  attributable  to
contractual  increases  due to Bell Atlantic  under the terms of the  Management
Agreement.

         Depreciation and amortization  increased  $115,000 from $73,000 for the
twelve  months ended  December 31, 1993 to $188,000 for the twelve  months ended
December  31, 1994.  The increase in  depreciation  and  amortization  costs was
primarily  attributable to increased purchases of customer premises equipment in
anticipation  of a commercial  roll-out  and  acquisition  of equipment  for one
transmitter site.

         Interest  expense was  $1,919,000  for the twelve months ended December
31, 1994 with no interest  expense incurred for the twelve months ended December
31, 1993. The increase in interest expense related to the issuance of the Morgan
Notes on December 29, 1993. Interest income increased $427,000 from $100,000 for
the twelve  months ended  December  31, 1993 to $527,000  for the twelve  months
ended December 31, 1994. This increase  related to the interest  earnings on the
unexpended portion of the proceeds of the Morgan Notes.

         The net  loss  for the  twelve  months  ended  December  31,  1994  was
$5,999,000  compared to a net loss of  $1,991,000  for the twelve  months  ended
December 31, 1993.  The increase in the net loss was due  primarily to increased
operating expenses and interest expense.

Liquidity and Capital Resources

         For the year ended December 31, 1996, the Company  expended  $9,106,000
on operating  activities.  During the same  period,  capital  expenditures  were
$10,191,000,  consisting primarily of transmitter deployment and the purchase of
customer premises equipment.

         In February 1996, the Company  consummated  the Initial Public Offering
of 3,333,000  shares of Common Stock  (including an aggregate of 333,000  shares
sold by certain  shareholders  of the Company) at the initial  offering price of
$15.00 per share.  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  of other  expenses,  were  approximately
$39,850,000.

         Prior to the consummation of the Initial Public  Offering,  the Company
had financed its cash flow  requirements  primarily with proceeds  obtained from
private  placements of debt and equity.  In 1993, the Company  consummated a $10
million  private  placement  of equity  with Bell  Atlantic  and the $15 million
private  placement  of the Morgan  Notes.  The Company  utilized the proceeds of
these private placements to finance operations,  build out its system,  purchase
customer premises  equipment and fund  distributions  totaling $4 million to the
Founders in 1993 and 1994.  The Morgan Notes accrued  interest at Morgan's prime
lending  rate  plus 4%,  with a minimum  rate of 8% and a  maximum  rate of 12%.
Effective  December 15, 1995, $5 million  principal  amount of the Morgan Notes,
together  with accrued  interest  thereon of  approximately  $1.3  million,  was
exchanged for the Morgan Exchange Notes. Prior to such exchange accrued interest
on the Morgan Notes was added to the outstanding  principal balance.  The Morgan
Exchange  Notes accrue  interest at Morgan's  prime lending rate plus 6%, with a
minimum rate of 10% and a maximum rate of 15%.  Interest on the Morgan  Exchange
Notes is payable  quarterly,  beginning March 28, 1996.  Principal is payable as
follows:  4/15 of the  outstanding  balance is payable on June 30, 1997, 5/11 of
the then  outstanding  balance  is payable  on June 30,  1998 and the  remaining
balance  is  payable  on April  30,  1999.  The  Morgan  Exchange  Notes are not
convertible. Upon the consummation of the Incorporation Transactions in February
1996,  the  remaining  $10  million  principal  amount of the  Morgan  Notes was
converted into 604,858 shares of Common Stock.  Interest  accrued,  in an amount
proportionate to the amount of principal


                                       22
<PAGE>


converted,  from the date of issue of the Morgan  Notes  through the  conversion
date was irrevocably  waived and reclassified to additional paid-in capital upon
such conversion.

         On September  30, 1995,  the Company  exercised its option to terminate
the Management  Agreement,  effective  December 31, 1995.  Effective December 1,
1995, the Company  entered into an agreement with Bell Atlantic which  converted
outstanding fees and related  interest thereon due to Bell Atlantic  pursuant to
the terms of the Management Agreement, totaling approximately $3.5 million, to a
senior  convertible  note (the "Bell Atlantic  Note").  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 for fees accrued during the fourth quarter
of 1995 under the Management Agreement.

         On December 15, 1995,  the Company  entered into two sale and leaseback
transactions  totaling  approximately  $2.6 million.  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 expects that the remaining proceeds from the Initial Public
Offering, and internally generated  funds will be sufficient  for the continued
build-out of its multichannel  broadband cellular television system. The Company
believes that its sources of capital,  including  internally generated funds and
the  remaining  proceeds  from the Initial  Public  Offering will be adequate to
satisfy  anticipated  capital needs and  operating  expenses for the next twelve
months.  Additional funding would be required for the Company to expand into the
New York BTA (if acquired) or other BTAs, or to provide additional services such
as high-speed Internet access, telephony and other two-way services.

         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.

         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's  current  business
strategy  is based on  rapid  subscriber  growth.  Should  capital  conservation
measures be  required,  the Company  may slow the rate of  subscriber  growth or
delay additional transmitter deployment,  enabling the Company to operate for an
extended period of time.

         Transmitter   Deployment.   The   Company   anticipates   that  the  17
transmitters  it  plans to have in  operation  by the end of 1997  will  give it
access to  subscribers  throughout  most of the New York PMSA.  The  Company has
leased space on 15 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 over 50 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 may 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.

         Customer Premises Equipment. Customer premises equipment consists of at
least one set-top  converter and at least one receive  antenna.  At December 31,
1996, the Company had outstanding long-term orders with CT&T for the purchase of
set-top  converters,  receive  antennas,  high-speed  modems,  transmitters  and
repeaters,  aggregating  approximately  $11.6  million  (net of  deposits) to be
delivered to the Company during 1997 and 1998.




                                       23
<PAGE>


         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  television system
and sell communications services on an exclusive basis for the New York PMSA and
the New York BTA (to the  extent  the  Company  holds or  obtains  a  commercial
license  from the FCC).  CT&T has also agreed to license its  technology  to the
Company in other BTAs in which the Company  obtains LMDS  licenses from the FCC.
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.

         Other  Transactions with CT&T. As of December 31, 1996, the Company had
an  amount  due  from  CT&T of  approximately  $760,000,  which  represents  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 BTA.  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 rule  making  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, 1996,  the Company  recorded a deferred tax asset of  approximately
$13.9  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 $13.9 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.
The Company has not yet determined the impact of the  implementation of SFAS No.
128 on its financial statements and related disclosures.




                                       24
<PAGE>


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 29 to 49 and S-1 of this Report.

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

                                     None.


                                    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, 1997.


                                     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....................................29

         Consolidated Balance Sheets as of December 31, 1995 and December
         31, 1996.............................................................30

         Consolidated Statements of Operations for the years ended December
         31, 1994, 1995 and 1996 and for the period January 1, 1992 (date of
         inception) to December 31, 1996......................................31

         Consolidated Statements of Changes in Partners' Capital and
         Stockholders' Equity (Deficit) for the years ended December
         31, 1994, 1995 and 1996 and for the period January 1, 1992
         (date of inception) to December 31, 1996 ............................32

         Consolidated Statements of Cash Flows for the years ended
         December 31, 1994, 1995 and 1996 and for the period January 1,
         1992 (date of inception) to December 31, 1996.....................33-34

         Notes to Consolidated Financial Statements........................35-49

(2)      Financial Statement Schedule

         Schedule II -- Valuation and Qualifying Accounts....................S-1

(b)      Reports on Form 8-K

         None.













                                       25
<PAGE>


(c)      Exhibits

3.1*     Certificate of Incorporation.

3.2*     By-laws.

4.1*     Form of Common Stock Certificate.

4.2*     Stockholders  Agreement,  dated as of January 12, 1996, by and among
         CellularVision USA, Inc., Shant S. Hovnanian, Bernard B. Bossard and
         Vahak S. Hovnanian.

4.3*     Registration  Rights Agreement,  dated as of January 12, 1996, by and
         among  CellularVision  USA, Inc., Bell Atlantic Ventures XXIII, Inc.,
         Philips PGNY Corp.,  Inc. and Morgan  Guaranty  Trust  Company of New
         York, as Trustee of the Commingled  Pension Trust Fund  (Multi-Market
         Special Investment) of Morgan Guaranty Trust Company of New York, and
         as Investment Manager and Agent for an Institutional Investor.

10.1*    Amended and Restated License Agreement,  together with Addendum to
         License  Agreement,  each dated as of  July  7,  1993,  by  and
         between  CellularVision  Technology  &  Telecommunications,   L.P.
         and CellularVision of New York, L.P. and certain amendments and
         supplements thereto.

10.2*    Reserved  Channel  Rights  Agreement,  dated as of July 7, 1993, by
         and between  Vahak S.  Hovnanian, Shant S. Hovnanian,  Bernard B.
         Bossard,  CellularVision of New York, L.P. and Bell Atlantic Ventures
         XXIII, Inc.

10.3*    Restructuring  Agreement,  dated as of January 12, 1996, by and among
         the Company,  CellularVision of New York, L.P., Hye Crest Management,
         Inc., Suite 12 Group,  Bell Atlantic  Ventures XXIII,  Inc.,  Philips
         PGNY Corp.,  Morgan Guaranty Trust Company of New York, as Trustee of
         the Commingled Pension Trust Fund (Multi-Market  Special  Investment)
         of Morgan  Guaranty  Trust  Company  of New York,  and as  Investment
         Manager and Agent for an Institutional Investor,  Shant S. Hovnanian,
         Bernard B. Bossard and Vahak S. Hovnanian.

10.4*    CellularVision USA, Inc. 1995 Stock Incentive Plan.

10.5*    Employment Agreement,  dated as of October 18, 1995, between
         CellularVision USA, Inc. and Bernard B.  Bossard.

10.6*    Employment  Agreement,  dated as of October 18, 1995, between
         CellularVision  USA, Inc. and Shant S.  Hovnanian.

10.7*    Employment Agreement, dated as of January 1, 1996, between
         CellularVision USA, Inc. and John Walber.

10.8**   Employment  Agreement,  dated as of July 31, 1996,  between
         CellularVision  USA, Inc. and Charles N.  Garber.

10.9*    Intercompany  Agreement,   dated  January  12,  1996,  by  and  among
         CellularVision    USA,    Inc.,     CellularVision    Technology    &
         Telecommunications, L.P., CellularVision of New York, L.P., Shant S.
         Hovnanian, Bernard B. Bossard and Vahak S. Hovnanian.

10.10*   Second  Addendum to License  Agreement,  dated as of January 12, 1996,
         by and between  CellularVision Technology & Telecommunications, L.P.
         and CellularVision of New York, L.P.

10.11*   Corporate Name License and Grant of Future Licenses Agreement,  dated
         as of January 12, 1996,  by and between  CellularVision  Technology &
         Telecommunications, L.P. and CellularVision USA, Inc.



                                       26
<PAGE>



10.12*   Amended   and   Restated   Agreement   of  Limited   Partnership   of
         CellularVision  of New York,  L.P.,  dated as of July 7, 1993, by and
         between Hye Crest Management,  Inc., Bell Atlantic  Ventures,  XXIII,
         Inc.  and the  limited  partners  set  forth  on the  signature  page
         thereto.

10.13*   Master Amendment  Agreement,  dated as of October 8, 1993, by and
         among Vahak S. Hovnanian,  Shant S.  Hovnanian,  Bernard B. Bossard,
         Hye Crest  Management,  Inc., Suite 12 Group,  CellularVision of New
         York, L.P., CellularVision Technology & Telecommunications,  L.P.,
         Bell Atlantic Ventures XXIII, Inc.  and Philips PGNY Corp.

10.14*   Second Master Amendment Agreement,  dated as of December 29, 1993, by
         and among Hye Crest Management,  Inc., Suite 12 Group, CellularVision
         of New York, L.P.,  CellularVision  Technology &  Telecommunications,
         L.P., Bell Atlantic Ventures XXIII, Inc., Philips PGNY Corp.,  Morgan
         Guaranty  Trust  Company of New York,  as  trustee of the  Commingled
         Pension  Trust  Fund  (Multi-Market  Special  Investment)  of  Morgan
         Guaranty  Trust Company of New York,  and as  Investment  Manager and
         Agent for an Institutional Investor.

10.15*+  Note  Purchase  Agreement,  dated as of December  29,  1993,  between
         CellularVision of New York, L.P. and Morgan Guaranty Trust Company of
         New  York,   as  trustee  of  the   Commingled   Pension  Trust  Fund
         (Multi-Market Special Investment) of Morgan Guaranty Trust Company of
         New  York  with  respect  to the  issuance  and  sale of  $12,000,000
         principal amount of Convertible  Exchangeable  Subordinated  Notes of
         CellularVision of New York, L.P.

10.16*   Agreement of Lease, dated May 9, 1994, by and between Cellular Vision
         of New York and New York City Economic  Development  Corporation  and
         Sublease,  dated March 8, 1995,  between  CellularVision of New York,
         L.P. and Harvard Fax, Inc.

10.17*   Communications  Antenna Site Agreement,  dated December 6, 1994,
         between  CellularVision of New York L.P. and Tower Owners, Inc., as
         amended.

10.18*   Master  Lease  Agreement  No. 6035,  dated  December 12,  1995,
         between Linc Capital  Management,  a division of  Scientific  Leasing
         Inc.,  and  CellularVision  of New York,  L.P.,  together  with the
         Schedules and Addendum No. 1 thereto;  Warrant  Certificate Nos. 1, 2
         and 3, dated December 14, 1995, issued to Linc Capital Partners, Inc.
         by the Company.

10.19*   Master  Equipment  Lease,  dated  December  14, 1995  between  Boston
         Financial & Equity  Corporation and CellularVision of New York, L.P.,
         together  with  the  Schedules  and  the  Addendum  thereto;  Warrant
         Certificate  Nos. 4 and 5, dated December 14, 1995,  issued to Boston
         Financial & Equity Corporation by the Company.

10.20*   Senior  Convertible  Term  Note,  dated  December  1,  1995,  in  the
         principal  amount  of  $3,521,257  issued to Bell  Atlantic  Ventures
         XXIII, Inc. by  CellularVision  of New York, L.P. and  CellularVision
         USA,  Inc. and the  Agreement,  dated as of December 1, 1995,  by and
         among CellularVision USA, Inc., CellularVision of New York, L.P., and
         Bell Atlantic Ventures XXIII, Inc.

10.21*   Warrant,  dated  June 1, 1994,  issued by  CellularVision  of New
         York,  L.P.  to Alex.  Brown & Sons Incorporated.

10.22*   Warrant, dated June 1, 1994, issued by CellularVision of New York,
         L.P. to Mark B. Fisher.

10.23*   Warrant, dated December 29, 1993, issued by CellularVision of New
         York, L.P. to Peter Rinfret.

10.24*   Warrant,  dated October 8, 1993,  issued by Vahak S. Hovnanian and
         Shant S. Hovnanian to Alex.  Brown Financial Corporation.




                                       27
<PAGE>



10.25*   Warrant,  dated  October 8, 1993,  issued by Vahak S.  Hovnanian  and
         Shant S.  Hovnanian  to Mark B.  Fisher.

10.26*   Non-qualified  Stock Option Agreement under the  CellularVision  USA,
         Inc. 1995 Stock Incentive Plan,  dated as of January 15, 1996, by and
         between the Company and John Walber.

10.28*   Agreement,  dated as of January 12, 1996, by and among  CellularVision
         USA, Inc.,  CellularVision of New York,  L.P., Hye Crest  Management,
         Inc.,  Shant S. Hovnanian,  Vahak S.  Hovnanian,  Bernard B.  Bossard
         and Bell Atlantic Ventures XXIII, Inc.

10.29    Exchange Notes, dated as of December 15, 1995, of CellularVision USA,
         Inc.  issued to Morgan Guaranty Trust Company of New York, as trustee
         of  the   Commingled   Pension  Trust  Fund   (Multi-Market   Special
         Investment)  of Morgan  Guaranty  Trust  Company of New York,  and as
         Investment  Manager and Agent for an Institutional  Investor,  in the
         principal  amounts of  approximately  $5.0 million and $1.3  million,
         respectively  (form of  Exchange  Note  included  as  Exhibit  A-2 to
         Exhibit 10.15 above).

21*      Subsidiaries of CellularVision USA, Inc.

23.1     Consent of Coopers & Lybrand L.L.P.

27.1     Financial Data Schedule.

27.2     Restated Financial Data Schedule.

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

*    Incorporated  by  reference  to the  Company's  Registration  Statement
     in Form S-1  (File No.  33-98340)  which was declared effective by the
     Commission on February 7, 1996.

**   Incorporated  by  reference  to the  Company's  Form 10-Q for the
     quarterly  period ended June 30, 1996 filed by the Registrant on August
     12, 1996.

+    An   identical   note   purchase   agreement   has  been  entered  into
     by CellularVision  of New York,  L.P. and Morgan Guaranty Trust Company of
     New York, as Investment  Manager and Agent for an  Institutional  Investor
     with respect  to the  issuance  and  sale  of  $3,000,000  principal
     amount  of Convertible Exchangeable  Subordinated Notes of CellularVision
     of New York, L.P.




                                       28
<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," a
Development  Stage  Company)  listed in Item  14(a) of this Form  10-K/A.  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, 1995 and 1996, and the consolidated
results of its  operations  and its cash flows for the years ended  December 31,
1994,  1995 and 1996 and for the period  January 1, 1992 (date of  inception) to
December 31, 1996, 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
February 14, 1997,
except for Note 4, as to which the date is
March 17, 1997





                                       29
<PAGE>




                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   ------------

                        ASSETS                                1995               1996
                                                              ----               ----

Current assets:
     <S>                                                      <C>               <C>
     Cash and cash equivalents.........................     $ 3,536,354        $19,600,070
     Accounts receivable, net of allowance
         for doubtful accounts of $133,730
         and  $124,370.................................         410,141            530,333
     Prepaid expenses and other........................         228,803            255,800
     Due from affiliates...............................               -            759,527
     Deferred offering costs...........................       1,619,972                 -
                                                            -----------         ----------
                  Total current assets.................       5,795,270         21,145,730
     Property and equipment, net of
         accumulated depreciation of
         $981,466 and $2,753,841.......................       6,321,768         14,157,666
     Intangible assets, net of accumulated
         amortization of $39,564 and
         $77,383.......................................          97,177            187,160
     Debt placement fees...............................         622,678            181,069
     Notes receivable from related parties.............               -             91,275
     Other noncurrent assets...........................         158,594            160,982
                                                           ------------        -----------
                  Total assets.........................    $ 12,995,487        $35,923,882
                                                           ============        ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
     Accounts payable..................................     $   355,490        $   893,861
     Accrued liabilities...............................       2,246,349          1,562,982
     Due to affiliates.................................       1,294,812                  -
     Note payable to affiliate.........................       3,521,257                  -
     Current portion of Exchange notes.................               -          1,669,244

     Other current liabilities.........................          24,799            255,008
                                                            -----------      -------------
                  Total current liabilities............       7,442,707          4,381,095
     Convertible exchangeable
             subordinated notes payable................      12,576,324
     Exchange notes....................................       6,295,017          4,590,421
                                                            -----------       ------------
                  Total liabilities....................      26,314,048          8,971,516
Commitments and contingencies (Note 7)
Stockholders' equity (deficit):
        Common Stock, ($.01 par value;  40,000,000
                 shares authorized; 12,395,142 and
                 16,000,000 shares issued and
                 outstanding)...........................        123,951            160,000
     Preferred Stock, ($.01 par value;
     20,000,000 shares authorized; none issued
     and outstanding)...................................              -                  -

     Additional paid-in capital.........................      6,401,454         58,267,533
     Deficit accumulated during the development stage...    (19,843,966)       (31,475,167)
                                                            ------------      -------------
     Stockholders' equity (deficit).....................    (13,318,561)        26,952,366
                                                            ------------      ------------
                  Total liabilities and
                  stockholders' equity  (deficit).......    $12,995,487       $ 35,923,882
                                                            ===========       ============

</TABLE>

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



                                       30
<PAGE>





                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                                                        January 1, 1992
                                                      Year Ended December 31,         (date of inception)
                                          ------------------------------------------    to December 31,
                                             1994           1995           1996              1996
                                          -----------     -----------  -------------  -------------------
<S>                                       <C>             <C>          <C>             <C>
Revenue..............................     $    50,743     $ 1,195,593  $   2,189,766     $ 3,492,983
                                          -----------     -----------  -------------   -------------

Expenses:
     Service costs...................          38,710         602,995      1,174,619       1,843,313
     Selling, general and
       administrative................       2,884,005       5,637,066     10,574,362      21,393,173
     Management fees.................       1,546,377       2,698,564              -       4,494,941
     Depreciation and amortization...         187,925       1,376,140      2,258,415       3,946,832
                                          -----------     -----------  -------------   -------------
     Total operating expenses........       4,657,017      10,314,765     14,007,396      31,678,259
                                          -----------     -----------  -------------   -------------
     Operating loss..................     ( 4,606,274)     (9,119,172)   (11,817,630)    (28,185,276)
                                         ------------    ------------ --------------  --------------

Interest income......................         526,546         403,914      1,291,516       2,322,054
Interest expense.....................      (1,918,942)     (2,587,916)    (1,105,087)     (5,611,945)
                                          -----------     -----------  --------------  --------------
     Loss before provision for
     income taxes....................      (5,998,670)    (11,303,174)   (11,631,201)    (31,475,167)
                                          ------------    ------------   ------------    ------------


Provision for income taxes...........           -               -              -               -

       Net loss................          $ (5,998,670)   $(11,303,174)  $(11,631,201)  $ (31,475,167)
                                         =============   =============  =============  ==============


Loss per common share..........                               $(0.91)         $(0.75)
                                                              =======         =======

Weighted average common shares
outstanding....................                            12,395,142      15,576,478
                                                           ==========      ==========
</TABLE>





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





                                       31
<PAGE>




                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

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

              For the years ended December 31, 1994, 1995 and 1996
                       and for the period January 1, 1992
                    (date of inception) to December 31, 1996
<TABLE>
<CAPTION>

                                                                                                              Total
                                                                                                            Partners'
                                                                                  Net         Deficit      Capital and
                                                                               Unrealized   Accumulated      Stock-
                                                               Additional       Gain on     During the      holders'
                                  Partners'        Common       Paid-in        Marketable   Development      Equity
                                   Capital         Stock        Capital        Securities      Stage        (Deficit)
                                  ---------        ------      ----------      ----------   -----------    -----------

<S>                             <C>           <C>            <C>            <C>           <C>             <C>
Balance, January 1, 1992....     $   26,152    $      100                                                  $   26,252
Contributions...............      1,019,688                                                                 1,019,688
Distributions...............       (175,156)                                                                 (175,156)
         Net loss...........                                                                 (550,997)       (550,997)
                                 ----------     -----------                                 ----------    ------------

Balance, December 31, 1992..        870,684           100                                    (550,997)        319,787
Contributions................     9,707,728                                                                 9,707,728
Advance to HCM stockholders..    (3,000,000)                                                               (3,000,000)
Distribution.................    (1,054,947)                                                               (1,054,947)
          Net loss...........                                                               (1,991,125)    (1,991,125)
                                 ----------     -----------                                 ----------    -----------


Balance,  December 31, 1993.      6,523,465           100                                   (2,542,122)     3,981,443
Contributions................        94,462                                                                    94,462
Distributions................    (3,038,889)                                                               (3,038,889)
Repayment from HCM
stockholders.................     3,000,000                                                                 3,000,000
Net unrealized gain on                                                           22,574                        22,574
marketable securities...
          Net loss...........                                                               (5,998,670)    (5,998,670)
                                  ---------     -----------                    ---------   -----------    -----------

Balance, December 31, 1994...     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
                                  =========     ===========    ==========     ========    =============   ===========
</TABLE>

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



                                       32
<PAGE>





                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                                    January 1, 1992
                                                                                                       (date of
                                                            Year Ended December 31,                  inception) to
                                               ---------------------------------------------------   December 31,
                                                    1994             1995              1996               1996
                                                   -----           --------          --------      ----------------
Cash flows from operating activities:
<S>                                            <C>              <C>              <C>                 <C>
   Net loss...............................    $ (5,998,670)   $ (11,303,174)   $ (11,631,201)       $  (31,475,167)
   Adjustments to reconcile net loss to net
      cash used in operating activities:
       Depreciation and amortization......         187,925        1,376,140        2,258,415             3,946,832
       Amortization of placement fees.....         163,128          189,507           98,783               451,418
       Provision for doubtful accounts....               -          202,108          351,839               553,947
       Stock option compensation expense..               -                -          150,000               150,000

       Changes in assets and liabilities:
         Accounts receivable..............          (5,521)        (604,413)        (472,031)           (1,084,283)
         Prepaid expenses and other.......         149,392         (204,232)         (26,997)              (67,346)
         Notes receivable from related
         parties..........................               -                -          (91,275)              (91,275)
         Accounts payable and accrued
         liabilities......................        (309,242)         622,277        2,077,817             3,025,309
         Other current liabilities........          33,181           (8,382)         230,209               252,758
         Due to affiliates................       1,191,753        3,203,046       (2,054,339)            2,595,501
         Accrued interest.................       1,755,814        2,115,527            4,955             3,876,296
         Other noncurrent assets..........         (88,234)         (57,340)          (2,388)             (160,982)
           Net cash used in                     -----------      -----------      -----------          ------------
              operating activities........      (2,920,474)      (4,468,936)      (9,106,213)          (18,026,992)
                                                -----------      -----------      -----------          ------------
Cash flows from investing activities:
     Intangibles..........................        (135,838)            (903)        (127,802)             (264,543)
     Property and equipment additions.....      (3,163,310)      (6,809,719)     (10,191,494)          (20,629,861)
     Proceeds from sale of property
       and equipment......................               -        2,608,261          135,000             2,743,261
     Purchase of available-for-sale
       securities.........................     (20,008,383)      (6,907,826)               -           (26,916,209)
     Maturities of available-for-sale
       securities.........................      14,908,612       12,007,597                -            26,916,209
           Net cash used in investing           -----------      ----------      ------------          ------------
              activities..................      (8,398,919)         897,410      (10,184,296)          (18,151,143)
   Cash flows from financing activities:        -----------      ----------      ------------          ------------
     Advance to HCM stockholders..........               -                -                -            (3,000,000)
     Contributions........................          94,462                -                -            10,821,878
     Distribution.........................         (38,889)         (53,733)         (13,889)           (1,336,614)
      Convertible exchangeable subordinated
       notes payable......................               -                -                -            15,000,000
Proceeds from sale of stock...............               -                -       41,850,000            41,850,000
Repayment of note payable to affiliate....                                        (3,521,257)           (3,521,257)
     Deferred offering costs..............               -          (99,862)      (2,960,629)           (3,060,491)
     Placement costs......................         (20,000)        (159,696)               _              (975,311)
           Net cash provided by financing      ------------       ----------      ----------            -----------
              activities..................          35,573         (313,291)      35,354,225            55,778,205
           Net increase (decrease) in cash     ------------       ----------      ----------            -----------
             and cash equivalents.........     (11,283,820)      (3,884,817)      16,063,716            19,600,070
Cash and cash equivalents, beginning of
period....................................      18,704,991        7,421,171        3,536,354                     -
                                                ----------       ----------      -----------           -----------
Cash and cash equivalents, end of period..      $7,421,171       $3,536,354      $19,600,070           $19,600,070
                                                ==========       ==========      ===========           ===========

</TABLE>


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





                                       33
<PAGE>


                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>

                                                                                                           January 1, 1992
                                                              Year Ended December 31,                    (date of inception)
                                                              -----------------------                      to December 31,
                                                          1995                       1996                       1996
                                                          ----                       ----                       ----
Supplemental Cash Flow Disclosures:
<S>                                                       <C>                     <C>                       <C>

   Cash paid for interest during period............        -                      $ 1,100,133                $ 1,100,133
                                                                                  ===========                ===========

   Cash paid for income taxes during
   period..........................................        -                           -                          -

Noncash transactions:

   Common Stock issued for
   convertible debt................................        -                      $12,731,450                $12,731,450
                                                                                  ===========                ===========

</TABLE>





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



                                       34
<PAGE>


                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                   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  multichannel  broadband  cellular
television  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.  In  addition,  the FCC may  grant to the  Company  a
Pioneer's  Preference  pursuant to which the Company  would be allowed to expand
its service area to include the entire New York Basic Trading Area  ("BTA"),  of
which the New York PMSA is a part, by paying a fee  representing  the difference
between  the value of a  license  to serve the New York BTA and the value of the
Company's current  commercial  license to serve the New York PMSA,  subject to a
15%  discount  from the  average  auction  price paid at the LMDS  auctions  for
licenses in comparable service areas.

Predecessor Companies and Basis of Presentation

         The consolidated  financial statements for the years ended December 31,
1994,  1995 and 1996  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 head-end 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
head-end 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 head-end 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.








                                       35
<PAGE>


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:
   <TABLE>
   <CAPTION>

                                                                     December 31,
                                                      -------------------------------------------
                                                              1995                  1996
                                                              ----                  ----
       <S>                                                 <C>                 <C>
       Cash in bank..............................         $    165,816         $    312,218
       Overnight reverse repurchase agreements...            3,370,538           19,287,852
                                                           -----------         ------------
                Total............................          $ 3,536,354         $ 19,600,070
                                                           ===========         ============
</TABLE>

         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, 1995 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.

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  advanced  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 head-end  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.
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  $645,000  and  $3,358,000  at December 31, 1995 and
1996, respectively, are recorded as property and equipment.

         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.





                                       36
<PAGE>


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, 1996, the Company recorded a deferred tax asset of $13.9 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 $13.9 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.

Net Loss Per Share

         Net Loss per common  share for the years  ended  December  31, 1995 and
1996,  is  computed by dividing  net loss by weighted  average  number of common
shares outstanding during the year,  including common stock equivalents  (unless
anti-dilutive).

         Presentation  of earnings per share is not presented for the year ended
December 31, 1994, as it is not considered indicative of the on-going entity.

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, 1995 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.







                                       37
<PAGE>



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.

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. The Company has not yet determined
the impact of the implementation of SFAS No. 128 on its financial statements and
related disclosures.

3.  Property and Equipment

         Property and equipment consisted of the following:

<TABLE>
<CAPTION>

                                                                      December 31,
                                                                 ---------------------------
                                                                    1995            1996
                                                                 ----------     ------------
         <C>                                                     <S>            <S>
         Transmission and head-end equipment.......              $  740,227     $  4,240,899
         Customer premises equipment...............               4,186,685        6,891,570
         Leasehold improvements....................                 519,483          643,586
         Office equipment..........................                 461,619          768,487
         Equipment deposits........................                 645,000        3,357,864
         Capitalized installation costs............                 750,220        1,009,101
                                                                  ---------        ---------
                                                                  7,303,234       16,911,507
         Less Accumulated depreciation.............                 981,466        2,753,841
                                                                 ----------        ---------
                  Total............................              $6,321,768      $14,157,666
                                                                 ==========      ===========
</TABLE>

Depreciation  expense was $176,000,  $1,349,000  and  $2,221,000 for the periods
ended December 31, 1994, 1995 and 1996 respectively.











                                       38
<PAGE>


4.  FCC Matters

         CVNY holds a fixed  station  commercial  license  granted by the FCC in
January 1991 which  authorizes  the Company to use the  27.5-28.5  GHz frequency
band to operate a multicell LMDS video delivery  system  throughout the New York
PMSA.  The  Company's  license is the only  commercial  license for this service
granted by the FCC. Moreover, 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
commercial  license was granted in 1991, with an initial term of five years, and
expired in February  1996.  An  application  for  renewal of this fixed  station
license was filed on December 29, 1995.  The FCC stated in the Second Report and
Order that it will commence  processing  the Company's  renewal  application  by
placing the  application on Public Notice not later than 30 days after the March
13, 1997  release date of the Order.  The new LMDS  service  rules will apply to
this renewal  application.  While the Company has an  expectation  of renewal of
this  license,  as a result of its  deployment  efforts since 1992 and the FCC's
adoption of a renewal expectancy provision in the Second Report and Order, there
is no guarantee  that the FCC will renew the license.  Under the FCC's rules,  a
license  automatically  stays in effect  pending  FCC  action on a timely  filed
renewal application.

         In the  First  Report  and Order the FCC  grandfathered  the  Company's
continued  operations in the 27.5-28.5 GHz spectrum (which the Company currently
is licensed to use) for a period of two years from the release date of the First
Report and Order, July 22, 1996, or until the first GSO/FSS  satellite  intended
to operate in the  28.35-28.50  GHz band is launched,  whichever  occurs  later.
Additionally, under the grandfather provision adopted by the FCC, the Company is
authorized  to  use  the  newly   designated  150  MHz  at  29.1-29.25  GHz  for
hub-to-subscriber  operations during the grandfathered period, thus allowing the
Company  currently to use 1,150 MHz in the New York PMSA.  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  maintaining  its  1,000  MHz  spectrum
allocation,  at 27.5-28.35 GHz and 29.1-29.25  GHz, along with an additional 150
MHz in the 31 GHz band.

         CVNY also holds an  experimental  license  authorizing  limited  market
tests  which was  granted by the FCC in 1988 and has been  renewed  for full two
year  terms  on a  bi-yearly  basis.  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.  On June
30, 1995, the Company filed a timely application for renewal of its experimental
license which had an expiration  date of September 1, 1995.  The FCC granted the
renewal  application,  effective  September 1, 1995, for a new two-year  license
term. In addition,  on November 26, 1996, the Company filed for an  experimental
license  in the  31.0-31.3  GHz band in the New  York  BTA in  order to  conduct
limited  market  studies of various  packages of video,  telephony  and /or data
services delivered through 31 GHz LMDS technology. This application currently is
pending before the FCC.

         On March 13,  1997,  the FCC adopted the LMDS Second  Report and Order,
which includes  service,  auction and  eligibility  rules for LMDS.  This Second
Report and Order largely  concludes the LMDS  rulemaking  proceeding  except for
unresolved issues regarding disaggregation and partitioning, which is subject to
a Fifth Notice of Proposed  Rulemaking ("Fifth NPRM"). FCC officials have stated
their intent to commence  the  nationwide  licensing  of LMDS  through  spectrum
auctions by the summer of 1997.

         The FCC in the Second  Report and Order  provides for two LMDS licenses
per Basic  Trading  Area  ("BTA"):  one license for 1,150 MHz, the other for 150
MHz, amounting to 1,300 MHz allocated to LMDS. In addition to the non-contiguous
1 GHz of 28 GHz spectrum  allocated  to LMDS in the First Report and Order,  the
FCC has allocated an additional  300 MHz in the 31 GHz band for LMDS, 150 MHz of
which will be allocated to one LMDS license,  the other 150 MHz will be combined
with the 1,000 MHz in the 28 GHz band.





                                       39
<PAGE>


         The 1,150 MHz license  will consist 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  Mobile  Satellite  Service  (MSS)  systems;  and  150  MHz  in  the
31.075-31.225 GHz band on a protected basis. The 150 MHz license will consist 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 on a protected basis. LMDS licensees operating in this
bifurcated  31 GHz band will be required to afford  interference  protection  to
incumbent  licensees.  Also,  this second 150 MHz block can be combined with the
1,150 MHz license to create a 1.3 GHz LMDS system.

         In order to encourage  competition in the video and telephony  markets,
the FCC decided to substantially  restrict local exchange  carriers ("LECs") and
cable  companies  from  acquiring  the 1,150 MHz LMDS  license.  Under the rules
adopted  in the  Second  Report  and  Order,  LECs and cable  companies  will be
ineligible to acquire a 20% or greater  ownership  interest in an 1,150 MHz LMDS
license in their service  region for a period of three years.  This  eligibility
restriction may be extended or eliminated by the FCC upon a future review of its
regulations.  Also,  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 bid on the 150 MHz  license  in their
service area as there is no such eligibility restriction on this LMDS license.

         The  FCC  has  adopted  several  opportunity   enhancing  measures  for
qualifying small businesses. The FCC will define a  small business as an entity
whose average annual gross revenues,  together with  controlling  principals and
affiliates for the three  preceding  years does not exceed $40 million.  A small
business will be entitled to a 25% bidding  credit.  Small  businesses  are also
entitled to installment  payments at an interest rate based on the rate for U.S.
Treasury  obligations of maturity equal to the license term (10yrs) fixed at the
time of licensing, plus 2.5%. Payments shall include interest only for the first
two years and payments of interest and  principal  amortized  over the remaining
eight years.  The rate of interest on ten-year US Treasury  obligations  will be
determined  by taking the coupon rate of interest on ten-year US Treasury  notes
most  recently  auctioned  by  the  Treasury   Department  before  licenses  are
conditionally  granted.  Moreover,  entities with gross  revenues  exceeding $40
million but not exceeding  $75 million will be entitled to a 15% bidding  credit
and the same ten-year  repayment plan as small  businesses,  except interest and
principal will be amortized over the whole ten-year period.

         The  FCC  also  initiated  a  Fifth  NPRM  to  address  the  issues  of
disaggregation  and  partitioning  which will enable a licensee  to  partition 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.

         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. The Company believes,  based on the 1994
General Agreement on Tariffs and Trade ("GATT")  legislation and the FCC's prior
determinations not to subject parties to peer review whose Pioneer's  Preference
applications  were accepted for filing before September 1, 1994, that this is an
unnecessary  regulatory  requirement.  The  Company  is  currently  seeking  FCC
clarification on this issue. Accordingly, there can be no assurance that the FCC
will grant the Company's Pioneer's Preference.




                                       40
<PAGE>


         Based on the Second Report and Order,  wherein the FCC confirms that it
will commence  processing the Company's  commercial license renewal  application
for the New York PMSA within 30 days of the March 13, 1997 release of the Order,
the outcome of the  Pioneer's  Preference  award has no impact on the  Company's
License to operate in the New York PMSA. As previously  stated by the FCC in the
Third Notice of Proposed  Rulemaking,  the Pioneer's Preference would apply only
to the outer portion of the New York BTA not covered by the  Company's  existing
license  for the New  York  PMSA.  If the  Company  ultimately  is  awarded  the
Pioneer's  Preference award, the Company would be licensed to use the portion of
the  New  York  BTA  outside  the New  York  PMSA  pursuant  to the  FCC's  band
segmentation  plan (i.e.,  27.5-28.35 GHz,  29.1-29.25 GHz and 30.0-30.3 GHz).
While the remainder of the New York BTA would be awarded to the Company  without
being subject to a spectrum auction,  under the FCC's most recent proposal,  the
Company would have the exclusive  right to extend its license to add the portion
of the New York BTA not included in the  1,000-plus  square mile area covered by
the  Company's  existing  license  for  the  New  York  PMSA  by  paying  a  fee
representing  the  difference  between the value of a license to service the New
York BTA and the value of the Company's current  commercial license to serve the
New York PMSA, subject to a 15% discount from the average price paid at the LMDS
auctions for  licenses in  comparable  service  areas.  In addition,  the FCC is
considering  the adoption of conditions on the  Company's  Pioneer's  Preference
similar  to those  placed  on the  Pioneer's  Preferences  granted  to  Personal
Communications  Service licensees.  If adopted, these conditions may require the
Company to  construct  the  system  subject to the  Pioneer's  Preference  using
substantially  the same technology upon which its Pioneer's  Preference award is
based.

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 for the New York PMSA and the New
York BTA (to the extent the Company  holds or obtains a commercial  license from
the FCC).  CT&T has also agreed to license the LMDS technology to the Company in
other BTAs in which the Company obtains LMDS licenses from the FCC. 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.  The license  fees were  $4,000,  $79,000 and $149,000 for the years ended
December 31, 1994, 1995 and 1996.

          Under the license agreement,  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, 1995 and 1996 was $5,595,000  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,  and CVNY
intends to fulfill  the  remaining  obligations  under these  commitments  which
totaled  approximately  $11.6  million,  net of  deposits  of $3.4  million,  at
December  31, 1996.  Over 83% of the deposits are covered by a pledge  agreement
which  collateralizes  CT&T's  security  interest in equipment  ordered from its
vendors.







                                       41
<PAGE>


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  years  ended  December  31,  1994  and  1995,  CVNY  incurred
$1,546,000 and $2,699,000  respectively,  of management fees from Bell Atlantic.
The  reimbursed  costs are  included  in  selling,  general  and  administrative
expenses and totaled  $640,000 and  $1,949,000  for the years ended December 31,
1994 and 1995, respectively.  For the year ended December 31, 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 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 years ended
December 31, 1994 and 1995 was $754,000 and $612,000,  respectively.  Similarly,
CVNY reimbursed certain legal, general and administrative expenses paid by CT&T.
The total of such  expenditures  for the years ended  December 31, 1994 and 1995
were  $503,000 and $268,000,  respectively.  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 to CT&T an annual  royalty  amount
which totaled  $80,000 for each of the years ended  December 31, 1994,  1995 and
1996.




                                       42
<PAGE>


         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.

Other Transactions

         In 1996, CVNY 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 $91,275 at December 31, 1996.

         An affiliate of certain directors of HCM provided administrative, legal
and operational  functions to CVNY. These costs aggregated  $131,000 and $94,000
for the years ended December 31, 1994 and 1995.  There were no related costs for
the year ended December 31, 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.

         On December 29, 1993,  concurrently with the closing of the issuance of
the convertible exchangeable notes discussed in Note 6, CVNY advanced $3,000,000
to the managing general partner.  This advance was interest-free.  In June 1994,
this  advance was settled  through a non-cash  capital  distribution  to the HCM
stockholders.  This amount was presented as a reduction in partners'  capital at
December 31, 1993.

         Amounts due to certain partners of CVNY consisted of the following:

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                       -----------------------------
                                                                           1995            1996
                                                                       ------------  ---------------
                   <S>                                                 <C>           <C>
                   Due (to) from Bell Atlantic...............          $(1,116,480)  $           -0-
                   Due (to) from CT&T........................             (178,332)          759,527
                                                                       ------------- ---------------
                            Total............................          $(1,294,812)  $       759,527
                                                                       ============  ===============
</TABLE>

         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  $72,500,
$179,434  and $286,934 of such  expenses for the years ended  December 31, 1994,
1995 and 1996 respectively.  The Company also subleases certain office space for
ICVA on a month-to-month  basis. As of December 31, 1996, the monthly charge was
$2,884.













                                       43
<PAGE>


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.

         The scheduled  repayment  dates in respect of the Exchange Notes are as
follows:

    Date                                       Amount Payable
    ----                                       --------------

June 30, 1997.............4/15 of the aggregate outstanding principal balance
June 30, 1998.............5/11 of the aggregate outstanding principal balance
June 30, 1999.............Remaining amounts outstanding

7.  Commitments and Contingencies

         The Company has entered into various  operating lease  arrangements for
automobiles, office equipment and rent expiring at various dates.

         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.




                                       44
<PAGE>


         At December  31, 1996,  future  minimum  rental and lease  payments due
under these arrangements are as follows:

         1997.................................................   $1,815,975
         1998.................................................    1,664,430
         1999.................................................      868,956
         2000.................................................      293,990
         2001.................................................      265,290
         Thereafter...........................................      562,439
                                                               ------------
                  Total.......................................   $5,471,080
                                                                 ==========

         Rent expense was  approximately  $120,000,  $180,000 and  $432,000 for
the years ended  December 31, 1994,  1995 and 1996 respectively.

         CT&T entered into certain purchase commitments during 1996 on behalf of
CVNY for the manufacture of antennas,  receivers,  modems and transmitters,  and
CVNY intends to fulfill the remaining  obligations under these commitments which
totaled  approximately $11.6 million (net of deposits) at December 31, 1996. See
Note 5.

         The Company has entered into a series of  noncancelable  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 $35,000, $510,000 and $1,026,000 for the years ended December
31, 1994, 1995 and 1996, 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.


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
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.




                                       45
<PAGE>


          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.

         In connection  with  employment  agreements  with three officers of the
Company,  non-qualified  stock options to purchase an aggregate of 50,000 shares
of Common  Stock were issued  pursuant to the Plan.  The  options,  which have a
ten-year  term,  were  immediately  exercisable at the date of grant at exercise
prices ranging from $10.50 to $15.00 per share.  Following the resignation of an
officer of the Company in 1996, 10,000 of those options were terminated.

         In February 1996, the Company  granted  options to each director who is
not employed by the Company or any of its affiliates to purchase 5,000 shares of
Common Stock at the initial  public  offering price of $15.00 per share. A total
of 35,000 options were granted to directors in February 1996. The options have a
ten-year term and are immediately exercisable at the date of grant.

         On August 1, 1996, a total of 93,700 options was granted to employees.
During 1996, 3,000 of those options were terminated, leaving a balance of 90,700
options   outstanding.   On  August  1,  1996,  30,233  of  those  options  were
exercisable.  Of the remaining options,  30,234 are exercisable on April 1, 1997
and 30,233 are exercisable on April 1, 1998.

         Since the  exercise  price of all stock  options  granted to  employees
under the 1995 Plan in 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  the  year.
Compensation  expense would have been $1,297,000 in 1996, had compensation  cost
for stock options  awarded in 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 $12,928,000 and $0.83 loss per share for 1996.



                                       46
<PAGE>


         The stock options were valued using the  Black-Scholes  option  pricing
model. Key assumptions used in valuing the options included:  risk free interest
rates of 5.3%-6.8%,  an expected  life of five years and a volatility  factor of
80%.

          A total of 35,000  options  were issued to a legal  consultant  during
1996. Exercise prices ranged from $9.875 to $12.50. On August 1, 1996, 28,333 of
the options were immediately exercisable, 3,334 are exercisable on April 1, 1997
and 3,333 are exercisable on April 1, 1998.

         At  December  31, 1996 and 1995,  there were  1,049,300  and  1,250,000
shares available for future grants, respectively.

         At December 31, 1995, the Company had issued warrants to purchase up to
190,862 shares of Common Stock.  No additional  warrants were issued in 1996. At
December 31, 1995,  an aggregate  (i) up to 113,256  shares were issuable by the
Company,  and (ii) 77,606 shares were issuable by Suite 12 Group from its 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.  Mr.
Hovnanian  is  currently  negotiating  an  extension  of his  contract  with the
Company,  and is continuing to serve as Chairman,  President and CEO pending the
successful conclusion of these discussions.

         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,  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.




                                       47
<PAGE>


         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 are 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 have been issued.

         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.




                                       48
<PAGE>


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.  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 at the army base.  The suit seeks $1
million in damages and is in its preliminary  stages.  The Company cannot make a
determination  at this time as to the possible  outcome of the action or whether
the case  will go to trial.  A summary  judgment  motion  has been  filed by the
Company and is currently  pending,  requesting  that the court dismiss the case.
The Company does not believe that in the event an adverse  judgment is rendered,
the effect would be material to the Company's financial  position,  but 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.  The suit seeks  injunctive  relief and $4 million in punitive
damages. The Company believes,  based upon advice of counsel,  that this suit is
likely  to be  resolved  without a  material  adverse  effect  on the  financial
position of the Company,  but could have a material effect on operating  results
in the period in which the matter is resolved.

         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.  Although this action is still in its
preliminary   stages,   the  defendants  have  obtained   dismissal  of  certain
allegations and intend to continue to vigorously defend the action.





                                       49
<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 amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, in New York,
New York on April 9, 1997.

                                      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
amended  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                     April 9, 1997
-------------------------- Executive Officer and
Shant S. Hovnanian         Chairman of the Board
                           of Directors




/s/ Charles N. Garber      Chief Financial Officer                 April 9, 1997
--------------------------
Charles N. Garber

/s/ Bernard B. Bossard     Executive  Vice  President,             April 9, 1997
-------------------------- Chief  Technical
Bernard B. Bossard         Officer and Director



/s/ Vahak S. Hovnanian     Director                                April 9, 1997
--------------------------
Vahak S. Hovnanian

/s/ Bruce G. McNeill       Director                                April 9, 1997
--------------------------
Bruce G. McNeill

/s/ Roy H. March           Director                                April 9, 1997
--------------------------
Roy H. March

/s/ Matthew J. Rinaldo     Director                                April 9, 1997
--------------------------
Matthew J. Rinaldo

/s/ Dennis G. Spickler     Director                                April 9, 1997
--------------------------
Dennis G. Spickler





                                       50
<PAGE>






                            CELLULARVISION USA, INC.
                          (A Development Stage Company)

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

              For the Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>



                                                   Balance at        Charged to
                                                  Beginning of       Costs and                      Balance at end
                  Description                        Period           Expenses       Deductions        of Period
                  -----------                        ------           --------       ----------        ---------

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

1994
----

   Allowance for doubtful accounts.........         $   1,000         $  1,402      $         0          $2,402
                                                    =========         ========      ===========          ======




1996
----

    Deferred Tax Asset Valuation Reserve....        $       0      $13,900,000      $         0    $ 13,900,000
                                                    =========      ===========      ===========    ============

1995
----

   Deferred Tax Asset Valuation Reserve....         $       0      $         0      $         0    $          0
                                                    =========      ===========      ===========    ============

1994
----

   Deferred Tax Asset Valuation Reserve....         $       0      $         0      $         0    $          0
                                                    =========      ===========      ===========    ============



</TABLE>





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