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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended December 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ______________________

COMMISSION FILE NUMBER 0-16560

VANGUARD CELLULAR SYSTEMS, INC.
________________________________________________________________________________
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

North Carolina 56-1549590
______________________________________________________________ ___________________________________

(STATE OR OTHER JURISDICTION OF INCORPORATION ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2002 Pisgah Church Road, Suite 300,
Greensboro, North Carolina 27455-3314
______________________________________________________________ ____________________________________
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (336) 282-3690

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, par value $.01 per share

(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES X NO
--- ---

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

The aggregate market value of the registrant's Common Stock held by those
other than executive officers and directors at March 22, 1999, based on the
NASDAQ closing sale price for the Registrant's Common Stock as of such date,
was approximately $912,050,577.

The number of shares outstanding of the issuer's common stock as of March
22, 1999 was 40,177,375.
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TABLE OF CONTENTS

PART I

Item 1. Business ......................................................................... 1
Item 2. Properties ....................................................................... 18
Item 3. Legal Proceedings ................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders .............................. 18

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ......... 19
Item 6. Selected Consolidated Financial Data ............................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 22
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ...................... 30
Item 8. Financial Statements and Supplementary Data ...................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................................. 32

PART III

Item 10. Directors and Executive Officers of the Registrant .............................. 33
Item 11. Executive Compensation .......................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management .................. 38
Item 13. Certain Relationships and Related Transactions .................................. 40

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 41
Signatures ............................................................................... 42
Index to Financial Statements and Schedules .............................................. F-1
Exhibit Index

ITEM 1. BUSINESS

For definitions of certain terms used in this Form 10-K, see "Certain
Definitions" beginning on Page 16 hereof.

OVERVIEW -- AT&T TRANSACTION

Vanguard Cellular Systems, Inc. ("the Company") is an independent operator
of cellular telephone and paging systems in the United States with 6.8 million
aggregate POPs as of December 31, 1998. The Company serves over 664,000
subscribers comprised of 26 markets located in the Mid-Atlantic, Ohio Valley and
New England regions of the United States. The Mid-Atlantic SuperSystem, which is
contiguous to the New York, Philadelphia and Baltimore/Washington MSAs and the
New England metro-cluster, which is contiguous to the Boston MSA, (four of the
nation's seven largest MSAs) collectively represent approximately 80% of the
Company's operating POPs. The Company's wireless products and services are
distributed under the CellularONE(R) brand name, one of the most recognized
brand names in the wireless industry.

During 1997, the Company began a long-term strategic planning process, the
goals of which were to position Vanguard to deal effectively with present and
anticipated changes in the telecommunications industry and to enhance the value
of shareholder investments in the Company.

As a result of this process, the Company began to focus on reducing its
debt and concentrating its operations geographically to expand in the areas
where the Company's principal operations were located and to enhance
shareholder value. To that end, the Company's Board of Directors approved the
sale of Vanguard's Myrtle Beach, South Carolina and Florida operations, its
interest in a joint venture providing cellular services in
Wilmington/Jacksonville, North Carolina and certain minority interests in
cellular markets located in the same geographic regions as the foregoing
markets. These sales were completed during the second and third quarters of
1998, respectively.

In May 1998, the Company's Board of Directors authorized the Company's
management to explore the options and consider the avenues for a potential sale
of the Company. The Company engaged an investment banker and conducted an
exploratory sales process. As a result of that auction process, the Company
entered into negotiations with AT&T Corp. ("AT&T").

As of October 2, 1998, the Company entered into an Amended and Restated
Agreement and Plan of Merger, (the "Merger Agreement") with AT&T and its wholly
owned subsidiary, Winston, Inc. Under the terms of the Merger Agreement, the
Company will be merged into Winston, Inc. and each of the Company's outstanding
shares of Class A Common Stock, par value $.01 per share (other than dissenting
shares), will, at each shareholder's option, be converted into the right to
receive either $23.00 cash or 0.59805 (as adjusted to reflect a three-for-two
stock split declared by AT&T on March 17, 1999) shares of AT&T common stock,
subject to the limitation that the overall consideration for such shares will
consist of 50% cash and 50% AT&T common stock.

The Company's Board of Directors and the Board of Directors of AT&T have
approved the transaction. The transaction is subject to the approval of the
Company's shareholders and to certain other conditions.

The Merger Agreement contains certain restrictions on the conduct of the
Company's business prior to the consummation of the merger. Pursuant to the
Merger Agreement, the Company has agreed for the period prior to the
consumation of the merger to operate its business in the ordinary course, to
refrain from taking various corporate actions without the consent of AT&T, and
not to solicit or enter into negotiations or agreements relating to a competing
business.

A special shareholders' meeting to consider the Merger Agreement is
scheduled to be held April 27, 1999. Reference is made to the copy of the
Merger Agreement filed with the SEC as Exhibit 2(a) to the Company's Report on
Form 8-K dated December 31, 1998.

OVERVIEW -- COMPANY'S MARKETS

The Company's markets are located in predominantly suburban and rural
areas proximate to major urban areas, which the Company believes affords it
several advantages over traditional urban wireless operations, including (i)
greater network capacity, (ii) greater roaming revenue opportunities, (iii)
lower distribution costs and (iv) higher barriers to entry. Because there are
limits to the number of signals that can be transmitted simultaneously in a
given area, the Company's less densely populated suburban and rural locations
allow for greater frequency reuse, resulting in greater overall network
capacity than in high density urban markets. The Company is able to provide
high quality voice transmission with reduced instances of blocked or dropped
calls. In addition to these network advantages, the Company's metro-clusters
enjoy greater roaming revenue opportunities by virtue of their proximity to
large urban centers. This benefit is best exemplified in the Mid-Atlantic
SuperSystem, which is located in the heavily traveled corridor between New
York, Philadelphia and Baltimore/Washington

D.C. Roaming revenue requires minimal incremental administrative and marketing
expenditures, and the Company believes that it is well positioned to benefit
from both cellular roaming and roaming by users of personal communication
services ("PCS"). The Company has signed agreements with AT&T Wireless and
Sprint PCS and 11 other PCS carriers to provide roaming services to PCS
customers of these companies who roam into the Company's markets with dual
frequency phones. The Company also believes that it experiences lower
distribution costs due to its internal distribution channels such as direct
sales, retail stores and kiosks, which are more economical outside of urban
areas. Finally, the Company believes that the lower population density and
greater geographic coverage of its suburban and rural metro-clusters act as
barriers to entry given the relatively higher per-subscriber costs of building
competing wireless systems.

Since its inception until the introduction of PCS, the cellular industry
had two entities competing as facilities - based carriers in each market.
Licensing for PCS broadband spectrum is essentially complete, and the Company
is currently competing with PCS operators in 16 markets and is aware of site
acquisition, zoning and construction of infrastructure by other competitive PCS
providers in several of its other markets. The Company is preparing for
increased competition by building out and converting its cellular telephone
systems to digital networks, increasing the quality of coverage in its service
areas and offering new features, products and services to its customers. The
Company believes its management team's operating experience, developed
distribution channels and customer service orientation will be significant
components in providing effective competition to these new entrants. In
addition, the Company believes its extensive system footprint and the location
of its operations in suburban and rural markets provide significant barriers to
early competition from PCS competitors.

BUSINESS STRATEGY

The Company's overall goal is to continue to pursue strong growth of
subscribers, revenues and EBITDA. The Company intends to achieve this goal
through its operating strategy of providing a broad range of high quality
integrated wireless communications products and services. Key elements of the
Company's strategy include:

o CONTINUOUS CELLULAR NETWORK BUILDOUT. The Company continuously improves
its systems. In 1994, the Company began a cellular network expansion and
upgrade program to increase geographic coverage and provide for additional
portable usage in the Company's cellular markets. As of December 31, 1998,
the Company had 429 cell sites and plans to add 70-80 cell sites in 1999
as it continues to enhance its network. The Company believes that its
networks have sufficient capacity in its spectrum to serve the Company's
growing subscriber base in the near future but has implemented a gradual
transition to digital technology. The Company's networks are currently
operating both in digital and in analog/digital-ready, with dual mode
analog/Time Division Multiple Access ("TDMA") digital radio technology
mode. See " -- Expansion of Product Offerings" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."

o INVESTMENT IN BRAND IDENTITY. The Company's wireless products and
services are distributed under the CellularONE(R) brand name, one of the
most recognized brand names in the wireless industry. The CellularONE(R)
brand name currently is used by cellular systems covering more than 12,000
cities and towns, representing total POPs of over 115 million. The Company
has a minority ownership interest in the partnership that owns the
CellularONE(R) brand name and that controls the promotion and management
of the brand. In addition to benefitting from local advertising by
licensees, the CellularONE(R) brand name is advertised on a national basis
by the partnership that owns the brand with funding provided by licensing
fees.

o EMPHASIS ON CUSTOMER SERVICE AND ADVANCED BILLING SYSTEMS. The Company
provides on-line customer support, 24 hours a day, seven days a week. The
Company's internally developed, proprietary Flexcell(R) billing and
management information system enables the Company to provide quality
services to its expanding customer base and affords it access to customer
data, which it uses to facilitate its marketing efforts. One such service
is Rapid Activation, which enables the Company to execute credit checks,
order entry, and subscriber activation in approximately five minutes. See
" -- Customer Service."

o GROWTH OF INTERNAL DISTRIBUTION CHANNELS. The Company distributes its
products and services through both its internal distribution network
(direct sales force, sales and service centers, and retail stores) and
external distribution channels (national retailers, local agents and
automotive dealers). The Company is continuing its long-term emphasis on
internal distribution channels, particularly its own retail outlets, which
the Company believes offer substantial benefits. These benefits include
lower cost, higher effectiveness in selling to high margin customers, and
a consistent point of customer contact, resulting in greater ongoing
satisfaction for both internally and externally generated customers.
Accordingly, the Company intends to continue building additional retail
outlets, as well as upgrading existing outlets. See " -- Marketing and
Distribution."

o EXPANSION OF PRODUCT OFFERINGS. The Company continues to offer new and
innovative products and services to increase the value of the basic voice
product to the customer and to increase airtime revenues. In addition to
enhanced cellular voice service packages, the Company offers data
transmission, and Cellular Digital Packet Data ("CDPD") services. The
Company has also begun reselling paging, Internet and long distance
telephone services. With the integration of digital technology, the
Company will be able to offer a variety of additional services such as
caller identification, short messaging and call encryption.

MARKETS AND CLUSTERS

The following table sets forth as of December 31, 1998, the markets in
which the Company owns a cellular system by region and by cluster, and the
total POPs (as derived from 1997 population estimates).

TOTAL
POPS
------------

Mid-Atlantic SuperSystem:
Allentown, PA/NJ .......................... 713,438
Wilkes-Barre/Scranton, PA ................. 653,817
Harrisburg, PA ............................ 499,402
Lancaster, PA ............................. 453,348
York, PA .................................. 456,861
Reading, PA ............................... 353,650
Williamsport, PA .......................... 118,681
State College, PA ......................... 131,962
Wayne, PA (PA-5 RSA) ...................... 84,292
Chambersburg, PA (PA-10 East RSA) ......... 141,875
Mifflin, PA (PA-11 RSA) ................... 113,933
Lebanon, PA (PA-12 RSA) ................... 117,361
Union, PA (PA-8 RSA) ...................... 408,709
Altoona, PA ............................... 131,287
Binghamton, NY/PA ......................... 293,703
Elmira, NY ................................ 92,820
-------
Subtotal ................................ 4,765,139
---------
Ohio Valley SuperSystem:
Huntington, WV/KY/OH ...................... 316,929
Charleston, WV ............................ 254,889
Parkersburg-Marietta, WV /OH .............. 157,364
Ross, OH (OH-9 RSA) ....................... 248,993
Perry, OH (OH-10-South RSA) ............... 112,256
Logan, WV (WV-6 RSA) ...................... 182,128
Mason, WV (WV-1 RSA) ...................... 77,008
---------
Subtotal ................................ 1,349,567
---------
New England Metro-cluster:
Portland, ME .............................. 288,136
Portsmouth, NH/ME ......................... 280,193
Bar Harbor, ME (ME-4 RSA) ................. 86,052
---------
Subtotal ................................ 654,381
---------
Other Minority Interests ................... 62,109
---------
TOTAL POPs ................................. 6,831,196
=========

SUBSCRIBERS

Management believes that the Company generates the majority of its revenue
from subscribers who are business users. Historically, the Company's business
users were individuals in such professions as construction and real estate who
worked extensively from their cars and utilized cellular telephone service to
improve productivity. As a result of the growing acceptance of cellular
communications and the declining cost of portable and transportable phones, as
well as the Company's

marketing efforts, the Company is attracting larger numbers of customers who
are nonbusiness users and business users now are drawn from a wider range of
occupations. Business users normally generate more revenue than nonbusiness
consumers. While the Company anticipates increasing nonbusiness consumer
acceptance of cellular telephone service, business users are expected to
generate the majority of the Company's revenue for the foreseeable future.

The following table sets forth the aggregate number of subscribers in the
Company's markets at the end of the periods indicated.

QUARTER 1996 1997 1998
- ------------------- --------- --------- ------------------

First ........... 405,000 540,000 667,000
Second .......... 430,000 580,000 692,000
Third ........... 461,000 610,000 678,000 (1)
Fourth .......... 513,000 645,000 664,000 (2)

- ---------
(1) Sale of Myrtle Beach, SC Market on June 30, 1998 reduced beginning of
quarter subscribers by approximately 34,000.

(2) Sale of Florida Metro Cluster Markets on September 30, 1998 reduced
beginning of quarter subscribers by approximately 55,000.

The incremental subscriber growth and the rate of incremental subscriber
growth in the Company's markets (adjusted for the sale of the Myrtle Beach and
Florida Markets in 1998) is set forth in the following table for the periods
indicated.

1996 1997 1998
----------- ----------- ----------

Incremental Subscriber Growth .......... 132,000 132,000 97,500
Rate of Incremental Subscriber Growth .. 35% 26% 17%

The following table sets forth the number of subscribers and the
penetration percentages in the Company's markets as of the dates indicated.

DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- ---------------------------- ---------------------------
SUBSCRIBERS PENETRATION* SUBSCRIBERS PENETRATION* SUBSCRIBERS PENETRATION*
------------- -------------- ------------- -------------- ------------- -------------

Mid-Atlantic SuperSystem ..... 324,500 6.81% 408,000 8.56% 473,000 9.93%
Ohio Valley SuperSystem ...... 78,500 5.79 98,500 7.26 118,500 8.78
New England .................. 48,500 8.61 60,000 9.25 72,500 11.08
Florida ...................... 39,000 7.00 48,000 8.58 -- --
Myrtle Beach ................. 22,500 9.05 30,500 12.04 -- --
------- ------- -------
Total ....................... 513,000 6.77 645,000 8.51 664,000 9.81
======= ======= =======

- ---------
* Penetration represents total year-end subscribers divided by year-end total
POPs in the Company's markets.

The Company believes subscriber growth and increased penetration in 1996,
1997 and 1998 were a product of the growing acceptance of cellular
communications and the Company's efforts to capitalize on this increasing
acceptance of cellular communications and an expanded distribution network. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."

The Company offers paging services on a resale basis to the subscribers
listed above. Additionally, there were approximately 80,000 subscribers who
subscribed to paging only services as of December 31, 1998 from the NationPage
acquisition.

PRODUCTS AND SERVICES

The Company's primary line of business is the provision of cellular
telephone services. Customers are offered several pricing options combining
different monthly access and usage charges and fees for related services.

The Company provides regional service among its contiguous markets, such
as those within the Mid-Atlantic SuperSystem. A customer in these regions can
place and receive calls throughout the network without any additional daily fee
and often at the same incremental rate per minute as in the customer's home
market. In certain adjacent cellular markets not owned by the Company, the
Company offers similar regional pricing options to its subscribers. The Company
has entered into agreements with other cellular companies that allow its
subscribers to roam in substantially all of the MSAs and RSAs in

the country. These agreements allow the Company's subscribers to be
pre-registered in cellular systems outside the Company's operating regions and
to receive service while they are outside their home systems, typically for a
per minute usage charge, and in some cases, an additional daily fee.

The Company has offered and will continue to offer new and innovative
products and services to increase the value of the basic voice product to the
customer and to increase airtime revenues. Recent service additions include
enhanced voice mail, which alerts the customer when a message has been left,
and single number service, which allows a customer to use the same phone number
in several locations. Other recent service additions include call management,
which directs incoming calls to a succession of locations until the customer is
reached, and voice dialing, which lets the customer make calls by spoken
command without having to touch the keypad.

The digital upgrades will allow the Company to offer a full range of
digital services to its customers. Among the new opportunities are full digital
voice communication, short message service, caller ID, and paging.
Additionally, Cellular Digital Packet Data ("CDPD") and Wireless Intelligent
Network ("WIN") services are being deployed. See " -- Cellular Technology."

The Company resells paging services in its regional metro-clusters. To
maintain its access to quality paging for its customers in its Mid-Atlantic
SuperSystem, in July 1998, the Company acquired NationPage, a leading regional
paging provider in Pennsylvania and New York for approximately $28.5 million.
There were approximately 82,000 subscribers acquired as a part of this
acquisition. The acquisition of NationPage minimized future capacity
constraints, eliminated variations in reselling prices and margins, and created
synergies with the Company's sales and network infrastructure. The Company also
expanded its product offering into Internet services as a re-seller.

MARKETING AND DISTRIBUTION

The Company markets its services under the CellularONE(R) brand name, one
of the most recognized brand names in the wireless communications industry. In
addition to benefiting from local advertising by licensees, the CellularONE(R)
brand name is advertised on a national basis by the partnership that owns the
brand using the proceeds of licensing fees. The CellularONE(R) brand name
currently is used by cellular systems covering more than 12,000 cities and
towns with total POPs of more than 115 million. The Company is one of three
owners of the CellularONE(R) brand name. The Company currently has an option to
increase its ownership interest in the partnership that owns the brand name, at
a cost of approximately $6.1 million, to one-third from the 2.5% interest it
currently owns. As an owner of the CellularONE(R) name, the Company exercises
influence over the promotion and future services offered under the brand. As
part of an ongoing strategy to enhance the value of the CellularONE(R) brand,
the owners of the brand currently plan to continue to license new carriers to
operate under the CellularONE(R) name, both for cellular, as well as for
paging, PCS, long distance and for resellers of these services. Where
CellularONE(R) is licensed, existing licensees currently have the exclusive
right to use the brand name for cellular and other services.

The Company uses multiple distribution channels in each of its service
areas to provide effective and extensive marketing of its products and services
and to reduce its reliance on any single distribution source. These
distribution channels fall into two broad categories: internally developed and
controlled channels, and external channels.

The Company is continuing its long-term focus on internal distribution
channels as a means to reduce the cost and improve the quality of new
subscribers. The Company's retail stores have been a historically low-cost
distribution channel, a benefit that is enhanced for the Company as a result of
relatively low facilities and other costs in the Company's suburban and rural
markets as compared to urban areas. Also, Company sales representatives are
most effective in selling to the high end customers and businesses, which tend
to provide the Company with the highest profit margins. The Company believes
that cellular customers prefer to deal directly with sales representatives
employed by the Company. In addition, Company stores provide an ongoing point
of contact for service to subscribers regardless of whether the point of
purchase was internal or external. The Company plans to expand its base of
retail stores and kiosks and upgrade its existing retail outlets. The Company
had over 145 retail locations as of December 31, 1998.

The Company's sales force consists of approximately 650 sales and
administrative employees, who target small to medium- sized companies, a
high-margin area of business. In order to maintain a knowledgeable,
customer-oriented sales

force, the Company developed and administers its own sales training program
designed to educate sales representatives for its markets. The program offers a
curriculum that highlights mobile technologies, cellular equipment prospecting,
sales techniques, and the customer service process, and the Company believes
that, following the program, sales representatives are better able to address
existing and potential customers' needs in a professional, knowledgeable and
productive manner.

The Company sells and rents cellular telephone equipment to its customers
to encourage use of its services. The Company continues its practice, typical
in the industry, of selling telephones at or below cost in response to
competitive pressures. The magnitude of the losses experienced in connection
with providing cellular telephone equipment reflects the Company's increased
subscriber growth. The Company also offers an equipment rental program that
many subscribers have found to be an economical means of acquiring the use of
cellular equipment. Under the terms of the rental program, subscribers obtain
the use of a cellular telephone for a monthly charge. Although the Company
retains ownership of this equipment, subscribers have the option to purchase
their cellular telephones at any time during the rental period. The Company
often utilizes a promotion under which the first year's rental charge is waived
when the subscriber agrees to a one-year service contract. During 1998, the
Company began selling equipment under a "twelve-month same as cash" program
where the purchase price is billed to the customer over the twelve-month
period.

The Company also utilizes a telemarketing program as part of its sales and
customer service efforts. This program is intended to aid the customer by
providing sales follow-up and support, and helps the Company in securing
additional and better sales referrals, upgrading existing subscribers to higher
rate plans and promoting new custom-calling features.

External distribution channels include national retailers such as WalMart,
automobile dealers, and local agents and resellers. The Company enters into
exclusive short-term contracts with each of its external distribution channels.
While the Company benefitted from the increased success of external
distribution channels, the Company continues to emphasize internal distribution
channels, which it believes result in higher long-term profit margins, and as a
result, the percentage of internally generated customers increased to 70%, 75%
and 80% in 1996, 1997, and 1998, respectively.

CUSTOMER SERVICE

The Company places a high priority on providing consistently high quality
customer service. The central customer service department located in
Greensboro, North Carolina, is open 24 hours daily, including weekends and
holidays, and is available to handle all types of customer service inquiries.
In 1996, the Company opened regional call centers in each of its metro-clusters
to handle certain types of customer issues. The benefits of regional call
centers include having service delivery as close to the customer as possible to
cover specific regional circumstances, being a more significant local employer
in the regions and reducing the risk of encountering a lack of experienced
customer service employees in the Greensboro, North Carolina area. The central
customer service facility continues to provide service as backup and overflow
for the regional centers, as primary service provider in certain instances and
for the critical evening, night and weekend duty. All customer service
personnel are trained in certain key areas such as general mobile telephone
technology, available cellular equipment, cellular billing and roaming. The
Company believes that this training provides these employees with the requisite
knowledge to handle customer inquiries quickly and competently, resulting in
greater customer satisfaction. The Company's training program, which was
developed and is administered internally, requires employees to demonstrate
competency through testing.

The Company has developed a proprietary billing and management information
system, Flexcell(R), which it believes provides several service advantages to
its customers. Using Flexcell(R), customer service representatives are able to
access current billing information quickly to respond promptly to customer
inquiries. In addition, this system allows for integration of customer-related
data from various operations within the Company into a single database. Using
this database, service calls are systematically analyzed each month to
highlight key customer issues. The customer database also provides the basis
for customer satisfaction information. The Company had a contract to provide
Flexcell(R) software and support to American Mobile Satellite Corporation
("AMSC"). The software code was subsequently sold to AMSC during 1997. The
Company is not currently providing any software support to AMSC nor is it
marketing Flexcell to any third parties.

To supplement the Company's customer service operations, Company
telemarketers contact customers periodically to determine their satisfaction
with the Company's service and to identify problems that can lead to subscriber
cancellations. The Company has developed an integrated feature called "Rapid
Activation," designed to reduce the time required to activate service for a new
customer. Rapid Activation allows the Company to perform a credit check,
complete order entry and activate a cellular subscriber in approximately five
minutes.

To ensure quality installation for automotive customers and overall
customer satisfaction, the Company has established its own installation and
repair centers in most of its markets. These CellularONE(R) installation and
repair centers provide

one-stop shopping for the Company's customers and enable the Company to control
installation quality and scheduling and inventory levels. These centers are
also authorized to perform warranty repair work for certain cellular telephone
manufacturers.

CELLULAR TELEPHONE TECHNOLOGY

Cellular telephone service is a form of telecommunications capable of
delivering high quality, high capacity mobile and portable telephone services.
Cellular systems are engineered so that a service area is divided into multiple
cells approximately one to five miles in radius. Each cell contains a
relatively low power transmitter, a receiver and signaling equipment (the base
station). The base station in each cell is connected by microwave or telephone
line to the mobile telephone switching office ("MTSO"). The MTSO controls the
automatic transfer of calls from cell to cell as a subscriber travels,
coordinates calls to and from a mobile unit, allocates calls among the cells
within the system, and connects calls to the local landline telephone system or
to a long-distance telephone network. Each conversation in a cellular system
involves a radio transmission between a subscriber unit and a base station and
the transmission of the call between the base station and the MTSO.

The MTSO and base stations periodically monitor the signal strength of
calls in progress. The signal strength of the transmission between a subscriber
unit and the base station in any cell declines as the unit moves away from the
base station. When the signal strength of a call declines to a predetermined
level, the MTSO hands off the call in a fraction of a second to the base
station of another cell where the transmission strength is greater. If the
subscriber unit leaves the service area of the cellular system, the call is
disconnected unless an appropriate technical interface has been established
with an adjacent system.

The Federal Communications Commissions ("FCC") has allocated the cellular
telephone systems frequencies in the 800 MHz band of the radio spectrum. Each
of the two licenses in a cellular market is assigned 416 frequency pairs. Each
conversation on a cellular system occurs on a pair of radio talking paths, thus
providing full duplex (i.e., simultaneous two-way) service. Two significant
features of cellular telephone systems are: (i) frequency reuse, enabling the
simultaneous use of the same frequency in two adequately separated cells, and
(ii) call hand-off. A cellular telephone system's frequency reuse and call
hand-off features result in highly efficient use of available frequencies and
enable cellular telephone systems to process more simultaneous calls and
service more users over a greater area than conventional mobile telephone
systems.

A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or, by using directional
antennas, dividing a cell into discrete multiple sectors or coverage areas,
thereby facilitating frequency reuse. Furthermore, an area within a system may
be served by more than one cell through procedures that utilize available
channels in adjacent cells. When all possible channels are in use, further
growth can be accomplished through a process known as "cell splitting." Cell
splitting entails dividing a single cell into a number of smaller cells
serviced by lower-power transmitters, thereby increasing the reuse factor and
the number of calls that can be handled in a given area. Digital transmission
technologies are expected to provide cellular licensees with additional
capacity to handle calls on cellular frequencies.

There are limits to the number of signals that can be transmitted
simultaneously in a given area. In highly populated MSAs, the level of demand
for mobile and portable service is often large in relation to the existing
capacity of most systems. Based on the demographics of its markets, the Company
does not anticipate that the provision of mobile and portable service within
its networks will require as large a proportion of the systems' capacities as
is required in higher density MSAs. Therefore, the Company's systems are
expected to have more capacity with which to pursue data applications and other
expanded cellular services, which the Company believes may enhance its revenue
potential and limit market opportunities for competitive mobile data systems.

All cellular telephones are designed to be compatible with cellular
systems in all market areas within the United States so that a cellular
telephone may be used wherever a subscriber is located. Changes of cellular
telephone numbers or other technical adjustments to mobile units by the
manufacturer or local cellular telephone service businesses are generally
required to enable the subscriber to change from one cellular service provider
to another within a service area. Cellular system operators may provide service
to roamers temporarily located in, or traveling through, their service area.
The cellular system providing service to the roamer generally receives 100% of
the revenues from such service and such roaming charges are billed to the
roamer's local service provider.

The cellular mobile telephone services available to customers and the
sources of revenue available to a system operator are similar to those
available with standard home and office telephones. For example, cellular
systems can offer a variety of features, including call forwarding, call
waiting, conference calling, voice message and retrieval, and data
transmission. Because cellular systems are fully interconnected with the
landline telephone network, subscribers can receive and

originate both local and long distance calls from their cellular telephones.
The subscribers generally are charged separately for monthly access, air time,
toll calls and custom calling features.

Cellular telephone systems operate under interconnection agreements with
various local exchange carriers ("LECs") and interexchange (long distance)
carriers ("IXCs"). The interconnection agreements establish the manner in which
the cellular telephone system integrates with other telecommunications systems.
The cellular operator and the local landline telephone company must cooperate
in the interconnection between the cellular and landline telephone systems to
permit cellular subscribers to call landline subscribers and vice versa. The
technical and financial details of such interconnection arrangements are
subject to negotiation and vary from system to system.

There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, the
radio transmission of cellular telephone calls is done predominantly on an
analog basis. Digital technology offers advantages, including improved voice
quality, larger system capacity, and perhaps lower incremental costs for
additional subscribers. The conversion from analog to digital radio technology
is expected to be an industry-wide process that will take a number of years.
There are currently two principal digital technologies used by cellular
operators in the United States, Time Division Multiple Access ("TDMA") and Code
Division Multiple Access ("CDMA").

During 1997, the Company completed testing of its TDMA digital voice and
features network in conjunction with Northern Telecom. Vanguard was selected to
serve as the test site for North Telecom's TDMA hardware and software. The
tests were successful and led to the introduction of IS-136 TDMA digital voice
using new 13Kb vocoders (voice encoders) and features in Myrtle Beach, South
Carolina and the Southern Pennsylvania region in the fourth quarter of 1997.
The Company's remaining markets began to offer digital service during the first
half of 1998. The substantial majority of the cellular equipment currently
employed by the Company in its systems is "TDMA ready" and can work in either
an analog or digital mode. As a result, the Company should be able to
transition from analog to digital mode with minimal expense. However, one or
more of the technologies currently utilized by the Company or implemented in
the future may not be preferred by its customers or may become obsolete. If
either event occurs, it could result in the Company undergoing a conversion
which could involve significant expense. Pending such a conversion, the Company
could be at a competitive disadvantage.

COMPETITION

OTHER CELLULAR COMPETITION. The cellular telephone business is a regulated
duopoly. Until 1994, the FCC provided for only two licenses in each market
(although certain markets have been subdivided as a result of voluntary
settlements), one to a nonwireline company and one to a wireline company, which
is usually the local telephone company or its affiliate. Each licensee has the
exclusive grant of a defined frequency band within each market. The Company
holds exclusively nonwireline licenses. The primary competition, therefore, for
the Company's cellular service in any market has traditionally come from the
wireline licensee in that market. Competition is principally on the basis of
services and enhancements offered (including the provision of cellular
equipment at or below cost), the technical quality of the system, price and the
quality and responsiveness of customer service.

In the Company's markets, its cellular competitors are affiliates of the
following companies:

MARKET CELLULAR COMPETITOR
- --------------------------------------------- ----------------------------------------------

Allentown, PA/NJ ...................... Bell Atlantic Mobile
Altoona, PA ........................... ALLTEL Corporation
Harrisburg, PA ........................ ALLTEL Corporation
Lancaster, PA ......................... ALLTEL Corporation
Reading, PA ........................... Bell Atlantic Mobile
State College, PA ..................... ALLTEL Corporation
Wilkes Barre/Scranton, PA ............. ALLTEL Corporation
Williamsport, PA ...................... ALLTEL Corporation
York, PA .............................. ALLTEL Corporation
Wayne, PA (PA-5 RSA) .................. ALLTEL Corporation
Union, PA (PA-8 RSA) .................. ALLTEL Corporation
Chambersburg, PA (PA-10 East RSA) ..... ALLTEL Corporation
Mifflin, PA (PA-11 RSA) ............... Bell Atlantic Mobile
Lebanon, PA (PA-12 RSA) ............... ALLTEL Corporation
Binghamton, NY/PA ..................... Frontier/Bell Atlantic Mobile
Elmira, NY ............................ Frontier/Bell Atlantic Mobile
Charleston, WV ........................ ALLTEL Corporation
Huntington, WV/OH/KY .................. ALLTEL Corporation
Parkersburg/Marietta WV/OH ............ ALLTEL Corporation
Mason, WV (WV-l East RSA) ............. Bell Atlantic/Mobile
Logan, WV (WV-6 RSA) .................. ALLTEL Corporation
Perry, Ohio (OH-10 RSA) ............... ALLTEL Corporation
Ross, Ohio (OH-9 RSA) ................. U.S. Cellular Corp.
Portland, ME .......................... Northeast Cellular/U.S. Cellular Corp.
Portsmouth, NH/ME ..................... Saco River Cellular, Inc./U.S. Cellular Corp.
Bar Harbor, ME (ME-4 RSA) ............. U.S. Cellular Corp.

COMPETITION FROM OTHER TECHNOLOGIES. In addition to competition from the
other cellular carrier in each of its markets, the Company faces competition
from PCS, Enhanced Specialized Mobile Radio ("ESMR") system operators, and
resellers of cellular and other facilities-based services.

Licensing for broadband PCS was divided by the FCC into 51 Major Trading
Areas ("MTAs") and 493 Basic Trading Areas ("BTAs") based upon geographic
boundaries described in the 1992 Rand McNally Commercial Atlas & Marketing
Guide. Each of two licensees holds 30 MHz of PCS spectrum in each MTA, one
licensee holds 30 MHz of PCS spectrum in each BTA and each of three licensees
holds 10 MHz of PCS spectrum in each BTA. The FCC's rules limit a cellular
licensee to 45 MHz of aggregate spectrum in an area in which the cellular
licensee provides cellular services to 10% or more of the population. The FCC's
imposed 45 MHz cap for combined PCS/cellular spectrum is now being considered
for elimination by the FCC. Cellular licensees are not limited by the two 10
MHz PCS license limitations outside of the areas in which they operate cellular
systems.

PCS services include wireless two-way telecommunications for voice, data
and other transmissions employing digital micro-cellular technology. PCS
operates in the 1850 to 1990 MHz band. PCS requires a network of small,
low-powered transceivers placed throughout a neighborhood, business office or
office complex, city or metropolitan area. PCS customers communicate using
digital devices similar to portable cellular telephones. The Company believes
that digital service technology offers similar services on the 800 MHz cellular
frequencies.

During all of 1997, the Company competed with a PCS operator in its Myrtle
Beach RSA. In addition, during the year, the construction of towers and other
wireless infrastructure by other competitive PCS providers occurred in many of
the Company's other markets. During 1998 the Company competed with PCS
operators in 16 of its markets. The Company considers Omnipoint and Sprint PCS
to be two of the most significant PCS operators in its markets and is aware of
site acquisition, zoning and construction of infrastructure by other
competitive PCS providers in several of its other markets.

The specialized mobile radio ("SMR") industry provides customers,
principally business users such as taxicabs and construction firms with two-way
radio dispatch services. The FCC has licensed Enhanced SMR ("ESMR") system
operators to construct digital mobile communications systems on existing SMR
frequencies in many metropolitan areas throughout

the United States. ESMR systems are permitted by the FCC to be interconnected
to the public switched telephone network and are significantly less expensive
to build and operate than other wireless telephone systems. The systems are,
however, licensed to operate on substantially fewer channels per system than
cellular or PCS systems, and currently lack the ability to expand capacity
through frequency re-use by using low-power transmitters and by handing off
calls. However, in 1994, the FCC licensed ESMR systems in the 800-MHz bands for
wide-area use, thus increasing the potential competition with cellular
networks. The FCC has also decided to license SMR spectrum in contiguous blocks
via the competitive bidding process. ESMR systems have been built out in most
MSAs and some RSAs and offer both traditional dispatch services and cellular
like services.

Cellular system licensees are required by FCC policy to provide wholesale
cellular service to qualified resellers. A reseller provides cellular service
to customers but is not itself an FCC cellular license holder. A reseller
typically buys capacity on a cellular telephone network and is assigned a block
of cellular telephone numbers from a cellular carrier. The reseller markets
provide wireless telephone service through their own distribution channels to
the public. In this way, a reseller is not only a customer of the cellular
telephone licensee's service, but also competes with the licensee for
customers. To date, the Company has no resellers operating in its markets.

Plans to construct and launch Low Earth Orbit satellites ("LEOs"), such as
Motorola's Iridium project which recently became operational, are viewed as a
feasible means of providing wireless phone service to remote areas that would
otherwise be unattractive to other wireless operators. The service can
therefore be viewed as complementary (not competitive with cellular),
particularly since LEOs are expected to eventually offer their connection
services to wireless operators in their service areas.

In February 1997, the U.S. entered into a World Trade Organization treaty
stipulating global telecommunications standards. The agreement requires the
U.S. to permit foreign investors to hold indirect ownership of commercial
mobile radio services ("CMRS") licenses in the U.S.. These changes will permit
additional foreign investment and participation in the U.S. wireless
marketplace and therefore may enhance competition.

Despite increasing competition from PCS, SMR and other technologies,
cellular service is expected to maintain its dominant position in the wireless
communications industry in the near future. While the new PCS operators are
forcing operators to digitize their networks at a faster pace, cellular
operators have a considerable head start relative to future entrants into the
wireless communications industry. As a result, competing technologies will have
to address the cellular industry's considerable coverage, marketing advantage
and other barriers to entry. In the meantime, the cellular industry's
increasingly rapid pace of conversion to digital will provide it with the
ability to offer expanded services, improved quality and lower pricing to its
customer base.

The Company is preparing for the more competitive environment represented
by the build out of PCS and other digitally based communications technologies
by building out and enhancing its cellular telephone networks including the
conversion of its own networks to digital technology, increasing the quality of
coverage in its service areas, and by offering new features, products and
services to its customers that the Company believes will be competitive with
future communications providers that may utilize digital technology. See " --
Products and Services." The Company believes that it can effectively compete by
utilizing its experience in developing and operating cellular networks and by
virtue of the barriers imposed by its extensive existing system footprint. The
Company believes that it has developed strong distribution channels and
customer service capabilities overseen by an experienced management team. The
Company's cellular systems are primarily located in suburban and rural markets
into which management believes new PCS licensees are likely to enter only after
initiation of PCS operations in higher density markets which may be more
economically attractive. The Company will offer roaming services to PCS
customers and has already entered into several roaming contracts to do so.

REGULATION OF CELLULAR SYSTEMS

FEDERAL REGULATION. The Company is subject to extensive regulation by the
Federal Government as a provider of cellular communications services. Pursuant
to the Communications Act of 1934, as amended (the "Communications Act"), the
licensing, construction, operation, acquisition and transfer of cellular
communications systems in the United States are regulated by the FCC. The FCC
has promulgated rules governing the construction and operation of cellular
communications systems and licensing and technical standards for the provision
of cellular telephone service ("FCC Rules"). For licensing purposes, the United
States is divided into 734 discrete geographically defined market areas
comprised of 306 MSAs and 428 RSAs.

In each market, the frequencies allocated for cellular telephone use are
divided into two equal 25 MHZ blocks and designated as Block A and Block B.
Block A licenses were initially reserved for nonwireline entities, such as the
Company.

Block B licensees were initially reserved for entities affiliated with a
wireline telephone company. Under current FCC Rules, a Block A or Block B
License may be transferred with FCC approval without restriction as to wireline
affiliation, but generally, no entity may own a substantial interest in both
block A and Block B in any one MSA or RSA. The FCC may prohibit or impose
conditions on sales or transfers of licenses.

Cellular service providers must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users,
permitees and licensees in order to avoid interference between adjacent
systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The FCC also regulates cellular service resale practices and the
terms under which certain ancillary services may be provided through cellular
facilities.

The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for transfers to or from the Company of a
controlling interest in any license or construction permit, or any rights
thereunder. Although there can be no assurance that any future requests for
approval of applications filed will be approved or acted upon in a timely
manner by the FCC, the Company has no reason to believe such requests or
applications would not be approved or granted in due course.

Initial operating licenses are generally granted for terms of up to 10
years, beginning on the dates of the grant of the initial operating authority
and are renewable upon application to the FCC. Licenses may be revoked and
license renewal applications denied for cause after appropriate notice and
hearing. The FCC generally grants current licensees a license renewal if they
have complied with their obligations under the Communications Act during their
license terms. A potential challenger would bear a heavy burden to demonstrate
that a license should not be renewed if the licensee's performance merits
renewal expectancy.

Near the conclusion of the license term, licensees must file applications
for renewal of licenses to obtain authority to operate for up to an additional
10-year term. Applications for license renewal may be denied if the FCC
determines that the grant of an application would not serve the public
interest. In addition, at license renewal time, other parties may file
competing applications for authorization. In the event that qualified
competitors file, the FCC may be required to hold a hearing to determine
whether the incumbent or the competitor will receive the license. In 1993, the
FCC adopted specific standards to apply to cellular renewals, concluding that
it will award a renewal expectancy to a cellular licensee that meets certain
standards of past performance. If the existing licensee receives a renewal
expectancy, it is likely that the existing licensee's cellular license will be
renewed without a full comparative hearing. To receive a renewal expectancy, a
licensee must show that it (i) has provided "substantial" service during its
past license term, and (ii) has substantially complied with applicable FCC
Rules and policies and the Communications Act. "Substantial" service is defined
as service which is sound, favorable and substantially above a level of
mediocre service that might only minimally warrant renewal.

In 1994, the Company filed for renewal of one expiring license (for the
Allentown-Bethlehem-Easton, PA/NJ MSA) which was originally granted by the FCC
in 1985. In 1995, the Company filed for renewal of two expiring licenses (for
the Northeast Pennsylvania, PA and Harrisburg, PA MSAs) which were originally
granted by the FCC in 1986. In 1997 and 1998, the Company filed for renewal of
eight and six additional MSA licenses, respectively which were originally
granted in 1987 and 1988. All license renewals were granted. The Company
believes that it has met and will continue to meet all requirements necessary
to secure renewal of its remaining cellular licenses which are scheduled to
expire between 1999 and 2006. However, there can be no assurances that any such
licenses will be renewed.

In July 1994, the FCC issued a notice proposing a requirement whereby all
cellular carriers would have to provide interexchange carriers with equal
access. Currently, only AT&T-affiliated cellular carriers and the cellular
affiliates of the Regional Bell Operating Companies ("RBOCs") are required to
provide equal access. The FCC also proposed requiring all commercial mobile
radio service providers to provide interconnection to other mobile service
providers. In April 1995, however, the FCC concluded that it would be premature
to adopt such a requirement. The Telecommunications Act of 1996 (the "Telecom
Act") provides that a cellular carrier need not provide equal access unless
such denial is contrary to the public interest.

THE TELECOMMUNICATIONS ACT OF 1996. The Telecom Act makes changes to the
Communications Act and the antitrust consent decree applicable to the RBOCs,
affecting the cellular industry. This legislation, among other things, affects
competition for local telecommunications services, interconnection arrangements
for carriers, universal service funding and the provision of interexchange
services by the RBOCs' wireless systems.

The Telecom Act requires state public utilities commissions and/or the FCC
to implement policies that mandate cost-based reciprocal compensation between
cellular carriers and local exchange carriers for interconnection services. The
Company believes that implementation of these policies has resulted in a
substantial decrease in interconnection expenses incurred by the Company.
Pursuant to the requirements of the Act, the Company entered into negotiations
with all of the local exchange carriers who provide interexchange service to
the Company and its customers. These negotiations have resulted in contracts
containing significant decreases in the rates charged by many of the LEC's and
have also provided for the LEC to pay reciprocal compensation to the Company
for calls the Company terminates to its customers. The Company has not yet
concluded negotiations with all of these LEC's. These contractual arrangements
must be reviewed by state public utility commissions within 90 days of
submission, or the agreements will become effective automatically.

The Telecom Act also eases the restrictions on provision of interexchange
telephone services by wireless carriers affiliated with RBOCs. RBOC-related
wireless carriers have interpreted the legislation to permit immediate
provision of long distance call delivery for their cellular customers and have
begun providing this service.

STATE AND LOCAL APPROVALS. Congress amended the Communications Act to
preempt, as of August 10, 1994, state or local regulation of the entry of, and
the rates charged by, any commercial mobile service or any private mobile
service, which includes cellular telephone service. The Company is free to
establish rates and offer new products and services with a minimum of
regulatory requirements. Several of the seven states in which the Company
operates still maintain nominal oversight jurisdiction, primarily focusing upon
resolution of customer complaints.

The location and construction of cellular transmitter towers and antennas
are subject to Federal Aviation Administration ("FAA") regulations and may be
subject to Federal, state and local environmental regulation as well as state
or local zoning, land use and other regulation. Before a system can be put into
commercial operation, the grantee of a construction permit must obtain all
necessary zoning and building permit approvals for the cell sites and MTSO
locations and must secure state certification and tariff approvals, if
required. The time needed to obtain zoning approvals and requisite site permits
varies from market to market and state to state. Similarly, variations exist in
local zoning processes. There can be no assurance that any state or local
regulatory requirements currently applicable to the systems in which the
Company's affiliates have an interest will not be changed in the future or that
regulatory requirements will not be adopted in those states and localities
which currently have none.

Zoning and planning regulation is becoming more restrictive with the
addition of PCS carriers which are seeking sites for network construction as
well. The industry is seeking relief from local laws which arbitrarily restrict
the expansion of cellular networks. The Telecom Act provides potential limited
relief by permitting the FCC to preempt states and localities from applying
regulations in a manner which has the effect of prohibiting construction and
operation of new cell sites. Members of Congress have introduced legislation to
strip the FCC of the power to preempt states and localities. It is unknown if
these attempts will be successful.

The Communications Act prohibits the issuance of a license to, or the
holding of a license by, any corporation of which more than 20% of the capital
stock is owned of record or voted by non-U.S. citizens or their representatives
or by a foreign government or a representative thereof, or by any corporation
organized under the laws of a foreign country. The Communications Act also
prohibits the issuance of a license to, or the holding of a license by, any
corporation directly or indirectly controlled by any other corporation of which
more than 25% of the capital stock is owned of record or voted by non-U.S.
citizens or their representatives or by a foreign government or representative
thereof, or by any corporation organized under the laws of a foreign country.
The FCC does however have the power to waive these restrictions in appropriate
circumstances and a recent World Trade Organization treaty has had the effect
of easing these restrictions further. The FCC has interpreted these
restrictions to apply to partnerships and other business entities as well as
corporations, subject to certain modifications. Failure to comply with these
requirements may result in denial or revocation of licenses.

OTHER INVESTMENTS

In July, 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million. The
NationPage acquisition will minimize future paging service capacity constraints
and was financed through borrowings under the 1998 Loan Agreements.

In the first quarter of 1998, the Company participated in the FCC's Local
Multipoint Distribution Service ("LMDS") auction, which concluded on March 25,
1998. The Company was the high bidder for 22 LMDS Basic Trading Area ("BTA")
licenses, with an aggregate bid of $8.9 million. The majority of these licenses
are in the same markets as the Company's

existing cellular operations. In June 1998, the licenses were issued. LMDS
frequencies may be used for a variety of technologies, including traditional
wireless telephony, competitive local exchange service, and broadband data
transmissions including Internet, video and others.

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND FOREIGN
INVESTMENTS. At December 31, 1998, the Company owned approximately 29% of the
outstanding stock of International Wireless Communications Holdings, Inc.
("IWCH"), in which the Company has previously invested an aggregate of $24.8
million and had provided loans of $5.7 million as discussed below. IWCH is a
development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America. International
Wireless Communications Holdings, Inc., International Wireless Communications,
Inc., Radio Movil Digital Americas, Inc., International Wireless Communications
Latin America Holdings, Ltd. and Pakistan Wireless Holdings Limited
(collectively, "IWC") filed separate petitions for relief under Chapter 11 of
the United States Bankruptcy Code on September 3, 1998. Pursuant to Bankruptcy
Court approval on October 28, 1998, the Company has provided IWC with
post-petition debtor-in-possession financing in the amount of $4.6 million on a
senior secured and administrative priority basis (the "Financing"). The
Financing will mature upon the earlier of (i) October 20, 1999, (ii) the date
of declaration of events of default by the Company (as described in the
Financing documents) and (iii) the effective date of an order of the Bankruptcy
Court confirming a Plan of Reorganization (The "Plan") for any of the
above-referenced debtors (which pursuant to an order of confirmation entered on
March 26, 1999, could occur any time on or after April 9, 1999). At IWC's
option, the Financing, along with interest and fees earned under the Financing,
may be converted into equity of the reorganized debtors under the Plan. The
Financing was fully funded by the Company in November, 1998. The Company has
also entered into an Interim Operating Agreement with IWC ("Interim Operating
Agreement") which provides, among other things, that IWC is granted authority
to exercise day-to-day control over the Company's investment in Pakistan Mobile
Communications (Pvt) Ltd. ("PMCL") during the course of the Chapter 11 cases
and the Company is granted authority to exercise day-to-day control over IWC's
interests in Star Digitel Limited ("SDL") during the course of the Chapter 11
cases. The Bankruptcy Court approved the Interim Operating Agreement at a
hearing on October 28, 1998.

On the effective date of the Plan, and pursuant to the Plan, the
transactions described below, among others, will occur. The Company will
transfer any interests which it holds as of the effective date, either directly
or indirectly, in Pakistan Wireless Holdings Limited ("PWHL"), International
Wireless Communications Pakistan, Limited ("IWCPL") and Pakistan Mobile
Communications (Pvt) Ltd. ("PMCL") to an entity which is a subsidiary of IWC
(the "New Pakistan Entity"). In addition, as of the effective date, the Company
is deemed to have waived certain distributions to which it would have been
entitled arising out of certain indebtedness owed by the foregoing entities in
the approximate principal amount of $4 million, and shall receive warrants
issued by the New Pakistan Entity which, if exercised in full, would result in
the Company receiving 15% of the common stock of the New Pakistan Entity.

On the effective date of the Plan, the Company will assign and transfer
all of its direct and indirect equity interests in Star Digitel Ltd. ("SDL")
which it or any Affiliate held as of August 21, 1998, to a new subsidiary or
Affiliate, called herein "New Vanguard Sub," to which, pursuant to the Plan,
the Company was to provide no less than $5 million in cash for capital calls.
The Company believes that it has met that obligation.

On the effective date of the Plan, the Company will cause New Vanguard Sub
to issue and distribute warrants to Reorganized IWCH (the "NVS Warrants"). The
NVS Warrants are exercisable from and including the effective date until the
fifth anniversary of the effective date. The NVS Warrants give Reorganized IWCH
the right to purchase up to 17.5% of the issued and outstanding common stock of
New Vanguard Sub on a fully diluted basis at a nominal exercise price of one
cent per share. The NVS Warrants shall also contain standard anti-dilution
protections.

On the effective date of the Plan, IWC will also transfer to New Vanguard
Sub its entire direct and indirect equity interests in SDL, together with all
equity or profit participation interests in SDL, or accrued as a result of
capital calls or other similar contributions related to the above described
interests that they held as of August 21, 1998, including, without limitation,
their rights under an Amended and Restated Shareholders Agreement among SDL,
Star Telecom, IWC China and Vanguard China, Inc. dated as April 4, 1997, as
amended, and a Subscription Agreement among SDL, Star Telecom, and IWC China
dated as of September 23, 1996.

The Company records its proportionate share of losses of IWC under the
equity method of accounting. During 1996, 1997 and 1998, the Company recognized
an amount of losses on the equity method from IWC that was equal to the
Company's equity investment as well as the Financing investment.

provision and development of cellular telecommunications services in the
People's Republic of China. SDL is a development stage company, and as such, is
expected to incur operating losses for the foreseeable future. Through December
31, 1998, the Company had invested $12.6 million in SDL and has provided $5.0
million in shareholder loans. SDL requires capital to construct, operate and
expand its cellular systems, SDL has met its capital requirements primarily
through bank financing, equipment loans and shareholder investments. During
1998, SDL sought additional third party debt or equity financing in order to
continue its operations. As of March 1999, SDL had been unsuccessful in
obtaining additional outside financing and the shareholders had not agreed to
contribute sufficient capital to maintain operations and existing obligations.
With the uncertainty of SDL as a going concern for 1999, the Company decided to
writeoff its total remaining investment in SDL resulting in a $14.4 million
charge to net losses from unconsolidated investments. Additionally, the Company
had guaranteed obligations of SDL totalling $16.9 million, of which $16.6
million were called for payment in February 1999. As a result, the Company
accrued a liability totaling $16.9 million at December 31, 1998, representing
the expected funding of loan guarantees of SDL.

During 1997, the Company acquired a 12% equity interest in IWCPL for $7.0
million. IWCPL owns approximately 59% of the equity in Pakistan Mobile
Communications (Pvt) Ltd., ("PMCL") a Pakistan company that owns and operates
the cellular license in Pakistan. Through December 31, 1998, the Company had
invested $10.2 million in IWCPL, and has provided $3.6 million in debt
financing. The Company records its proportionate share of the losses of IWCPL
under the equity method of accounting.

During the third quarter of 1998 the Company caused certain letters of
credit to be issued in favor of ABN AMRO Bank N.V. and Motorola, Inc. as
security for certain obligations owed to those letter of credit beneficiaries
by PMCL. The Company's total obligations under the letter of credits are $3.1
million. Vanguard Pakistan Inc., an indirect subsidiary of the Company, has
also entered into a Contribution and Indemnity Agreement with other
shareholders of PMCL. Under that agreement, Vanguard Pakistan, Inc. agreed to
pay a percentage, equal to its percentage shareholding in PMCL, of no more than
25% of certain increased costs that may be incurred by one of the letter of
credit beneficiaries. The Company's maximum potential liability under the
Contribution and Indemnity Agreement is approximately $418,000. Additionally,
upon the effective date of the plan of reorganization for IWC by the Bankruptcy
Court (which pursuant to the order of confirmation entered on March 26, 1999,
could occur any time on or after April 9, 1999), the Company will cause to be
issued approximately $7.4 million in letters of credit to the same
beneficiaries noted above.

Upon the effective date of the Plan and the exchange of the Company's
interest in IWCPL for IWC's interest in SDL, the Company will evaluate its
$13.1 million net investment in Pakistan with respect to its net realizable
value as a part of SDL due to the uncertainty of SDL's ability to continue
as a going concern.

INTERoACT SYSTEMS, INC. As of December 31, 1998, the Company had invested
$10.0 million in the common stock of InteroAct Systems, Inc. (InteroAct) and
$8.0 million in InteroAct's convertible preferred stock for an ownership
interest of approximately 24%. InteroAct is a development stage company that
provides consumer product manufacturers and retailers (currently supermarkets)
the ability to offer targeted promotions to retail customers at the point of
entry of a retail outlet through an interactive multi-media system utilizing
ATM-like terminals.

During 1996, InteroAct completed the sale of 142,000 units ("Units") of
14% Senior Discount Notes due 2003, which have been exchanged for identical
notes registered with the Securities and Exchange Commission ("SEC") and
warrants to purchase shares of common stock at $.01 per share. The Company
purchased for $12.0 million a total of 18,000 Units consisting of $18.0 million
principal amount at maturity of these 14% Senior Discount Notes and warrants to
purchase 132,012 shares (subsequently increased to 169,722) of common stock. At
issuance, the Company allocated, based upon the estimated fair values, $8.9
million and $3.1 million to the debentures and warrants purchased by the
Company, respectively. The shares issuable upon the exercise of these warrants
currently represent approximately 2% of InteroAct's outstanding common stock.
In addition, under a stock warrant agreement, the Company has the right to
acquire at any time prior to May 5, 2005 an aggregate of 900,113 shares of
common stock for $23.50 per share, which shares presently represent
approximately 10% of the outstanding common stock of InteroAct.

the Company invested an additional $8.0 million in InteroAct. Accordingly,
during the third and fourth quarters of 1998 the Company recognized $5.7
million in equity method losses and expects to recognize additional equity
method losses in 1999 based upon its proportionate share of the losses of
InteroAct to the extent of the remianing carrying value of its investments in
InteroAct.

In addition to the current ownership held by the Company, certain
officers, directors and entities affiliated with certain directors of the
Company maintain an additional 27% ownership interest in InteroAct.

OTHER. The Company formerly held a 50% investment in a joint venture known
as Eastern North Carolina Cellular Joint Venture ("ENCCJV") created to acquire,
own and operate various cellular markets located primarily in eastern North
Carolina. In August 1998, the Company sold its interest in the joint venture
for $30.0 million recognizing a gain of approximately $18.0 million.

During 1994 and 1995, the Company invested $35.0 million in cash and
received additional shares of stock worth $7.7 million as compensation for a
management services agreement with Geotek Communications, Inc. ("Geotek"), a
company which was developing a wireless communications network using FHMA
technology. As a result of permanent impairments to Geotek's stock price as
well as a filing of petitions for relief by Geotek under Chapter 11 of the
Bankruptcy Code during 1998, the Company wrote off its investment in Geotek
during 1997 and 1998.

EMPLOYEES

As of December 31, 1998, the Company had approximately 1800 full-time
employees, including approximately 650 employees associated with its sales
force. None of those employees are represented by a labor organization.
Management considers its employee relations to be good.

CERTAIN DEFINITIONS

Certain terms used in this Form 10-K are defined with particular meanings
as used herein.

ANALOG: Transmission method employing a continuous (rather than pulsed or
digital) electrical signal that varies in amplitude or frequency in response to
changes in sound, light or position.

BTA: One of the 493 Basic Trading Areas, which are smaller than MTAs, into
which the licensing for broadband PCS has been divided based on the geographic
divisions in the 1992 Rand McNally Commercial Atlas & Marketing Guide.

CDMA: Code Division Multiple Access digital technology. Technique that
spreads a signal over a frequency band that is larger than the signal to enable
the use of a common band by many users and to achieve signal security and
privacy.

CDPD: Cellular Digital Packet Data, a new packet data network protocol
which offers fast and reliable data transmission without using large amounts of
network capacity.

CELL SITE: The entire infrastructure and radio equipment associated with a
cellular transmitting and receiving station, including the land, building,
tower, antennas and electrical equipment.

CLUSTERS: A group of contiguous markets, the provision of which
facilitates wide areas of uninterrupted cellular service, reduced airtime
rates, automatic delivery of inbound calls and simplified dialing patterns.

COMMUNICATIONS ACT: The Communications Act of 1934, as amended.

DIGITAL: Transmission system in which information is transmitted in a
series of pulses.

ESMR: Enhanced Specialized Mobile Radio communications services, supplied
by converting analog SMR services into an integrated, digital transmission
system providing for call hand-off, frequency reuse and wide-call delivery
networks.

FAA: The United States Federal Aviation Administration.

FCC: The United States Federal Communications Commission.

FCC RULES: The rules promulgated by the FCC governing the construction and
operation of cellular communications systems and licensing and technical
standards for the provision of cellular communications service.

IXC: Usually referred to as inter-exchange carriers or long-distance
providers. There are many facilities-based IXCs including AT&T, MCI, WorldCom,
Sprint and Frontier, as well as competitive access providers that are
authorized for IXC services.

LEC: A Company providing local telephone services.

MARKET: An MSA or RSA.

METRO-CLUSTER: A group of contiguous markets, the provision of which
facilitates wide areas of uninterrupted cellular service, reduced airtime
rates, automatic delivery of inbound calls and simplified dialing patterns.

MSA: One of the Metropolitan Statistical Areas for which the FCC licensed
cellular communications systems.

MTA: One of the 51 Major Trading Areas into which the licensing for
broadband PCS has been divided based on the geographic divisions in the 1992
Rand McNally Commercial Atlas & Marketing Guide.

MTSO: A mobile telephone switching office, through which cell sites are
connected to the local landline telephone network.

NONWIRELINE LICENSE: The license for a market initially awarded to a
Company or group that was not affiliated with a local landline telephone
carrier in such market.

PCS: Personal Communications Services. Emerging technologies providing
wireless access to the local and long distance telephone system. Most PCS plans
call for low-powered, light weight pocket phones with individual, personal
telephone numbers that can be accessed without geographic restriction.

PENETRATION: Customers divided by POPs in a given area.

POPS: The estimate of the 1997 population of a MSA or RSA, as derived from
the 1997 population estimates prepared by Strategic Mapping, Inc.

RBOCS: The Regional Bell Operating Companies.

RESELLER: A Company that provides cellular service to customers but does
not hold an FCC cellular license or own cellular facilities. A reseller secures
blocks of cellular telephone numbers from a licensed carrier and, in turn,
sells service through its own distribution network to the public.

ROAMER: A cellular customer who makes or receives calls when traveling in
another cellular company's market using his/her home cellular phone.

ROAMING: The ability of cellular customers to make or receive calls when
traveling in another cellular company's market. Occurs when a cellular customer
leaves the cellular carrier's home area and uses his cellular phone.

RSA: One of the Rural Service Areas for which the FCC licensed cellular
communications systems.

SERVICE AREA: An MSA or RSA.

SMR: Specialized Mobile Radio communications services.

TDMA: Time Division Multiple Access digital technology, which designates a
time frame for cellular users to transmit within a frequency.

WIRELINE LICENSE: The license for a market initially awarded (or renewed)
to a Company or group that was affiliated with a local landline telephone
carrier in such market.

ITEM 2. PROPERTIES

The Company owns or leases certain properties in addition to the interests
in cellular licenses presently owned by the Company. The Company leases its
principal executive offices located in Greensboro, North Carolina, consisting
of approximately 128,000 square feet of office space. The Company either owns
or leases under long-term contracts 429 cell site locations, six cellular
switch locations and certain office and retail space in its operating cellular
markets. Rent expense under operating leases was $13.8 million in 1998.

ITEM 3. LEGAL PROCEEDINGS

As of December 31, 1998, Vanguard owned approximately 29% of the
outstanding common stock of International Wireless Communications Holdings,
Inc. ("IWCH"). Vanguard's investment in IWCH has a carrying value of zero. IWCH
is a development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America. IWCH and its
affiliates, International Wireless Communications, Inc., Radio Movil Digital
Americas, Inc., International Wireless Communications Latin America Holdings,
Ltd. And Pakistan Wireless Holdings Limited filed separate petitions for relief
under Chapter 11 of the United States Bankruptcy Code on September 3, 1998. A
Plan of Reorganization (the "Plan") was submitted by IWCH.

On January 22, 1999, a group of IWCH shareholders filed a complaint in the
Supreme Court of the State of New York (Warburg Dillon Read, ET AL. v. Vanguard
Cellular Systems, Inc. ET AL) against Vanguard and certain of Vanguard's and
IWCH's directors and officers, alleging fraud and misrepresentation in
connection with the merger of Radio Movil Digital Americas into a subsidiary of
IWCH. The complaint seeks $81 million in compensatory damages and $325 million
in punitive damages. The plaintiffs are former Radio Movil shareholders who
received IWCH Series I Preferred Stock as consideration in the merger.

In addition, on December 16, 1998, another group of IWCH shareholders, who
formerly were Radio Movil Shareholders, filed a complaint in the U.S. District
Court for the District of Delaware (Loeb Partners Corporation, ET AL v.
Griffin, ET AL.) against present and former officers and directors of IWCH
(including certain present and former officers and directors of Vanguard)
seeking damages in excess of $3.5 million with respect to the Radio Movil
transaction. In addition, in the course of the IWCH bankruptcy proceeding,
certain other shareholders of IWCH have asserted in the filings with the court
that they have claims against Vanguard or individual current or former officers
and directors of Vanguard in connection with IWCH.

On March 26, 1999, the bankruptcy court confirmed the IWCH plan of
reorganization as submitted, with one modification. Upon the effective date,
which could occur any time on or after April 9, 1999, Vanguard and Vanguard
officers and directors are released from claims by IWCH and IWCH bondholders
under the release provisions of the Plan. Direct (i.e., non-derivative) claims
against Vanguard or its officers and directors by shareholders of IWCH,
including those stated in the above described suits, are not released under the
Plan, as modified. The Company believes that the allegations of the shareholder
suits are without merit and intends to vigorously defend such suits.

On March 16, 1999, the Company received a letter from a California
attorney purporting to represent Star Digitel, in which he threatened that Star
Digitel would sue Vanguard, a Vanguard affiliate, and a director of Vanguard,
on the grounds that Vanguard, the Vanguard affiliate and the Vanguard director
failed to fulfill certain alleged promises to raise funds for Star Digitel, to
assist Star Digitel in finding a strategic investment partner, and to assist
Star Digitel in resolving disputes with a commercial equipment supplier. The
letter asserts that the damages could exceed $500 million. Star Digitel filed
suit containing causes of action for breach of contract, fraud and
misrepresentation, consistent with the above description, in Federal District
Court in Los Angeles on March 23, 1999. The Company believes that the
allegations of the suit are without any merit and intends to vigorously defend
such litigation.

Other legal proceedings pending against the Company or any of its
subsidiaries are routine filings with the FCC and state regulatory authorities
and customary regulatory proceedings pending in connection with acquisitions
and interconnection rates and practices, proceedings concerning the
telecommunications industry generally and other proceedings arising in the
ordinary course of business.

Management believes, even if resolved unfavorably to the Company, the above
legal proceedings would not have a materially adverse effect on the Company's
business.

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

There were no matters submitted to a vote of security holders of the
Company during the quarter ended December 31, 1998.

PART II

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

PRICE RANGE OF COMMON STOCK

1998 1997
----------------------- -----------------------
HIGH LOW HIGH LOW
----------- ----------- ----------- -----------

First Quarter ........ $ 20.19 $ 11.63 $ 16.25 $ 11.13
Second Quarter ....... 20.00 16.50 14.50 9.25
Third Quarter ........ 25.25 17.88 16.00 13.38
Fourth Quarter ....... 26.63 18.69 16.94 11.38

The high and low bid prices are as reported by the NASDAQ National Market
System. These price quotations reflect inter-dealer prices, without mark-down
or commissions, and may not necessarily represent actual transactions. On March
22, 1999, there were approximately 761 shareholders of record.

As discussed in Note 4 to the Consolidated Financial Statements in Item 8
and Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7, the covenants under the Company's long-term credit
facility limit the payment of cash dividends on common stock. The Company has
not paid any cash dividends on its common stock since its inception and does
not anticipate paying dividends in the foreseeable future.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

FOR THE YEARS ENDED
DECEMBER 31
--------------------------
1998 1997
------------- ------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue ............................................. $ 385,826 $ 349,638
Cellular telephone equipment revenue ........................ 34,984 23,328
Other ....................................................... 896 1,552
----------- ---------
421,706 374,518
----------- ---------
Costs and expenses:
Cost of service ............................................. 30,187 34,443
Cost of cellular telephone equipment ........................ 56,889 40,223
General and administrative .................................. 106,892 100,913
Marketing and selling ....................................... 76,244 75,794
Merger and other costs ...................................... 4,684 --
Depreciation and amortization ............................... 82,960 73,881
----------- ---------
357,856 325,254
----------- ---------
Income from operations ........................................ 63,850 49,264
Interest expense .............................................. (55,876) (57,257)
Net earnings (losses) from unconsolidated investments (a) ..... (70,395) (46,124)
Gain on dispositions (b) ...................................... 268,359 317
Other, net .................................................... 956 1,073
----------- ---------
Income (loss) before income taxes ............................. 206,894 (52,727)
Income tax (provision) benefit (c) ............................ (112,642) 48,635
----------- ---------
Income (loss) before extraordinary item ....................... 94,252 (10,027)
Extraordinary item (d) ........................................ (20,005) --
----------- ---------
Net income (loss) ............................................. $ 74,247 $ (10,027)
=========== =========
NET INCOME (LOSS) PER COMMON SHARE:
Earnings (loss) per common share -- basic
Net income (loss) before extraordinary loss ................. $ 2.54 $ (0.25)
Extraordinary loss, net of income tax ....................... $ (0.54) $ --
Net income (loss) ........................................... $ 2.00 $ (0.25)
Weighted average number of common shares outstanding 37,156 40,224
Earnings (loss) per common share -- assuming dilution
Net income (loss) before extraordinary loss ................. $ 2.43 $ (0.25)
Extraordinary loss, net of income tax ....................... $ (0.52) $ --
Net income (loss) ........................................... $ 1.91 $ (0.25)
Weighted average number of diluted common shares
outstanding ................................................ 38,791 40,224

OTHER DATA:
Capital expenditures (e) ...................................... $ 99,139 $ 121,662
EBITDA (f) .................................................... $ 151,494 $ 123,145
Total subscribers in majority owned markets at year end ....... 664 645

BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficiency) .................................. $ 34,703 $ 64,328
Property and equipment, net ................................... 345,108 371,343
Total assets .................................................. 753,726 827,961
Long-term debt (including current portion) .................... 568,276 768,967
Shareholders' equity .......................................... 100,757 910

FOR THE YEARS ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
------------ ----------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)

STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue ............................................. $ 282,694 $ 217,440 $ 146,417
Cellular telephone equipment revenue ........................ 15,120 15,647 18,529
Other ....................................................... 4,240 2,984 3,055
--------- --------- ---------
302,054 236,071 168,001
--------- --------- ---------
Costs and expenses:
Cost of service ............................................. 31,678 27,043 21,008
Cost of cellular telephone equipment ........................ 25,372 25,605 29,933
General and administrative .................................. 80,057 60,489 44,019
Marketing and selling ....................................... 62,384 54,906 37,102
Merger and other costs ...................................... -- -- --
Depreciation and amortization ............................... 48,635 36,170 24,073
--------- --------- ---------
248,126 204,213 156,135
--------- --------- ---------
Income from operations ........................................ 53,928 31,858 11,866
Interest expense .............................................. (46,199) (38,293) (22,126)
Net earnings (losses) from unconsolidated investments (a) ..... (9,344) (2,261) 206
Gain on dispositions (b) ...................................... 2,958 1,787 (339)
Other, net .................................................... 997 (104) (3,552)
--------- --------- ---------
Income (loss) before income taxes ............................. 2,340 (7,013) (13,945)
Income tax (provision) benefit (c) ............................ 4,109 -- --
--------- --------- ---------
Income (loss) before extraordinary item ....................... 6,449 (7,013) (13,945)
Extraordinary item (d) ........................................ -- -- (8,402)
--------- --------- ---------
Net income (loss) ............................................. $ 6,449 $ (7,013) $ (22,347)
========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Earnings (loss) per common share -- basic
Net income (loss) before extraordinary loss ................. $ 0.16 $ (0.17) $ (0.36)
Extraordinary loss, net of income tax ....................... $ -- $ -- $ (0.22)
Net income (loss) ........................................... $ 0.16 $ (0.17) $ (0.58)
Weighted average number of common shares outstanding 41,320 41,100 38,628
Earnings (loss) per common share -- assuming dilution
Net income (loss) before extraordinary loss ................. $ 0.15 $ (0.17) $ (0.36)
Extraordinary loss, net of income tax ....................... $ -- $ -- $ (0.22)
Net income (loss) ........................................... $ 0.15 $ (0.17) $ (0.58)
Weighted average number of diluted common shares
outstanding ................................................ 41,898 41,100 38,628

OTHER DATA:
Capital expenditures (e) ...................................... $ 130,805 $ 129,894 $ 62,632
EBITDA (f) .................................................... $ 102,563 $ 68,028 $ 35,939
Total subscribers in majority owned markets at year end ....... 513 381 245

BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficiency) .................................. $ (5,962) $ 4,997 $ (1,778)
Property and equipment, net ................................... 313,800 225,206 120,325
Total assets .................................................. 730,581 596,577 431,711
Long-term debt (including current portion) .................... 629,954 522,143 348,649
Shareholders' equity .......................................... 33,451 29,048 39,207

- ---------
(a) The Company owns 3.3 million shares of Geotek Common Stock. During 1997,
the Company recorded a loss of $32.7 million on this investment as
declines in the market value of Geotek common stock were deemed to be
other than temporary. In addition during 1997, the Company recorded losses
of $13.4 million on its investments in IWC, InteroAct, SDL and IWCPL.
During 1998, the Company recorded additional losses related to its
investments in Geotek, IWC, InteroAct, SDL and IWCPL including the
establishment of a valuation allowance of $31.3 million related to the
Company's investment in SDL.

(b) During 1998, the Company sold its ownership interests in the Myrtle Beach,
SC, RSA, Pensacola, FL MSA and Fort Walton Beach, FL MSA and its interest
in the Eastern North Carolina Cellular Joint Venture for total proceeds of
approximately $369.0 million.

(c) In 1997 and 1996, the Company recognized a deferred income tax benefit of
$42.7 million and $5.0 million, respectively, net of current income tax
expense of $0 and $891,000, respectively. In prior years, the Company made
the determination that it was uncertain that its net deferred income tax
assets would be realized. See -- Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Position.

(d) The extraordinary items for the years ended December 31, 1998 and 1994 of
$20.0 million and $8.4 million, respectively, reflect the write-off of
deferred financing costs associated with the Company's credit facilities
that were replaced during 1998 and 1994 and the costs associated with the
1998 tender offer for the Company's Debentures.

(e) Capital expenditures excluded fixed assets obtained through acquisitions of
businesses.

(f) EBITDA consists of income (loss) from operations before income taxes,
depreciation and amortization and merger and other costs. Although EBITDA
is not a measure of performance calculated in accordance with Generally
Accepted Accounting Principles ("GAAP"), management believes that it is
useful to a prospective investor because it is a measure widely used in
the cellular industry to evaluate a Company's operating performance.
EBITDA, however, should not be considered in isolation or as a substitute
for net income, cash flows from operating activities and other income or
cash flow statement data prepared in accordance with GAAP or as a measure
of liquidity or profitability.

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

The following is a discussion and analysis of the historical financial
condition and results of operations of the Company and factors affecting the
Company's financial resources. This discussion should be read in conjunction
with the Company's consolidated financial statements, including the notes
thereto.

OVERVIEW

As of October 2, 1998, the Company entered into an Amended and Restated
Agreement and Plan of Merger, (the "Merger Agreement") with AT&T and its wholly
owned subsidiary, Winston, Inc. Under the terms of the agreement, the Company
will be merged into Winston, Inc. and each of the Company's outstanding shares
of Class A Common Stock, par value $.01 per share (other than dissenting
shares), will, at each shareholder's option, be converted into the right to
receive either $23.00 cash or 0.59805 (as adjusted to reflect a three-for-two
stock split declared by AT&T on March 17, 1999) shares of AT&T common stock,
subject to the limitation that the overall consideration for such shares will
consist of 50% cash and 50% AT&T common stock.

The Merger Agreement contains certain restrictions on the conduct of the
Company's business prior to the consummation of the merger. Pursuant to the
Merger Agreement, the Company has agreed for the period prior to the merger to
operate its business in the ordinary course, to refrain from taking various
corporate actions without the consent of AT&T, and not to solicit or enter into
negotiations or agreements relating to a competing business.

A special shareholders' meeting to consider Merger Agreement is the
scheduled to be held April 27, 1999. Reference is made to the copy of the
Merger Agreement filed with the SEC as Exhibit 2(a) to the Company's Report on
Form 8-K dated December 31, 1998.

YEARS ENDED DECEMBER 31, 1998 AND 1997

On June 30, 1998, the Company completed the sale of its Myrtle Beach, SC
RSA market (the "Myrtle Beach Market"). The Myrtle Beach Market subscriber base
was approximately 34,000. On September 30, 1998, the Company completed the sale
of its Pensacola, FL MSA and Fort Walton Beach, FL RSA markets (the "Florida
Markets"). The Florida Markets' subscriber base was approximately 55,000.
Operating results for 1997 contain revenues and expenses generated by the
operation of these markets; however, the operating results for 1998 contain
only six months of revenue and expenses for the Myrtle Beach Market, and nine
months of revenue and expenses for the Florida Markets. Consequently, the
comparison of the results of operations for the years ended December 31, 1997
and 1998 as presented is not a comparison of like operations. To provide a more
meaningful comparison of operating results, additional analysis is presented
below comparing the Company's operating results for 1997 and 1998 excluding
from both periods the revenues and expenses of the Myrtle Beach and Florida
Markets ("Like Operations").

Service revenue in 1998 rose 10% to $385.8 million from $349.6 million in
1997, and rose 16% in a comparison of Like Operations for the same periods.
This increase was primarily the result of a 19,000 or 3% increase in the number
of subscribers in the Company's markets to approximately 664,000 at the end of
1998, as compared to approximately 645,000 in 1997. For Like Operations, the
subscriber base increased by approximately 97,500 or 17% during 1998.
Penetration, computed as a percentage of the Company's subscribers to total
POPs in the Company's cellular markets, increased to 9.8% in 1998 from 8.5%
last year. The increase in subscribers is the result of the growing acceptance
of cellular communications and the Company's efforts to capitalize on this
increasing acceptance through an expanded sales and distribution network.
Churn, the monthly rate of customer deactivations expressed as a percentage of
the subscriber base, decreased to 2.0% in 1998 from 2.2% in 1997.

Service revenue attributable to the Company's own subscribers (local
revenue) increased 7% during 1998 (12% for Like Operations) to $318.3 million
as compared to $297.5 million in 1997. Average monthly local revenue per
subscriber declined 6% to $40 in 1998 compared to $43 in 1997. This decline was
primarily due to the continued pattern of increased incremental penetration
into the segment of consumers who generally use their cellular phones less
frequently. Service revenue generated by nonsubscribers roaming into the
Company's markets increased 29% to $67.5 million in 1998 (44% for Like
Operations) as compared to $52.1 million in the prior year. This increase was
the result of increased usage partially offset by continued reductions in daily
access and usage rates. The reduced rates affect the Company as both a provider
and a purchaser of roaming services. Local revenue combined with roaming
revenue resulted in overall average monthly revenue per subscriber for 1998 of
$49, a decline of 4% from $50 in the prior year.

Cost of service as a percentage of service revenue decreased to 8% in 1998
from 10% in 1997 primarily as the result of a large increase in roaming revenue
with little incremental associated costs. The Company expects cost of service
as a percentage of service revenue to remain in the 8% to 10% range.

General and administrative expenses increased 6% or $6.0 million during
1998 (17% for Like Operations) as compared to 1997, primarily as a result of
increased costs associated with higher levels of staffing in the customer
operations and technical service areas, and from increased bad debt expense
associated with the larger subscriber base. General and administrative expense
as a percentage of service revenue decreased from 29% in 1997 to 28% in 1998.
For Like Operations, general and administrative expense as a percentage of
service revenue was 28% in both years.

Marketing and selling expenses increased 1% to $76.2 million in 1998 (4%
for Like Operations), compared to $75.8 million in 1997, but decreased as a
percentage of service revenue from 22% in 1997 to 20% in 1998. During 1998,
marketing and selling expenses including the net loss on cellular equipment
("Combined Marketing and Selling Expenses") increased to $98.1 million from
$92.7 million in 1997. Combined Marketing and Selling Expenses per gross
subscriber addition increased to $368 in 1998 from $330 last year.

Depreciation and amortization expense increased $9.1 million or 12% in
1998 as compared to 1997. Contributing to this increase is the Company's
decision to change the depreciable lives of its rental phone assets from 3
years to 1.5 years, which better reflects the useful life of this equipment. In
1998, this change increased depreciation expense by approximately $8.7 million.
Property and equipment placed in service since January 1, 1998 of approximately
$97.7 million also contributed to this increase.

Interest expense decreased $1.4 million or 2% during 1998. This decrease
resulted from a decrease in the interest rates charged and a decrease in
average borrowings of approximately $5.6 million.

Net losses from unconsolidated investments increased by $24.3 million.
This increase resulted primarily from the write off of the Company's
investments in and accrual of debt guarantees of Star Digitel Limited ("SDL"),
an additional $15.8 million equity investment the Company made in International
Wireless Communications Holdings, Inc. ("IWC") and an additional $8.0 million
invested in InteroAct Systems, Inc. ("InteroAct"). The Company continues to
recognize its proportionate share of the income and losses of its equity method
investees. Additionally, on June 29, 1998, Geotek Communications, Inc.
("Geotek") announced the filing of voluntary petitions seeking protection under
Chapter 11 of the Bankruptcy Code. Accordingly, the Company recognized an
impairment loss of approximately $10.0 million in the 1998 period to reduce its
investment in Geotek to zero. See "Liquidity and Capital Resources".

In 1998, the Company recorded income tax expense of $112.6 million as a
result of generating pre-tax net income of $206.9 million. This represents
income taxes associated primarily with the generation of taxable income on the
sale of the Florida Markets and Easten North Carolina Cellular Joint Venture
("ENCCJV") during the third quarter of 1998 and the sale of the Myrtle Beach
Market during the second quarter of 1998.

In 1998, the Company reported net income before extraordinary item of
$94.3 million or $2.54 basic net income per common share as compared to a net
loss in 1997 of $10.0 million or $0.25 basic net loss per common share. This
$104.3 million increase in net income before extraordinary item is primarily
attributable to the gain on the sale of the Florida and Myrtle Beach Markets
and the ENCCJV, offset by related income tax expense, and increases in losses
from unconsolidated investments, depreciation expense and interest expense.

In 1998, the Company reported an extraordinary loss of $20.0 million
(after an income tax benefit of $13.3 million), or $0.54 per basic common
share. In February 1998, the Company completed the closing of a $1 billion
credit facility which refinanced its existing $675 million facility. In
connection with this refinancing, the Company recorded an extraordinary loss of
$4.0 million, net of a $2.6 million income tax benefit, which represented the
write-off of all unamortized deferred financing costs related to the refinanced
facility. In December 1998, the Company completed a tender offer for its 9 3/8%
Senior Debentures and recorded an extraordinary loss of $16.0 million, net of a
$10.7 million income tax benefit, in connection with this offer. The
extraordinary loss includes the offer price, the consent payment, certain
dealer manager fees, the remaining unamortized deferred financing costs and
unamortized bond discount, and is offset by approximately $5.4 million of
proceeds related to the termination of certain reverse interest rate swap
transactions with Toronto Dominion and NationsBank. See "Liquidity and Capital
Resources."

YEARS ENDED DECEMBER 31, 1997 AND 1996

Service revenue in 1997 rose 24% to $349.6 million from $282.7 million in
1996. This increase was primarily the result of a 132,000 or 26% increase in
the number of subscribers in the Company's markets to approximately 645,000 in
1997, as

compared to approximately 513,000 in 1996. Penetration, computed as a
percentage of the Company's subscribers to total POPs in majority owned
cellular markets, increased to 8.5% in 1997 from 6.8% in 1996. The increase in
subscribers was the result of the growing acceptance of cellular communications
and the Company's efforts to capitalize on this increasing acceptance through
an expanded sales and distribution network. Churn, the monthly rate of customer
deactivations expressed as a percentage of the subscriber base, remained
constant between years at 2.2%.

Service revenue attributable to the Company's own subscribers (local
revenue) increased 26% during 1997 to $297.5 million as compared to $236.1
million in 1996. Average monthly local revenue per subscriber declined 5% to
$43 in 1997 compared to $45 in the prior year. This decline was primarily due
to the continued pattern of increased incremental penetration into the segment
of consumers who generally use their cellular phones less frequently. Service
revenue generated by nonsubscribers roaming into the Company's markets
increased 12% to $52.1 million in 1997 as compared to $46.6 million in the
prior year. This increase was the result of increased usage partially offset by
continued reductions in daily access and usage rates. The reduced rates affect
the Company as both a provider and a purchaser of roaming services. Local
revenue combined with roaming revenue resulted in overall average monthly
revenue per subscriber for the year of $50, a decline of 7% from $54 in the
prior year.

Cost of service as a percentage of service revenue decreased to 10% during
1997 from 11% during 1996.

General and administrative expenses increased 26% or $20.9 million during
1997 as compared to 1996. General and administrative expenses as a percentage
of service revenue increased from 28% to 29% in 1997. This increase was due
primarily to compensation expense resulting from increases in the Company's
employee base, generally in the areas of technical services, customer
operations and new product development. General and administrative expenses as
a percentage of service revenue are expected to stabilize and then decline
slowly as the Company adds more subscribers without commensurate increases in
general and administrative overhead and experiences higher utilization of the
Company's existing personnel and systems.

Marketing and selling expenses increased 21% to $75.8 million during 1997,
compared to $62.4 million in 1996. As a percentage of service revenue, these
expenses remained constant at 22% in both years. During 1997, marketing and
selling expenses including the net loss on cellular equipment ("Combined
Marketing and Selling Expenses") increased to $92.7 million from $72.6 million
in 1996. Combined Marketing and Selling Expenses per gross subscriber addition
increased to $330 in 1997 from $301 in 1996 as a result of increased
advertising and fixed costs for new stores that were opened in 1997. While the
Company has benefited from the increased success of external distribution
channels, the Company continues to emphasize internal distribution channels,
which it believes will result in higher long-term profit margins.

Depreciation and amortization expenses increased $25.2 million or 52%
during 1997 as compared to 1996. Property and equipment placed in service in
1997 of approximately $121.7 million, which included $22.0 million of cellular
telephones held for rental that have relatively short depreciable lives,
together with property and equipment placed in service in 1996 of $130.8
million, which had its first complete year of depreciation in 1997, accounted
for substantially all of this increase.

Interest expense increased $11.1 million or 24% during 1997. This increase
primarily resulted from an increase in average borrowings of approximately
$137.0 million. Interest rates remained fairly constant between years.

Net losses from unconsolidated investments increased by $36.8 million.
This increase resulted primarily from higher operating, amortization and
interest expenses incurred by InteroAct offset somewhat by the suspension of
the Company's recognition of losses attributable to its equity method
investments in IWC. The Company continues to recognize its share of the income
and losses of its equity method investments in InteroAct, ENCCJV, SDL and
International Wireless Communications Pakistan, Ltd. ("IWCPL"). Additionally,
during 1997, the Geotek common stock price, as quoted on the NASDAQ National
Market System, declined from $7.13 per share at December 31, 1996 to $1.53 per
share at December 31, 1997. Based on Geotek's historical performance, including
the significant current year decline in the market value of Geotek's common
stock, the Company's management made the determination that the decline in
Geotek's common stock price during 1997 was other than temporary. Accordingly,
the Company recognized an unrealized holding loss of $32.7 million in the 1997
consolidated statement of operations in recording the Company's investment in
Geotek common stock at its market value at December 31, 1997. This treatment
was in accordance with the guidance provided by SFAS No. 115. Previously,
unrealized holding losses related to the investment in Geotek common stock were
recorded as a component of stockholders' equity in accordance with SFAS No.
115.

The Company recognized a deferred income tax asset of $42.7 million in
1997 and a deferred income tax asset of $5.0 million, net of current income tax
expense of $891,000 in 1996. During 1998 the Company entered into agreements to
sell

its Myrtle Beach Market as well as its interest in the ENCCJV. See "Liquidity
and Capital Resources". These sales transactions were expected to generate
substantial capital gains which would utilize an equivalent amount of the
Company's accumulated net operating loss carryforwards. Based on these
anticipated gains, management assessed that it was more likely than not that a
significant portion of the Company's deferred income taxes would be realizable,
and, accordingly, the Company recognized a total of $52.6 million of net
deferred income tax assets as of December 31, 1997. Prior to 1996, the Company
made the assessment that realization of its net deferred income tax assets was
uncertain due primarily to its history of operating losses. See "Liquidity and
Capital Resources -- Income Taxes."

The Company reported a net loss of $10.0 million or $ 0.25 per share for
1997 as compared to net income of $6.5 million or $0.16 per share for 1996.
This $16.5 million decline in net income was due primarily to the recognition
of the unrealized holding loss on the Geotek investment and increases in
depreciation and interest expense and losses from unconsolidated investments
from the prior year, partially offset by the increase in the income tax benefit
as compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital to acquire, construct, operate and expand its
cellular systems. Prior to entering into the Merger Agreement, the Company also
explored, on an ongoing basis, possible acquisitions of cellular systems and
properties as well as other investment opportunities, some of which have
involved significant expenditures or commitments. In addition, although the
initial buildout of its cellular system is complete, the Company will continue
to construct additional cell sites and purchase cellular equipment to increase
capacity as subscribers are added and usage increases, to expand geographic
coverage, to provide for increased portable usage and to upgrade its cellular
system for digital conversion and the implementation of new services. In 1998,
the Company spent approximately $99.1 million on total capital expenditures and
approximately $67.9 million in connection with investments and loans to
unconsolidated affiliates. In 1997, the Company spent approximately $121.7
million on total capital expenditures and $17.8 million in connection with
acquisitions and loans to unconsolidated affiliates.

The specific capital requirements of the Company will depend primarily on
the timing and size of any additional acquisitions and other investments as
well as property and equipment needs. EBITDA has been a growing source of
internal funding in recent years, and the Company anticipates that in 1999
EBITDA will be sufficient to cover property and equipment expenditures and debt
service requirements. The Company has met its capital requirements in the past
primarily through bank financing, issuance of public debentures, private and
public issuances of its Class A Common Stock and internally generated funds.
The Company used approximately $315 million of the cash proceeds from the sale
of its Myrtle Beach and Florida Markets to reduce its debt. For the immediate
future, the Company will rely on borrowings under its existing credit facility
to meet any liquidity needs.

EBITDA does not represent and should not be considered as an alternative
to net income or operating income as determined by generally accepted
accounting principles. It should not be considered in isolation from other
measures of performance according to such principles, including operating
results and cash flows. EBITDA increased to $151.5 million in 1998 from $123.1
million in 1997 and net cash provided by operating activities as shown on the
Statement of Cash Flows increased to $70.6 million in 1998 from $46.1 million
in 1997 primarily due to a change in billing procedures during the second
quarter of 1997. Historically, the Company billed subscriber access fees in
advance. To reduce customer confusion upon receipt of the first bill and to
remain competitive, the Company changed its billing policy and now bills access
fees in arrears. This change had no impact on the Company's revenue
recognition, but did reduce the in-flow of cash from bill payments in 1997. Net
cash provided by operating activities in 1998 reflects a $1.4 million reduction
in interest expense and a $10.6 million reduction in working capital items.
Investing activities, primarily acquisitions of property and equipment and
investment transactions, provided net cash of $213.0 million in 1998 and used
cash of $154.9 million in 1997. The significant change in investing activities
is caused by the approximately $369 million of proceeds from the sale of three
properties in 1998, a decline in the level of capital expenditures in 1998,
offset by increases in cash paid for acquisitions resulting primarily from the
acquisition of NationPage and additional investments in IWC, InteroAct, SDL and
IWCPL. Cash flows from financing activities used net cash of $252.0 million in
1998 as compared to providing cash of $100.0 million in 1997. The significant
change in financing activities was primarily caused by repayments of long-term
debt with the proceeds from the property sales discussed previously.

FINANCING AGREEMENTS. At December 31, 1997 the Company's long-term debt
consisted primarily of a $675 million credit facility (the "Credit Facility")
and $200 million of 9 3/8% Senior Debentures due 2006 (the "Debentures"). In
February 1998, the Company completed the closing of an amendment to the Credit
Facility, increasing the facility to $1.0 billion (subsequently reduced through
debt repayments) pursuant to the Third Amended and Restated Facility A Loan

Agreement ("Facility A Loan") and the Facility B Loan Agreement ("Facility B
Loan") (collectively, the "1998 Loan Agreements") with various lenders led by
The Bank of New York, The Toronto-Dominion Bank, and NationsBank of Texas, N.A.

The Facility A and Facility B Loans were available to provide the Company
with additional financial and operating flexibility and to enable it to pursue
business opportunities that might arise in the future. The Facility A Loan
consisted of a $750 million senior secured reducing revolving credit facility
which allowed for the issuance of up to $25 million of standby letters of
credit. The Facility B Loan consisted of a $250 million 364-day revolving
credit facility which could be extended for an additional 364-day period upon
the approval of the lenders or converted to a term loan according to the terms
and subject to certain conditions of the Facility B Loan Agreement. On June 30,
1998, the Company permanently reduced funds available for borrowing under its
Facility A Loan by paying down debt with $150 million of the proceeds from the
sale of its Myrtle Beach Market. During February 1999, the Company converted
the Facility B Loan Agreement into a term loan of $250 million using the
proceeds to repay borrowings under its Facility A Loan.

Borrowings under the 1998 Loan Agreements bear interest at a rate equal to
the Company's choice of the Prime Rate or Eurodollar Rate plus an applicable
margin based upon a leverage ratio for the most recent fiscal quarter. The
ranges for this applicable margin are 0.0% to 0.25% for the Prime Rate and 0.5%
to 1.50% for the Eurodollar Rate. Based upon the leverage ratio at the end of
1998, the applicable margins for the first quarter of 1999 are 0.0% and 0.625%
for the Prime Rate and Eurodollar Rate, respectively.

The outstanding amounts of the Facility A and B Loans as of September 30,
2000 are to be repaid in increasing quarterly installments commencing on
September 30, 2000 and terminating at the maturity date of December 31, 2005.
The quarterly installment payments begin at 2.5% of the outstanding principal
amount at September 30, 2000 and gradually increase to 6.875% of the
outstanding principal amount. The 1998 Loan Agreements are to be paid in full
and terminated within sixty days after the closing date of the merger with
AT&T.

On December 4, 1998 the Company completed a cash tender offer ("Tender
Offer") and consent solicitation relating to its $200 million outstanding
principal amount of 9 3/8% Senior Debentures due April 15, 2006 (the "Offer").
The purchase price was $1,137.54 (inclusive of a $30.00 consent payment) plus
$12.76 in accrued interest per $1,000 principal amount of Debentures. A total
of $196.7 million in principal amount of Debentures were tendered. The purchase
price and the consent payments for the Debentures were paid with borrowings
under the 1998 Loan Agreements.

In conjunction with the Tender Offer, consents to certain proposed
amendments to the Indenture governing the Debentures were received that
eliminated substantially all of the restrictive covenants and amended certain
other provisions contained in the Indenture governing the Debentures.

Among other restrictions, the 1998 Loan Agreements limit the payment of
cash dividends, limit the use of borrowings and the creation of additional
long-term indebtedness and require the maintenance of certain financial ratios.
The provisions of the 1998 Loan Agreements were established in relation to the
Company's projected capital needs, projected results of operations and cash
flow. These provisions were generally designed to require continued improvement
in the Company's operating performance such that EBITDA would be sufficient to
continue servicing the debt as repayments are required. During November 1998,
the 1998 Loan Agreements were modified to permit the Tender Offer and the
Merger Agreement with AT&T. The Company is in compliance with all requirements
of the 1998 Loan Agreements and the Indenture.

Borrowings under the 1998 Loan Agreements are secured by the stock of
Vanguard Cellular Financial Corp. and Vanguard Cellular Operating Corp., direct
or indirect wholly-owned subsidiaries of the Company.

INVESTMENTS IN DOMESTIC WIRELESS. Prior to entering into the Merger
Agreement, the Company explored, on an ongoing basis, possible acquisitions of
additional cellular systems and licenses. The Company currently has no
agreements in principle regarding any such cellular acquisition. The Company
also explored possible acquisition of companies that would facilitate new
service offerings to its customer base, such as paging and Internet access.
During 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million. The
NationPage acquisition has minimized future paging service capacity constraints
and was financed through borrowings under the 1998 Loan Agreements.

OTHER INVESTMENTS. At December 31, 1998, the Company owned approximately
29% of the outstanding stock of International Wireless Communications Holdings,
Inc. ("IWCH"), in which the Company has previously invested an aggregate of
$24.8 million and had provided loans of $5.7 million as discussed below. IWCH
is a development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America. International
Wireless Communications Holdings, Inc., International Wireless Communications,
Inc., Radio Movil Digital Americas, Inc., International Wireless Communications
Latin America Holdings, Ltd. and Pakistan Wireless Holdings Limited
(collectively,

"IWC") filed separate petitions for relief under Chapter 11 of the United
States Bankruptcy Code on September 3, 1998. Pursuant to Bankruptcy Court
approval on October 28, 1998, the Company has provided IWC with post-petition
debtor-in-possession financing in the amount of $4.6 million on a senior
secured and administrative priority basis (the "Financing"). The Financing will
mature upon the earlier of (i) October 20, 1999, (ii) the date of declaration
of events of default by the Company (as described in the Financing documents)
and (iii) the effective date of an order of the Bankruptcy Court confirming a
Plan of Reorganization (the "Plan") for any of the above-referenced debtors
(which pursuant to an order of confirmation entered on March 26, 1999, could
occur any time on or after April 9, 1999). At IWC's option, the Financing,
along with interest and fees earned under the Financing, may be converted into
equity of the reorganized debtors under the Plan. The Financing was fully
funded by the Company in November 1998. The Company has also entered into an
Interim Operating Agreement with IWC ("Interim Operating Agreement") which
provides, among other things, that IWC is granted authority to exercise
day-to-day control over the Company's investment in Pakistan Mobile
Communications (Pvt) Ltd. ("PMCL") during the course of the Chapter 11 cases
and the Company is granted authority to exercise day-to-day control over IWC's
interests in Star Digitel Limited ("SDL") during the course of the Chapter 11
cases. The Bankruptcy Court approved the Interim Operating Agreement at a
hearing on October 28, 1998.

During the first quarter of 1997, the Company entered into a stock
purchase agreement to purchase from an unrelated third party 7% of the
outstanding shares of SDL, a Hong Kong company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. SDL is a
development stage company, and as such, is expected to incur operating losses
for the foreseeable future. Through December 31, 1998, the Company had invested
$12.6 million in SDL and has provided $4.9 million in shareholder loans. SDL
requires capital to construct, operate and expand its cellular systems, SDL has
met its capital requirements primarily through bank financing, equipment loans
and shareholder investments. During 1998, SDL sought additional third party
debt or equity financing in order to continue its operations. As of March 1999,
SDL had been unsuccessful in obtaining additional outside financing and the
shareholders had not agreed to contribute sufficient capital to maintain
operations and existing obligations. With the uncertainty of SDL as a going
concern for 1999, the Company decided to writeoff its total remaining investment
in SDL resulting in a $14.4 million charge to net losses from unconsolidated
investments. Additionally, the Company had guaranteed obligations of SDL
totalling $16.9 million, of which $16.6 million were called for payment in
February 1999.

As a result, the Company accrued a liability totaling $16.9 million at December
31, 1998, representing the expected funding of loan guarantees of SDL.

During 1997, the Company acquired a 12% equity interest in IWCPL for $7.0
million. IWCPL owns approximately 59% of the equity in Pakistan Mobile
Communications (Pvt) Ltd., ("PLCL") a Pakistan company that owns and operates
the cellular license in Pakistan. Through December 31, 1998, the Company had
invested $10.2 million in IWCPL and provided $3.6 million in debt financing.
The Company records its proportionate share of the losses of IWCPL under the
equity method of accounting.

During the third quarter of 1998, the Company caused certain letters of
credit to be issued in favor of ABN AMRO Bank N.V. and Motorola, Inc. as
security for certain obligations owed to those letter of credit beneficiaries
by PMCL. The Company's total obligations under the letter of credits are $3.1
million. Vanguard Pakistan Inc., an indirect subsidiary of the Company, has
also entered into a Contribution and Indemnity Agreement with other
shareholders of PMCL. Under that agreement, Vanguard Pakistan, Inc. agreed to
pay a percentage, equal to its percentage shareholding in PMCL, of no more than
25% of certain increased costs that may be incurred by one of the letter of
credit beneficiaries. The Company's maximum potential liability under the
Contribution and Indemnity Agreement is approximately $418,000. Additionally,
upon the effective date of the plan of reorganization for IWC by the Bankruptcy
Court (which pursuant to the order of confimation entered on March 26, 1999,
could occur any time on or after April 9, 1999), the Company will cause to be
issued approximately $7.4 million in letters of credit to the same
beneficiaries noted above.

As of December 31, 1998, the Company had invested $10.0 million in the
common stock of InteroAct Systems, Inc. and $8.0 million in convertible
preferred stock for an ownership interest of approximately 24%. InteroAct is a
development stage company that provides consumer product manufacturers and
retailers (currently supermarkets) the ability to offer targeted promotions to
retail customers at the point of entry of a retail outlet through an
interactive multi-media system utilizing ATM-like terminals.

During 1996, InteroAct completed the sale of 142,000 units ("Units") of
14% Senior Discount Notes due 2003, which have been exchanged for identical
notes registered with the SEC and warrants to purchase shares of common stock
at $.01 per share. The Company purchased for $12.0 million a total of 18,000
Units consisting of $18.0 million principal amount at maturity of these 14%
Senior Discount Notes and warrants to purchase 132,012 shares (subsequently
increased to 169,722) of common stock. At issuance, the Company allocated,
based upon the estimated fair values, $8.9 million and $3.1 million to the
debentures and warrants purchased by the Company, respectively. The shares
issuable upon the exercise of these warrants currently represent approximately
2% of InteroAct's outstanding common stock. In addition, under a stock warrant
agreement, the Company has the right to acquire at any time prior to May 5,
2005 an aggregate of 900,113 shares of common stock for $23.50 per share, which
shares presently represent approximately 10% of the outstanding common stock of
InteroAct.

InteroAct has incurred net losses since its inception. The net losses are
expected to be significant in future years as InteroAct continues the rollout
of its systems in retail supermarkets. The Company records its proportionate
share of these losses under the equity method of accounting. The Company's
equity and warrant investment was reduced to zero through the recognition of
equity method losses during 1997 and 1998. As of June 30, 1998, the Company's
total investment in InteroAct was reduced to zero through the recognition of
equity method losses. As a result, the Company suspended the recognition of
losses attributable to InteroAct until such time that equity method income
became available to offset the Company's share of InteroAct's future losses or
the Company made further investments in InteroAct. In the third quarter of
1998, the Company invested an additional $8.0 million in InteroAct.
Accordingly, during the third and fourth quarters of 1998 the Company
recognized $5.7 million in equity method losses and expects to recognize
additional equity method losses in 1999 based upon its proportionate share of
the losses of InteroAct to the extent of the remaining carrying value of its
investment in InteroAct.

CAPITAL EXPENDITURES. As of December 31, 1998, the Company had $477.0
million of property and equipment in service. The Company historically has
incurred capital expenditures primarily based upon capacity needs in its
existing markets resulting from continued subscriber growth. To increase
geographic coverage and provide for additional digital usage

the Company intends to increase the number of sites and add additional digital
capacity to existing sites as it has done over the past few years. As a result
of this continued network buildout and the ongoing growth of the Company's
subscriber base, capital expenditures were approximately $99 million during
1998. Capital expenditures for 1999 are estimated to be approximately $70 to
$80 million and are expected to be funded primarily through internally
generated funds. Approximately $60 million of those capital expenditures will
be for equipment, and the remainder will be primarily for computer equipment,
leasehold improvements and rental telephones.

STOCK REPURCHASES. In 1997, the Company's Board of Directors authorized
the repurchase of up to 7,500,000 shares of its Class A Common Stock from time
to time in open market or other transactions. During 1997 and 1998, the Company
repurchased 2,810,000 and 1,612,000 shares, respectively, at an average price
per share of approximately $13.00 in 1997 and $17.70 in 1998. The Company has
not repurchased any common stock since July 1998 and is prohibited from
repurchasing any additional shares under its merger agreement with AT&T.

INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 -- "Accounting for Income
Taxes." This standard requires, among other things, the recognition of future
income tax benefits, measured by enacted income tax rates, attributable to
deductible temporary differences between financial statement and income tax
bases of assets and liabilities and to tax Net Operating Loss ("NOL")
carryforwards, to the extent that realization of such benefits is more likely
than not.

In evaluating the reliability of its net deferred income tax assets
(before valuation allowance) at December 31, 1997, the Company considered the
expected effects of certain planned market and asset disposition transactions.
These transactions were expected to generate substantial taxable income to
utilize a significant portion of the accumulated NOL's. As a result, the
Company recognized, as of December 31, 1997, a net deferred income tax asset of
$52.6 million. A valuation allowance of $31.4 million was retained on certain
assets due to uncertainties as to their realizability. The disposition
transactions discussed previously were consummated during 1998 and generated
taxable income to the Company of approximately $285 million. As a result, the
Company utilized NOL's to offset the Federal (and partially offset the state)
income taxes that would have been due on these gains. During 1998, management
recorded a valuation allowance on capital losses incurred during the year on
certain unconsolidated investments due to uncertainties as to when and whether
these assets will be realized in the future. As of December 31, 1998, a
valuation allowance of $23.8 million remains related to losses accumulated
during 1998 on these investments.

As of December 31, 1998, the Company had Federal NOL carryforwards of
approximately $78 million which are available to offset future taxable income
to reduce the amount of tax paid. These NOL carryforwards expire periodically
through 2012. The primary differences between the accumulated deficit for
financial reporting purposes and the income tax loss carryforwards relate to
the differences in the treatment of certain deferred cellular license
acquisition costs, certain gains on dispositions of cellular interests,
partnership losses, depreciation methods, estimated useful lives and
compensation earned under stock compensation plans. These carryforwards may be
subject to annual limitation in the future in accordance with the Tax Reform
Act of 1986 and the ability to use these carryforwards could be significantly
impacted by a future "change in control" of the Company. The limitations, if
any, arising from such future "change in control" cannot be known at this time.
See Note 7 to the Company's Consolidated Financial Statements for further
information regarding the Company's income tax status.

GENERAL. Although no assurance can be given that such will be the case,
the Company believes that its internally generated funds and available
borrowing capacity under the 1998 Loan Agreements will be sufficient during the
next several years to complete its planned network expansion, to fund debt
service, to provide flexibility, to repurchase shares, to pursue acquisitions
and other business opportunities that might arise in the future, and to meet
working capital and general corporate needs. The Company also may issue
additional shares of Class A Common Stock.

THE YEAR 2000 ISSUES

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations.

The Company currently has ongoing efforts to modify its existing computer
systems and expects to have all essential systems Year 2000 compliant before
the end of 1999. Management believes the effort and cost that will be required
to bring the Company's computer systems into compliance will not be material.

In May 1997, the Company created a cross-functional team to examine the
Year 2000 issue, create a plan to make the Company compliant and oversee the
process of becoming compliant. The plan created by this team is in process and
is scheduled for completion well before December 31, 1999. This plan takes
information technology and embedded technology into consideration and also
emphasizes relationships with significant third-parties.

The Company has focused on two critical systems, its cellular network and
its internally developed billing system. The cellular network is provided by
one vendor who has worked closely with the Company for many years. The Company
closely monitored the work of the vendor in its process of providing and
testing a Year 2000 compliant product. The bulk of the work in becoming Year
2000 compliant is related to making the internally developed billing system
compliant. The plan also includes less critical systems, such as the Company's
data center, internal voice and data networks, and business operations systems.

The Company has completed the awareness, assessment and solution design
phases and is currently in the remediation phase of the project. Once
remediation is completed the only phase remaining is testing and validation.
The Company estimates that the plan is 78% complete.

The Company has incurred costs of approximately $800,000 and estimates an
additional cost of $1.2 million for a total project cost of approximately $2.0
million. Based on these figures the Company has incurred approximately 40% of
its Year 2000 costs.

The costs incurred to date are approximately 4% of the Company's
Information Technology ("IT") 1998 budget and the estimated total Year 2000
costs to be incurred in 1999 is approximately 5% of the IT budget. These
figures do not address the opportunity costs incurred by taking these resources
away from other projects. The Company's IT Department's general policy is to
only accept projects where the cost of implementation is less than the return
on investment. The return on investment could be anywhere from 2% to 10%
depending on the project. The Company estimates that the cost of lost
opportunity due to resources allocated to the Year 2000 project is between $1.5
million and $3.0 million.

In the event that the cellular network fails to perform as intended
because of a Year 2000 issue, even though the Year 2000 compliance plan has
been executed, the Company's estimate of the worst case scenario is that
certain types of calls may not be completed and certain types of services may
not function properly. These calls and services would be related to either a
Vanguard customer roaming in another company's market or a non-Vanguard
customer roaming in a Vanguard market. A Vanguard customer making a local call
in a Vanguard market would not fit this scenario and would likely have no
problem making a call.

If the internally developed billing system, as well as, any other internal
system does not work as intended due to the Year 2000 issue after the plan has
been executed, the worst case scenario is likely to be a minor loss of
functionality. The major subsystems in the billing system will be tested
extensively and it is more likely that a minor subsystem or report may have a
problem. In the same way, due to our verification processes, it is unlikely
that a critical application will have a problem and more likely that a minor
application will have an issue.

In the event that a Year 2000 problem does occur, the Company has manual
procedures that will allow it to continue operations until the problem can be
resolved. The Company will have a process for addressing any issues that arise
and the resources on hand to resolve problems in a timely manner.

INFLATION

The Company believes that inflation affects its business no more than it
generally affects other similar businesses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's long-term debt obligations. While the
Company cannot predict the impact interest rate movements will have on its
debt, the Company uses interest rate swaps and caps to modify its exposure to
interest rate movements and to reduce borrowing rates. The Company does not use
derivative financial instruments for trading purposes.

The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for the Company's long-term
debt and interest rate protection agreements. Weighted average variable
interest rates are based on implied forward rates in the yield curve (based on
information provided by one of the Company's lending institutions) at December
31, 1998 (amounts in thousands):

FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL MARKET VALUE
----------- ----------- ----------- ----------- ----------- ------------ ----------- -------------

LONG TERM DEBT:
Fixed rate .................. $ -- $ -- $ -- $ -- $ -- $ 3,276 $ 3,276 $ 3,669
Average interest rate ....... -- -- -- -- -- 9.38% 9.38% --
Variable rate ............... -- 28,250 84,750 84,750 98,875 268,375 565,000 565,000
Average interest rate ....... -- 6.03% 6.22% 6.31% 6.43% 6.60% 6.45% --

INTEREST RATE SWAPS (PAY
FIXED, RECEIVE VARIABLE):
Notional Amount ............. 50,000 50,000 50,000 50,000 50,000 -- -- (1,806)
Average Pay Rate ............ 6.10% 6.10% 6.10% 6.10% 6.10% -- -- --
Average Receive Rate ........ 5.28% 5.53% 5.72% 5.81% 5.93% -- -- --
Notional Amount ............. 100,000 100,000 100,000 100,000 100,000 -- -- (1,836)
Average Pay Rate ............ 5.62% 5.62% 5.62% 5.62% 5.62% -- -- --
Average Receive Rate ........ 5.28% 5.53% 5.72% 5.81% 5.93% -- -- --

INTEREST RATE CAPS ON
LIBOR:
Notional Amount ............. 100,000 -- -- -- -- -- -- --
Capped Rate ................. 7.50% -- -- -- -- -- -- --
Notional Amount ............. 25,000 -- -- -- -- -- -- --
Capped Rate ................. 8.00% -- -- -- -- -- -- --
Notional Amount ............. 100,000 100,000 100,000 100,000 -- -- -- (257)
Capped Rate ................. 8.50% 8.50% 8.50% 8.50% -- -- -- --
Notional Amount ............. 75,000 75,000 75,000 75,000 -- -- -- (136)
Capped Rate ................. 7.50% 7.50% 7.50% 7.50% -- -- -- --

"SAFE HARBOR" STATEMENT UNDER SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED:

Except for the historical information presented, the matters disclosed in
this report include forward-looking statements. These statements represent the
Company's judgment on the future and are subject to risks and uncertainties
that could cause actual results to differ materially. Such factors include,
without limitation: (i) the substantial leverage of the Company which may
adversely affect the Company's ability to finance its future operations, to
compete effectively against better capitalized competitors and to withstand
downturns in its business or the economy generally; (ii) a change in economic
conditions in the markets served by the Company which could effect demand for
cellular services; (iii) greater than anticipated competition from PCS and ESMR
companies that provide services and features in addition to those currently
provided by cellular companies, and the risk that the Company will not be able
to provide such services and features or that it will not be able to do so on a
timely or profitable basis; (iv) technological developments that make the
Company's existing analog networks and planned digital networks uncompetitive
or obsolete such as the risk that the Company's choice of Time Division
Multiple Access ("TDMA") as its digital technology leaves it at a competitive
disadvantage if other digital technologies, including Code Division Multiple
Access ("CDMA"), ultimately provide substantial advantages over TDMA or analog
technology and competitive pressures force the Company to implement CDMA or
another digital technology at substantially increased cost; (v) higher than
anticipated costs due to unauthorized use of its networks and the development
and implementation of measures to curtail such fraudulent use; (vi) greater
than anticipated losses attributable to its equity interests in other
companies; (vii) risks associated with Year 2000 compliance issues, and (viii)
adverse changes in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and notes to consolidated financial
statements of the Registrant and its subsidiaries are included in this Form
10-K following the Index to Financial Statements and Schedules. In addition,
Financial Statements of the Registrant's 50% or less owned significant
subsidiaries are included.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information about each of the
Company's executive officers and directors:

NAME AGE POSITION
- --------------------------------- ----- --------------------------------------------------------

Haynes G. Griffin 52 Chairman of the Board of Directors
Stephen R. Leeolou 43 President, Chief Executive Officer, Director
Stuart S. Richardson 52 Vice Chairman of the Board of Directors
L. Richardson Preyer, Jr. 51 Vice Chairman of the Board of Directors, Executive Vice
President, Treasurer
Stephen L. Holcombe 42 Executive Vice President, Chief Financial Officer
Richard C. Rowlenson 49 Executive Vice President, General Counsel
Timothy G. Biltz 40 Executive Vice President, Chief Operating Officer
S. Tony Gore, III 52 Executive Vice President -- Acquisitions and Corporate
Development
Dennis B. Francis 47 Executive Vice President -- Chief Technical Officer
F. Cooper Brantley 51 Director
Doris R. Bray 61 Director
Robert M. DeMichele 54 Director
L. Richardson Preyer, Sr. 80 Director
Robert A. Silverberg 64 Director

HAYNES G. GRIFFIN is a co-founder of the Company and has been a director
since 1985 and was elected Chairman of the Board of Directors in November,
1996. Mr. Griffin served as Chief Executive Officer from the Company's
inception until November, 1996. From November 1996 until May 1998 he served as
Co-Chief Executive Officer with Mr. Leeolou. Mr. Griffin is Chairman of the
Board of International Wireless Communications Holdings, Inc. and is a member
of the Boards of Directors of Lexington Global Asset Managers, Inc., and
InteroAct Systems, Inc. Mr. Griffin currently serves on the United States
Advisory Council on the National Information Infrastructure. He is a past
Chairman of the Cellular Telecommunications Industry Association.

STEPHEN R. LEEOLOU is President and Chief Executive Officer and a
co-founder of the Company and has been a director since 1985. From November
1996 until May 1998 when he was elected Chief Executive Officer, he served as
Co-Chief Executive Officer with Mr. Griffin. Prior to becoming President in
November 1996, Mr. Leeolou served as Executive Vice President, Chief Operating
Officer and Secretary of the Company. Mr. Leeolou is the Chairman of the Board
and Chief Executive Officer of InteroAct Systems, Inc.

STUART S. RICHARDSON has been a director since 1985 and was Chairman of
the Board of Directors from 1986 to 1996 and currently serves as Vice Chairman
of the Board of Directors. Since 1995, Mr. Richardson has been Chairman of the
Board of Lexington Global Asset Managers, Inc., a diversified financial
services holding company. From 1985 to 1995, Mr. Richardson was an executive of
Piedmont Management Company, Inc., formerly the parent corporation of Lexington
Global Asset Managers, Inc., and served as its Vice Chairman from 1986 to 1995.
Mr. Richardson also serves as a director of Chartwell Reinsurance Co. and
InteroAct Systems, Inc.

L. RICHARDSON PREYER, JR. is Vice Chairman of the Board, Executive Vice
President, Treasurer and a co-founder of the Company. Mr. Preyer serves as
Administrative Trustee of Piedmont Associates and Southeastern Associates,
investment partnerships, and is a director of InteroAct Systems, Inc.

STEPHEN L. HOLCOMBE is Executive Vice President and Chief Financial
Officer of the Company. He became Chief Financial Office of the Company in 1986
and became Executive Vice President in 1996.

RICHARD C. ROWLENSON is Executive Vice President, General Counsel and
Secretary of the Company. He joined the Company as General Counsel in 1987 and
became Executive Vice President in 1996.

TIMOTHY G. BILTZ is Executive Vice President and Chief Operating Officer
of the Company. He joined the Company in 1989 as Vice President of Marketing
and Operations and was Executive Vice President and President of US Wireless
Operations from November 1996 until May 1998 when he became Chief Operating
Officer.

S. TONY GORE, III is Executive Vice President of Acquisitions and
Corporate Development. He joined the Company in 1985 and became Executive Vice
President in November 1996. Mr. Gore is presently a task force member of the
North Carolina International Commission on Economic Development.

DENNIS B. FRANCIS is Executive Vice President and Chief Technical Officer.
He joined the Company in 1992 as Director of Technical Services and became
Executive Vice President and Chief Technical Officer in 1996.

F. COOPER BRANTLEY has been a director of the Company since 1995. Since
1976, Mr. Brantley has been a Member of Adams Kleemeier Hagan Hannah & Fouts,
P.L.L.C. (Attorneys-at-Law).

DORIS R. BRAY has been a director of the Company since 1994. Since 1987,
Ms. Bray has been a Partner of Schell Bray Aycock Abel & Livingston P.L.L.C.
(Attorneys-at-Law). Ms. Bray is a director of Cone Mills Corporation.

ROBERT M. DEMICHELE has been a director of the Company since 1987. Since
1995, Mr. DeMichele has been the President and Chief Executive Officer and a
director of Lexington Global Asset Managers, Inc. From 1981 to 1995, Mr.
DeMichele was President and Chief Executive Officer and a director of Piedmont
Management Company, Inc., formerly the parent corporation of Lexington Global
Asset Managers, Inc. Mr. DeMichele is also a director of The Navigators Group,
Inc., Chartwell Reinsurance Co. and InteroAct Systems, Inc.

L. RICHARDSON PREYER, SR. has been a director of the Company since 1985
and is a private investor. Mr. Preyer, Sr. is a director of Lexington Global
Asset Managers, Inc.

ROBERT A. SILVERBERG has been a director of the Company since 1985. From
1995 to 1998, Mr. Silverberg was an Executive Vice President and Director of
Vectra Banking Corporation. From 1981 until 1995, Mr. Silverberg was Chairman
of the Board and President of First Denver Corporation and Chairman of the
Board of its subsidiary, First National Bank of Denver. Mr. Silverberg was also
the President and Chairman of the Board of 181 Realty Company, Inc., a
commercial real estate holding company from 1968 to 1998. He now serves as a
Managing Partner of Silverberg Investment Co. LLLP. Mr. Silverberg is a
director of InteroAct Systems, Inc.

Mr. L. Richardson Preyer, Sr. is the father of Mr. L. Richardson Preyer,
Jr. and they are cousins of Mr. Stuart S. Richardson.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under federal securities laws, the Company's directors, its executive
officers, and any persons holding more than 10% of the Company's stock are
required to report their ownership of the Company's stock and any changes in
that ownership to the Securities and Exchange Commission. Specific due dates
for these reports have been established and the Company is required to report
in this Item 10 of Form 10-K any failure to file by these dates. During fiscal
1998, all of these filing requirements were satisfied by the Company's
directors, officers and 10% holders. In making these statements, the Company
has relied on the written representations of its directors, officers and 10%
holders and copies of the reports that they have filed with the Commission.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table sets forth cash and certain other compensation paid or
accrued by the Company for its six most highly compensated executive officers
(the "Named Executive Officers") for the years ended December 31, 1998, 1997
and 1996, respectively:

SUMMARY COMPENSATION TABLE

LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
------------------------- ---------
OTHER RESTRICTED SECURITIES ALL OTHER
ANNUAL COMPENSATION ANNUAL STOCK UNDERLYING LTIP COMPEN-
------------------------ COMPEN- AWARD(S) OPTIONS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) ($) (#)(1) ($)(2) ($)(3)
- ------------------------------------ ------ ------------ ----------- ------------ ------------ ------------ --------- ----------

Haynes G. Griffin 1998 410,670 246,250 -- -- -- 500,000 4,750
Chairman of the Board 1997 410,670 197,000 -- -- 390,000 -- 4,750
1996 410,670 198,445 -- -- 150,000 -- 4,500
Stephen R. Leeolou 1998 410,670 246,250 -- -- -- 500,000 4,750
President and Chief Executive 1997 410,670 197,000 -- -- 390,000 -- 4,750
Officer 1996 370,413 199,099 -- -- 150,000 -- 4,500
L. Richardson Preyer, Jr. 1998 358,911 215,000 -- -- -- 500,000 4,750
Executive Vice President 1997 358,911 172,000 -- -- 390,000 -- 4,750
and Treasurer 1996 358,911 179,762 -- -- 150,000 -- 4,500
Timothy G. Biltz 1998 240,000 150,000 -- -- 200,000 -- 4,750
Executive Vice President and 1997 194,000 78,400 -- -- 76,500 -- 4,750
Chief Operating Officer 1996 152,000 62,130 -- -- 90,000 -- 4,500
Stephen L. Holcombe 1998 230,000 112,500 -- -- 175,000 -- 4,750
Executive Vice President and 1997 200,000 68,600 -- -- 76,500 -- 4,750
Chief Financial Officer 1996 181,000 68,938 -- -- 90,000 -- 4,500
Richard C. Rowlenson 1998 230,000 112,500 -- -- 175,000 -- 4,750
Executive Vice President, 1997 200,000 68,600 -- -- 76,500 -- 4,750
General Counsel and Secretary 1996 181,000 68,938 -- -- 90,000 -- 4,500

- ---------
(1) Options were granted under Company stock option plans. Options reported for
1997 reflect repricing of options granted in prior fiscal years.

(2) Payments received under Executive Officer Long-Term Compensation Plan as a
result of consolidated net profits (as defined in the Plan) for four
consecutive quarters equaling or exceeding $20 million.

(3) Amounts shown represent the Company's contribution to its 401(k) Plan,
except that amounts shown for 1996 include payments made in lieu of
Company contributions not allowed by I.R.S. limitations in the following
amounts: Mr. Griffin -- $630; Mr. Leeolou -- $630; Mr. Preyer -- $630; Mr.
Biltz -- $750; Mr. Holcombe -- $380; and Mr. Rowlenson -- $880.

The following table provides details regarding stock options granted to
the Named Executive Officers during 1998.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS EXERCISE STOCK APPRECIATION FOR OPTION
UNDERLYING GRANTED TO OR BASE TERM (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------------
NAME GRANTED (1) FISCAL YEAR ($/SHARE) DATE 0% ($) 5% ($) 10% ($)
- ---------------------- ------------- -------------- ---------- ----------- -------- ------------ ----------

Timothy G. Biltz 100,000 8.5 $ 15.00 2/18/08 0 943,342 2,390,614
100,000 8.5 $ 19.00 2/18/08 0 1,194,900 3,028,111
Stephen L. Holcombe 87,500 7.4 $ 15.00 2/18/08 0 825,424 2,091,787
87,500 7.4 $ 19.00 2/18/08 0 1,045,537 2,649,597
Richard C. Rowlenson 87,500 7.4 $ 15.00 2/18/08 0 825,424 2,091,787
87,500 7.4 $ 19.00 2/18/08 0 1,045,537 2,649,597

- ---------
(1) Non-qualified stock options granted under the Company's 1994 Amended and
Restated Long-term Incentive Plan. Options vested as of 8/18/98.

(2) As required by the Securities and Exchange Commission, the amounts shown
assume a 0%, 5% and 10% annual rate of Appreciation on the price of the
Company's Common Stock throughout a 10 year Option Term. There can be no
assurance that the rate of appreciation assumed for purposes of this table
will be achieved. The actual value of the stock options to the Named
Executive Officers and all optionees as a group will depend on the future
price of the Company's Common Stock. As reflected in the column which
assumes a 0% rate of appreciation, the options will have no value to the
Named Executive Officers if the price of the Company's Common Stock does
not increase above the exercise price of the options. If the price of the
Company's Common Stock increases, all shareholders will benefit
commensurately

with the Named Executive Officers. On December 31, 1998, there were
39,138,394 shares of Common Stock outstanding and the closing price of the
Common Stock was $25.813. Using the same Assumed Annual Rates of Stock Price
Appreciation for the Option Term to Arrive at Potential Realizable Value
shown in the table above, the gain to all shareholders as a group at the 5%
and 10% Rates would be $635,359,264 and $1,610,125,119, respectively. The
amount of the gain to all Named Executive Officers as a percent of the gain
to all shareholders under these scenarios would be approximately 0.93%.

OPTION EXERCISES AND HOLDINGS

The following table shows stock options exercised by the Named Executive
Officers during 1998, including the aggregate value of gains on the date of
exercise (the "Value Realized"). In addition, this table includes the number of
shares covered by both exercisable and unexercisable stock options owned by the
Named Executive Officers as of December 31, 1998. Also reported are the values
for "in-the-money" options which represent the positive spread between the
exercise price of any such existing stock options and the year-end price of the
Common Stock.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END (#) OPTIONS AT YEAR-END ($)(1)
SHARES ACQUIRED ----------------------------- ----------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ---------------- -------------------- ------------- --------------- ------------- --------------

Haynes G. Griffin ............. 550,062 7,498,446 145,938 174,000 1,489,842 2,520,837
Stephen R. Leeolou ............ 467,062 6,663,217 228,938 174,000 2,325,071 2,520,837
L. Richardson Preyer, Jr. ..... 472,062 6,713,532 223,938 174,000 2,274,756 2,520,837
Timothy G. Biltz .............. 80,634 988,403 278,666 74,699 2,423,890 959,600
Stephen L. Holcombe ........... 23,200 366,862 336,639 74,699 3,107,411 959,600
Richard C. Rowlenson .......... 18,000 284,634 334,300 74,699 3,094,537 959,600

- ---------
(1) The closing sales price of the Common Stock on December 31, 1998, the last
trading day of 1998, was $25.813 as reported on NASDAQ.

DIRECTORS' FEES

Five of the nine present directors are not salaried employees of the
Company. For their services, those directors are paid a retainer at an annual
rate of $12,000 plus $1,000 for the first in-person Board or Board Committee
meeting in any one day, and $500 for each telephonic meeting or for each
additional meeting on the same day that they attend. Pursuant to the Vanguard
1996 Non-Employee Director Stock Option Plan, each director also receives an
option to purchase 2,000 shares of Common Stock five business days after the
Annual Meeting of Shareholders at an exercise price equal to the fair market
value. Salaried employees receive no additional compensation for their services
as directors.

EMPLOYMENT AND OTHER RELATED AGREEMENTS

EMPLOYMENT AGREEMENTS. In March 1995, the Company entered into three-year
employment agreements with Messrs. Griffin, Leeolou, and Preyer, which remain
in effect on a year to year basis until terminated by either party on one
year's notice. Each agreement provides for continuation of salary and benefits
for the remaining term of the agreement if employment is terminated "other than
for cause" as defined in the agreement. Each executive is also entitled to
receive a lump sum payment in the event his employment is terminated following
a change in control of the Company without cause or upon certain events which
result in the diminution of his position, his relocation or a material increase
in travel obligations. The amount of the severance payment in each case is
equal to 2.99 times the executive's average annual total cash compensation for
the immediately preceding five fiscal years, which amount will be reduced if
necessary to avoid application of the provisions of Sections 280G and 4999 of
the Internal Revenue code of 1986, as amended (the "Code"). These sections of
the Code impose excise taxes on, and deny the payor a deduction for, certain
payments made in connection with a change in control, as defined therein. Each
employment agreement also provides that the executive will not compete with the
Company for a term of the agreement or for one year following his termination
of employment, whichever is later.

If the employment of Messrs. Griffin, Leeolou and Preyer is terminated
immediately after the merger of the Company with AT&T (the "Merger"), the
estimated value of their severance payments would be $2,196,000, $2,112,000 and
$1,990,000, respectively.

SENIOR MANAGEMENT SEVERANCE PLAN. Under the terms of the Senior Management
Severance Plan, each of Messrs. Holcombe, Rowlenson, Biltz, Francis and Gore,
is entitled to receive a lump sum severance payment should his employment be
terminated "other than for cause" following a change in control or upon certain
events which result in the diminution of his position, his relocation or a
material increase in travel obligations. The amount of the severance payments
in each case is equal to 2.99 times the executive's average annual total cash
compensation for the immediately preceding five fiscal years; provided,
however, that the severance payment will be reduced to the extent necessary to
avoid application of the provisions of Sections 280G and 4999 of the Code. If
the employment of each of Messrs. Holcombe, Rowlenson, Biltz, Francis and Gore
is terminated immediately after the Merger, the estimated value of their
severance payments would be $809,000, $809,000, $783,000, $670,000 and
$551,000, respectively.

TAX REIMBURSEMENT AGREEMENTS. The Company entered into Tax Reimbursement
Agreements on July 22, 1998, which agreements replaced prior agreements to the
same effect originally entered into in 1987, with each of Messrs. Griffin,
Leeolou, Preyer, Richardson and Holcombe. Each executive who is party to a tax
reimbursement agreement will receive, upon consummation of the Merger, payment
equal to the amount of income tax paid in 1991 and 1992 (the "Tax Reimbursement
Amounts") on amounts includable in his income as a result of the lapse of
restrictions on certain shares of Common Stock. The tax reimbursement
agreements, however, limit the Tax Reimbursement Amounts to amounts that would
not be subject to the provisions of Sections 280G and 4999 of the Code. Under
the Merger Agreement, AT&T has agreed to pay, within 90 days after the Merger,
such Tax Reimbursement Amounts to Messrs. Griffin, Leeolou, Preyer, Richardson
and Holcombe, which are anticipated to be $5,278,000, $5,278,000, $5,278,000,
$992,000 and $165,000, respectively.

EXECUTIVE OFFICER LONG-TERM INCENTIVE COMPENSATION PLAN. Under the terms
of the Vanguard Executive Officer Long-Term Incentive Compensation Plan (the
"Long Term Plan"), which was amended on July 22, 1998 to extend the expiration
date from September 30, 1998 to September 30, 2003, upon consumation of the
Merger by the Company's Board of Directors, each of Messrs. Griffin, Leeolou
and Preyer became entitled to receive $500,000 and Mr. Richardson became
entitled to receive $94,000.

EMPLOYEE STOCK OPTIONS. Under the Company's Amended and Restated Stock
Compensation Plan, the 1989 Stock Plan and the Restated 1994 Long Term
Incentive Plan (collectively, the "Vanguard Stock Option Plans"), the Company
or its subsidiaries have granted options to purchase Vanguard Shares
("Options") to certain executive officers and other employees. Under the Merger
Agreement, subject to AT&T's consent, each of the Named Executive Officers and
Messrs. Gore and Francis, may be loaned by the Company, the amount necessary to
exercise his vested Options and the amount necessary to satisfy the tax
withholding associated therewith on a part recourse and part nonrecourse basis
(which will become fully recourse upon the Merger). Such loans would be secured
by, among other things, the shares of Common Stock issued upon the exercise of
such Options and any amounts due under employment agreements, tax reimbursement
agreements and the senior management severance plan (as described above) and
would become due and payable upon consummation of the Merger to the extent of
any cash received in the Merger and 90 days following the Merger for any
remaining balance, if the Merger is consummated, or five years from the date of
loan, if the Merger is not consummated.

As of December 31, 1998, Messrs. Griffin, Leeolou, Preyer and Richardson
had exercised 550,062, 467,062, 472,062 and 137,000 Options respectively,
borrowing $9,401,061, $7,791,301, $7,888,275 and $2,407,487, respectively. As
of March 22, 1999, Messrs. Griffin, Leeolou, Preyer, Richardson, Holcombe,
Rowlenson, Biltz, Francis and Gore had 319,938, 402,938, 397,938, 81,250,
285,899, 251,299, 60,299, 10,100 and 91,949 Options that will be exercisable
prior to the effective date of the Merger, respectively. Assuming that each of
the foregoing individuals exercises all of his outstanding vested Options and
assuming that the value of the shares of Common Stock at the time of exercise
is $23.00 per share, then the maximum amount of the loan to each of Messrs.
Griffin, Leeolou and Preyer would be $14,160,560, and the maximum amount of the
loan to each of Messrs. Richardson, Holcombe, Rowlenson, Biltz, Francis and
Gore would be $3,410,601, $5,465,453, $4,857,201, $1,149,562, $174,415, and
$1,658,520, respectively.

As of March 22, 1999, the directors of Vanguard, not including the
directors, who are also officers of the Company, (as a group) held Options to
purchase an aggregate of 33,000 shares of Common Stock pursuant to the Vanguard
Stock Option Plans and the 1996 Stock Option Plan for Non-Employee Directors,
all of which were exercisable. Assuming that the non-employee directors of
Vanguard do not exercise any of their Options prior to the Merger, then, upon
the consummation of the Merger, Doris R. Bray, Robert A. Silverberg, F. Cooper
Brantley, and Robert M. DeMichele will receive $56,178, $29,930, $29,930, and
$56,178, respectively, in exchange for their outstanding Options. Messrs.
Richardson, Holcombe, Rowlenson, Biltz, Francis and Gore will receive in the
Merger, or upon exercise prior thereto, approximately $389,625, $516,825,
$516,825, $516,825, $496,025, and $422,775, respectively, in exchange for their
Options that are currently unexercisable.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following are the only persons known to Vanguard who beneficially own
more than 5% of the outstanding Vanguard Shares as of March 22, 1999:

BENEFICIAL
OWNERSHIP(1)(2)(4)
-----------------------------
NAME AND ADDRESS SHARES PERCENT
- -------------------------------------------------- ------------------ ----------

Stuart S. Richardson ..................... 2,728,151(3) 6.78%
c/o Lexington Global Asset Managers, Inc.
Park 80 West, Plaza Two
Saddle Brook, NJ 07663

- ---------
(1) The descendants of Lunsford Richardson, Sr., their spouses, trusts and
corporations in which they have interests and charitable organizations
established by such descendants (collectively, the "RICHARDSON FAMILY")
beneficially own approximately 8,247,187 Vanguard Shares, or 20.29% of the
Vanguard Shares, and, consequently, may, if they act in concert, be in a
position to control the management and the affairs of Vanguard. Such
number of Vanguard Shares includes 479,188 Vanguard Shares that members of
the Richardson Family have the right to acquire under presently
exercisable Options. The individuals and institutions constituting the
Richardson Family have differing interests and may not necessarily vote
their Vanguard Shares in the same manner. Furthermore, trustees and
directors have fiduciary obligations (either individually or jointly with
other fiduciaries) that may dictate positions that differ from their
personal interests.

(2) Unless otherwise indicated, all Vanguard Shares are owned of record by the
person named and the beneficial ownership consists of sole voting power
and sole investment power.

(3) Includes 81,250 Vanguard Shares that Mr. Richardson has the right to
acquire under presently exercisable Options; 17,900 Vanguard Shares owned
by Mr. Richardson's spouse; 1,057,759 Vanguard Shares held by the Smith
Richardson Foundation, of which Mr. Richardson is a trustee; 83,882
Vanguard Shares held by various other trusts of which Mr. Richardson is
also a trustee; and 1,308,917 Vanguard Shares held by Piedmont
Harbor-Piedmont Associates Limited Partnership over which Mr. Richardson
obtained shared voting and investment authority pursuant to the terms of
an appointment of agent, dated September 30, 1998, by the Managing General
Partner Piedmont Harbor-Piedmont Associates Limited Partnership. The
Vanguard Shares shown as beneficially owned do not include 50,012 Vanguard
Shares held in trusts for the benefit of Mr. Richardson's children. Mr.
Richardson denies beneficial ownership of the Vanguard Shares held by such
trusts. Mr. Richardson denies beneficial ownership of the Vanguard Shares
directly owned by his spouse. Mr. Richardson has entered into a Voting
Agreement with respect to 50,736 of the Vanguard Shares he beneficially
owns. The Smith Richardson Foundation and Piedmont Harbor-Piedmont
Associates Limited Partnership have also entered into Voting Agreements.

(4) As described in "Other Agreements," AT&T has been granted under the
Shareholder's Options, the Charitable Trust and Family Foundation
Shareholder's Options and the Vanguard Option, options to purchase,
collectively, up to 13,997,889 Vanguard Shares from Vanguard, Messrs.
Preyer, Griffin, Leeolou and Richardson, the Smith Richardson Foundation
and Piedmont Harbor-Piedmont Associates Limited Partnership, and from
Vanguard. AT&T filed a Schedule 13D in connection with the Shareholder's
Options and the Vanguard Option in which AT&T disclaimed beneficial
ownership of Vanguard Shares subject to such agreements.

The following table sets forth information with respect to the beneficial
ownership of Vanguard Shares, as of March 22, 1999 by (i) each director and the
executive officers named in the Summary Compensation Table included in
Vanguard's Proxy Statement dated April 20, 1998 and (ii) all directors and
executive officers as a group. Unless otherwise indicated, all Vanguard Shares
are owned of record by the individuals named and the beneficial ownership
consists of sole voting power and sole investment power. The number of Vanguard
Shares beneficially owned by each of the persons listed below includes Vanguard
Shares subject to options that become exercisable on or before the Effective
Time.

AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT
- -------------------------------------------------------------------------- ---------------------- ----------

Stuart S. Richardson ................................................ 2,728,151(1) 6.78%
Haynes G. Griffin ................................................... 1,659,800(2) 4.10%
Stephen R. Leeolou .................................................. 1,408,615(3) 3.47%
L. Richardson Preyer, Jr. ........................................... 1,387,573(4) 3.42%
Timothy G. Biltz .................................................... 61,455(5) *
Stephen L. Holcombe ................................................. 311,464(6) *
Richard C. Rowlenson ................................................ 290,993(7) *
F. Cooper Brantley .................................................. 27,198(8) *
Doris R. Bray ....................................................... 14,800(9) *
Robert M. DeMichele ................................................. 1,068,259(10) 2.66%
L. Richardson Preyer, Sr. ........................................... 96,703(11) *
Robert A. Silverberg ................................................ 171,000(12) *
All Directors, Nominees and Executive Officers as a group (14 persons) 8,332,334(13) 19.79%

- ---------
* Represents less than 1%

(1) For a detailed description of the nature of Mr. Richardson's beneficial
ownership, see "Security Ownership of Certain Beneficial Owners."

(2) Mr. Griffin has entered into a Voting Agreement with respect to 1,357,993
of these Vanguard Shares. Also includes 319,938 Vanguard Shares that Mr.
Griffin has the right to acquire under presently exercisable Options that,
if exercised will become subject to his Voting Agreement. Also includes
5,271 Vanguard Shares owned by Mr. Griffin's spouse as to which he shares
voting and investment power. Does not include 51,690 Vanguard Shares held
by trusts, the sole beneficiaries of which are Mr. Griffin's sons and the
trustee of which is Mr. Griffin's brother. Mr. Griffin denies beneficial
ownership of the foregoing Vanguard Shares owned by his spouse and held by
such trusts. Also does not include 200,000 Vanguard Shares held by a
charitable remainder unitrust and 40,000 Vanguard Shares held by the
Griffin Family Foundation, over which Mr. Griffin has no investment or
voting authority.

(3) Mr. Leeolou has entered into a Voting Agreement with respect to 1,005,612
of these Vanguard Shares. Also includes 402,938 Vanguard Shares that Mr.
Leeolou has the right to acquire under presently exercisable Options that,
if acquired, will become subject to his Voting Agreement. Does not include
36,954 Vanguard Shares held by trusts, the sole beneficiaries of which are
Mr. Leeolou's children and the trustee of which is Mr. Leeolou's brother.
Mr. Leeolou denies beneficial ownership of the Vanguard Shares held by
these trusts. The Vanguard Shares shown also do not include 269,325
Vanguard Shares held by a trust of which Mr. Leeolou may be deemed to
share investment power but over which he has no voting power. Also does
not include 202,500 Vanguard Shares held by a charitable remainder
unitrust and 80,800 Vanguard Shares held by the Leeolou Family Foundation,
over which Mr. Leeolou has no investment or voting authority.

(4) Mr. Preyer has entered into a Voting Agreement with respect to 976,090 of
these Vanguard Shares. Also includes 397,938 Vanguard Shares that Mr.
Preyer has the right to acquire under presently exercisable Options that,
if exercised, will become subject to his Voting Agreement. Also includes
12,061 Vanguard Shares owned by Mr. Preyer's spouse as to which he shares
voting and investment power. Does not include 63,279 Vanguard Shares held
by trusts, the sole beneficiaries of which are Mr. Preyer's children and
the trustee of which is Mr. Preyer's sister. Mr. Preyer denies beneficial
ownership of the foregoing Vanguard Shares owned by his spouse and held by
such trusts. The Vanguard Shares shown do not include 300,000 Vanguard
Shares held by a trust of which Mr. Preyer may be deemed to share
investment power but over which he has no voting power. Also does not
include 249,736 Vanguard Shares held by a charitable remainder unitrust
and 11,746 Vanguard Shares held by the Preyer Jacobs Foundation, over
which Mr. Preyer has no investment or voting authority.

(5) Includes 60,299 Vanguard Shares that Mr. Biltz has the right to acquire
under presently exercisable Options.

(6) Includes 285,899 Vanguard Shares that Mr. Holcombe has the right to acquire
under presently exercisable Options.

(7) Includes 251,299 Vanguard Shares that Mr. Rowlenson has the right to
acquire under presently exercisable Options. Also includes 14,427 Vanguard
Shares owned by Mr. Rowlenson's spouse as to which he shares voting and
investment power. Does not include 13,550 Vanguard Shares held by trusts,
the sole beneficiaries of which are Mr. Rowlenson's children and the
trustee of which is Mr. Rowlenson's brother-in-law. Mr. Rowlenson denies
beneficial ownership of the foregoing Vanguard Shares owned by his spouse
and held by such trusts.

(8) Includes 6,000 Vanguard Shares that Mr. Brantley has the right to acquire
under presently exercisable Options.

(9) Includes 10,500 Vanguard Shares that Mrs. Bray has the right to acquire
under presently exercisable Options.

(10) Includes 10,500 Vanguard Shares that Mr. DeMichele has the right to
acquire under presently exercisable Options and 1,057,759 Vanguard Shares
held by the Smith Richardson Foundation, Inc., of which Mr. DeMichele
serves as one of eight trustees. The Vanguard Shares held by the Smith
Richardson Foundation, Inc. are also reported as beneficially owned by Mr.
Richardson, who is also a trustee. Mr. DeMichele denies beneficial
ownership of Vanguard Shares held by the Smith Richardson Foundation, Inc.

(11) Includes 28,245 Vanguard Shares held by Mr. Preyer's spouse. Mr. Preyer
denies beneficial ownership of the foregoing Vanguard Shares owned by his
spouse. The Vanguard Shares shown do not include 14,929 Vanguard Shares
held by a trust of which Mr. Preyer may be deemed to share investment
power but over which he has no voting power.

(12) Includes 6,000 Vanguard Shares that Mr. Silverberg has the right to
acquire under presently exercisable Options and 165,000 Vanguard Shares
owned of record by a limited partnership of which Mr. Silverberg is
managing partner.

(13) Includes 1,934,610 Vanguard Shares that directors and executive officers
have the right to purchase under the presently exercisable Options.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As of December 31, 1998, the Company had approximately a 29% ownership
interest in International Wireless Communications Holdings, Inc. ("IWCH"),
which interest represented an investment of approximately $26.4 million. The
Company also loaned $4.6 million to IWCH as discussed in more detail at Item 7
under the heading "Liquidity and Capital Resources -- Other Investments."
Haynes Griffin, a director and executive officer of the Company served as
Chairman of the Board of IWCH during 1998 and holds an option to purchase
400,000 shares of IWCH common stock.

As of December 31, 1998, the Company had invested $12.6 million in Star
Digitel Limited ("SDL") and had provided $4.9 million in shareholder loans. The
Company also guaranteed obligations of SDL totaling $16.9 million, of which
$16.6 million were called for payment in February 1999.

As of December 31, 1998, the Company owned approximately 24% of the
outstanding voting stock of InteroAct Systems, Inc. ("InteroAct") as more fully
described at Item 7 under the heading "Liquidity and Capital Resources --
Other Investments." Stephen R. Leeolou, a director and chief executive officer
of the Company serves as Chairman of the Board and Chief Executive Officer of
InteroAct and Messrs. Richardson, Griffin, Preyer, Jr., DeMichele and
Silverberg serve as directors of InteroAct. Michael Leeolou, an executive
officer of InteroAct is the brother of Stephen R. Leeolou.

During 1998, the Company provided certain management services to InteroAct
under the terms of a management services agreement and was reimbursed for
expenses it incurred. By agreement with certain shareholders of InteroAct, the
Company has the right to designate six members of InteroAct's Board of
Directors. This agreement will terminate upon the effective date of the Merger.

PART IV

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

(a) (1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. The financial statements and supplemental
schedules listed in the accompanying Index to Financial Statements and Schedules are filed as a part
of this report.
(a) (3) EXHIBITS. Exhibits to this report are listed in the accompanying Index to Exhibits.
(b) REPORTS ON FORM 8-K.
(b) (1) On December 31, 1998, the Registrant filed a Current Report on Form 8-K reporting that on
December 24, 1998, the Registrant entered into the Amended and Restated Agreement and Plan of
Merger, dated as of October 2, 1998, with AT&T Corp. and Winston Inc. to incorporate certain prior
amendments and to make certain other changes to the agreement. Related exhibits were also filed.
(b) (2) On December 4, 1998, the Registrant filed a Current Report on Form 8-K reporting that on December 3,
1998, the Registrant accepted for payment all of the Registrant's 9 3/8% Senior Debentures due April
15, 2006 properly tendered (and not withdrawn) in connection with the cash tender offer commenced on
November 4, 1998, and filed related exhibits.
(b) (3) On November 9, 1998, the Registrant filed a Current Report on Form 8-K reporting that on
November 4, 1998, the Registrant commenced a cash tender offer for its $200 million outstanding
principal amount 9 3/8% Senior Debentures due April 15, 2006, and filing as an exhibit Amendment
No. 1 to the Agreement and Plan of Merger dated as of October 2, 1998 among AT&T Corp., Winston,
Inc. and Vanguard Cellular Systems, Inc.
(b) (4) On October 15, 1998, the Registrant filed a Current Report on Form 8-K reporting that on
September 30, 1998, the Registrant closed the sale of its Pensacola, FL MSA and Fort Walton Beach,
FL RSA markets pursuant to an Asset Purchase Agreement dated May 22, 1998.
(b) (5) On October 13, 1998, the Registrant filed a Current Report on Form 8-K reporting that on October 2,
1998, the Registrant signed a definitive merger agreement with AT&T Corp., and filed related exhibits.
(b) (6) On July 13, 1998, the Registrant filed a current Report on Form 8-K. On July 13, 1998, the Registrant
filed a Current Report on Form 8-K reporting that on June 30, 1998, the Registrant closed the sale of
its Myrtle Beach and South Carolina 5-Georgetown rural service area markets pursuant to an Asset
Purchase Agreement dated March 10, 1998.

SIGNATURES

Pursuant to the requirements of the Section 13 and 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

VANGUARD CELLULAR SYSTEMS, INC.

By: /s/ HAYNES G. GRIFFIN
-------------------------------------
HAYNES G. GRIFFIN
CHAIRMAN OF THE BOARD OF DIRECTORS

Date: March 31, 1999

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

SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- ---------------

/s/ HAYNES G. GRIFFIN Chairman of the Board of Directors March 31, 1999
----------------------------------
HAYNES G. GRIFFIN

/s/ STEPHEN R. LEEOLOU President, Chief Executive Officer, March 31, 1999
---------------------------------- Director
STEPHEN R. LEEOLOU

/s/ STUART S. RICHARDSON Vice Chairman of the Board of March 31, 1999
---------------------------------- Directors
STUART S. RICHARDSON

/s/ L. RICHARDSON PREYER, JR. Vice Chairman of the Board of March 31, 1999
---------------------------------- Directors
L. RICHARDSON PREYER, JR.

/s/ STEPHEN L. HOLCOMBE Chief Financial Officer (Principal March 31, 1999
---------------------------------- accounting and principal financial
STEPHEN L. HOLCOMBE officer)

/s/ F. COOPER BRANTLEY Director March 31, 1999
----------------------------------
F. COOPER BRANTLEY

/s/ DORIS R. BRAY Director March 31, 1999
----------------------------------
DORIS R. BRAY

/s/ ROBERT M. DEMICHELE Director March 31, 1999
----------------------------------
ROBERT M. DEMICHELE

/s/ L. RICHARDSON PREYER, SR. Director March 31, 1999
----------------------------------
L. RICHARDSON PREYER, SR.

/s/ ROBERT A. SILVERBERG Director March 31, 1999
----------------------------------
ROBERT A. SILVERBERG

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

PAGE
------

Vanguard Cellular Systems, Inc. and Subsidiaries
Consolidated Balance Sheets, December 31, 1998 and 1997 ..................................... F-2
Consolidated Statements of Operations for the Years ended December 31, 1998, 1997 and 1996... F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31,
1998, 1997 and 1996 ....................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years ended December
31, 1998, 1997 and 1996 ................................................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996... F-6
Notes to Consolidated Financial Statements .................................................. F-7
Report of Independent Public Accountants .................................................... F-28
Schedule I -- Condensed Financial Information of the Registrant ............................. F-29
Schedule II -- Valuation and Qualifying Accounts ............................................ F-33
Financial Statements of Certain Significant 50% or less Owned Subsidiaries ................... F-34

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.

F-1

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLAR AMOUNTS IN THOUSANDS)

DECEMBER 31,
---------------------------
1998 1997
------------- -------------

ASSETS
CURRENT ASSETS:
Cash, including $16,625 held in escrow................................................... $ 34,038 $ 2,487
Accounts receivable, net of allowances for doubtful accounts of $9,798 and $8,184........ 54,917 54,340
Cellular telephone inventories .......................................................... 13,696 18,826
Deferred income tax asset ............................................................... 10,374 43,139
Prepaid expenses ........................................................................ 2,554 3,620
---------- ----------
Total current assets ................................................................. 115,579 122,412
---------- ----------
INVESTMENTS .............................................................................. 278,438 307,718
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land .................................................................................... 1,331 2,432
Buildings ............................................................................... 0 557
Cellular telephones held for rental ..................................................... 23,189 33,505
Cellular telephone and paging systems ................................................... 377,058 382,012
Office furniture and equipment .......................................................... 75,233 81,160
---------- ----------
476,811 499,666
Less -- Accumulated depreciation ........................................................ (175,686) (166,230)
---------- ----------
301,125 333,436
Construction in progress ................................................................ 43,983 37,907
---------- ----------
345,108 371,343
---------- ----------
NONCURRENT DEFERRED INCOME TAX ASSET ..................................................... -- 9,447
---------- ----------
NOTES RECEIVABLE FROM EMPLOYEES AND DIRECTORS ............................................ 8,270 --
---------- ----------
OTHER ASSETS, net of accumulated amortization of $8,957 and $10,701 ...................... 6,331 17,041
---------- ----------
Total assets ......................................................................... $ 753,726 $ 827,961
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES -- Accounts payable and accrued expenses ............................. $ 80,876 $ 58,084
---------- ----------
NONCURRENT DEFERRED INCOME TAX LIABILITY ................................................. 3,817 --
---------- ----------
LONG-TERM DEBT ........................................................................... 568,276 768,967
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Preferred stock -- $.01 par value, 1,000,000 shares authorized, no shares issued ........ -- --
Common stock, Class A -- $.01 par value, 250,000,000 shares authorized, and 39,138,394
and 38,307,623 shares issued and outstanding .......................................... 391 383
Common stock, Class B -- $.01 par value, 30,000,000 shares authorized, no shares issued. -- --
Additional capital in excess of par value ............................................... 285,618 221,624
Notes receivable from employees and directors............................................ (19,218) --
Accumulated deficit ..................................................................... (166,034) (221,097)
---------- ----------
Total shareholders' equity ........................................................... 100,757 910
---------- ----------
Total liabilities and shareholders' equity ........................................... $ 753,726 $ 827,961
========== ==========

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

F-2

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ -------------- ------------

REVENUE:
Service revenue ................................................. $ 385,826 $ 349,638 $ 282,694
Cellular telephone equipment revenue ............................ 34,984 23,328 15,120
Other ........................................................... 896 1,552 4,240
---------- ---------- ---------
421,706 374,518 302,054
---------- ---------- ---------
COSTS AND EXPENSES:
Cost of service ................................................. 30,187 34,443 31,678
Cost of cellular telephone equipment ............................ 56,889 40,223 25,372
General and administrative ...................................... 106,892 100,913 80,057
Marketing and selling ........................................... 76,244 75,794 62,384
Depreciation and amortization ................................... 82,960 73,881 48,635
Merger and other costs .......................................... 4,684 -- --
---------- ---------- ---------
357,856 325,254 248,126
---------- ---------- ---------
INCOME FROM OPERATIONS ............................................ 63,850 49,264 53,928
INTEREST EXPENSE .................................................. (55,876) (57,257) (46,199)
NET GAINS ON DISPOSITIONS ......................................... 268,359 317 2,958
NET LOSSES FROM UNCONSOLIDATED INVESTMENTS ........................ (70,395) (46,124) (9,344)
OTHER, net ........................................................ 956 1,073 997
---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM .......... 206,894 (52,727) 2,340
INCOME TAX (EXPENSE) BENEFIT ...................................... (112,642) 42,700 4,109
---------- ---------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ....................... 94,252 (10,027) 6,449
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT, NET OF INCOME TAX
BENEFIT OF $13,337 .............................................. (20,005) -- --
---------- ---------- ---------
NET INCOME (LOSS) ................................................. $ 74,247 $ (10,027) $ 6,449
========== ========== =========
EARNINGS (LOSS) PER COMMON SHARE -- BASIC
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ....................... $ 2.54 $ (0.25) $ 0.16
EXTRAORDINARY LOSS, NET OF INCOME TAX BENEFIT ..................... (0.54) -- --
---------- ---------- ---------
NET INCOME (LOSS) ................................................. 2.00 (0.25) 0.16
========== ========== =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING .............. 37,156 40,224 41,320
========== ========== =========
EARNINGS (LOSS) PER COMMON SHARE -- ASSUMING DILUTION
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ....................... $ 2.43 $ (0.25) $ 0.15
EXTRAORDINARY LOSS, NET OF INCOME TAX BENEFIT ..................... (0.52) -- --
---------- ---------- ---------
NET INCOME (LOSS) ................................................. 1.91 (0.25) 0.15
========== ========== =========
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES OUTSTANDING ...... 38,791 40,224 41,898
========== ========== =========

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

F-3

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(DOLLAR AMOUNTS IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- -------------- ----------

Net income (loss) ............................................................ $ 74,247 $ (10,027) $ 6,449
Other comprehensive income, net of income tax provision:
Unrealized holding gain (loss) on securities
Unrealized holding gain (loss) arising during period ...................... (1,524) (18,187) 1,825
Less: Reclassification adjustment for losses included in net income (loss). 1,524 32,757 --
-------- ---------- -------
Other comprehensive income, before income taxes .......................... -- 14,570 1,825
Income tax provision related to items of other comprehensive income ....... -- (5,100) (639)
-------- ---------- -------
Other comprehensive income, net of income taxes .......................... -- 9,470 1,186
-------- ---------- -------
Comprehensive income (loss) .................................................. $ 74,247 $ (557) $ 7,635
======== ========== =======

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

F-4

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(DOLLAR AMOUNTS IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
-----------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
CLASS A CAPITAL IN NOTES RECEIVABLE
------------------------- EXCESS OF NET UNREALIZED FROM EMPLOYEES AND
SHARES AMOUNT PAR VALUE HOLDING GAIN/LOSS DIRECTORS
-------------- ---------- ------------ ------------------- ------------------

BALANCE, January 1, 1996 ............... 41,312,053 $413 $ 238,662 $ (16,395) $ --
Shares issued upon exercise of stock
options ............................... 27,190 -- 448 -- --
Shares issued for cash ................. 279 -- 6 -- --
Shares repurchased and retired ......... (255,000) (2) (1,476) -- --
Net unrealized holding gain ............ -- -- -- 1,825 --
Net income ............................. -- -- -- -- --
---------- ------ --------- --------- -----------
BALANCE, December 31, 1996 ............. 41,084,522 411 237,640 (14,570) --
Shares issued upon exercise of stock
options ............................... 17,550 -- 58 -- --
Shares issued for cash ................. 15,551 -- 178 -- --
Shares repurchased and retired ......... (2,810,000) (28) (16,252) --
Net unrealized holding losses
recognized through operations ......... -- -- -- 14,570 --
Net loss ............................... -- -- -- -- --
---------- ------ --------- --------- -----------
BALANCE, December 31, 1997 ............. 38,307,623 383 221,624 -- --
Shares issued upon exercise of stock
options ............................... 2,396,614 24 30,272 -- --
Shares issued for cash ................. 46,157 -- 727 -- --
Equity swap fees ....................... -- -- (76) -- --
Shares repurchased and retired ......... (1,612,000) (16) (9,326) -- --
Recognition of deferred income tax
asset ................................. -- -- 42,397 -- --
Loans to employees and directors for
sale of stock.......................... -- -- -- -- (19,218)
Net income ............................. -- -- -- -- --
---------- ------ --------- --------- -----------
BALANCE, December 31, 1998 ............. 39,138,394 $391 $ 285,618 $ -- $(19,218)
========== ====== ========= ========= ===========

TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
-------------- -------------

BALANCE, January 1, 1996 ............... $(193,632) $29,048
Shares issued upon exercise of stock
options ............................... -- 448
Shares issued for cash ................. -- 6
Shares repurchased and retired ......... (2,847) (4,325)
Net unrealized holding gain ............ -- 1,825
Net income ............................. 6,449 6,449
---------- -------
BALANCE, December 31, 1996 ............. (190,030) 33,451
Shares issued upon exercise of stock
options ............................... -- 58
Shares issued for cash ................. -- 178
Shares repurchased and retired ......... (21,040) (37,320)
Net unrealized holding losses
recognized through operations ......... -- 14,570
Net loss ............................... (10,027) (10,027)
---------- -------
BALANCE, December 31, 1997 ............. (221,097) 910
Shares issued upon exercise of stock
options ............................... -- 30,296
Shares issued for cash ................. -- 727
Equity swap fees ....................... -- (76)
Shares repurchased and retired ......... (19,184) (28,526)
Recognition of deferred income tax
asset ................................. -- 42,397
Loans to employees and directors for
sale of stock.......................... -- (19,218)
Net income ............................. 74,247 74,247
---------- -------
BALANCE, December 31, 1998 ............. $(166,034) $100,757
========== =======

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

F-5

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------------- -------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ 74,247 $ (10,027) $ 6,449
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ................................................ 82,960 73,881 48,635
Amortization of deferred financing costs ..................................... 1,563 1,983 1,587
Net losses from unconsolidated investments ................................... 70,395 46,124 9,344
Net gains on dispositions .................................................... (268,359) (317) (2,989)
Deferred income tax provision (benefit) ...................................... 88,664 (42,700) (5,000)
Extraordinary loss .......................................................... 33,342 -- --
Stock received for management consulting services ............................ -- -- (2,087)
Changes in current items:
Accounts receivable, net .................................................... (7,720) (24,433) 1,363
Cellular telephone inventories .............................................. 4,808 (2,905) (6,964)
Accounts payable and accrued expenses ....................................... (10,211) 6,071 10,627
Other, net .................................................................. 957 (1,563) (550)
------------ ---------- ----------
Net cash provided by operating activities ................................... 70,646 46,114 60,415
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................ (86,568) (136,825) (119,077)
Payments for acquisitions of investments ....................................... (67,856) (17,773) (38,790)
Proceeds from dispositions ..................................................... 376,022 448 5,184
Capital contributions to unconsolidated affiliates ............................. (8,646) (706) (221)
------------ ---------- ----------
Net cash provided by (used in) investing activities ......................... 212,952 (154,856) (152,904)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt ........................................... (1,184,417) -- (193,007)
Proceeds of long-term debt ..................................................... 956,000 138,993 300,802
Debt issuance costs ............................................................ (4,106) -- (6,914)
Proceeds from termination of interest rate protection agreements ............... 5,385 -- --
Repurchases of common stock .................................................... (28,602) (37,320) (4,325)
Net proceeds from issuance of common stock ..................................... 11,805 236 454
Loans to shareholders and directors ............................................ (8,270) -- --
Increase (decrease) in other assets ............................................ 158 (1,860) (1,426)
------------ ---------- ----------
Net cash provided by (used in) financing activities ......................... (252,047) 100,049 95,584
------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH ................................................. 31,551 (8,693) 3,095
CASH, beginning of year ......................................................... 2,487 11,180 8,085
------------ ---------- ----------
CASH, end of year ............................................................... $ 34,038 $ 2,487 $ 11,180
============ ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR FOR:
INTEREST, net of amounts capitalized ........................................... $ 59,350 $ 52,812 $ 42,579
INCOME TAXES ................................................................... 10,300 -- 891
============ ========== ==========

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

F-6

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION

Vanguard Cellular Systems, Inc. ("Vanguard") (a North Carolina
corporation) through its only direct subsidiary, Vanguard Cellular Financial
Corp. ("VCFC"), is a provider of cellular telephone and paging services to
various markets in the eastern United States. The majority of Vanguard's
operations are conducted in the Mid-Atlantic SuperSystem covering areas of
Pennsylvania, New York and New Jersey. The primary activities of Vanguard,
VCFC, its wholly owned subsidiaries and its majority owned cellular entities
(collectively referred to as the Company) include acquiring interests in
entities that have been granted nonwireline Federal Communications Commission
("FCC") permits to construct or authorizations to operate cellular telephone
and paging systems, and constructing and operating cellular and paging systems.

All of the Company's cellular entities operate under the trade name of
CellularONE(R), which is the trade name many nonwireline carriers have adopted
to provide uniformity throughout the industry. The trade name is owned by a
partnership in which the Company holds a minority ownership interest.

Vanguard is a holding company which is the 100% shareholder of VCFC. This
organization was created to structurally subordinate Vanguard's $200 million in
Senior Debentures to VCFC's Credit Facility. (See Note 5 -- Long-Term Financing
Arrangements.)

NOTE 2 -- AT&T MERGER

On October 2, 1998, the Company entered into a definitive merger agreement
with AT&T Corp. (AT&T), the "Merger Agreement". Under the terms of the Merger
Agreement, each of the Company's outstanding shares of Class A Common Stock
(other than dissenting shares) will, at each shareholder's option, be converted
into the right to receive 0.59805 (as adjusted to reflect a three-for-two stock
split declared by AT&T on March 17, 1999) of a share of AT&T common stock or
$23.00 in cash and the Company will be merged into a wholly owned subsidiary of
AT&T. Such share exchange options are subject to the overall limitation that
the overall consideration for the Company's shares will consist of 50% cash and
50% AT&T common stock. This proposed transaction has been approved by the
Company's Board of Directors and the Board of Directors of AT&T. Ultimate
consummation is subject to the approval of the Company's shareholders who are
expected to vote on the transaction in April 1999 and certain other conditions.

In connection with the Merger Agreement with AT&T, certain officers and
affiliated entities of the Company entered into voting Agreements with AT&T.
Under the voting agreements, each shareholder has agreed (i) to vote such
shareholder's shares in favor of approval of the merger proposal and against
any acquisition proposal from any other person other than AT&T, and (ii) if so
requested, to deliver to AT&T an irrevocable proxy with respect to such shares.
Vanguard has agreed to indemnify the shareholders from and against all expenses
(including reasonable attorneys' fees) incurred in connection with the defense
of any action (actual or threatened) arising out of the voting agreements up to
an aggregate of $1 million. Vanguard is not liable for any settlement,
judgement or award resulting from any such proceeding. Also under the voting
agreements, each shareholder has agreed not to dispose of such shareholder's
shares, except in certain limited cases for specified purposes. Generally, in
the event of any permitted disposal, AT&T has a right of first refusal to
purchase any Vanguard shares to be sold.

Under pre-existing employment agreements with the Company, certain members
of management are eligible to receive lump sum payments upon a post-merger
termination of employment (as defined in the employment agreements). Such
payments will be computed as 2.99 times each employee's average annual total
cash compensation for the immediately preceding five years. Should each of the
eligible employees be terminated following the merger, the total payments to
the employees would be approximately $10.0 million.

In October 1998, the Board of Directors of the Company revised an existing
long term incentive plan that provides for the payment, upon consummation of
the AT&T merger, of approximately $1.6 million to certain members of management
and the Board of Directors. Further, the Board of Directors approved a
resolution to accelerate the vesting of all outstanding stock options upon
consummation of the AT&T merger.

In accordance with agreements entered into in July 1998 (which agreements
replaced prior agreements that were scheduled to expire in September 1998),
certain members of management and the Board of Directors are entitled to
receive, upon

F-7

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 2 -- AT&T MERGER -- Continued

the consummation of the AT&T merger, payment equal to the amount of income tax
paid in 1991 and 1992 related to certain restricted stock awards. Such
payments, if made, are expected to total approximately $17.0 million.

Under the AT&T merger agreement, certain members of management and the
Board of Directors are eligible to receive loans from the Company in amounts
necessary to exercise vested stock options and to satisfy the tax withholding
associated therewith. Such loans would be part recourse and part nonrecourse
and would be secured by the shares of stock issued upon the exercise of such
options and amounts due to the individuals under certain employment
arrangements with the Company. Such loans would become due and payable upon the
consummation of the merger, to the extent of cash received by the individual in
the merger and 90 days following the merger for any remaining balance. Should
the merger fail to occur, such loans will be due within five years from the
date of the loan. As of December 31, 1998, loans were outstanding to certain
members of management and the Board of Directors totaling $27.5 million.

Through December 31, 1998, the Company has incurred approximately $3.2
million of merger related costs consisting primarily of investment advisor and
other professional fees. These costs are included in merger and other costs on
the accompanying 1998 statement of operations.

NOTE 3 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Vanguard,
VCFC, its wholly owned subsidiaries and the entities in which it has a majority
ownership interest. Investments in which the Company exercises significant
influence but does not exercise control through majority ownership have been
accounted for using the equity method of accounting. Investments in which the
Company does not exercise significant influence or control through majority
ownership have been accounted for using the cost method of accounting. All
significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

The preparation of these consolidated financial statements and footnote
disclosures required the use of certain estimates by management in determining
the Company's financial position and results of operations. Actual results
could differ from those estimates.

CELLULAR TELEPHONE INVENTORIES

Inventories, consisting primarily of cellular telephones held for resale,
are valued at the lower of first-in, first-out (FIFO) cost or market.

INVESTMENTS

INVESTMENTS IN DOMESTIC WIRELESS ENTITIES -- Investments in domestic
cellular entities consist of the costs incurred to acquire FCC licenses or
interests in entities that have been awarded FCC licenses to provide cellular
service, net of the Company's share of the fair value of the net assets
acquired, payments of other acquisition related expenses and capital
contributions to unconsolidated cellular entities. The Company's investments in
consolidated wireless entities are being amortized over forty years. Exchanges
of minority ownership interests in cellular entities are recorded based on the
fair value of the ownership interests acquired.

INVESTMENTS IN OTHER ENTITIES -- Investments in other entities consist of
the Company's investments in International Wireless Communications Holdings,
Inc. ("IWC"), Star Digitel Limited ("SDL"), International Wireless
Communications Pakistan Ltd. ("IWCPL"), InteroAct Systems, Incorporated
("InteroAct"), Eastern North Carolina Cellular Joint Venture ("ENCCJV") and
Geotek Communications, Inc. ("Geotek"). The investments in IWC, SDL, IWCPL,
InteroAct and ENCCJV are recorded using the equity method. The investment in
Geotek common stock is considered to be "available for sale" under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."

The Company recognizes its pro rata share of the net income or losses
generated by the entities carried on the equity method of accounting in its
consolidated statements of operations (see Note 4).

F-8

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is calculated on
a straight-line basis for financial reporting purposes over the following
estimated useful lives:

Buildings ................................... 20 years
Cellular telephones held for rental ......... 1.5 years
Cellular telephone systems .................. 7-20 years
Office furniture and equipment .............. 3-10 years

During 1998, the Company changed the depreciable lives of the rental phone
assets from 3 years to 1.5 years, which better reflects the useful life of this
equipment. This change increased depreciation expense by approximately $8.7
million or $0.23 per basic common share for the year ended December 31, 1998.

At December 31, 1998 and 1997, construction in progress was composed
primarily of the cost of uncompleted additions to the Company's cellular
telephone systems. The Company capitalized interest costs of $824,000 in 1998
and $1.3 million in 1997 and 1996, as part of the cost of cellular telephone
systems.

Maintenance, repairs and minor renewals are charged to operations as
incurred. Gains or losses at the time of disposition of property and equipment
are reflected in the statements of operations currently.

Cellular telephones are rented to certain customers generally with a
contract for a minimum stipulated length of service. Such customers have the
option to purchase the cellular telephone at any time during the term of the
agreement.

LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
reviews for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Under SFAS No. 121, an
impairment loss would be recognized when estimated future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount. Impairment losses are calculated as the difference between
the asset's carrying value and its estimated fair market value. Impairment
losses have been recorded by the Company related to its investments in Geotek
and Star Digitel as discussed in Note 4.

OTHER ASSETS

Other assets consist of the following at December 31, 1998 and 1997 (in
thousands):

1998 1997
----------- ------------

Deferred financing costs .............. $ 4,217 $ 16,016
Acquired customer bases ............... 8,190 8,190
Interest rate cap agreements .......... 1,209 1,569
Other ................................. 1,672 1,967
-------- ---------
15,288 27,742
Accumulated amortization .............. (8,957) (10,701)
-------- ---------
$ 6,331 $ 17,041
======== =========

Deferred financing costs are being amortized over the periods of the
related agreements. Amortization of $1.2 million, $2.0 million, and $1.6
million has been included in interest expense in each of the accompanying
December 31, 1998, 1997, and 1996 consolidated statements of operations,
respectively. Upon the closing of the 1998 Loan Agreements (Note 5), the
Company paid fees of approximately $4.0 million to the lenders. These fees and
other costs incurred in the refinancing were recorded as a long-term asset in
the first quarter of 1998 and will be amortized over the lives of the
agreements. Remaining unamortized deferred financing costs of $6.6 million
related to the 1994 Credit Facility were expensed in the first quarter of 1998
and are included in the statement of operations as an extraordinary item.
Additionally, in connection with the Bond Tender Offer (Note 5), remaining
unamortized deferred financing costs of $4.4 million and the remaining
unamortized

F-9

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 3 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued

bond discount of $145,000 related to the Debentures were expensed in the fourth
quarter of 1998 and are included in the statement of operations as an
extraordinary item.

The acquired customer bases relate to the acquisitions of the Logan, WV
(WV-6) RSA in August 1996, the Union, PA (PA-8) RSA in January 1995, and the
Binghamton, NY and Elmira, NY MSAs in December 1994. The customer bases are
being amortized over a four-year period and, accordingly, amortization of $2.1
million, $2.1 million, and $1.8 million has been included in the accompanying
December 31, 1998, 1997 and 1996 consolidated statements of operations,
respectively.

The Company maintains interest rate cap agreements with certain major
financial institutions. These costs are being amortized over the lives of the
agreements, and accordingly, amortization of $633,000, $243,000, and $242,000
has been included in interest expense in the accompanying December 31, 1998,
1997 and 1996 consolidated statements of operations, respectively.

REVENUE RECOGNITION

Service revenue is recognized at the time cellular and paging services are
provided and service fees related to prebilled services are not recognized
until earned. Cellular telephone equipment revenues consist primarily of sales
of cellular telephones to subscribers and are recognized at the time equipment
is delivered to the subscriber. During 1998, the Company began selling
equipment under a "twelve-month same as cash" program where the purchase price
is billed to the customer over the twelve month period. The revenue from the
sale is recognized when the equipment is delivered to the customer.
Accordingly, there are approximately $8.2 million of installment receivables
included in the December 31, 1998 accounts receivable balance.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the use of the "asset and
liability method" of accounting for income taxes. Accordingly, deferred income
tax assets and liabilities are determined based on the difference between the
financial statement and income tax bases of assets and liabilities, using
enacted income tax rates in effect for the year in which the differences are
expected to reverse (see Note 7).

DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments in the form of interest rate cap and swap
agreements are used by the Company in the management of its interest rate
exposures. Interest rate swap agreements modify the interest characteristics of
a portion of the Company's debt. Amounts paid or received under interest rate
swap agreements are accrued as interest rates change and are recognized over
the life of the swap agreements as an adjustment to interest expense. The
related receivable from, or amounts payable to, the counter-parties are
included in accounts receivable or accounts payable and accrued expenses.
Interest rate caps are used to lock in a maximum rate if rates rise, but enable
the Company to otherwise pay lower market rates. The costs of interest rate cap
agreements are included in interest expense ratably over the lives of the
agreements. Payments to be received as a result of the cap agreements are
accrued as a reduction of interest expense. The unamortized costs of the cap
agreements are included in other assets (see Note 5). The Company does not hold
or issue financial instruments for trading purposes.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share is computed based upon the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share for 1998 and 1996 reflects the potential dilution that could
occur if the Company's outstanding options to issue common stock were exercised
and converted into common shares that then shared in the earnings of the
Company. Diluted earnings (loss) per common share is computed in accordance
with the guidance provided by SFAS No. 128, "Earnings Per Share."

Outstanding options to purchase 2,314,750 common shares with exercise
prices ranging from $21.50 to $25.13 were not included in the 1996 calculation
of diluted earnings per common share because the options' exercise prices were
greater than the average market price of the common shares. All outstanding
options at December 31, 1998 were included in the

F-10

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 3 -- SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued

1998 calculation. Options to purchase 4,870,802 shares at a weighted average
exercise price of $13.31 were outstanding as of December 31, 1997, but were not
included in the computation of diluted loss per common share because the effect
would be antidilutive.

STATEMENTS OF CASH FLOWS

Additional required disclosures of noncash investing and financing
activities for the years ended December 31, 1998, 1997 and 1996 are as follows:

The Company acquired ownership interests in certain cellular entities and
other investments for cash and noncash consideration, as follows (in
thousands):

1998 1997 1996
---------- ----------- ----------

Fair value of investments acquired ..................... $67,856 $ 17,723 $57,272
------- -------- -------
Fair value of noncash consideration given up:
Cellular licenses and interests ....................... -- -- 16,395
Stock received for management consulting services ..... -- -- 2,087
------- -------- -------
-- -- 18,482
------- -------- -------
Cash acquisitions of investments ....................... $67,856 $ 17,723 $38,790
======= ======== =======

The Company acquired property and equipment for cash and noncash
consideration, as follows:

Cash ................................... $86,568 $ 136,825 $119,077
Increase (decrease) in accounts payable. 12,564 (15,163) 11,728
------- --------- --------
$99,132 $ 121,662 $130,805
======= ========= ========

RECLASSIFICATION

Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.

F-11

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 4 -- INVESTMENTS

Investments consist of the following as of December 31, 1998 and 1997 (in
thousands):

1998 1997
------------ -----------

INVESTMENTS IN DOMESTIC WIRELESS ENTITIES:
Consolidated entities:
License cost ......................................... $ 305,360 $ 297,142
Accumulated amortization ............................. (46,454) (43,696)
--------- ---------
258,906 253,446
--------- ---------
Entities carried on the equity method:
Cost ................................................. -- 10,193
Accumulated share of earnings ........................ -- 1,960
--------- ---------
-- 12,153
--------- ---------
Entities carried on the cost method .................... 4,179 9,592
--------- ---------
263,085 275,191
--------- ---------
INVESTMENTS IN OTHER ENTITIES:
Entities carried on the equity method:
Investment in equity securities ...................... 68,875 40,794
Debentures, net of discount of $4,119 and $6,449 ..... 13,881 11,551
Loans ................................................ 31,297 4,045
Accumulated share of losses .......................... (67,408) (33,842)
Valuation allowances on investments in SDL ........... (31,292) --
--------- ---------
15,353 22,548
--------- ---------
Investments carried as "available for sale":
Cost ................................................. -- 37,736
Net unrealized holding losses ........................ -- (32,757)
--------- ---------
-- 4,979
--------- ---------
Other investments, at cost ............................. -- 5,000
--------- ---------
15,353 32,527
--------- ---------
$ 278,438 $ 307,718
========= =========

INVESTMENTS IN DOMESTIC WIRELESS ENTITIES

The Company's significant activity relating to its investments in domestic
wireless entities is discussed below.

CONSOLIDATED ENTITIES AND ENTITIES ON THE EQUITY METHOD

In August 1996, the Company acquired the Logan, WV RSA ("WV-6 RSA") for a
cash purchase price of $16.7 million. The WV-6 RSA is contiguous to the
Company's West Virginia markets and its operations are managed as part of its
West Virginia metro-cluster.

F-12

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 4 -- INVESTMENTS -- Continued

Pro forma results of operations, as if the acquisition of the WV-6 RSA had
occurred January 1, 1995 are as follows (in thousands, except per share data):

YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995
------------- -----------

Revenue .................... $ 304,196 $239,412
Net income (loss) .......... 4,774 (8,790)
Net income (loss) per share:
Basic ..................... 0.12 (0.21)
Diluted ................... 0.11 (0.21)

In the third quarter of 1996, the Company acquired the remaining portions
of the State College, PA and Williamsport, PA MSAs and the PA-10 East RSA in
exchange for $2.8 million in cash. These markets are now 100% owned by the
Company.

In October 1996, the Company exchanged certain cellular properties for
four cellular markets contiguous to its Ohio Valley SuperSystem. In this
transaction, the Company received four markets, OH-9 RSA, OH-10 RSA (excluding
Perry and Hocking counties), Parkersburg-Marietta, WV-OH MSA, and the remaining
county in the WV-1 RSA, in exchange for the Company's Orange County, NY
cellular market and ownership interests in several minority owned cellular
markets. The Company surrendered 324,000 POPs in Orange County and 76,000 POPs
in minority owned markets, and added 542,000 POPs to the Ohio Valley
SuperSystem. This transaction was treated principally as an exchange of similar
productive assets and, therefore, the cellular markets received have been
recorded at the historical cost of the Orange County, NY cellular market,
increased for the fair value of the additional minority ownership interests
given up.

In June 1998, the Company sold for approximately $162.0 million in cash
its Myrtle Beach, SC RSA market and related operations. The purchaser required
the Company to place $8.0 million of the purchase price into an escrow fund for
one year. These escrowed funds are to be held for certain purchase price
adjustments, if any, that may be identified by the purchaser and agreed to by
the Company. The date for post closing adjustments has passed, and management
does not anticipate such further adjustments to the purchase price.

In August 1998, the Company sold its 50% investment in a joint venture
known as Eastern North Carolina Cellular Joint Venture ("ENCCJV"), for $30
million in cash. The underlying net assets of the joint venture consisted
principally of its investment in the FCC licenses in the Wilmington, NC and
Jacksonville, NC MSA cellular markets.

In September 1998, the Company sold for approximately $177.0 million in
cash its Pensacola, FL MSA and its Fort Walton Beach, FL RSA markets as well as
various minority interests in cellular licenses (the "Florida Markets"). The
purchaser required the Company to place $8.6 million of the purchase price into
an escrow fund for one year. These escrowed funds are to be held for certain
purchase price adjustments, if any, that may be identified by the purchaser and
agreed to by the Company. Currently, management does not anticipate any
material adjustments to the purchase price.

As a result of the three dispositions, the Company recognized pre-tax
gains of $267.3 million during 1998.

In July 1998, the Company purchased NationPage, a leading regional paging
provider in Pennsylvania and New York, for approximately $28.5 million in cash.
Pro forma results of operations, as if the acquisition of NationPage had
occurred January 1, 1997 are as follows (in thousands, except per share data):

F-13

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 4 -- INVESTMENTS -- Continued

YEAR ENDED
DECEMBER 31,
-------------------------
1998 1997
------------- -----------

Revenue ............................................. $ 426,870 $ 383,719
Net income (loss) before extraordinary item ......... 92,742 (10,823)
Net income (loss) ................................... 72,737 (10,823)
Net income (loss) per share:
Basic .............................................. $ 1.96 $ (0.27)
Diluted ............................................ 1.88 (0.27)

In the first quarter of 1998, the Company participated in the Federal
Communications Commission's ("FCC") Local Multipoint Distribution Service
("LMDS") auction, which concluded on March 25, 1998. The Company was the high
bidder for 22 LMDS Basic Trading Area ("BTA") licenses, with an aggregate bid
of $8.9 million. The majority of these licenses are in the same markets as the
Company's existing cellular operations. LMDS frequencies may be used for a
variety of technologies, including traditional wireless telephony, competitive
local exchange service, and broadband data transmissions including Internet,
video and others. The investment in LMDS licenses is being amortized over a
forty year period.

CELLULAR ENTITIES ON THE COST METHOD

The investment balance of approximately $4.2 million at December 31, 1998
represents the Company's investment in approximately 17 cellular markets with
ownership interests ranging from 0.27% to 12.44%. The Company holds these
ownership interests for investment purposes. As discussed above, the Company
sold various minority interests with a total cost of $4.8 million in
conjunction with the sale of its Florida Markets.

NONCELLULAR INVESTMENTS

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND FOREIGN INVESTMENTS

At December 31, 1998, the Company owned approximately 29% of the
outstanding stock of IWC and has invested an aggregate of $24.8 million and had
provided loans of $5.7 million. IWC is a development stage company specializing
in securing, building and operating wireless businesses, primarily in Asia and
Latin America. International Wireless Communications Holdings, Inc.,
International Wireless Communications, Inc., Radio Movil Digital Americas,
Inc., International Wireless Communications Latin America Holdings, Ltd. and
Pakistan Wireless Holdings Limited filed separate petitions for relief under
chapter 11 of the United States Bankruptcy Code on September 3, 1998. Pursuant
to Bankruptcy Court approval on October 28, 1998, the Company has provided IWC
with post-petition debtor-in-possession financing in the amount of $4.6 million
on a senior secured and administrative priority basis (the "Financing"). The
Financing will mature upon the earlier of (i) October 20, 1999, (ii) the date
of declaration of events of default by the Company (as described in the
Financing documents) and (iii) the effective date of an order of the Bankruptcy
Court confirming a plan or reorganization for any of the above-referenced
debtors (which pursuant to the order of confirmation entered on March 26, 1999,
could occur any time on or after April 9, 1999). At IWC's option, the
Financing, along with interest and fees earned under the Financing, may be
converted into equity of the reorganized debtors under a plan of
reorganization. The Financing was fully funded by the Company in November 1998.
The Company has also entered into an Interim Operating Agreement with IWC
("Interim Operating Agreement") which provides, among other things, that IWC is
granted authority to exercise day-to-day control over the Company's investment
in Pakistan Mobile Communications (Pvt) Ltd. ("PMCL") during the course of the
Chapter 11 cases and the Company is granted authority to exercise day-to-day
control over IWC's interests in SDL during the course of the Chapter 11 cases.
The Bankruptcy Court approved the Interim Operating Agreement at a hearing on
October 28, 1998. By order entered on March 26, 1999, the Bankruptcy Court
approved the IWC reorganization plan.

The Company accounts for its investment in IWC under the equity method of
accounting and, for the years ended December 31, 1998, 1997 and 1996,
recognized losses on this investment totaling $15.3 million, $1.5 million and
$11.5 million, respectively. As of December 31, 1998 and 1997, the Company had
recognized an amount of losses on the equity method from IWC that was equal to
the Company's equity investment in IWC. As a result, the Company has suspended
the recognition of losses attributable to IWC until such time that the Company
makes further investments in IWC.

F-14

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 4 -- INVESTMENTS -- Continued

During the first quarter of 1997, the Company entered into a stock
purchase agreement to purchase from an unrelated third party 7% of the
outstanding shares of SDL, a Hong Kong company whose principal business
activities relate to the provision and development of cellular
telecommunications services in the People's Republic of China. SDL is a
development stage company, and as such, is expected to incur operating losses
for the foreseeable future. The Company accounts for its investment using the
equity method of accounting. Through December 31, 1998, the Company had
invested $12.6 million in SDL and has provided $5.0 million in shareholder
loans. In addition, the Company had guaranteed obligations of SDL totaling
$16.9 million, of which $16.6 million have been called during 1999; however,
the funding has not yet occurred. SDL requires capital to construct, operate
and expand its cellular systems. During 1998, SDL sought additional third party
debt or equity financing to continue its operations. As of March 1999, SDL had
been unsuccessful in obtaining additional outside financing and its
shareholders have not agreed to contribute sufficient capital to maintain
operations and pay its existing obligations. With the uncertainty of SDL's
ability to continue as a going concern in 1999, the Company decided to write
off its total investment in SDL resulting in a $14.4 million charge to net
losses from unconsolidated investments. In addition, the Company accrued a
liability totaling $16.9 million at December 31, 1998, representing the
expected funding of the Company's loan guarantees of SDL. For the years ended
December 31, 1998 and 1997, the Company recorded losses on its investment in
SDL of $33.7 million and $805,000 respectively.

During 1997, the Company acquired a 12% equity interest in IWCPL for $7.0
million. IWCPL owns approximately 59% of the equity in Pakistan Mobile
Communications (Pvt) Ltd., ("PLCL") a Pakistan company that owns and operates
the cellular license in Pakistan. Through December 31, 1998, the Company had
invested $10.2 million in IWCPL, and has provided $3.6 million in debt
financing. The Company records its proportionate share of the losses of IWCPL
under the equity method of accounting. For the years ended December 31, 1998
and 1997, the Company recognized losses on this investment totaling $364,000
and $425,000, respectively.

In connection with IWC's bankruptcy filing, a Plan of Reorganization was
filed and upon the effective date of an order of the Bankruptcy Court
confirming a Plan of Reorganization, which could occur any time on or after
April 9, 1999, the Company will exchange its interest in IWCPL for IWC's
interest in SDL. At that point the Company will evaluate its $13.1 million net
investment in Pakistan with respect to its net realizable value as a part of
SDL due to the uncertainty of SDL's ability to continue as a going concern.

INTERoACT SYSTEMS, INCORPORATED.

InteroAct is a development stage company that provides consumer product
manufacturers and retailers (currently supermarkets) the ability to offer
targeted promotions to retail customers at the point of entry of a retail
outlet through an interactive multi-media system utilizing ATM-like terminals.
InteroAct has incurred significant net losses since its inception. Such net
losses are expected to continue in future years as InteroAct accelerates the
rollout of its systems in retail supermarkets.

As of December 31, 1998, the Company had invested $10.2 million in
InteroAct common stock and $8.0 million in InteroAct preferred stock for an
ownership interest of approximately 24%. Further, the Company has invested
$12.0 million for 18,000 units of 14% Senior Discount Notes issued by InteroAct
consisting of $18.0 million principal amount at maturity of the Notes and
warrants to purchase up to 169,722 shares of InteroAct common stock. The
Company also holds additional warrants to purchase up to 900,113 shares of
InteroAct common stock. InteroAct shares issuable under warrants held by
Vanguard represent approximately 10% of the outstanding common stock of
InteroAct. In addition to the current ownership held by the Company, certain
officers, directors and entities affiliated with certain directors of the
Company maintain an additional 27% ownership interest in InteroAct.

The Company accounts for its investments in InteroAct under the equity
method of accounting. As of June 30, 1998, the Company's total investment in
InteroAct was reduced to zero through the recognition of equity method losses
and further loss recognition was suspended. In the third quarter of 1998, the
Company invested an additional $8.0 million in InteroAct preferred stock and
resumed recognition of equity method losses at that time. As of December 31,
1998, the Company's remaining investment in InteroAct, subject to future equity
method losses was $2.3 million. Total equity method losses related to InteroAct
were $15.5 million, $11.0 million and $4.2 million during 1998, 1997 and 1996,
respectively.

F-15

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 4 -- INVESTMENTS -- Continued

GEOTEK COMMUNICATIONS, INC.

Geotek Communications, Inc. (Geotek) is a telecommunications company which
was formed to develop a wireless communications network using FHMA digital
technology. In 1994, the Company purchased from Geotek 2.5 million shares of
Geotek common stock for $30 million. In September 1995, the Company purchased,
for $5.0 million in cash, 531,463 shares of convertible preferred stock of
Geotek. Under a management agreement, the Company earned and recorded revenue
on approximately 500,000 shares of Geotek common stock with an aggregate value
of $7.7 million during 1994 through 1996.

During the fourth quarter of 1997, as a result of declines in the common
stock price of Geotek, the Company's management made the determination that its
investment in Geotek was impaired and recorded a loss of $32.7 million to
adjust the Company's investment in Geotek common stock to its market value at
December 31, 1997. In June 1998, Geotek filed petitions seeking protection
under Chapter 11 of the United States Bankruptcy Code. Geotek common stock was
delisted from NASDAQ on June 30, 1998. Geotek subsequently revised its filing
to a Chapter 7 liquidation filing. Based on these actions, the Company's
management made the determination that its remaining investment in Geotek was
permanently impaired and recognized a loss of approximately $10.0 million to
reduce the investment to zero.

NOTE 5 -- LONG-TERM FINANCING ARRANGEMENTS

At December 31, 1998 the Company's long-term financing arrangements
consist primarily of a $1.0 billion Credit Facility (as permanently reduced in
1998 through loan repayments) with various lenders and $3.8 million of Senior
Debentures due 2006. The Credit Facility is senior to the Senior Debentures
through the use of structured subordination whereby Vanguard is the borrower on
the Senior Debentures and VCFC, Vanguard's only direct subsidiary, is the
primary obligor on the Credit Facility. As discussed below, the Company's
Credit Facility was refinanced in February 1998 and the majority of the
Debentures were tendered and retired in December 1998.

Long-term debt consists of the following as of December 31, 1998 and 1997
(in thousands):

1998 1997
----------- ------------

Debt of VCFC:
Borrowings under the 1998 Loan Agreements:
Facility A Loan ............................................................ $565,000 $ --
Facility B Loan ............................................................ -- --
Borrowings under the 1994 Credit Facility:
Term Loan .................................................................. -- 325,000
Revolving Loan ............................................................. -- 244,000
Other Long-Term Debt ......................................................... -- 130
-------- ---------
$565,000 $ 569,130
Debt of Vanguard:
9 3/8% Senior Debentures due 2006, net of unamortized discount of $0 and $163. 3,276 199,837
-------- ---------
$568,276 $ 768,967
======== =========

CREDIT FACILITY OF VCFC

In February 1998, the Company completed the closing of an amendment to the
1994 Credit Facility, increasing the facility to $1.0 billion pursuant to the
Third Amended and Restated Facility A Loan Agreement (Facility A Loan) and the
Facility B Loan Agreement (Facility B Loan), (collectively, the 1998 Loan
Agreements), with various lenders.

The Facility A and Facility B Loans are available to provide the Company
with additional financial and operating flexibility and enable it to pursue
business opportunities that may arise in the future. The Facility A Loan
consisted of a $750 million senior secured reducing revolving credit facility
which allows for the issuance of up to $25 million of standby letters of
credit. On June 30, 1998, the Company permanently reduced funds available for
borrowing under its Facility A loan by paying down debt with $150 million of
the proceeds from the sale of its Myrtle Beach SC, RSA market. The Facility B

F-16

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 5 -- LONG-TERM FINANCING ARRANGEMENTS -- Continued

Loan consisted of a $250 million 364-day revolving credit facility which may be
extended for an additional 364-day period upon the approval of the lenders or
converted to a term loan according to the terms and subject to certain
conditions of the Facility B Loan Agreement. Subsequent to December 31, 1998,
the Company borrowed $250 million against the Facility B which was converted to
a term loan according to the terms of the agreement. The proceeds were used to
pay down part of the outstanding balance on the Facility A Loan.

Borrowings under the Facility A and Facility B Loans bear interest at a
rate equal to the Company's choice of the Prime Rate or Eurodollar Rate plus an
applicable margin based upon a leverage ratio for the most recent fiscal
quarter. The ranges for this applicable margin are 0.0% to 0.25% for the Prime
Rate and 0.5% to 1.5% for the Eurodollar Rate. Based on the leverage ratio,
computed as the ratio of Total Debt (as defined) to Adjusted Cash Flow (as
defined), as of December 31, 1998, the Company's applicable margins on
borrowings under the Facility A and Facility B Loans are 0.00% and .625% per
annum for the first quarter of 1999 for the Prime Rate and Eurodollar Rate,
respectively. Upon the occurrence of an event of default as defined in the
Facility A and Facility B Loan agreements, the applicable margin added to both
the Eurodollar Rate and the Prime Rate becomes 2.0%.

The outstanding amounts of the Facility A and Facility B Loans as of
September 30, 2000 are to be repaid in increasing quarterly installments
commencing on September 30, 2000 and terminating at the maturity date of
December 31, 2005. The quarterly installment payments begin at 2.5% of the
outstanding principal amount at September 30, 2000 and gradually increase to
6.875% of the outstanding principal amount. As discussed above, the Company
borrowed funds under the Facility B Loan subsequent to December 31, 1998 and has
converted the borrowings to a term loan maturing on December 31, 2005. In the
event of a merger with AT&T, the facilities are to be repaid in full and
terminated within sixty days after the closing date of the merger.

The outstanding commitment under the Facility A Loan is reduced and the
outstanding borrowings under the Facility B term loan, are due quarterly as
follows:

PERCENTAGE OF
OUTSTANDING LOANS
------------------

1999 ............. --
2000 ............. 5.0
2001 ............. 15.0
2002 ............. 15.0
2003 ............. 17.5
2004 ............. 20.0
2005 ............. 27.5
-----
100.0%
=====

Upon closing of the 1998 Loan Agreements, the Company paid fees of
approximately $4.0 million to the lenders. These fees and other costs incurred
in the refinancing were recorded as a long-term asset in 1998 and are being
amortized over the lives of the agreements. Remaining unamortized deferred
financing costs of $6.6 million related to the 1994 Credit Facility were
expensed in 1998 and are included on the Statement of Operations as an
extraordinary item. The Company must pay to the lenders a commitment fee equal
to either 0.375% or 0.25% of the aggregate unborrowed balance of the available
Facility A commitment and 0.2% or 0.15% of the aggregate unborrowed balance of
the Facility B commitment during the terms of the loans based upon the Leverage
Ratio for the most recent fiscal quarter.

Borrowings under the 1998 Loan Agreements are secured by the stock of VCFC
and Vanguard Cellular Operating Corp., direct or indirect wholly owned
subsidiaries of the Company. Among other restrictions, the 1998 Loan Agreements
limit the payment of cash dividends, limit the use of borrowings, limit the
creation of additional long-term indebtedness and

F-17

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 5 -- LONG-TERM FINANCING ARRANGEMENTS -- Continued

require the maintenance of certain financial ratios. The requirements of the
1998 Loan Agreements were established in relation to projected capital needs
and projected results of operations and cash flow. These requirements generally
were designed to require continued improvement in operating performance such
that the Company's cash flow would be sufficient to continue servicing the debt
as repayments are required. As of December 31, 1998, VCFC is in compliance with
all loan covenants.

SENIOR DEBENTURES OF VANGUARD

On April 10, 1996, Vanguard issued $200 million aggregate principal amount
of 9 3/8% Senior Debentures due 2006 (the "Debentures") through an underwritten
public offering. The Debentures were issued at a price to the public of 99.901
for a yield of 9.384%. The net proceeds from the sale of the Debentures of
approximately $194.8 million were used to reduce borrowings under the Revolving
Loan portion of the Credit Facility and pay approximately $844,000 of expenses
in connection with an amendment to the Credit Facility. The Credit Facility was
amended to permit issuance of the Debentures and to require the structural
subordination of the Debentures by making VCFC the primary obligor of the
Credit Facility and all liabilities of the Company (other than the Debentures)
and the owner of all stock and partnership interests of the Company's operating
subsidiaries.

During November 1998, the Company commenced a cash tender offer and
consent solicitation (the "Offer") of the Debentures. The Company offered to
purchase for cash any and all of the outstanding Debentures and solicited
consents (the "Solicitation") from registered holders of the Debentures to
proposed amendments which eliminated substantially all of the covenants in the
Debenture other than the covenants to pay principal and interest on the
Debentures. The Company offered a price of $1,107.54 per $1,000 principal
amount of Debentures plus accrued and unpaid interest of $12.76 and a consent
payment of $30 per $1,000 of Debentures. As of the expiration date of the
offer, $196.7 million in principal amount of the total $200.0 million had been
tendered (and not withdrawn) and the requisite consents to the proposed
amendments were received. The remaining Debentures ($3.3 million in principal)
mature in 2006 with interest payable semi-annually and are redeemable at the
Company's option, in whole or in part, at any time on or after April 15, 2001.
The amendments eliminated virtually all of the covenants of the Debentures.
Amounts paid to retire the Debentures were paid with borrowings under the 1998
Loan Agreements.

In connection with the Offer and the closing of the 1998 Loan Agreements,
an extraordinary loss was recorded consisting of the following components (in
thousands):

Costs in excess of principal (Debentures) ........................... $ 27,057
Manager fee and other costs (Debentures) ............................ 505
Unamortized bond issuance costs and discount (Debentures) ........... 4,549
Unamortized debt issuance costs (1994 Credit Facility) .............. 6,616
Proceeds from termination of reverse interest swap transactions ..... (5,385)
---------
33,342
Income tax benefit of the above transactions ........................ (13,337)
---------
$ 20,005
=========

The future maturities of the principal amount outstanding of all long-term
financing arrangements at December 31, 1998 were as follows (in thousands):

1999 ................... $ 0
2000 ................... 28,250
2001 ................... 84,750
2002 ................... 84,750
2003 ................... 98,875
Thereafter ............. 271,651
--------
$568,276
========

F-18

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 5 -- LONG-TERM FINANCING ARRANGEMENTS -- Continued

INTEREST RATE PROTECTION AGREEMENTS

The Company maintains interest rate swaps and interest rate caps which
provide protection against interest rate risk. At December 31, 1998 and 1997
the Company had interest rate cap agreements in place covering a notional
amount of $300 million and $500 million, respectively. The interest rate cap
agreements provide protection to the extent that LIBOR exceeds the strike level
through the expiration date as follows (in thousands):

1998 1997
- ------------------------------------------------------ -----------------------------------------------------
STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE STRIKE LEVEL NOTIONAL AMOUNT EXPIRATION DATE
- -------------- ----------------- ----------------- -------------- ----------------- ----------------

7.5% $ 50,000 February 1999 7.5% $ 50,000 February 1999
7.5 50,000 February 1999 7.5 50,000 February 1999
8.0 25,000 August 1999 8.0 25,000 August 1999
8.5 100,000 November 2002 9.5 100,000 October 2002
7.5 75,000 November 2002 9.5 100,000 October 2002
---------
$ 300,000 8.5 100,000 November 2002
=========
7.5 75,000 November 2002
---------
$ 500,000
=========

The total cost of the interest rate cap agreements in place at December
31, 1998 of $1.2 million has been recorded in other assets in the accompanying
1998 consolidated balance sheet and is being amortized over the lives of the
agreements as a component of interest expense. During 1998, the Company
terminated two of the cap agreements and included approximately $294,000 of
unamortized costs in interest expense.

Additionally, at December 31, 1998 the Company maintains interest rate
swap agreements that fix the LIBOR interest rate at 6.10% on a notional amount
of $50 million through October 2002 and at 5.62% on a notional amount of $100
million through January 2003. Under these swap agreements, the Company benefits
if LIBOR interest rates increase above the fixed rates and incurs additional
interest expense if rates remain below the fixed rates. Any amounts received or
paid under these agreements are reflected as interest expense over the period
covered.

During December 1998, in connection with the Offer described above, the
Company received $5.4 million for the termination of certain reverse interest
rate swap agreements with Toronto Dominion and NationsBank. The proceeds were
recorded on the Statement of Operations as a reduction of the extraordinary
loss on the extinguishment of debt.

The effect of interest rate protection agreements on the operating results
of the Company was to decrease interest expense by $171,000 in 1998 and
increase interest expense by $16,000, and $464,000 in 1997 and 1996,
respectively.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The new statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value and requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Application of this
statement is required for fiscal years beginning after June 15, 1999, and may
be implemented as early as fiscal quarters beginning June 16, 1998, but cannot
be applied retroactively.

The Company has not applied this statement in the financial statements
contained herein. The estimated fair value of interest rate cap and swap
agreements presented below is based on quoted market prices as if the
agreements were entered into on the measurement date (in thousands):

DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------- ------------ ---------- -----------

$ 831 $(4,035) $1,464 $(868)

F-19

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 6 -- COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

As of December 31, 1998, Vanguard owned approximately 29% of the
outstanding common stock of International Wireless Communications Holdings,
Inc. ("IWCH"). Vanguard's investment in IWCH has a carrying value of zero. IWCH
is a development stage company specializing in securing, building and operating
wireless businesses, primarily in Asia and Latin America. IWCH and its
affiliates, International Wireless Communications, Inc., Radio Movil Digital
Americas, Inc., International Wireless Communications Latin America Holdings,
Ltd. and Pakistan Wireless Holdings Limited filed separate petitions for relief
under Chapter 11 of the United States Bankruptcy Code on September 3, 1998. A
Plan of Reorganization (the "Plan") was submitted by IWCH.

On March 26, 1999, the bankruptcy court confirmed the IWCH plan of
reorganization as submitted with one modification. Upon the effective date,
which could occur any time on or after April 9, 1999, Vanguard and Vanguard
officers and directors are released from claims by IWCH and IWCH bondholders
under the release provisions of the Plan. Direct (i.e., non-derivative) claims
against Vanguard or its officers and directors by shareholders of IWCH,
including those stated in the above referenced suits, are not released under
the Plan, as modified. The Company believes that the allegations of the
shareholder suits are without merit and intends to vigorously defend such
suits.

Management believes, even if resolved unfavorably to the Company, the above
legal proceedings would not have a materially adverse effect on the Company's
business.

OPERATING LEASES

The Company leases office space, furniture, equipment, vehicles and land
under noncancelable operating leases expiring through 2019. As of December 31,
1998, the future minimum rental payments under these lease agreements having an
initial or remaining term in excess of one year were as follows (in thousands):

F-20

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 6 -- COMMITMENTS AND CONTINGENCIES -- Continued

1999 ................... $ 13,800
2000 ................... 13,092
2001 ................... 12,330
2002 ................... 11,451
2003 ................... 10,922
Thereafter ............. 99,644
--------
$161,239
========

Rent expense under operating leases was $13.8 million, $12.9 million, and
$9.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

CONSTRUCTION AND CAPITAL COMMITMENTS

Capital expenditures for 1999 are estimated to be approximately $70.0
million to $80.0 million, and are expected to be funded primarily with
internally generated funds.

NOTE 7 -- INCOME TAXES

Deferred income taxes are provided for the temporary differences between
the financial reporting and tax basis of the Company's assets and liabilities.
The components of net deferred income taxes as of December 31, 1998 and 1997
were as follows (in thousands):

1998 1997
------------ -----------

Deferred income tax assets:
Net operating loss carryforwards ..................... $ 52,564 $ 122,926
Property and equipment ............................... 228 --
Alternative minimum tax credits ...................... 6,191 891
Accumulated losses of unconsolidated investments ..... 23,814 --
Other liabilities and reserves ....................... 6,545 6,280
Less: Valuation allowance ........................... (23,814) (31,439)
--------- ---------
Total deferred income tax assets .................... 65,528 98,658
--------- ---------
Deferred income tax liabilities:
Investments and other intangibles .................... (58,971) (45,630)
Property and equipment ............................... -- (442)
Total deferred income tax liabilities ............... (58,971) (46,072)
--------- ---------
Net deferred income taxes .............................. $ 6,557 $ 52,586
========= =========

As of December 31, 1998, the Company has cumulative net deferred income
tax assets (before valuation allowance) totaling approximately $30.3 million.
The net deferred income tax asset is composed of $89.3 million of gross
deferred income tax assets and $59.0 million of gross deferred income tax
liabilities. The gross deferred income tax assets consist primarily of the
income tax effect of Federal net operating loss carryforwards ("NOL's") of
approximately $78.3 million. These losses may be used to reduce future taxable
income and expire periodically through 2012. Included in the NOL carryforward
are additional income tax deductions arising from restricted stock bonuses,
stock options and stock purchase warrants ("Equity NOL's). The recognition of
this component results in a direct increase to shareholders' equity. Gross
deferred income tax assets also include timing differences related to reserves
and accruals, basis differences in property and equipment, cumulative losses on
unconsolidated investments and alternative minimum tax credit carryforwards.
Deferred income tax liabilities consist primarily of basis differences in
cellular licenses.

Prior to 1996, the Company incurred significant financial reporting and
tax losses primarily as a result of substantial depreciation, amortization and
interest expenses associated with acquiring and developing its cellular markets
and substantial marketing and other operating costs associated with building
its subscriber base. Although substantial net deferred income

F-21

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 7 -- INCOME TAXES -- Continued

tax assets were generated during these periods, a valuation allowance was
established because in management's assessment the historical operating results
made it uncertain whether the net deferred income tax assets would be realized.

In evaluating the realizability of its net deferred income tax assets
(before valuation allowance) at December 31, 1997, the Company considered the
expected effects of certain planned market and asset disposition transactions.
These transactions were expected to generate substantial taxable income to
utilize a significant portion of the accumulated NOL's. As a result, the
Company had recognized, as of December 31, 1997, a net deferred income tax
asset of $52.6 million. A valuation allowance of $31.4 million was retained on
certain assets due to uncertainties as to their realizability. These assets
consisted of the Equity NOL's. The disposition transactions discussed
previously were consummated during 1998 and generated taxable income to the
Company of approximately $285.0 million. As a result, the Company utilized the
NOL's to offset the Federal and partially offset the state income taxes that
would have been due on these gains.

For the years ended December 31, 1998, 1997 and 1996, the Company's
benefit (provision) for income taxes (including the benefit of $13.3 million on
the 1998 extraordinary loss) consisted of the following (in thousands):

1998 1997 1996
------------- ---------- ---------

Deferred ............... $ (88,664) $42,700 $5,000
Current
Federal ................ (5,300) -- (891)
State .................. (5,341) -- --
--------- ------- ------
$ (99,305) $42,700 $4,109
========= ======= ======

In addition to the provision recorded, the Company recognized deferred
income tax assets during the fourth quarter of 1998 totaling approximately
$11.0 million related to Equity NOL's generated with the exercise of certain
stock options. This recognition was recorded as a direct increase to
shareholders' equity.

A reconciliation between income taxes computed at the statutory Federal
rate of 35% and the reported income tax (provision) benefit is as follows (in
thousands):

DECEMBER 31,
-------------------------------------
1998 1997 1996
------------- ----------- -----------

Amount at statutory Federal rate .............. $ (66,658) $ 18,454 $ (808)
State income taxes net of Federal benefit ..... (3,472) --
Net benefit of tax planning strategies ........ -- -- 6,616
Change in valuation allowance ................. (23,814) 32,805 638
Other ......................................... (5,361) (8,559) (2,337)
--------- -------- --------
Income tax benefit ............................ $ (99,305) $ 42,700 $ 4,109
========= ======== ========

In 1996, the Company executed certain tax planning strategies that had the
effect of increasing the total net deferred income tax assets. These
transactions generally resulted in the current utilization of net operating
loss carryforwards in exchange for the creation of income tax basis that will
be deductible in future periods.

The remaining valuation allowance at December 31, 1997 of $31.4 million
related to the Equity NOL's was reversed during the third quarter of 1998 with
a direct increase to shareholders' equity as it was determined by management
that it was more likely than not that the Equity NOL's were realizable. During
1998, management recorded a valuation allowance on capital losses incurred
during the year on certain unconsolidated investments due to uncertainties as
to when and whether these assets will be realized in the future. As of December
31, 1998, a valuation allowance of $23.8 million remains related to losses
accumulated during 1998 on these investments.

The primary differences between the accumulated deficit for financial
reporting purposes and the income tax loss carryforwards relate to the
differences in the treatment of certain deferred cellular license acquisition
costs, certain gains on dispositions of cellular interests, partnership losses,
depreciation methods, estimated useful lives and compensation earned under the
stock compensation plan. These carryforwards may be subject to annual
limitation in the future in accordance with

F-22

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 7 -- INCOME TAXES -- Continued

the Tax Reform Act of 1986 and the ability to use these carryforwards could be
significantly impacted by a future "change of control" of the Company. The
limitations, if any, arising from such future "change in control" cannot be
known at this time.

NOTE 8 -- CAPITAL STOCK AND COMPREHENSIVE INCOME

ACQUISITION OF CELLULAR INTERESTS

The Company has registered 4,500,000 shares of its Class A common stock
and 3,000,000 shares of its Class B common stock. The shares may be offered in
connection with the acquisition of entities which have received or may receive
an authorization or license from the FCC to provide cellular service. Through
December 31, 1998, 2,707,957 of these registered shares of Class A common stock
have been issued in conjunction with the acquisition of cellular markets.

STOCK COMPENSATION PLANS

During 1994, the Board adopted the 1994 Long-Term Incentive Plan (the
"1994 Plan"). Under the provisions of the 1994 Plan, the Company may grant up
to 6,000,000 shares of the Company's Class A common stock to officers,
directors and key employees in the form of nonqualified stock options,
incentive stock options, stock appreciation rights, unrestricted stock,
restricted stock and performance shares. During 1996, the Board adopted the
1996 Stock Option Plan for Non-Employee Directors (the "1996 Plan"). Under the
provisions of the 1996 Plan, the Company may grant up to 100,000 shares of the
Company's Class A common stock to non-employee directors of the Company in the
form of nonqualified stock options. All stock options must require exercise
prices of not less than the fair market value of the Company's Class A common
stock on the date of the grant, except that certain incentive stock options
must require exercise prices of not less than 110% of fair market value of the
Company's Class A common stock on the date of the grant. Options granted under
the 1994 and 1996 Plans may not have a term greater than ten years from the
date of grant and are not transferable except upon death. As of December 31,
1998, 2,203,800 shares were available for future grants under the 1994 Plan and
70,000 shares were available for future grants under the 1996 Plan.

Upon adoption of the 1994 Plan, the Company's previously adopted stock
option and stock compensation plans were terminated. Options granted and
outstanding under these previous plans are still exercisable, but no further
grants may be made under these plans.

STOCK OPTIONS

Under the terms of the Company's previous and current stock compensation
plans, the Board has granted incentive stock options and nonqualified stock
options requiring exercise prices approximating the fair market value of the
Company's Class A common stock on the date of the grant.

F-23

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 8 -- CAPITAL STOCK AND COMPREHENSIVE INCOME -- Continued

Stock option activity under the plans was as follows:

NUMBER OF SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE
------------------ -----------------

Balance, January 1, 1996 ........... 3,903,102 $ 18.96
---------
Granted ............................ 1,331,925 18.40
Exercised .......................... (27,190) 16.56
Forfeited .......................... (6,450) 24.57
---------
Balance, December 31, 1996 ......... 5,201,387 18.82
---------
Granted ............................ 2,012,075 10.02
Exercised .......................... (17,470) 3.32
Forfeited .......................... (24,940) 14.91
Cancelled .......................... (2,300,250) 22.95
----------
Balance, December 31, 1997 ......... 4,870,802 13.31
----------
Granted ............................ 1,185,000 16.11
Exercised .......................... (2,396,614) 12.64
Forfeited .......................... (47,085) 15.30
----------
Balance, December 31, 1998 ......... 3,612,103 14.65
----------

During December, 1998, certain executive officers and directors exercised
stock options totaling 1,626,186 shares at a weighted average exercise price of
$11.82. Subsequent to December 31, 1998, approximately 1,020,760 additional
options had been exercised at a weighted average exercise price of $15.31.

In January 1997, the Board of Directors authorized the cancellation of
certain options with higher exercise prices and the issuance of fewer options
at a lower exercise price. Options for 2,299,750 shares with exercise prices
ranging from $21.50 to $25.125 were canceled and new options for 1,980,575
shares with an exercise price of $15.69 were issued. The exercise price for all
of these new options reflected the fair market value at the time of issuance.
In April 1997, the Board of Directors authorized the amendment of certain
options, nearly all of which were these newly issued options approved in
January 1997, to lower the exercise price to $10.00, the fair market value at
that time.

Of the total options outstanding at December 31, 1998, 2,791,030 have an
exercise price in the range of $10.00 and $15.75 with a weighted-average
exercise price of $13.45 and a weighted-average remaining contractual life of
7.1 years. Of the 2,791,030 options, 1,907,876 are exercisable at December 31,
1998. Of the total outstanding options at December 31, 1998, 811,073 have an
exercise price in the range of $17.17 and $19.25 with a weighted-average
exercise price of $18.69 and a weighted-average contractual life of 6.4 years,
and 799,498 of those options are exercisable at December 31, 1998. The
remaining 10,000 options have an exercise price of $22.38 and a remaining
contractual life of 7.4 years.

In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. SFAS No. 123 encourages companies to adopt the fair value method for
compensation expense recognition related to employee stock options. Existing
accounting requirements of Accounting Principles Board Opinion No. 25 ("APB No.
25") use the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company elected to remain under the APB No. 25
rules for stock options, and is required to provide pro forma disclosures of
what net income and earnings per share would have been had the Company adopted
the new fair value method for recognition purposes. The following information
is presented as if the Company had adopted SFAS No. 123 and restated its
results (in thousands, except per share data):

F-24

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 8 -- CAPITAL STOCK AND COMPREHENSIVE INCOME -- Continued

1998 1997 1996
------------- -------------- ------------

Net income (loss):
As reported .................... $ 74,247 $ (10,027) $ 6,449
Pro forma ...................... $ 60,105 $ (19,309) $ 163
Net income (loss) per share:
Basic:
As reported .................... $ 2.00 $ (0.25) $ 0.16
Pro forma ...................... $ 1.82 $ (0.48) $ (0.27)
Net income (loss) per share:
Diluted:
As reported .................... $ 1.91 $ (0.25) $ 0.15
Pro forma ...................... $ 1.74 $ (0.48) $ (0.27)

For the above information, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for grants in fiscal 1998, 1997, and 1996,
respectively: risk free rates of 5.5% to 5.6%, 6.5% to 6.8%, and 6.0% to 6.6%
expected volatility of 50%, 45%, and 35% and expected lives of 7 years in each
year. The weighted-average grant date fair value of options granted during
1998, 1997, and 1996 was $7.33, $7.27, and $9.19, respectively.

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the above pro forma amounts may not
be representative of the compensation costs to be expected in future years.

SHARES RESERVED FOR ISSUANCE

At December 31, 1998, 5,885,903 shares of the Company's Class A common
stock are reserved for exercise and grant under the Company's stock
compensation plans. In addition, 1,792,043 shares of Class A common stock and
3,000,000 shares of Class B common stock are reserved for issuance in
conjunction with the acquisition of cellular interests discussed above.

SHARE REPURCHASE

The Company's Board of Directors has authorized the repurchase of up to
7,500,000 shares of its Class A Common Stock from time to time in open market
or other transactions. During 1998, 1997 and 1996, the Company repurchased
1,612,100, 2,810,000 and 255,000 shares, respectively, of its Class A Common
Stock at an average price of approximately $17.70 in 1998, $13.00 in 1997 and
$17.00 in 1996.

During the second quarter of 1998, the Company entered into a total return
equity swap (the "Equity Swap") with a financial institution counterparty (the
"Counterparty"). Pursuant to the swap, the Company has the right to purchase
from the Counterparty on or prior to June 30, 2000, shares of Vanguard Cellular
Systems, Inc.'s Class A common stock ("Equity Swap Shares") at a price based
upon the Counterparty purchase price for said shares at initiation of the
Equity Swap. At each quarter end during the term of the Equity Swap, the
Company is required to settle any decrease in the market value of the Equity
Swap Shares below the Counterparty's cost with shares of Vanguard Cellular
Systems, Inc.'s Class A stock, or with cash or a letter of credit in the amount
of the decrease. In addition, the Company is required to pay the Counterparty a
quarterly fee equal to a LIBOR-based rate on the Counterparty's adjusted cost
to acquire the Equity Swap Shares. Due to the Company's ability to issue shares
to settle periodic price fluctuations under the Equity Swap, the Company
records all amounts received (paid) under this arrangement as increases
(decreases) to equity.

The purpose of the total return equity swap is to allow the Company to
lock in the current price of Vanguard stock in anticipation of, or in lieu of,
a future buyback, without the necessity of a present cash outlay. As of
December 31, 1998, the Counterparty had acquired 112,800 shares of Vanguard
Class A Common Stock at an approximate cost of $2.1 million. Based on the
closing stock price of $25.81 at December 31, 1998, the market value of the
Equity Swap Shares was greater than the Counterparty's cost of such shares by
$765,874.

F-25

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 9 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses were composed of the following at
December 31, 1998 and 1997 (in thousands):

1998 1997
----------- -----------

Accounts payable ..................... $ 33,315 $ 26,594
Accrued expenses:
Interest ............................ 4,615 8,763
Payroll and commissions ............. 14,508 13,578
Accrued obligations of SDL .......... 16,900 --
Taxes ............................... 5,221 3,543
Other ............................... 6,317 5,606
-------- --------
$ 80,876 $ 58,084
======== ========

NOTE 10 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each category of financial instruments for which it is practicable to
estimate that value:

CELLULAR ENTITIES CARRIED ON THE COST METHOD -- The fair value of these
instruments is estimated based upon recent transactions from this portfolio.

INTERoACT DEBENTURES AND WARRANTS -- The fair value of the combined
investment in InteroAct debentures and warrants is based upon the quoted market
price.

INTEREST RATE PROTECTION AGREEMENTS -- The fair value of interest rate cap
and swap agreements is based on quoted market prices as if the agreements were
entered into on the measurement date.

BORROWINGS UNDER CREDIT FACILITY -- The fair value of the borrowings under
the VCFC Credit Facility approximates the carrying value.

VANGUARD SENIOR DEBENTURES -- The fair value of the Vanguard Senior
Debentures is based upon quoted market price.

The estimated fair values of the Company's financial assets (liabilities)
are summarized as follows (in thousands):

DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------ ------------- -------------

Cellular entities carried on the cost method ..... $ 4,179 $ 9,317 $ 9,592 $ 27,907
InteroAct debentures and warrants ................ 0 1,440 8,300 10,800
Interest rate protection agreements .............. 831 (4,035) 1,464 (868)
Borrowings under Credit Facility ................. (565,000) (565,000) (569,000) (569,000)
Senior Debentures of Vanguard .................... (3,276) (3,669) (199,837) (208,000)
Notes receivable from employees and directors..... 27,488 27,488 -- --

F-26

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 11 -- QUARTERLY INFORMATION (UNAUDITED; IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)

1998 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
- ------------------------------------------------------ ------------ -------------- -------------- ------------ --------------

Revenue ............................................. $ 97,959 $ 112,193 $ 109,228 $ 102,326 $ 421,706
Income from operations .............................. 11,742 20,317 18,818 12,973 63,850
Net income (loss) before extraordinary item ......... (16,758) 63,809 89,736 (42,535) 94,252
Net income (loss) ................................... (20,729) 63,809 89,736 (58,569) 74,247
Net income (loss) per share before extraordinary item
Basic .............................................. (0.44) 1.72 2.44 (1.15) 2.54
Diluted ............................................ (0.44) 1.65 2.31 (1.15) 2.43
Net income (loss) per share
Basic .............................................. (0.55) 1.72 2.44 (1.59) 2.00
Diluted ............................................ (0.55) 1.65 2.31 (1.59) 1.91

1997 QUARTERS FIRST SECOND THIRD FOURTH TOTAL
- ------------------------------------------------------ --------- ----------- ----------- --------- -----------
Revenue ............................................. $ 80,315 $ 94,148 $ 101,317 $ 98,738 $ 374,518
Income from operations .............................. 10,882 13,047 18,780 6,555 49,264
Net income (loss) ................................... 228 74 1,068 (11,397) (10,027)
Net income (loss) per share
Basic .............................................. 0.01 0.00 0.03 (0.29) (0.25)
Diluted ............................................ 0.01 0.00 0.03 (0.29) (0.25)

Certain amounts in the quarterly financial information for the first,
second and third quarters of 1997 have been reclassified to conform to the
fourth quarter presentation.

F-27

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Vanguard Cellular Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Vanguard
Cellular Systems, Inc. (a North Carolina corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, comprehensive income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.

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

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

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
consolidated financial statements and schedules are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. The schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly state in all material respects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Greensboro, North Carolina,
March 22, 1999.

F-28

VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

CONDENSED PARENT COMPANY BALANCE SHEETS

(DOLLAR AMOUNTS IN THOUSANDS)

DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------

ASSETS
Cash ..................................................................................... $ 9,998 $ 1,110
Prepaid expenses ......................................................................... 6 6
Investments .............................................................................. 85,729 198,542
Notes receivable from employees and directors ............................................ 8,270 --
Other assets ............................................................................. 50 4,951
---------- ----------
Total assets .......................................................................... $ 104,053 $ 204,609
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities ...................................................................... $ 20 $ 3,862
Long-term debt, net of discount of $0 and $163 ........................................... 3,276 199,837
---------- ----------
Total liabilities ..................................................................... 3,296 203,699
---------- ----------
Shareholders' equity:
Preferred stock -- $.01 par value, 1,000,000 shares authorized, no shares issued ........ -- --
Common stock, Class A -- $.01 par value, 250,000,000 shares authorized, 39,138,394 and
38,307,623 shares issued and outstanding .............................................. 391 383
Common stock, Class B -- $.01 par value, 30,000,000 shares authorized, no shares issued -- --
Additional capital in excess of par value ............................................... 285,618 221,624
Notes receivable from employees and directors............................................ (19,218) --
Accumulated deficit ..................................................................... (166,034) (221,097)
---------- ----------
Total shareholders' equity ............................................................ 119,975 910
---------- ----------
Total liabilities and shareholders' equity ............................................ $ 104,053 204,609
========== ==========

The accompanying notes to condensed parent company financial statements are an
integral part of these balance sheets.

F-29

VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS

(DOLLAR AMOUNTS IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ -------------- ------------

General and administrative expense .......................... $ (68) $ (73) $ --
Interest expense ............................................ (17,359) (19,025) (13,940)
Equity in earnings of Vanguard Cellular Financial Corp. ..... 118,400 9,071 20,389
--------- ---------- ---------
Income (loss) before extraordinary item ..................... 100,973 (10,027) 6,449
Extraordinary loss on extinguishment of debt ................ (26,726) -- --
--------- ---------- ---------
Net income (loss) ........................................... $ 74,247 $ (10,027) $ 6,449
========= ========== =========

The accompanying notes to condensed parent company financial statements are an
integral part of these statements.

F-30

VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

CONDENSED STATEMENTS OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------- --------------- ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ 74,247 $(10,027) $ 6,449
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Amortization of deferred debt issuance costs ............................. 540 600 450
Extraordinary loss on extinguishment of debt ............................. 26,726 -- --
Equity in earnings of Vanguard Cellular Financial Corp ................... (118,400) (9,071) (20,389)
Amortization of bond investment discount ................................. 18 20 15
Change in prepaid expenses ............................................... -- (6) --
Change in accrued liabilities ............................................ (1,332) 22 3,840
---------- ---------- ----------
Net cash used in operating activities ................................... (18,201) (18,462) (9,635)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from dividends of investee ........................................ 273,604 56,070 13,960
Investment in Vanguard Cellular Financial Corp. ............................ -- -- (193,668)
---------- ---------- ----------
Net cash provided by (used in) investing activities ..................... 273,604 56,070 (179,708)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ................................. 11,805 236 454
Repurchase of common stock ................................................. (28,602) (37,320) (4,325)
Proceeds of long-term debt ................................................. -- -- 199,802
Proceeds of termination of interest rate protection agreements ............. 5,385 -- --
Repayments of long term debt ............................................... (226,783) -- --
Loans to shareholders and directors ........................................ (8,270) -- --
Increase in other assets ................................................... (50) -- --
Debt issuance costs ........................................................ -- -- (6,002)
---------- ---------- ----------
Net cash provided by (used in) financing activities ..................... (246,515) (37,084) 189,929
---------- ---------- ----------
NET INCREASE IN CASH ........................................................ 8,888 524 586
CASH, BEGINNING OF YEAR ..................................................... 1,110 586 --
---------- ---------- ----------
CASH, END OF YEAR ........................................................... $ 9,998 $ 1,110 $ 586
========== ========== ==========

The accompanying notes to condensed parent company financial statements are an
integral part of these statements.

F-31

VANGUARD CELLULAR SYSTEMS, INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. PRESENTATION

These condensed financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make
the information presented not misleading.

2. ORGANIZATION

Vanguard Cellular Systems, Inc. ("Vanguard") is a holding company which is
the 100% shareholder of Vanguard Cellular Financial Corp. ("VCFC"). This
organization was created in April 1996 to structurally subordinate Vanguard's
$200 million in Senior Debentures to VCFC's Credit Facility. Prior to that
time, operations of the Company were conducted by Vanguard. For purposes of
this condensed financial information, the reorganization has been treated in a
manner similar to a pooling-of-interests. As a result, this condensed financial
information has been prepared as if Vanguard were a holding company in all
periods.

3. LONG-TERM DEBT

On April 10, 1996, Vanguard issued $200 million aggregate principal amount
of 9 3/8% Senior Debentures due 2006 (the "Debentures") through an underwritten
public offering. The Debentures were issued at a price to the public of 99.901
for a yield of 9.384%. The net proceeds from the sale of the Debentures of
approximately $194.8 million were contributed to VCFC primarily to reduce
borrowings under the VCFC Credit Facility and were used by Vanguard to pay
other expenses. The VCFC Credit Facility was amended to permit issuance of the
Debentures and require the structural subordination of the Debentures by making
VCFC the primary obligor of the Credit Facility and all liabilities of Vanguard
(other than the Debentures) and the owner of all stock and partnership
interests of Vanguard's operating subsidiaries.

The proceeds were recorded on the Statement of Operations as an
extraordinary item. In connection with the Offer, an extraordinary loss was
recorded consisting of the following components (in thousands):

Costs in excess of principal .................................... $ 27,057
Manager fee and other costs ..................................... 505
Unamortized bond issue costs and discount ....................... 4,549
Proceeds from termination of reverse interest swap transactions . (5,385)
--------
$ 26,726
========

4. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL DISCLOSURES.

F-32

VANGUARD CELLULAR SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(DOLLAR AMOUNTS IN THOUSANDS)

BALANCE PROVISION
AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS(1) OTHER(2) PERIOD
----------- ------------ --------------- ---------- -----------

Allowance for doubtful accounts:
Year ended December 31, 1996 ......... $ 5,823 $ 5,860 $ (7,113) $ 47 $ 4,617
Year ended December 31, 1997 ......... 4,617 11,288 (7,721) -- 8,184
Year ended December 31, 1998 ......... 8,184 12,564 (10,020) (930) 9,798

- ---------
(1) Accounts written off during the period.

(2) Represents removal of allowance for doubtful accounts for entities sold
during the period, net of the allowance for doubtful accounts for entities
acquired.

BALANCE PROVISION
AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES(1) DEDUCTIONS OTHER PERIOD
----------- ------------- ------------ ------- -----------

Valuation allowances on investments:
Year ended December 31, 1998 ......... $ -- $ 31,292 $ -- $ -- $ 31,292

- ---------
(1) Represents the write off of the remaining investment balance in SDL of
$14,392 as well as the accrual of a liability of $16,900 representing the
expected funding of the Company's loan guarantees of SDL.

F-33

INDEPENDENT AUDITORS' REPORT

The Board of Directors

International Wireless Communications Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of
International Wireless Communications Holdings, Inc. and subsidiary ("IWC
Holdings" or the "Company") as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of IWC Holdings'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of PT Rajasa Hazanah Perkasa ("RHP"), an investment which is
reflected in the accompanying consolidated financial statements using the
equity method of accounting as of and for the year ended December 31, 1996
(see Note 5). The Company's investment in RHP as of December 31, 1996 was
$28,030,000 and its equity in losses of RHP was $4,746,000 for the year ended
December 31, 1996. In addition, we did not audit the financial statements of
Star Digitel Limited ("Star Digitel"), an investment which is reflected in
the accompanying consolidated financial statements using the equity method of
accounting as of and for the year ended December 31, 1997 (See Note 5). The
Company's investment in Star Digitel as of December 31, 1997 was $19,122,000
and its equity in losses of Star Digitel was $8,531,000 for the year ended
December 31, 1997. These statements were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to
the amounts included for RHP as of and for the year ended December 31, 1996
and Star Digitel as of and for the year ended December 31, 1997, is based on
the reports of other auditors.

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

In our opinion, based on our audit and the reports of other
auditors for 1996 and 1997, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of IWC
Holdings as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency
that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

KPMG LLP

Mountain View, California
April 10, 1998

F-34

INDEPENDENT AUDITORS' REPORT

To the shareholders of Star Digitel Limited

We have audited the consolidated balance sheets of Star Digitel
Limited and subsidiaries as of December 31, 1997, and the related
consolidated profit and loss account and cash flow statement for the year
then ended (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted
auditing standards in Hong Kong, which are substantially similar to generally
accepted auditing standards in the United States of America. 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.

As discussed in Note 21(c), the Company's investments in mobile
cellular telecommunications projects in the Peoples Republic of China, ("PRC")
are undertaken in the form of cooperative joint ventures or cooperative
agreements. The structure of the Great Wall cooperative joint ventures in which
the Company has invested is a derivative of a structure commonly referred to as
a "Chinese-Chinese-Foreign" ("CCF"). Subsequent to April 1998, it became public
knowledge that the State Planning Commission ("SPC"), the Ministry of Foreign
Trade and Economic Commission ("MOFTEC") and the Ministry of Finance ("MOF") had
requested approval from the State Council for proposed new regulations to govern
the use of the CCF structure in joint ventures involving Unicom, the second
largest telecommunications operator in the PRC. The proposed new regulations
would affect, amongst others, the profit sharing arrangements of the joint
venture partners and the disposition of the fixed assets of the joint venture.
To date, the State Council has not approved the proposed new regulations. A
press conference in December 1998 by the Ministry of Information Industry
("MII") indicated that the MII is currently undertaking a review of Unicom's
joint ventures using the CCF structure. Any new regulations resulting from the
approval from the State Council of the submission from the SPC, MOFTEC and MOF
or the review of the Unicom joint ventures by the MII may trigger a review of
the Company's Great Wall joint ventures and thus, may significantly impact the
operations of the Company.

On March 25, 1999, one of the shareholders of the Company ("the major
shareholder") issued a public announcement stating that the results of the
Company have been materially and adversely affected by the uncertainty in the
PRC government policies towards telecommunications industry and in part the
default on the part of another shareholder of the Company in making equity
contributions to the Company. As such, the directors of the major shareholder
are considering to make a provision against the value of their interest in the
Company.

In addition, as discussed in Note 21(d), (e), (f) and (g), subsequent
to April 1998, the Company received a writ of summons and statutory demands from
certain creditors and banks for repayment of amounts due of approximately
US$52.5 million. The balances represent amounts owed in respect of certain
cellular networks and other related equipment, software and various services for
the construction of the Company's cellular networks in the PRC of approximately
US$15.9 million and various loans together with interest and other incidental
fees of approximately US$36.6 million. The Company has filed a writ against one
of the creditors for damages resulting from breach of contract and to rescind
certain contracts entered by the Company with that creditor. The claim filed by
the Company also requested that the statutory demand filed by that creditor be
declared to be of no effect. The Company has also filed another writ against one
of the banks for damages due to, among others, breach of duty of secrecy owed by
that bank to the Company.

As discussed in Note 21(h), on March 24, 1999, the Company received
a notice from one of its bankers ("the second bank") notifying the application
of a deposit pledged by the Company to this second bank of approximately US$1
million for the repayment of the short-term facilities provided by the second
bank of approximately the same amount, plus accrued interest, matured on March
22, 1999. The application of the deposit pledged for the repayment of the
short-term facilities mentioned above may trigger an event of default on the
term loan agreements with the bank mentioned in Note 21(f). However, the bank
had not responded to this event of default up to March 30, 1999.

As discussed in Note 21(i), on February 12, 1999, the Company
appointed an independent financial advisor to review and give recommendations on
the financial affairs of the Company which includes formulation of proposals for
debt restructuring for submission to creditors of the Company. The Company,
along with the financial advisor, and the creditors, including those mentioned
in the preceding paragraph, are in the process of negotiating a settlement for
the debts owed and the disputes but no agreements have been reached up to March
30, 1999. Further, no formal proposals for debt restructuring have yet
been presented by the financial advisor up to March 30, 1999.

As discussed in Note 21(j), pursuant to written resolutions of the
Board of Directors dated March 11 and 17, 1999, the Company has appointed legal
counsel in the United States to commence and has commenced legal proceedings
against Vanguard Cellular Systems Inc. ("Vanguard"), one of its shareholders
through Vanguard China Inc., a wholly owned subsidiary of Vanguard, to claim for
damages resulting from Vanguard's breach of a letter agreement dated September
3, 1998 whereby Vanguard agreed to use its best efforts to raise capital to
replace the US$19 million which was originally to be contributed by
International Wireless Communications Inc.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Star Digitel Limited and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles in Hong Kong.

Generally accepted accounting principles in Hong Kong vary in
certain respects with those in the United States of America. A description of
the significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net loss and
shareholders' deficit are set forth in Note 23 to the consolidated financial
statements (not presented separately herein).

Arthur Andersen & Co.

Hong Kong,
April 3, 1998 (except with respect to the matters discussed in Note 21(c),
(d), (e), (f), (g), (h), (i), and (j), as to which the date is March 30, 1999).

F-35

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY

We have audited the consolidated balance sheets of PT Rajasa
Hazanah Perkasa and Subsidiary as of December 31, 1996 and the related
consolidated statements of income and deficit and cash flows for the year
then ended (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of PT
Rajasa Hazanah Perkasa and its subsidiary as of December 31, 1996 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles in the Republic of
Indonesia.

Generally accepted accounting principles in Indonesia vary in
certain respects with those in the United States of America. A description of
the significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net loss and
stockholders' equity (capital deficiency) are set forth in Notes 22 and 23 to
the consolidated financial statements (not presented separately herein).

Arthur Andersen LLP

Greensboro, North Carolina,
March 24, 1997

F-36

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(In thousands, except share data)

ASSETS 1996 1997
-------------- --------------

Current assets:
Cash and cash equivalents (including restricted cash of $1,500 in 1997)................... $ 41,657 4,410
Investments in affiliates held for sale................................................... 2,062 1,873
Other current assets...................................................................... 10,689 10,533
-------------- --------------
Total current assets.................................................................... 54,408 16,816
Property and equipment, net.................................................................. 18,426 22,406
Notes receivable from affiliate.............................................................. -- 4,583
Investments in affiliates.................................................................... 68,394 57,432
Telecommunication licenses and other intangibles, net........................................ 18,484 12,521
Debt issuance costs, net..................................................................... 6,431 7,961
License deposit and other assets ............................................................ 3,215 1,650
-------------- --------------
Total assets.......................................................................... $ 169,358 123,369
-------------- --------------
-------------- --------------

LIABILITIES, MINORITY INTERESTS, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable and accrued expenses.................................................. $ 7,313 11,012
Bank liability.......................................................................... -- 5,000
-------------- --------------
Total current liabilities............................................................ 7,313 16,012
Long-term debt, net...................................................................... 75,466 123,072
-------------- --------------
Total liabilities.................................................................... 82,779 139,084
Commitments and contingencies (Note 13)
Minority interests in consolidated subsidiaries.......................................... 5,685 8,675
Redeemable convertible preferred stock, $.01 par value per share;
21,541,480 and 33,231,480 shares designated in 1996 and 1997,
respectively; 15,973,200 and 15,981,876 shares issued and
outstanding in 1996 and 1997, respectively; net of note receivable from
stockholder of $26 in 1996 and 1997; liquidation and minimum
redemption value of $107,459......................................................... 103,021 105,306
Stockholders' deficit:
Preferred stock, $.01 par value per share;
6,768,520 shares designated; 933,200 shares issued and
outstanding in 1996 and 1997; liquidation value of $793............................ 9 9
Common stock, $.01 par value per share; 26,000,000 and 66,000,000
shares authorized in 1996 and 1997, respectively; 636,720 and 1,310,230
shares issued and outstanding in 1996 and 1997, respectively....................... 6 13
Additional paid-in capital................................................................. 31,060 52,937
Note receivable from stockholder........................................................... (152) (152)
Deferred compensation...................................................................... -- (1,209)
Unrealized gain on investments............................................................. 68 --
Cumulative translation adjustment.......................................................... 271 (1,970)
Accumulated deficit........................................................................ (53,389) (179,324)
-------------- --------------
Total stockholders' deficit.......................................................... (22,127) (129,696)
-------------- --------------
Total liabilities, minority interests, redeemable
convertible preferred stock and stockholders' deficit.............................. $ 169,358 123,369
-------------- --------------
-------------- --------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-37

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)

1995 1996 1997
------------ ------------ -------------

Operating revenues......................................................... $ -- 869 3,275
Cost of revenues........................................................... -- 1,948 3,471
------------ ------------ -------------
-- (1,079) (196)

Operating expenses:
Selling, general and administrative expenses............................ 6,365 17,333 31,174
Equity in losses of affiliates.......................................... 3,756 11,258 42,584
Impairment in asset value............................................... -- 525 24,000
Minority interests in losses of consolidated subsidiaries............... -- (275) (1,148)
------------ ------------ -------------
Loss from operations.................................................. (10,121) (29,920) (96,806)
Other income (expense):
Interest income......................................................... 232 1,823 1,599
Interest expense........................................................ (1,354) (6,790) (27,524)
Other................................................................... (28) (1,021) (919)
------------ ------------ -------------

Net loss................................................................... $ (11,271) (35,908) (123,650)
------------ ------------ -------------
------------ ------------ -------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-38

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)

PREFERRED STOCK COMMON STOCK ADDITIONAL NOTE RECEIVABLE
--------------------- --------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER
------ ------ ------ ------- ------- -------------

Balances as of December 31, 1994... 1,200,000 $ 12 76,080 $ 1 625 (152)
Issuance of common stock........... -- -- 251,920 2 124 --
Accretion of redeemable
convertible preferred stock...... -- -- -- -- -- --
Foreign currency translation....... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
--------- ------- ----------- ------- ---------- -------------

Balances as of December 31, 1995... 1,200,000 12 328,000 3 749 (152)
Conversion of Series A
preferred stock to common stock.. (266,800) (3) 266,800 3 -- --
Exercise of stock options.......... -- -- 41,920 -- 11 --
Issuance of common stock warrants.. -- -- -- -- 30,300 --
Unrealized gain on investments..... -- -- -- -- -- --
Foreign currency translation....... -- -- -- -- -- --
Accretion of redeemable
convertible preferred stock...... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
--------- ------- ----------- ------- ---------- -------------

Balances as of December 31, 1996... 933,200 9 636,720 6 31,060 (152)
Exercise of stock options.......... -- -- 180,000 2 43 --

Issuance of common stock warrants.. -- -- -- -- 11,701 --
Issuance of common stock........... -- -- 493,510 5 6,154 --
Value assigned to Debt
Conversion Feature of IWCH
Pakistan Facility................ -- -- -- -- 3,979 --
Deferred compensation.............. -- -- -- -- -- --

Amortization of deferred
compensation...................
Net warrant exercises of
redeemable convertible -- -- -- -- -- --
preferred stock................
Accretion of redeemable
convertible preferred stock.... -- -- -- -- -- --
Unrealized loss on investments..... -- -- -- -- -- --
Foreign currency translation....... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
--------- ------- ----------- ------- ---------- -------------
Balances as of December 31, 1997... 933,200 $ 9 1,310,230 $ 13 52,937 (152)
--------- ------- ----------- ------- ---------- -------------
--------- ------- ----------- ------- ---------- -------------

UNREALIZED CUMULATIVE TOTAL
DEFERRED GAIN (LOSS) ON TRANSLATION ACCUMULATED STOCKHOLDERS'
COMPENSATION INVESTMENTS ADJUSTMENT DEFICIT DEFICIT
------------- -------------- ------------ ----------- -------------

Balances as of December 31, 1994... -- -- -- (3,640) (3,154)
Issuance of common stock........... -- -- -- -- 126
Accretion of redeemable
convertible preferred stock...... -- -- -- (459) (459)
Foreign currency translation....... -- -- (1) -- (1)
Net loss........................... -- -- -- (11,271) (11,271)
------------- ------------- ------------- ------------ --------------

Balances as of December 31, 1995... -- -- (1) (15,370) (14,759)
Conversion of Series A
preferred stock to common stock.. -- -- -- -- --
Exercise of stock options.......... -- -- -- -- 11
Issuance of common stock warrants.. -- -- -- -- 30,300
Unrealized gain on investments..... -- 68 -- -- 68
Foreign currency translation....... -- -- 272 -- 272
Accretion of redeemable
convertible preferred stock...... -- -- -- (2,111) (2,111)
Net loss........................... -- -- -- (35,908) (35,908)
------------- ------------- ------------- ------------ --------------

Balances as of December 31, 1996... -- 68 271 (53,389) (22,127)
Exercise of stock options.......... -- -- -- -- 45

Issuance of common stock warrants.. -- -- -- -- 11,701
Issuance of common stock........... -- -- -- -- 6,159
Value assigned to Debt
Conversion Feature of IWCH
Pakistan Facility................ -- -- -- -- 3,979
Deferred compensation.............. (1,453) -- -- -- (1,453)
Amortization of deferred
compensation................... 244 -- -- -- 244
Net warrant exercises of
redeemable convertible -- -- -- (81) (81)
preferred stock................
Accretion of redeemable
convertible preferred stock.... -- -- -- (2,204) (2,204)
Unrealized loss on investments..... -- (68) -- -- (68)
Foreign currency translation....... -- -- (2,241) -- (2,241)
Net loss........................... -- -- -- (123,650) (123,650)
------------- ------------- ------------- ------------ --------------
Balances as of December 31, 1997... (1,209) -- (1,970) (179,324) (129,696)
------------- ------------- ------------- ------------ --------------
------------- ------------- ------------- ------------ --------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-39

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)

1995 1996 1997
---- ---- ----

Cash flows from operating activities:
Net loss.............................................................................. $(11,271) (35,908) (123,650)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 37 732 1,885
Amortization of telecommunication licenses and other intangibles................. 294 1,103 1,249
Amortization of debt issuance costs.............................................. -- 369 9,196
Amortization of long-term debt discount.......................................... -- 5,764 17,319
Amortization of deferred compensation............................................ -- -- 244
Equity in losses of affiliates................................................... 3,756 11,258 42,584
Gain on sale of affiliate........................................................ -- -- (1,156)
Accrual of interest on long-term debt............................................ -- -- 1,287
Minority interests in losses of consolidated subsidiaries........................ -- 275 1,148
Issuance of common stock warrants................................................ -- -- 10,248
Impairment in asset value........................................................ -- 525 24,000
Unrealized gain (loss) on investments............................................ -- 68 (68)
Changes in operating assets and liabilities:
Other current assets........................................................... (350) (2,480) (6,377)
Accounts payable and accrued expenses.......................................... 5,557 1,246 3,699
Net cash used in operating activities........................................ (1,977) (17,048) (18,392)

Cash flows from investing activities:
Issuance of notes receivable from affiliates -- (1,058) (4,873)
Repayment of notes receivable from affiliates......................................... (113) 583 635
Issuance of notes receivable.......................................................... -- (3,231) (563)
Repayment of notes receivable......................................................... -- 1,800 1,496
Advances to affiliate................................................................. (728) (1,921) --
Investments in affiliates held for sale............................................... -- -- (211)
Proceeds from sale of affiliate....................................................... -- -- 3,218
Purchases of property and equipment................................................... (4,218) (8,657) (5,865)
Purchase of subsidiary................................................................ -- (3,198) --
Investments in affiliates............................................................. (19,589) (31,943) (41,411)
Minority interest in consolidated subsidiaries........................................ -- 5,410 1,842
Purchase of telecommunication licenses and other intangibles.......................... (12,153) (5,772) --
License deposits and other assets..................................................... 70 (8,197) 6,820
Net cash used in investing activities........................................ (36,731) (56,184) (38,912)

Cash flows from financing activities:
Proceeds from issuance of notes payable............................................... 28,138 -- --
Repayment of notes payable............................................................ (2,050) (4,000) --
Proceeds from revolving credit facility............................................... -- 7,000 --
Repayment of revolving credit facility................................................ -- (7,000) --
Net proceeds from issuance of stock and warrants...................................... 27,720 30,300 --
Exercise of stock options............................................................. -- 11 45
Debt issuance costs................................................................... -- (6,800) (6,747)
Proceeds from issuance of long-term debt.............................................. -- 69,702 29,000
Net cash provided by financing activities ................................... 53,808 89,213 22,298

Effect of foreign currency exchange rates on cash and cash equivalents................... -- 278 (2,241)

Net increase (decrease) in cash and cash equivalents.................................... 15,100 16,259 (37,247)
Cash and cash equivalents at beginning of year .......................................... 10,298 25,398 41,657
Cash and cash equivalents at end of year ................................................ $ 25,398 41,657 4,410
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information
Cash paid for interest ............................................................. $ 949 662 --
---------- ---------- ---------
---------- ---------- ---------

F-40

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

Noncash financing and investing activities:

Conversion of loans to equity................................................... $ 24,307 2,052 --
---------- ---------- ---------
---------- ---------- ---------

Conversion of note receivable to investment in affiliate........................ $ 2,020 -- --
---------- ---------- ---------
---------- ---------- ---------

Net warrant exercises of redeemable convertible preferred stock ................ $ -- -- 81
---------- ---------- ---------
---------- ---------- ---------

Issuance of common stock warrants in connection with Pakistan Bridge Facility,
Mobilink Finder's Fee and Vanguard/Star Digitel Guarantee.......................... $ -- -- 7,967
---------- ---------- ---------
---------- ---------- ---------

Value assigned to Debt Conversion Feature of IWCH Pakistan Facility............. $ -- -- 3,979
---------- ---------- ---------
---------- ---------- ---------

Exchange of redeemable convertible preferred stock for investments in
affiliates and telecommunication licenses and other intangibles................ $ 25,000 -- --
---------- ---------- ---------
---------- ---------- ---------

Exchange of common stock for investment in subsidiary/affiliate................. $ 125 -- 6,159
---------- ---------- ---------
---------- ---------- ---------

Note payable assumed in connection with an affiliate............................ $ 4,000 -- --
---------- ---------- ---------
---------- ---------- ---------

Effect of net assets of subsidiary previously accounted for by the
equity method................................................................... $ -- 4,395 --
---------- ---------- ---------
---------- ---------- ---------

Accretion of redeemable convertible preferred stock............................. $ 459 2,111 2,204
---------- ---------- ---------
---------- ---------- ---------

Vanguard Warrant/Option Exchange................................................ $ -- -- 3,734
---------- ---------- ---------
---------- ---------- ---------

Bank liability assumed in connection with an affiliate.......................... $ -- -- 5,000
---------- ---------- ---------
---------- ---------- ---------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-41

INTERNATIONAL WIRELESS COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

International Wireless Communications Holdings, Inc. ("IWC Holdings")
was incorporated in Delaware in July 1996 as a holding company whose primary
assets are all of the issued and outstanding capital stock of International
Wireless Communications, Inc. ("IWC") and notes receivable from IWC (IWC
Holdings and IWC are collectively referred to herein as the "Company"). IWC
was incorporated in Delaware in January 1992 and develops, owns and operates
wireless communications companies in major emerging markets in Asia and Latin
America. The Company, together with its strategic partners, provides cellular
services in China, Pakistan and Indonesia, and is developing a digital
enhanced specialized mobile radio ("ESMR") network in Brazil.

The Company has suffered significant recurring losses from operations
and has a capital deficiency that raise substantial doubt about its ability
to continue as a going concern. To date, the Company has invested principally
in local wireless businesses ("LWBs") that are in their early stages of
development, have a limited number of subscribers and are expected to incur
losses for a substantial period of time. The Company's losses have been
funded from cash previously raised through the sale of debt and equity
securities. The losses of the LWBs in which the Company is a significant
shareholder have been funded principally from equity infusions and advances
from the Company or other shareholders of the LWB. Pursuant to their business
strategies, all of the Company's subsidiaries and affiliates expect to
continue making expenditures to build-out their telecommunications networks
and fund operating losses which will require substantial amounts of cash.
Each of the Company's LWBs intends to raise the required level of cash
through combinations of capital infusions from existing or new shareholders,
equipment financing from equipment vendors or lending banks and/or debt
financing. The Company is committed to participate in such financings, when
necessary, for its core investments in China, Pakistan, Indonesia and Brazil
in order to maintain its current level of ownership, and in certain cases, to
increase its level of ownership. In order to obtain the additional funds it
needs to continue operating at planned levels, the Company will need
substantial funds from additional debt and/or equity financings. The
Company's plans with respect to obtaining additional capital include
additional shareholder investment of which $10,000,000 was obtained in March
1998, (see Note 16) and sale of non-strategic wireless investments. In recent
months, the Company and its LWBs have experienced significant difficulties in
obtaining adequate financing to fund operations. As a result, the majority of
the LWB's business plans have been delayed. Additional delays may negatively
affect the ability of the Company to realize the full value of the Company's
investments. The Company has further retained a financial advisor for the
purpose of evaluating its strategic and financial alternatives. There can be
no assurance that the Company or any of its interests in any of its LWBs can
be sold or that the Company or its LWBs can obtain any additional debt or
equity financing. If the Company cannot obtain additional financing, the
Company will have to significantly curtail its operations including delaying,
scaling back or eliminating one or more of its projects or merging, selling,
liquidating or suffering dilution in one or more of its investments. The
failure of the Company to participate in capital calls for Star Digitel
Limited ("Star Digitel") and International Wireless Communications Pakistan
Limited ("IWCPL") in particular will result in substantial dilution. The
curtailment of operations could result in the loss or revocation of
telecommunication licenses held by the LWBs.

In connection with the Debt Offering (see Note 9), IWC Holdings and IWC
completed a reorganization in which IWC became a wholly owned subsidiary of
IWC Holdings through the conversion of each share of the then-outstanding
capital stock of IWC into 40 shares of the corresponding class and series of
stock of IWC Holdings (the "Stock Conversion"). All data related to shares
and per share amounts for all periods presented have been adjusted to reflect
the effect of the reorganization and the Stock Conversion.

Consistent with industry practice, the Company considers itself to be
operating in one business segment.

F-42

BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts
of IWC, its wholly owned subsidiary, Servicos de Radio Comunicacoes Ltda.
("SRC"), various offshore holding companies, and a majority owned subsidiary,
PeruTel S.A. ("PeruTel"). The consolidated financial statements for the years
ended December 31, 1996 and 1997 also include the accounts of TeamTalk
Limited ("TeamTalk"), a wholly-owned subsidiary, since April 30, 1996, the
effective date of the acquisition (see Note 5); Wireless Data Services, Ltd.
("WDS") since February 1996 (64% interest as of December 31, 1997); Star
Telecom Overseas (Cayman Islands) Limited ("STOL") since August 1996 (56%
interest as of December 31, 1997) and Uniworld S.A. (formerly Promociones
Telefonicas S.A. ("Protelsa")) ("Uniworld") since December 1996 (66% interest
as of December 31, 1997). All significant intercompany accounts and
transactions have been eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION

The functional currency for the Company's foreign operating entities is
the applicable local currency, except for those entities located in highly
inflationary countries. Translation from the applicable foreign currencies to
U.S. dollars is performed for monetary assets and liabilities using current
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period.
The gains or losses, net of applicable deferred income taxes, resulting from
such translation, if material, are included in stockholders' deficit. Gains
or losses resulting from foreign currency transactions are included in other
income. Foreign currency gains or losses associated with transactions of
investments accounted for under the equity method of accounting are reflected
as a component of equity in gains or losses from affiliates. For
non-operating foreign investees and for the Company's investee in Brazil, a
highly inflationary country, the functional currency is the U.S. dollar.
Remeasurement adjustments for foreign entities, where the U.S. dollar is the
functional currency, and exchange gains and losses arising from transactions
denominated in a currency other than the functional currency, are included in
other income and are not material in any of the years presented.

REVENUE RECOGNITION

Revenue includes primarily access and usage charges for subscriber units
under service agreements with the Company's consolidated subsidiaries that
have commenced operations. The terms of these service agreements range from
monthly to 36 month periods.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid instruments with a maturity of
90 days or less at the time of acquisition to be cash equivalents.

The Company has classified its investments in certain debt and equity
securities as "available for sale". Such investments are recorded at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' deficit. The cost of securities sold is based upon the specific
identification method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at original cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the respective assets, generally three to five years for
non-telecommunication equipment and ten years for telecommunication equipment.

INVESTMENTS IN AFFILIATED COMPANIES

Investments in affiliated companies consist of interests in entities
that have been awarded telecommunication licenses to provide various wireless
telecommunication services.

The cost method of accounting is used for the Company's investments in
affiliated companies where the Company's voting interest is generally less
than 20% and the Company does not exert significant influence. Under the cost
method, the investment is recorded at cost, and income is recognized only to
the extent distributed by the investee as dividends. No such dividends were
declared or distributed for any of the years presented. Write-downs to the

F-43

recorded historical cost are recognized when the Company believes that an
other than temporary decline in value of the investment has occurred.

Where the Company's voting interest is 20% to 50% and the Company does
not exercise control, the equity method of accounting is used. Under this
method, the investment, originally recorded at cost, is adjusted to recognize
the Company's share of net earnings or losses of the investee, limited, in
the case of losses, to the extent of the Company's investment therein (except
where the Company has extended guarantees of debt of the affiliate) and the
amortization of telecommunication licenses and other intangibles, if any.
Write-downs from the adjusted historical cost are made when the Company
believes an impairment in value has occurred. The amount of the purchase
price that exceeded the fair value of the Company's percentage ownership of
the equity investee's tangible assets at the date of acquisition reflects the
existence of intangible assets of the equity investee. The primary intangible
asset of each equity investee consists of the equity investee's
telecommunication licenses or rights to participate in such licenses. Amounts
attributable to other intangibles, such as workforce, customer lists, and
agreements with local companies for transmitter and antenna locations, are
not material. Accordingly, the Company has accounted for the excess purchase
price as attributable primarily to telecommunication licenses and
participation rights and amortizes such intangibles generally over a period
of up to 20 years commencing upon the date of completion of the acquisition
or commencement of project operations in the case of Star Digitel. To the
extent that goodwill exists, the Company believes that the difference in
amortization lives between telecommunication licenses and goodwill would not
have a material effect on the accompanying consolidated financial statements.
In some cases, the terms of the licenses held by the equity investees are
less than twenty years. However, the Company believes that it will be able to
renew the licenses indefinitely if it builds out the infrastructure and
establishes commercial service. The costs of license renewal are expected to
be nominal.

The Company consolidates entities it controls, generally through greater
than 50% ownership interest.

TELECOMMUNICATION LICENSES AND OTHER INTANGIBLES

The Company has acquired majority ownership interest in various LWBs.
These acquisitions have been accounted for under the purchase method and are
included in the accompanying consolidated financial statements. The amount of
the purchase price that exceeded the underlying fair value of the Company's
pro rata ownership in the LWB's net tangible assets at the date of
acquisition represents the level of intangible assets of the LWB. The primary
intangible asset of each LWB consists of the LWB's telecommunication licenses
or rights to participate in such licenses. Given the early stage nature of
the acquired entities, amounts attributable to other intangibles, such as
workforce, customer lists, and agreements with local companies for
transmitter and antenna locations, are not material. Accordingly, the Company
has accounted for the excess purchase price as attributable primarily to
telecommunication licenses and participation rights. To the extent that
goodwill exists, the Company believes that the difference in amortization
lives between licenses and goodwill would not have a material effect on the
accompanying consolidated financial statements. Licenses are amortized
generally over a period of 20 years, commencing upon the date of completion
of the acquisition. In some cases, the terms of the licenses held by the
LWB's are less than twenty years. However, the Company believes that it will
be able to renew the licenses indefinitely if it builds out the
infrastructure and establishes commercial service. The costs of license
renewal are expected to be nominal. Amortization expense was approximately
$294,000, $1,103,000, and $1,249,000 for the years ended December 31, 1995,
1996 and 1997, respectively.

STOCK-BASED COMPENSATION

The Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25 to account for its employee
stock-based compensation plans.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
F-44

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

BUSINESS AND CREDIT CONCENTRATIONS AND RISK FACTORS

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents. The
Company's cash equivalents are comprised of investment grade short-term debt
instruments. Management believes that the financial risks associated with
such deposits are minimal.

Included in the Company's consolidated balance sheet as of December 31,
1996 and 1997, are long-term investments in various LWBs in such developing
countries as Brazil, China, India, Indonesia, Malaysia, Pakistan, New
Zealand and Peru.

Each IWC subsidiary and affiliate has a unique and distinct market,
operating and regulatory environment, and local economy with different
subscription rates and costs to build and operate the systems. Achieving each
operating plan is dependent upon successfully contending not only with normal
risks associated with constructing and operating wireless properties, but
also risks unique to operating in foreign emerging countries, such as
regulatory compliance, contractual restrictions, labor laws, expropriation,
nationalization, political, economic or social instability, and confiscatory
taxation.

The Company anticipates that it will often have a minority interest in
operating companies, in part because applicable laws often limit foreign
investors to minority equity positions. As such, the Company may be unable to
access the cash flow, if any, of its operating companies. Additionally, the
Company's ability to sell or transfer its ownership interest in its operating
companies is generally subject to limitations based on agreements with its
strategic and financial partners, as well as provisions in local operating
licenses and local government regulations that may prohibit or restrict the
transfer of the Company's ownership interest in such operating companies.

The U.S. dollar-denominated value of the Company's investment in its
operating companies and other wireless projects is partially a function of
the currency exchange rate between the U.S. dollar and the applicable local
currency. In addition, such operating companies and other wireless projects
will report their results of operations in the local currency and,
accordingly, the Company's results of operations may be adversely affected by
changes in currency exchange rate risks. As a result, the Company may
experience economic loss with respect to its investments and fluctuations in
its results of operations solely as a result of currency exchange rate
fluctuations. During the latter half of 1997, the Company experienced
significant equity losses relating to its investments in Asia, particularly
in PT Rajasa Hazanah Perkasa ("RHP"), the Company's cellular affiliate in
Indonesia, due in large part to the significant devaluation of the Indonesian
rupiah and the related remeasurement of its U.S. dollar-denominated credit
facility. The Company expects to experience continued foreign currency
translation losses in Asia, particularly where U.S. dollar-denominated debt
exists. This may also impact the Company's ability to raise debt at the
operating company level in Asia in the foreseeable future. The company does
not carry currency convertibility risk insurance or engage in foreign
currency hedge transactions.

The Company's ability to retain and exploit its existing
telecommunication licenses, and to obtain new licenses in the future, is
essential to the Company's operations. However, these licenses are typically
granted by governmental agencies in developing countries, and there can be no
assurance that these governmental agencies will not seek to unilaterally
limit, revoke, or otherwise adversely modify the terms of these licenses in
the future, any of which could have a material adverse effect on the Company,
and the Company may have limited or no legal recourse if any of these events
were to occur. In addition, licenses typically require renewal from time to
time and there can be no assurance that renewals to these licenses will be
granted.

Most of the LWBs currently operating have incurred operating losses and
negative cash flow from operations since inception, and the Company expects
that most of its operating companies will continue to generate operating

F-45

losses and negative cash flow from operations for the foreseeable future and
accordingly, the Company expects its losses to increase. Most of these
operating companies have only recently initiated providing commercial
services and have a limited subscriber base. This is not uncommon in the
wireless telecommunications industry, which requires significant capital
investments in the initial years prior to obtaining a sufficient subscriber
revenue base to support operations. Achievement of positive cash flow from
operations will depend on successful execution of management's business
plans. Those plans assume significant additional capital investment, in some
cases, to expand the wireless network. There can be no assurance that such
funding capacity will be available in the future.

RECOVERABILITY OF LONG-LIVED ASSETS

The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment
loss would be recognized when estimated future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount.

The recoverability of property and equipment, investments in equity and
cost investee companies, and the value attributed to telecommunications
licenses, is dependent upon the successful build-out of system
infrastructure, obtaining additional licenses by investee companies, and
successful development of systems in each of the respective markets in which
the Company's investees operate or through the sale of such assets. In 1996,
the Company wrote off its investments in HFCL Mobile Radio, Ltd. ("HFCL") and
PT Binamolti Visvalindo ("PTBV") of $320,000 and $205,000, respectively,
based on management's decision to no longer pursue such projects. In 1997,
the Company wrote off its investments in M/S Mobilcom (Pte) Ltd. ("Mobilcom
Pakistan") and PT Mobilkom Telekomindo ("Mobilkom") of $4,714,000 and
$1,500,000, respectively, and wrote down its investment in Prismanet (M) Sdn.
Bhd. (formerly STW) ("Prismanet") by $11,683,000 ($7,683,000 as an equity
investment and $4,000,000 as a cost investment) and RHP by $1,103,000 based
on management's decision to no longer pursue the Mobilcom Pakistan project
and significant other than temporary impairments in the Company's estimate of
the net realizable value in both Mobilkom, Prismanet and RHP (see Notes 4 and
5). In addition, the Company recorded its pro rata share of reserves
associated with the Prismanet "keep well" of $5,000,000 (see Note 13). All
such impairment write-offs and write-downs are classified as impairment in
asset value on the accompanying consolidated statements of operations for the
years ended December 31, 1996 and 1997.

RECLASSIFICATIONS

Certain amounts in the accompanying 1995 and 1996 consolidated financial
statements have been reclassified to conform with the 1997 consolidated
financial statement presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company will adopt SFAS No. 130 in fiscal 1998.

The Financial Accounting Standards Board recently issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
statement establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports. The Company will adopt SFAS No. 131 in
fiscal 1998. The Company has determined that it does not have any separately
reportable business segments.

(2) CASH AND CASH EQUIVALENTS

The Company has invested in a variety of short-term, highly liquid
investments all with original maturities of 90 days or less. As of December
31, 1996, the Company had cash of $11,811,000, and cash equivalents
consisting of money market mutual funds and U.S. government and agency
obligations totaling $3,009,000 and

F-46

$26,837,000, respectively. Unrealized gains on U.S. government and agency
obligations of $68,000 is included as a component of stockholders' deficit on
the accompanying consolidated balance sheet as of December 31, 1996. As of
December 31, 1997, the Company had cash of $669,000 and cash equivalents
consisting of money market mutual funds and seven day fixed term deposits
totaling $2,141,000 and $1,600,000, respectively.

F-47

(3) BALANCE SHEET COMPONENTS

Balance sheet components as of December 31 are as follows (in thousands):

1996 1997
-------------- ---------------

Other current assets
Employee receivables............................................................... $ 179 272
Taxes receivables.................................................................. 820 805
Accounts receivable................................................................ 348 1,797
Other receivables.................................................................. 1,373 5,487
License deposit.................................................................... 5,255 --
Notes receivable................................................................... 1,431 776
Notes receivable from affiliates................................................... 813 290
Prepaid expenses and other......................................................... 470 1,106
-------------- ---------------
$ 10,689 10,533
-------------- ---------------
-------------- ---------------

Property and equipment
Furniture and fixtures............................................................. $ 320 296
Computer and office equipment...................................................... 935 1,412
Automobiles........................................................................ 197 248
Leasehold improvements............................................................. 276 545
Telecommunication equipment........................................................ 9,930 17,854
Construction in process............................................................ 7,620 4,788
-------------- ---------------
19,278 25,143
Less accumulated depreciation........................................................ 852 2,737
-------------- ---------------
Property and equipment, net..................................................... $ 18,426 22,406
-------------- ---------------
-------------- ---------------

Telecommunication licenses and other intangibles
SRC/Via 1 project.................................................................. $ 6,680 6,680
Mobilcom Pakistan.................................................................. 5,439 725
TeamTalk........................................................................... 1,760 1,760
STOL............................................................................... 3,965 3,965
Protelsa........................................................................... 1,557 1,557
WDS................................................................................ 221 221
Other.............................................................................. 200 200
-------------- ---------------
19,822 15,108
Less accumulated amortization...................................................... 1,338 2,587
-------------- ---------------
Telecommunication licenses and other intangibles, net....................... $ 18,484 12,521
-------------- ---------------
-------------- ---------------

Accounts payable and accrued expenses
Accounts payable.................................................................. $ 5,163 4,187
Professional services............................................................. 718 1,237
Employee compensation and benefits................................................ 619 886
Equipment purchases............................................................... 27 3,393
Interest.......................................................................... -- 525
Other............................................................................. 786 784
-------------- ---------------
$ 7,313 11,012
-------------- ---------------
-------------- ---------------

F-48

(4) INVESTMENTS IN AFFILIATES HELD FOR SALE

In June 1997, the Company sold its 1.56% equity interest in Corporation
Mobilcom S.A. de C.V. ("Mobilcom Mexico") for $3,218,000 to a third party
affiliated with an existing shareholder in Mobilcom Mexico. The Company
carried this investment in Mobilcom Mexico at its historical cost basis of
$2,062,000. As a result, the Company reported a gain of $1,156,000 in other
income as of December 31, 1997. In compliance with the Indenture (see Note
9), proceeds from the disposition of the Company's interest in Mobilcom
Mexico were used for Permitted Investments (as defined) within 270 days after
the date of disposition.

In June 1997, the Company initiated the disposition of three additional
enhanced capacity trunked radio ("ECTR") investments as the Company re-aligns
its investment strategy and re-distributes its resources to its larger
cellular and ESMR investments. The investments held for sale include
TeamTalk, the Company's wholly owned New Zealand subsidiary; Universal
Telecommunications Service, Inc. ("UTS") in the Philippines and Mobilkom in
Indonesia. In December 1997, the Company wrote off its investment in Mobilkom
of $1,500,000 (see Note 1) as it does not expect to receive any proceeds from
a sale of this interest as a result of Mobilkom's delay in the execution of
its business plan and the effects of the Asian economic crisis on this
investment. The Company expects that the sale of Team Talk and UTS may occur
in 1998. The Company anticipates that the proceeds from disposition of Team
Talk and UTS will not materially differ from the Company's historical cost
basis.

Investments in affiliates held for sale as of December 31 are as follows
(in thousands):

1996 1997
----------------- ------------------

Mobilcom Mexico..................................... $ 2,062 --
UTS................................................. -- 1,873
----------------- ------------------
$ 2,062 1,873
----------------- ------------------
----------------- ------------------

In July 1997, the Company changed its method of accounting for its
investment in UTS from the equity method to the cost method since its
ownership interest was reduced from 19.04% to 15.41% as the Company elected
not to participate in a recent capital call. The Company has not changed the
basis of accounting for the remaining investments held for sale. The Company
continues to consolidate TeamTalk and has not reclassified this investment as
an asset held for sale. The Company's investment in, and advances to,
TeamTalk amounted to $17,979,000 as of December 31, 1997. Selected audited
financial information for TeamTalk is as follows as of and for the year ended
December 31, 1997 (in thousands):

Current assets.................................................................... $ 803
Noncurrent assets................................................................. 12,913
Current liabilities............................................................... 3,889
Noncurrent liabilities ........................................................... 9,427
Net revenues...................................................................... 1,811
Net loss.......................................................................... (3,235)

(5) INVESTMENTS IN AFFILIATES

Investments in affiliates represent interests in various LWBs in several
developing countries. These investments are accounted for under the equity or
cost methods of accounting.

EQUITY INVESTMENTS

For investments in companies in LWBs in which the Company's voting
interest is 20% to 50%, or for investments in companies in which the Company
exerts significant influence through board representation and management
authority even if its ownership is less than 20%, the equity method of
accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's share of gains or losses of
affiliates, limited to the extent of the Company's investment in and advances
to affiliates, including any debt guarantees or other contractual funding
commitments. All affiliated companies have fiscal years ended December 31.
Investments in affiliated companies are as follows (dollars in thousands):

F-49

AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
--------------------------------------------------------------------------
MALAYSIA INDONESIA NEW ZEALAND INDIA INDONESIA
--------- ---------- ---------- ------ ---------
PRISMANET RHP TEAMTALK HFCL PTBV TOTALS
--------- --------- ----------- ------ --------- ----------

Percentage of ownership............................... 30%(1) 25% 50% 49% 49%
Investments in affiliated companies as of
December 31, 1994................................. $ 1,400 -- 284 -- -- 1,684
Additional investment................................. 20,770 25,530 2,569 243 206 49,318
Amortization.......................................... (638) (319) (7) (1) (1) (966)
Losses................................................ (1,291) (991) (508) -- -- (2,790)
--------- -------- -------- ------ ----- --------
Equity in losses of affiliates........................ (1,929) (1,310) (515) (1) (1) (3,756)
--------- -------- -------- ------ ----- --------
Investments in affiliated companies as of
December 31, 1995................................. $ 20,241 24,220 2,338 242 205 47,246
--------- -------- -------- ------ ----- --------
--------- -------- -------- ------ ----- --------
Portion of investment exceeding the Company's share
of the underlying historical net assets as of
December 31, 1995................................. $ 16,821 23,361 1,526 242 205 42,155
--------- -------- -------- ------ ----- --------
--------- -------- -------- ------ ----- --------

F-50

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------------
MALAYSIA INDONESIA CHINA PHILIPPINES NEW ZEALAND INDIA INDONESIA
--------- ---------- ------------ ----------- ----------- ------ ---------
PRISMANET RHP STAR DIGITEL UTS TEAMTALK HFCL PTBV TOTALS
--------- ---------- ------------ ----------- ----------- ------ ---------- -------

Percentage of ownership................. 30%(1) 28% 40% 19%(2) 100%(3) 49%(4) 49%(4)

Investments in affiliated companies as
of December 31, 1995.................... $ 20,241 24,220 -- -- 2,338 242 205 47,246

Additional investment (reclassification) 1,201 8,556 20,000 1,906 (1,736) 78 -- 30,005

Impairment in asset value............... -- -- -- -- -- (320) (205) (525)

Amortization............................ (969) (1,278) (347) (51) -- -- -- (2,645)
(Losses) gains.......................... (3,563) (3,468) (1,000) 20 (602) -- -- (8,613)
--------- --------- -------- ------- ------- ------ ------- -------
Equity in losses of affiliates.......... (4,532) (4,746) (1,347) (31) (602) -- -- (11,258)
--------- --------- -------- ------- ------- ------ ------- -------

Investments in affiliated companies as
of December 31, 1996....................$ 16,910 28,030 18,653 1,875 -- -- -- 65,468

Portion of investment exceeding the
Company's share of the underlying
historical net assets as of
December 31, 1996.......................$ 15,852 28,030 10,653 882 -- -- -- 55,417

(2) Reflects an additional investment of $532,000, of which $354,000 was
paid in 1996 and the remainder was paid in January 1997, pursuant to an
agreement dated September 25, 1996. This investment was previously
accounted for as a cost investment.

(3) Reflects acquisition of the remaining 50% of TeamTalk, effective April
30, 1996, pursuant to an agreement dated June 24, 1996.

(4) HFCL and PTBV were fully written off during 1996 based on management's
decision to no longer pursue these projects.

F-51

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------
MALAYSIA INDONESIA CHINA PHILIPPINES PAKISTAN THAILAND
--------- --------- -------- ----------- ----------- -------------
WORLDPAGE
STAR COMPANY LIMITED
PRISMANET RHP DIGITEL UTS IWCPL ("WORLDPAGE") TOTALS
--------- --------- -------- ----------- ----------- --------------- ------

Percentage of ownership..................... 22.5%(1) 28% 40% 15%(2) 34% 11%

Investments in affiliated companies as of
December 31, 1996...........................$ 16,910 28,030 18,653 1,875 -- -- 65,468

Additional investment (reclassification).... (4,000) -- 9,000 (1,662) 26,127 4,500 33,965

Impairment in asset value................... (7,683) (1,103) -- -- -- -- (8,786)

Amortization................................ (885) (1,676) (731) (23) -- (37) (3,352)
Losses ..................................... (4,342) (25,251) (7,800) (190) (1,518) (131) (39,232)
-------- -------- -------- ------- -------- ------- --------
Equity in losses of affiliates.............. (5,227) (26,927) (8,531) (213) (1,518) (168) (42,584)
-------- -------- -------- ------- -------- ------- --------

Investments in affiliated companies as of
December 31, 1997...........................$ -- -- 19,122 -- 24,609 4,332 48,063
-------- -------- -------- ------- -------- ------- --------
-------- -------- -------- ------- -------- ------- --------

Portion of investment exceeding the
Company's share of the underlying
historical net assets as of
December 31, 1997...........................$ -- -- 18,922 -- -- 2,764 21,197
-------- -------- -------- ------- -------- ------- --------
-------- -------- -------- ------- -------- ------- --------

(1) The Company, along with the other Prismanet shareholders, agreed to
provide certain support in connection with a Malaysian Ringgit
91,000,000 (approximately $23,400,000 as of December 31, 1997) senior
credit facility obtained by Prismanet with a Malaysian bank syndicate
(see Note 13). The Company's ownership interest in Prismanet was reduced
from 30% to 22.5% during 1997 as the Company elected not to participate in
a recent capital call. Additionally, during 1997 the Company changed its
method of accounting for its investment in Prismanet from the equity
method to the cost method as the company believes it no longer exerts
significant influence.

(2) During 1997, the Company decided to offer UTS for sale and has
reclassified this investment to investments in affiliates held for sale
(see Note 4).

F-52

In June 1996, the Company entered into an agreement with the other 50%
owner of TeamTalk to acquire their 1,700,000 shares of TeamTalk's common
stock, as well as to assume TeamTalk's indebtedness to the shareholder
totaling $3,022,000, for a total purchase price of approximately $3,198,000.
The transaction was accounted for by the purchase method effective April 30,
1996, with the majority of the purchase price paid in July 1996. As of
December 31, 1996, TeamTalk was consolidated into the financial statements of
the Company as a wholly owned subsidiary. In connection with the incremental
investment, the Company reclassified the associated unamortized portion of
investment exceeding the Company's share of underlying historical net assets
to telecommunication licenses and other intangibles. The fair value of the
assets acquired and the liabilities assumed in connection with the
acquisition were $8,327,000 and $3,584,000, respectively.

In September 1996, IWC entered into a subscription agreement (the "Star
Digitel Subscription Agreement") with Star Telecom Holding Limited ("STHL"),
the Company's partner in STOL, to purchase a 40% equity interest in Star
Digitel for an aggregate purchase price of $20,000,000 and accounted for by
the purchase method. Pursuant to the Subscription Agreement, in September
1996, IWC also entered into an escrow agreement (the "Star Digitel Escrow
Agreement") and deposited, in escrow, $9,000,000 of the $20,000,000 purchase
price. In November 1996, in connection with the closing of the Company's
acquisition of an equity interest in Star Digitel, the $9,000,000 held in
escrow was released to STHL, and the Company funded an additional $11,000,000
to acquire its 40% interest in Star Digitel for an aggregate purchase price
of $20,000,000 and assigned $11,000,000 to participation rights in Star
Digitel's underlying projects, representing the amount of the purchase price
that exceeded the fair value of the Company's percentage ownership of Star
Digitel's tangible net assets.

In October 1996, the Company paid $8,556,000 to increase its interest in
RHP to 29.2% and accounted for this additional acquisition using the purchase
method. The Company assigned the entire amount of the purchase price to the
telecommunication license as the purchase price exceeded the fair value of
the Company's percentage ownership of RHP's tangible net assets in full at
the date of purchase. In December 1996, Nissho Iwai International (Singapore)
Pte. Ltd. purchased 3% of RHP, diluting the Company's ownership interest in
RHP down to 28.3%.

In October 1996, the Company paid $1,000,000 for an option to purchase
50% of Laranda Sdn. Bhd., a 10% shareholder of Prismanet, for an exercise
price of $7,200,000 and certain other contractual rights. The Company, at its
discretion, allowed the option to lapse on November 6, 1996 and subsequently
expensed the entire $1,000,000, which is classified as other expense in the
accompanying consolidated statement of operations.

In June 1997, the Company, including the designated assignee of IWC, IWC
China Limited ("IWC China"), amended the Star Digitel Subscription Agreement.
The Amendment to Subscription Agreement and Waiver ("Amendment and Waiver")
modified certain provisions in the Star Digitel Subscription Agreement,
including waiving the fulfillment of the conditions precedent to its
obligations to enter into and complete a second subscription of Star Digitel
shares for an aggregate subscription price of $19,000,000 and pay and deliver
to STHL the second $9,000,000 premium in June 1997. The Company funded the
$9,000,000 premium in June 1997. The Company assigned the entire amount of
the premium to the participation rights in Star Digitel's underlying projects.

In August 1997, the Company through its wholly owned subsidiary,
Pakistan Wireless Holdings Limited ("PWH"), acquired a 43.48% indirect equity
interest in IWCPL for an aggregate purchase price of $22,000,000 (see note
9), of which $15,841,000 was paid in cash and $6,159,000 of which was paid
with 493,510 shares of IWCH's common stock. IWCPL used these funds and the
proceeds from the sale of the remaining equity of IWCPL to an unrelated party
and to Vanguard Pakistan, Inc., a wholly owned indirect subsidiary of
Vanguard Cellular Systems, Inc., a significant stockholder of the Company
("Vanguard"), to acquire a 46% equity interest in Pakistan Mobile
Communications (Pvt) Limited ("Mobilink"), a cellular telephone service
provider in Pakistan, for an aggregate purchase price of $50,600,000. In
September 1997, IWCPL consummated the sale of newly issued shares in IWCPL to
an unrelated third party for $13,959,000 and used the proceeds to purchase an
additional 12.69% equity interest in Mobilink, thereby increasing its equity
interest in Mobilink to 58.69%. The Company's indirect equity interest in
Mobilink and IWCPL was 20% and 34.08%, respectively, after the consummation
of the foregoing transactions. During 1997, the Company also funded an
aggregate of $4,127,000 to IWCPL, which amount represents the Company's pro
rata share of various capital calls declared by IWCPL. This additional
funding brought the Company's investment in IWCPL to $26,127,000, as of
December 31, 1997. The Company accounted for its investment in IWCPL using
the purchase method of accounting and subsequently has reported this
investment under the equity method of accounting.

F-53

In September 1997, the Company paid its pro rata share of a finder's fee
to an unrelated third party in connection with its indirect investment in
Mobilink primarily through the issuance of a warrant to purchase 81,982
shares of the Company's common stock at an exercise price of $0.01 per share
(the "Mobilink Finder's Fee"). The Company recognized a total fee of
$1,022,000 million related to the Mobilink Finder's Fee which is included as
a component of the cost basis of IWCPL's investment in Mobilink.

In September 1997, STOL, a company that holds interests in various
paging projects in Asia and in which the Company holds a 56% indirect equity
interest, invested $4,500,000 for a 20% equity interest in WorldPage, a Thai
paging operator. The Company's corresponding indirect equity interest in
WorldPage is 11.2%. STOL recorded its investment in WorldPage using the
purchase method of accounting and assigned $2,801,000 of its investment to
telecommunication licenses and other intangibles, representing the amount of
the purchase price that exceeded the fair value of STOL's percentage
ownership of WorldPage's tangible net assets.

In September 1997, the Company recorded a write-down of $7,683,000 in
the Company's equity investment in Prismanet based on the Company's estimate
of the net realizable value of this investment using a discounted cash flow
analysis of Prismanet's revised business plan. The Company believes that a
significant other than temporary impairment in the value had occurred due to
then recently diminished prospects for the allocation of additional spectrum
at a different frequency band to Prismanet by the government of Malaysia in
the then foreseeable future. This allocation of additional spectrum is
believed by the Company to be critical to support the value of Prismanet's
business as proposed to be conducted. In December 1997, the Company changed
its method of accounting for its investment in Prismanet from the equity
method to the cost method since its ownership interest was reduced from 30%
to 24% as the Company elected not to participate in a recent capital call and
the Company is no longer able to exercise significant influence over this
investment. In December 1997, the Company further wrote down the investment
by $4,000,000 and recorded a $5,000,000 reserve associated with the Prismanet
"keep well" (see Note13). The remaining investment in Prismanet is zero as of
December 31, 1997.

In December 1997, the Company wrote off its remaining investment in RHP
of $1,103,000. As a result of the economic crisis in Asia, the inability of
PT Mobile Selular Indonesia ("Mobisel") (the operating company and subsidiary
of RHP) to extend bank financing with Nissho Iwai International (Singapore)
Pte. Ltd. ("Nissho Iwai"), the negative net equity of RHP and the
postponement in the execution of Mobisels' business plan, the Company
believes the impairment in the RHP investment is other than temporary. As a
result the Company wrote off the remaining equity investment balance. The
Company has no further obligations with respect to guarantees or commitments
pertaining to RHP or Mobisel.

Condensed financial statement data, presented in accordance with U.S.
generally accepted accounting principles and stated in U.S. dollars for
significant affiliated companies accounted for by the equity method follows
(in thousands):

F-54

AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
------------------------------------------------------
PRISMANET RHP (A) TEAM TALK
-------------- -------------- -------------------

Current assets............................................ $ 2,611 5,316 213
Noncurrent assets......................................... 33,299 21,336 6,307
Current liabilities....................................... 2,988 17,496 3,933
Noncurrent liabilities.................................... 21,925 6,257 1,492
Net revenues.............................................. 749 5,463 348
Net loss.................................................. (5,898) (3,186) (1,490)

AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996 (B)
------------------------------------------------------
PRISMANET RHP STAR DIGITEL
-------------- -------------- -------------------

Current assets............................................ $ 820 13,354 11,215
Noncurrent assets......................................... 41,686 64,556 55,617
Current liabilities....................................... 6,909 23,341 12,460
Noncurrent liabilities.................................... 33,526 63,834 47,817
Net revenues.............................................. 1,858 10,268 436
Net loss.................................................. (11,873) (12,072) (2,618)

AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997
----------------------------------------------------------------------------------------
RHP STAR DIGITEL IWCPL (C) WORLDPAGE (D)
----------------- --------------------- --------------------- --------------------
(unaudited)

Current assets......... $ 5,176 12,543 15,710 1,865
Noncurrent assets...... 56,105 114,748 118,071 7,651
Current liabilities.... 118,475 77,520 45,794 3,324
Noncurrent liabilities. 1,126 49,727 17,981 298
Net revenues........... 8,300 5,372 8,580 1,016
Net loss............... (89,151) (17,149) (4,453) (504)

- ------------
(A) For the period March 28, 1995 through December 31, 1995. Net revenues
and net loss for the period from January 1, 1995 through March 27,
1995 were $1,821,000 and $387,000, respectively.

(B) Effective April 30, 1996, TeamTalk became a wholly owned subsidiary
of the Company. Net revenues and net loss for the period from January
1, 1996 through April 30, 1996 were $282,000 and $645,000, respectively.

(C) Net revenues and net loss are from August 18, 1997, the date of the
acquisition. IWCPL had no revenues and net loss prior to this date.

(D) Net revenues and net loss are from September 25, 1997, the date of
acquisition. WorldPage had net revenues and net loss (unaudited) of
$3,263,000 and $3,383,000 respectively, for the year ended December 31,
1997.

F-55

COST INVESTMENTS

The Company uses the cost method of accounting for four other long-term
investments as of December 31, 1997. These are Prismanet, RPG Paging Services
Limited ("RPSL"), First International Telecommunication Company, Limited
("FIT") and Telecomunicaciones Globales, S.A. de C.V. ("Global Telecom"). In
December 1997, the Company began to account for its investment in Prismanet
as a cost investment (see above). As of December 31, 1997, the Company's
equity interest in Prismanet was 22.5% and the Company's investment in
Prismanet has been reduced to zero. The Company holds its interest in RPSL
and FIT indirectly through STOL. In January 1997, STOL purchased an
additional 9% of RSPL for $2,100,000, thereby increasing its equity interest
in RPSL from 10% to 19%, and correspondingly increasing the Company's
indirect interest in RPSL to 10.64% as of December 31, 1997. In September
1997, STOL invested $5,781,000 for a 12% equity interest in FIT, a Taiwanese
paging operator, which corresponds to a 6.72% indirect equity interest in FIT
held by the Company as of December 31, 1997. In January 1997, the Company
acquired a 1.56% equity interest in Global Telecom, a Mexican long distance
company, for $62,000.

The Company's carrying value of these investments as of December 31 are
as follows (in thousands):

1996 1997
----------------- ---------------

Mobilkom........................................ $ 1,500 --
RPSL............................................ 1,426 3,526
FIT............................................. -- 5,781
Global Telecom.................................. -- 62
----------------- ---------------
$ 2,926 9,369
----------------- ---------------
----------------- ---------------

During 1997, the Company reclassified Mobilkom to investments in
affiliates held for sale (see Note 4). The investment was subsequently
written off.

PRO FORMA SUMMARY

The following unaudited pro forma summary combines the consolidated
results of operations of the Company as if (i) TeamTalk had been a wholly
owned consolidated subsidiary as of January 1, 1996, (ii) ownership in RHP
had been 28.3% as of January 1, 1996 and (iii) the acquisitions of STOL, Star
Digitel, Uniworld and IWCPL had occurred as of January 1, 1996.

This pro forma summary does not necessarily reflect the results of
operations as they would have been if the Company had acquired the entities
as of January 1, 1996.

Unaudited pro forma consolidated results of operations for the various
acquisitions and mergers as described above are as follows (in thousands):

FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997
---------------- --------------

Revenues......................................................................... $ 1,161 3,275
Net loss......................................................................... (46,408) (127,063)

F-56

(6) RELATED PARTY TRANSACTIONS

NOTES RECEIVABLE FROM AFFILIATES

Notes receivable from affiliates as of December 31, 1996, consisted
primarily of the note due from Mobilcom Mexico for $158,000, plus cumulative
accrued interest of $20,000; and a series of interest-free promissory notes
loaned to Mobisel, an entity which the Company indirectly owns 19.8% through
its investment in RHP, totaling $635,000. In April 1997, the Company
collected the $635,000 note receivable from Mobisel. Concurrent with the sale
of Mobilcom Mexico in June 1997, the Company reclassified the Mobilcom Mexico
note from notes receivable from affiliates to notes receivable (see Note 7).

In March 1997, the Company loaned $3,500,000 to Star Digitel. This loan,
which is evidenced by a promissory note, accrues interest at 9% per annum and
is due upon written demand by the Company. In September 1997, the Company,
through its wholly owned subsidiary, IWC China, loaned $800,000 to Star
Digitel. This loan accrues interest at 9% per annum and is due upon written
demand by the Company. These loans have been classified as non-current as
repayment is not expected within the next 12 months.

VANGUARD MERGER

On December 18, 1995, the Company merged with Vanguard International
Telecommunications, Inc. ("VIT") (See Note 11), a wholly owned subsidiary of
Vanguard. Prior to this merger, Vanguard owned 10.46% of the Company and
provided a variety of services relating to the formation, development and
operation of the Company's wireless communication businesses. In exchange for
3,972,240 shares of Series E Redeemable Convertible Preferred Stock with a
liquidation preference of $6.29 per share, the Company acquired VIT's
interests in TeamTalk and VIT's rights to acquire an interest in various
international LWBs. The liquidation value was equal to the fair market value
of the Series E preferred stock on the date of the merger. The resulting
total value of $25,000,000, was allocated to the various LWBs based on their
respective stage of development and an independent valuation study of the
LWBs. As a result of this merger, Vanguard increased its ownership position
to approximately 36% and continues to provide the services described above.
The original cost to Vanguard of the net assets acquired by IWC in the merger
was approximately $550,000. The value of these assets, however, appreciated
significantly over time as licenses were subsequently granted, joint ventures
and other strategic alliances formed and business plans developed.

The excess of the allocated portion of the merger value to TeamTalk over
the net book value of TeamTalk was attributed to telecommunication licenses
and other intangibles. This excess amounted to $1,712,000 and is amortized on
a straight-line basis over 20 years.

The Company also acquired VIT's rights to participate in RHP, SRC,
Mobilcom Pakistan, HFCL and PTBV and other yet to be developed projects.
Approximately $23,288,000 was allocated to telecommunication licenses and
other intangibles in the LWBs based on their relative stage of development.
These amounts are amortized on a straight-line basis over 20 years.
Subsequently, Mobilcom Pakistan, HFCL and PTBV have been written off.

VANGUARD WARRANT/OPTION EXCHANGE

On May 5, 1997, the Company entered into an agreement with Vanguard,
pursuant to which Vanguard surrendered then-outstanding warrants to purchase
323,880 shares of Series C preferred stock, 416,720 shares of Series D
preferred stock and 64,120 shares of Series F preferred stock in exchange for
the issuance by the Company of a warrant to acquire 249,970 shares of common
stock at a purchase price of $0.25 per share and a second warrant to purchase
554,750 shares of common stock at an exercise price of $9.375 per share. This
second warrant was subsequently surrendered by Vanguard in exchange for the
issuance to certain officers and employees of Vanguard of an option to
purchase 53,330 shares of common stock at an exercise price of $9.375 per
share under International Wireless Communications Holdings, Inc.'s 1996 Stock
Option/Stock Issuance Plan (the "1996 SO/SIP") and options to purchase an
aggregate of 501,420 shares of common stock at a purchase price of $9.375 per
share outside the

F-57

1996 SO/SIP (see Note 11) (The foregoing transaction is hereinafter referred
to as the "Vanguard Warrant/Option Exchange"). Vanguard agreed to guarantee
from time to time, as part of the management advisory services in connection
with the Vanguard Warrant/Option Exchange, up to an aggregate of $3.2 million
of indebtedness incurred by the Company or its wholly owned subsidiaries
until the Company receives at least $3.2 million in alternative debt
financing or consummates an initial public offering ("IPO") of its common
stock, but in no event later than February 3, 1999. In addition, certain
Vanguard employees agreed to perform management advisory services over a four
year period. The Company recognized management advisory service expense of
$2.3 million related to the Vanguard Warrant/Option Exchange, which is
classified in selling, general and administrative expenses in the
accompanying consolidated statement of operations, and deferred compensation
of $1.5 million, which is presented net of amortization of $244,000, on the
accompanying balance sheet as of December 31, 1997. Pursuant to an $8 million
bridge loan agreement dated May 19, 1997 between Star Digitel and The
Toronto-Dominion Bank, each shareholder of Star Digitel agreed to guarantee
its pro rata share of the bridge loan. Pursuant to the guarantee facility
provided by it in connection with the Vanguard Warrant/Option Exchange,
Vanguard guaranteed the Company's $3.2 million pro rata share of the
guarantee.

VANGUARD STAR DIGITEL GUARANTEE

In September 1997, at the request of IWC China, Vanguard guaranteed
$8,000,000 of indebtedness to be incurred by Star Digitel (the "Vanguard Star
Digitel Guarantee"). Pursuant to a reimbursement agreement (the
"Reimbursement Agreement"), IWC China agreed to pay Vanguard (i) an up-front
guarantee fee of $240,000 in cash, (ii) a quarterly in-kind guarantee fee at
an initial rate of 6.75% that increases over time to 17.75% and (iii) an
additional guarantee fee payable in shares of Star Digitel owned by IWC China
if Vanguard is required to make any payments under the guarantee. In
addition, the Company granted Vanguard a ten-year warrant to purchase shares
of its common stock at an exercise price of $0.01 per share. The number of
shares issuable upon exercise of the warrant is initially set at 68,819 and
increases in quarterly increments thereafter until Vanguard's obligations
under the guarantee have been permanently released and discharged. In
December 1997, under this arrangement, the number of additional shares of the
Company's common stock issuable upon exercise of this warrant increased by
51,864 to an aggregate of 120,683 shares as of December 31, 1997 (see Note
11). The Company recognized an expense of $1,755,000 related to the Vanguard
Star Digitel Guarantee through December 31, 1997. The Company has recorded
this expense in other expense in the accompanying consolidated statement of
operations. The Company recognized additional expense related to incremental
quarterly warrant grants associated with this Vanguard Star Digitel Guarantee
in 1998 (see Note 16). Pursuant to a Pledge Agreement dated September 18,
1997, IWC China pledged all of its Star Digitel Shares to secure performance
of its obligations under the Reimbursement Agreement (and certain related
agreements).

(7) NOTE RECEIVABLE

On June 6, 1996, the Company loaned $3,080,000 to a co-shareholder of
Mobilcom Mexico, a trunked radio services operator in Mexico. The loan, in
the form of a promissory note, accrues interest at 13% per annum and was due
upon written demand by the Company. The Company's belief was that this loan
may facilitate future strategic investments in projects in which this
co-shareholder is involved. As of December 31, 1996, the co-shareholder had
repaid $1,800,000 of the total amount loaned, bringing the remaining
principal plus interest owed to $1,431,000. During 1997, this note, including
accrued interest, totaling $1,496,000 was repaid in full.

In March 1997, the Company loaned $500,000 to an unrelated third party.
This loan, which has a one year term, accrues interest at the rate of 15% per
annum and is guaranteed by another unrelated third party. In March 1998, the
Company agreed on a repayment plan with such party (see Note 16). Concurrent
with the sale of Mobilcom Mexico, the Company reclassified its note
receivable with Mobilcom Mexico from notes receivable with

F-58

affiliates to notes receivable (see Note 6). Consequently, as of December 31,
1997, principal plus interest on this note of $213,000 in the aggregate, is
included in notes receivable on the accompanying consolidated balance sheet.

(8) LICENSE DEPOSITS

In June 1996, the Company deposited $3,042,000 for a 20% interest in a
consortium pursuing ECTR licenses in Taiwan, which the Company classified as
license deposit and other assets in the accompanying consolidated balance
sheet as of December 31, 1996. The consortium was successful in winning four
of twelve license applications. In August 1997, the Company received a refund
of $1,933,000, which represents its pro rata portion of the deposit applied
to the unsuccessful applications, net of the Company's pro rata share of
application expenses and foreign currency loss of $105,000. The remaining
deposit of $1,004,000 was to represent the Company's initial capital
contribution to the ECTR venture to be formed; however, in September 1997,
the Company sold this interest to a third party for $1,153,000.

In August 1996, STOL and the Company deposited $3,005,000 and
$2,250,000, respectively, representing a combined 30% equity interest in a
proposed Taiwan paging project. In early February 1997, it was announced that
the respective bid applications were unsuccessful and the Company
reclassified the deposits to other current assets in the accompanying
consolidated balance sheet as of December 31, 1996. In 1997, STOL received a
refund of $1,881,000 of its deposit, net of its pro rata share of application
expenses of $347,000. In order to mitigate its transactional foreign currency
exposure, the remaining balance of $777,000, which was denominated in New
Taiwanese dollars, was used to pay fees associated with STOL's investment in
FIT. In 1997, the Company received a refund of $2,030,000, net of its pro
rata share of application expenses of $230,000.

(9) LONG-TERM DEBT AND DEBT ISSUANCE COSTS

DEBT OFFERING

In August 1996, the Company issued 196,720 units, each consisting of a
$1,000 principal amount 14% Senior Secured Discount Note due 2001 (a "Note"
and, collectively, the "Notes") and one warrant to purchase 11.638 shares
(for an aggregate of 2,289,421 shares) of common stock (the "Unit Warrants"),
$0.01 par value, for total gross proceeds of $100.0 million (the "Debt
Offering") (see note 11). Net proceeds, after repayment of $7.4 million,
including interest and fees, borrowed under a 1996 revolving credit agreement
with Toronto Dominion Capital (U.S.A.), Inc., an affiliate of Toronto
Dominion Bank, a stockholder of the Company, and other offering expenses,
totaled $86,602,000. Of the $100.0 million gross proceeds, $30.3 million was
allocated to additional paid-in capital related to the fair value of the
warrants issued in the Debt Offering. The Debt Offering is governed by the
Indenture dated as of August 15, 1996 between the Company, as issuer, and
Marine Midland Bank, as trustee (the "Indenture"). In November 1996, the
Company exchanged new 14% Senior Secured Discount Notes due 2001 (the
"Exchange Notes") which were registered under the Securities Act of 1933, as
amended (the "1933 Act"), for its outstanding Notes that were issued and sold
in a transaction exempt from registration under the 1933 Act. The terms of
the Exchange Notes are substantially identical (including principal amount,
interest rate, maturity, security and ranking) to the terms of the Notes.
Long-term debt associated with the Notes, net of unamortized discount, is
$92,785,000 on the accompanying consolidated balance sheet as of December 31,
1997.

The aggregate principal amount of the Notes is $196,720,000. The Notes
are due on August 15, 2001 and bear interest at an effective interest rate of
23.06%, compounded semi-annually. There are no scheduled cash interest
payments on the Notes. The Notes are senior secured obligations of the
Company and will rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and senior to all subordinated
indebtedness of the Company. The Notes are effectively subordinated to all
indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries and affiliated companies. The collateral securing the
Notes consists of a pledge of all of the capital stock of the Company.

There are no sinking fund requirements with respect to the principal of,
or the interest on, the Notes. Upon the occurrence of a change of control (as
defined in the indenture governing the Notes), each holder of the Notes will
have the option to require the Company to repurchase all or a portion of such
holder's Notes at 101% of the accreted value thereof to the date of
repurchase.

F-59

In connection with the Debt Offering, the Company entered into the
Indenture, which contains certain covenants that, among other things, limits
the ability of the Company and its subsidiaries and affiliates to incur
additional indebtedness, limits the ability of the Company to merge,
consolidate or sell substantially all of its assets; and limits the ability
to make investments. In addition, the Indenture prohibits making restricted
payments (as defined) and creating certain liens (as defined).

The Indenture also contained a provision that in the event the Company
did not complete an IPO of common stock on or prior to May 15, 1997, each
unexercised Unit Warrant issued in connection with the Debt Offering, would
entitle the holder thereof to purchase an additional 2.645 shares (for an
aggregate of 520,324 shares) of common stock. The Company issued such
additional warrants on May 15, 1997 (see Note 11).

The warrants are supported by a warrant agreement (the "Warrant
Agreement"). The Warrant Agreement includes a provision that if the Company
issues any options, warrants, or other securities convertible into or
exchangeable or exercisable for common stock, for a consideration per share
of common stock less than the current market value per share on the date of
issuance of such securities, the warrant number for each Note holder shall be
adjusted in accordance with the formula provided in the Warrant Agreement.
Such additional Unit Warrants have been issued (see Notes 11 and 16).

The costs related to the issuance of the Notes were capitalized and are
being amortized to interest expense using the effective interest method over
the life of the debt. Debt issuance costs are presented, net of amortization,
as $5,369,000 on the accompanying consolidated balance sheet as of December
31, 1997.

PAKISTAN BRIDGE FACILITY

In August 1997, the Company closed a bridge financing facility (the
"Pakistan Bridge Facility"), with Toronto Dominion Investments, Inc. ("TDI"),
Vanguard and other stockholders, whereby the Company received written
commitments for an aggregate amount of $29,000,000 in exchangeable bridge
loans. The Pakistan Bridge Facility is structured as a two-tier facility,
with $7,000,000 available to IWCH for general corporate and other purposes
(the "IWCH Pakistan Facility") and $22,000,000 loaned to PWH for the specific
purpose of financing the cash portion of the purchase price of the Company's
indirect investment in Mobilink and the Company's pro rata share of the
shareholder capital calls and shareholder loans required to finance the
operations of Mobilink (the "PWH Pakistan Facility"). The Pakistan Bridge
Facility contains significant restrictions on the Company's ability to raise
additional debt or equity financing until all amounts outstanding under the
Pakistan Bridge Facility are repaid in full. The Pakistan Bridge Facility
bears interest payable in-kind on a quarterly basis beginning at 14% and
increases over time to 25% (14% as of December 31, 1997). There are no
scheduled cash interest payments on the Pakistan Bridge Facility. Principal
plus accrued but unpaid interest on the Pakistan Bridge Facility matures in
August 2002. Principal plus accrued but unpaid interest on the Pakistan
Bridge Facility may be exchanged for the Company's Series G and H redeemable
convertible preferred stock upon certain occasions (as defined). As of
December 31, 1997, the $7,000,000 IWCH Pakistan Facility had been fully drawn
down. Accrued but unpaid interest on the Pakistan Bridge Facility as of
December 31, 1997 totaled $1,287,000.

Warrants to purchase shares of the Company's common stock at an exercise
price of $0.01 per share were also issued in connection with the IWCH
Pakistan Facility (the "Initial Pakistan Warrants"). The number of shares
issuable of the Company's common stock at the closing of the Pakistan Bridge
Facility upon exercise of the Initial Pakistan Warrants was initially set at
247,737 and increases upon the occurrence of certain events. During 1997, the
number of shares of the Company's common stock issuable upon exercise of the
Initial Pakistan Warrants increased by 445,839 to an aggregate of
693,576. The number of shares of the Company's common stock issuable upon
exercise of the Initial Pakistan Warrants subsequently increased (see Note
16). The Company also agreed to grant to the lenders under the Pakistan
Bridge Facility, upon the occurrence of a specified liquidity event (as
defined), additional warrants (the "Pakistan Liquidity Warrants"; together
with the Initial Pakistan Warrants, including its subsequent increases, the
"Pakistan Warrants") to purchase a number of shares of the Company's common
stock equal to the quotient of (i) 35% of the greater of (A) $2.0 million and
(B) the unpaid principal amount of and unpaid accrued interest in the IWCH
Pakistan Facility and (ii) the value of the Company's common stock with
respect to such liquidity event. As of December 31, 1997, no Pakistan
Liquidity warrants have been issued.

The costs related to the issuance of the Notes, which include all
warrants expected to be earned through December 1997 in accordance with the
terms of the IWCH Pakistan Facility and certain fees paid to TDI, were

F-60

capitalized and are being amortized to interest expense using the effective
interest method over the estimated term of the debt. In addition, the IWCH
Pakistan Facility contains a conversion feature whereby debt can be converted
to Series G redeemable convertible preferred stock at a price less than fair
value (the "Debt Conversion Feature"). The difference between fair value and
the conversion price (as defined) at the date of drawdown of the IWCH
Pakistan Facility, amounting to $3,979,000, was also capitalized and is being
amortized to interest expense using the effective interest method over the
estimated term of the debt. Debt issuance costs related to the Pakistan
Bridge Facility are presented, net of amortization, as $2,592,000 on the
accompanying consolidated balance sheet as of December 31, 1997.

(10) MINORITY INTEREST

In February 1996, the Company formed WDS, a joint venture, to develop,
install and support mobile data systems throughout the Pacific Rim. The
Company initially had a 50% equity interest in WDS, and funded its operations
on a pro rata basis for total funding during 1996 of $433,000. The Company
increased its equity interest in WDS to 64% during 1997 through the
conversion of shareholder advances into equity.

In August 1996, the Company acquired a 70% equity interest in STOL for
an aggregate purchase price of $13,500,000 which has been accounted for using
the purchase method. STOL holds a minority interest in RPSL, FIT and World
Page and is currently pursuing additional paging opportunities in Asia. The
Company's partner in STOL is STHL, the Company's partner in Star Digitel. The
Company allocated $3,965,000 of the purchase price to participation rights.
In July 1997, the Company, STOL and STHL entered into an agreement with a
third party providing for the issuance and sale to such third party of new
shares equivalent to up to a 20% interest in STOL, subject to STOL entering
into valid and binding agreements to invest in certain specified paging
companies. In September 30, 1997, STOL entered into such agreements with
these specified paging companies and, as a result, the third party paid STOL
$4,160,000 for a 20% interest in STOL, thereby diluting the Company's
interest in STOL to 56%.

In December 1996, the Company paid $1,600,000 to acquire a 66% equity
interest in Uniworld, which has been awarded a national license to provide
paging services in Peru and accounted for the acquisition using the purchase
method. The Company allocated $1,557,000 of the purchase price to the
telecommunication license.

Minority shareholders' interests is principally related to STOL and was
$5,315,000 and $8,675,000 as of December 31, 1996 and 1997, respectively.

(11) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT

The Company is authorized to issue 40,000,000 shares of preferred stock,
of which 33,231,480 are designated redeemable convertible preferred stock,
1,200,000 are designated nonredeemable convertible preferred stock, 5,568,520
are undesignated, and 66,000,000 shares of common stock, of which 60,000,000
are designated class 1 and 6,000,000 are designated class 2. All shares have
a par value of $0.01 per share.

Nonredeemable convertible preferred stock as of December 31, 1996 and
1997, was comprised of 933,200 issued and outstanding shares of Series A
preferred stock. In August 1996, a stockholder of the Company converted
266,800 shares of Series A preferred stock into 266,800 shares of common
stock. Series A preferred stock has a liquidation value per share of $.85 and
an aggregate liquidation value of $793,000.

F-61

Redeemable convertible preferred stock as of December 31, 1997, was
comprised of the following (in thousands except share and per share amounts):

LIQUIDATION AGGREGATE
REDEEMABLE CONVERTIBLE PREFERRED STOCK: SHARES SHARES ISSUED AND VALUE PER LIQUIDATION
DESIGNATED OUTSTANDING SHARE VALUE
- ---------------------------------------- --------------- --------------------- --------------- ----------------

Series B.............................. 1,229,240 1,229,240 .9652 $ 1,186
Series C.............................. 2,460,000 1,762,280 2.3343 4,114
Series D.............................. 5,800,000 3,652,960 6.8775 25,183
Series E.............................. 3,972,240 3,972,240 6.7365 26,759
Series F-1............................ 7,000,000 7,000,000 9.3750 43,505
Series F-2............................ 1,080,000 1,080,000 9.3750 6,712
Series G-1............................ 1,928,000 -- see below --
Series G-2............................ 1,292,000 -- see below --
Series H-1............................ 5,072,000 -- see below --
Series H-2............................ 3,398,000 -- see below --
--------------- --------------------- ----------------
33,231,480 15,981,876 $ 107,459
--------------- --------------------- ----------------
--------------- --------------------- ----------------

Each series of redeemable preferred stock is being accreted to its
respective minimum redemption amount, which is equal to the liquidation value.

The rights, preferences, and privileges of the holders of preferred
stock are as follows:

- LIQUIDATION

In the event of Company liquidation, the holders of Series G
preferred stock shall be entitled to receive, prior and in preference
to the holders of Series A, B, C, D, E, F and H preferred stock and
common stock an amount equal to the sum of (i) the IWCH Note Exchange
Price (as defined in the Company's Form 8-K as filed with the
Securities and Exchange Commission on September 12, 1997) and (ii) an
amount equal to declared but unpaid dividends on such share. The IWCH
Note Exchange Price is the lesser of (A) the conversion price
applicable to Series F preferred stock as of the date of the exchange
and (B) 65% of the share value applicable to the liquidity event (as
defined) or 65% of the appraised value if no liquidity event (as
defined) has occurred.

Then, the holders of Series H preferred stock shall be entitled to
receive an amount per share equal to the sum of (i) the PWH Note
Exchange Price (as defined in the Company's Form 8-K as filed with
the Securities and Exchange Commission on September 12, 1997) and
(ii) an amount equal to declared but unpaid dividends on such share.
The PWH Note Exchange Price is the net cash price per share used when
determining the number of shares of Series H preferred stock to issue
in order to equal the aggregate amount of the unpaid principal and
accrued interest on the PWH Pakistan Facility at the date of the
exchange.

Then, the holders of Series F preferred stock shall be entitled to
receive an amount per share equal to the sum of (i) the product of
(A) .50 multiplied by (B) the liquidation value per share specified
above, as adjusted, and (ii) any declared but unpaid dividends
thereon. Holders of Series B, C, D and E preferred stock ("Junior
preferred stock") shall next be entitled to receive an amount per
share equal to the sum of (i) the product of (A) .55 multiplied by
(B) an amount per share of .9193, 2.223, 6.55 and 6.2938,
respectively, as adjusted and (ii) any declared but unpaid dividends
thereon. Holders of Series B, C, D, E and F preferred stock shall
next be entitled to receive the product of (1) .50 multiplied by (2)
an amount per share of .9193, 2.223, 6.55, 6.55 and 9.375,
respectively, as adjusted.

Upon the completion of the distribution to the holders of the Series
B, C, D, E, F, G and H preferred stock, holders of the Series A
preferred stock shall be entitled to receive an amount per share
equal to .85, as adjusted, plus any declared but unpaid dividends
thereon. After the distributions described above, and after

F-62

the distribution related to common stock described below, the remaining
assets of the Company shall be distributed among the holders of the
preferred stock and common stock pro rata assuming full conversion of
preferred stock into common stock.

- DISTRIBUTIONS

The holders of preferred stock are entitled to receive noncumulative
dividends at the same time and on the same basis as holders of common
stock when, and if, declared by the Board of Directors. No dividends
had been declared through December 31, 1997.

- REDEMPTION

Each share of Series B, C, D, E, F, G and H preferred stock is
redeemable at any time on or after December 31, 1998, but within 45
days after the receipt by the Company of a written request from the
holders of a majority of the then outstanding shares of Series B, C,
D, E, F, G and H preferred stock. The Company shall redeem all such
shares by paying in cash a sum per share equal to the greater of (1)
the then fair market value of such share of preferred stock on an
as-converted basis, or (2) the redemption value of such share of
preferred stock (hereinafter referred to as the redemption price). In
the event the assets of the Company are insufficient to effect such
redemption in full, the shares of preferred stock not redeemed shall
remain outstanding and entitled to all the rights and preferences
provided herein.

In addition to the above redemption, at any time on or after December
31, 2000, but within 45 days after the receipt by the Company of a
written request from the majority of the holders of Series F
preferred stock, the Company shall redeem all outstanding shares of
such stock by paying, in cash, an amount per share equal to the
redemption price of such stock.

Upon the occurrence of a change of control of the Company that is not
approved by certain directors designated by the holders of Series F
preferred stock, the holders of a majority of the shares of Series F
preferred stock then outstanding shall have the right, by written
demand to the Company, to require the Company to redeem immediately
all the shares of Series F preferred stock then outstanding at a
price per share equal to the redemption price of the Series F
preferred stock.

In addition, at any time on or after the later of (i) the Pakistan
Bridge Facility Payment Date (as defined), (ii) the Series G or
Series H Exchange Date (as defined), (iii) December 31, 1998 or (iv)
a Series F Redemption (as defined), but within 45 days after the
receipt by the Company of a written request from the majority of the
Series G or Series H preferred stock, the Company shall redeem all
outstanding shares of such stock by paying, in cash, an amount per
share equal to the redemption price of such stock.

In addition, in the case of any redemption request made by the
holders of a majority of the Series F, G or H redeemable convertible
preferred stock, the holders of a majority of such other series of
preferred stock will be deemed to have made a redemption request
unless they decline such redemption by giving the Company written
notice to that effect within 10 days after delivery of the related
redemption notice.

- CONVERSION AND VOTING RIGHTS

Each share of preferred stock is convertible, at the option of the
holder, into such number of fully paid and nonassessable shares of
common stock as is determined by dividing the original preferred
stock issue price by the conversion price applicable to such
preferred share. Series A, B, C, D, E, F-1, G-1 and H-1 preferred
stock is convertible into Class 1 common stock, while Series F-2, G-2
and H-2 preferred stock is convertible into Class 2 common stock. In
addition each share of Series F-2, G-2 and H-2 preferred stock can be
converted into Series F-1, G-1 and H-1 preferred stock, respectively,
at any time. The conversion price per share for each series of
preferred stock is equal to the preferred stock issue price of the
respective series of preferred stock, subject to adjustment under
certain circumstances. An automatic conversion into common stock will
occur in the event of a firm commitment underwritten public offering
of at least $13.10 per share, as adjusted, and $8,000,000 in the
aggregate. However, the Series F preferred stock shall not
automatically be converted in Common Stock unless: (i) the
underwritten public offering is consummated

F-63

on or prior to December 31, 1998, (ii) the public offering per share is at
least $18.75, as adjusted, and (iii) the aggregate offering price is not
less than $25,000,000.

Each share of preferred stock has voting rights equal to that of
common stock on an "as if converted" basis. The holder of Series E
preferred stock is entitled to elect three directors to the Company's
Board of Directors, and, for so long as 20% of the shares of Series F
preferred stock remain outstanding, the holders of Series F preferred
stock are entitled to elect three directors. The holders of the
Series G-1 and H-1 preferred stock are entitled to elect one
director. However, if the holders of more than 10% of Series G and H
stock are entitled to elect a director by virtue of holding any other
Series of preferred stock, such right to elect a director may not be
exercised. As of December 31, 1997, the Company had 16,915,076 shares
of common stock reserved for the conversion of preferred stock.

PREFERRED STOCK TRANSACTIONS

- THE SERIES D FINANCING

In connection with the issuance of bridge notes on April 6, 1995, the
Company issued warrants (the "April Bridge Warrants") to purchase
10,760 shares, of which 5,960 related to Vanguard, of Series D
preferred stock at $6.55 per share. The warrants issued to Vanguard
were included in the May 1997 Vanguard Warrant/Option Exchange (see
Note 6). The remaining warrants are outstanding and are exercisable
until April 6, 1998.

In July 1995, convertible secured bridge financing notes issued on
April 24, 1995 were converted into 1,147,600 shares of Series D
preferred stock for an aggregate purchase price of $7,517,000 (a
purchase price of $6.55 per share).

In connection with the Series D Financing, Vanguard loaned $1.8
million to the Company in exchange for two convertible notes in the
amount of $900,000 each. Each note was due upon the earlier of April
26, 1996 or the occurrence of certain events which did not occur
prior to that date. On April 26, 1996, Vanguard converted both notes
including accrued interest into an aggregate of 274,800 shares of
Series D redeemable convertible preferred stock.

In July 1995, the Company entered into a merger agreement with
Vanguard and VIT, a wholly-owned subsidiary of Vanguard, whereby VIT
would merge their international interests in a number of
international wireless projects into the Company in exchange for
3,972,240 shares of Series E preferred stock. This merger was
completed on December 18, 1995, concurrent with the issuance of
Series F preferred stock (see Note 6).

In connection with the Vanguard Merger, the Company entered into an
agreement with an investor to amend previously existing warrant
agreements granted in connection with the Series C Financing. The
investor's original warrant to purchase 50,440 shares of Series C
preferred stock was amended to extend the warrant through December
18, 1997. The investor's original warrant to purchase 222,200 shares
of preferred stock was amended to increase the number of shares to
393,120 and to define the preferred stock as Series D preferred stock
at $6.55 per share. The warrant was exercisable until December 18,
1997. The investor's original warrant to purchase 444,360 shares of
preferred stock was amended to decrease the number of shares to
273,440 and to define the preferred stock as Series C preferred stock
at $2.22 per share. The warrant was exercisable until May 15, 1997.
In May 1997, the Series C and D Vanguard Merger warrants were
exchanged in the Vanguard Warrant/Option Exchange (see Note 6).

- THE SERIES F FINANCING

In connection with the issuance of a note payable to Vanguard in July
1995, the Company issued for a purchase price of $15,000, a warrant
to purchase 32,000 shares of Series F preferred stock at an exercise
price of $9.38 per share. The number of shares and the exercise price
are subject to adjustment in certain circumstances. The warrant is
exercisable until December 18, 1998.

F-64

Concurrent with the July 1995 Financing, for an aggregate purchase
price of $72,000, the Company issued warrants to purchase an
aggregate of 153,800, of which 32,120 related to Vanguard, shares of
Series F preferred stock (not including the warrant issued to
Vanguard in connection with the first July 1995 note) at an exercise
price of $9.38 per share. All share amounts and the exercise price
are subject to adjustment in certain circumstances. The warrants are
exercisable until December 18, 1998. In May 1997, all of Vanguard's
Series F Warrants were exchanged in the Vanguard Warrant/Option
Exchange (see Note 6).

On August 15, 1995 pursuant to a Note and Warrant Purchase Agreement
dated as of August 14, 1995, the Company issued for a purchase price
of $50,000 a warrant (the "First Warrant") to purchase 106,680 shares
of Series F preferred stock at an exercise price of $9.38 per share,
with the number of shares and exercise price subject to adjustment in
certain circumstances. The First Warrant is exercisable until
December 18, 1998.

Pursuant to a Loan Agreement dated August 14, 1995 between the
Company and an investor, the Company issued a second warrant (the
"Second Warrant") to purchase 106,680 shares of Series F preferred
stock at an exercise price of $9.38 per share, with the number of
shares and the exercise price subject to adjustment in certain
circumstances. The Second Warrant is exercisable until December 18,
1998, with the date being subject to change in the same
circumstances.

On December 18, 1995, the Company sold and issued 5,356,480 shares of
Series F preferred stock for $50,217,000. Prior to the share issuance
of the Series F preferred stock, the Company entered into bridge
financing agreements with certain existing shareholders. Certain
bridge loans were repaid with proceeds from the issuance of shares of
Series F preferred stock, while the remaining bridge loans were
converted into 1,147,600 shares of Series D preferred stock.

WARRANTS

On or prior to June 12, 1997 holders of warrants to purchase an
aggregate of 28,800 shares of Series D redeemable convertible preferred stock
exercised such warrants pursuant to the cashless "net-exercise" provisions
thereof. Upon such exercises, such warrantholders received an aggregate of
8,676 shares of Series D redeemable convertible preferred stock.

During 1997, pursuant to the terms of the Unit Warrants, the
number of additional shares of the Company's common stock issuable upon
exercise of the Unit Warrants increased by an aggregate of 92,987 shares to
an aggregate of 2,902,732 shares as a result of the issuance by the Company
of warrants to purchase the Company's common stock in connection with the
Pakistan Bridge Facility and the Vanguard Star Digitel Guarantee.

F-65

The Company had the following warrants outstanding as of December 31, 1997:

PREFERRED AND WARRANTS EXERCISE
COMMON STOCK OUTSTANDING PRICE EXPIRATION
- ------------------------------------ ------------------ -------------- ---------------------------

Series D preferred................. 4,800 $ 6.55 April 6, 1998(1)
Series F preferred................. 335,040 9.38 December 18, 1998(1)
Unit Warrants...................... 2,902,732 0.01 August 15, 2001
Pakistan Warrants.................. 693,576 0.01 August 18, 2007
Mobilink Finder's Fee Warrant...... 81,982 0.01 September 17, 2007
Vanguard Star Digitel Guarantee
warrant......................... 120,683 0.01 September 18, 2007
Vanguard Warrant/Option Exchange
options......................... 501,420 9.38 May 5, 2007
Vanguard Warrant/Option Exchange
Warrant......................... 249,970 .25 May 5, 2007(1)
------------------
4,890,203
------------------
------------------

- -----------
(1) Warrants expire in the event of an IPO.

COMMON STOCK

In the event of a liquidation, holders of common stock will be entitled
to receive an amount equal to $.50 per share, as adjusted, plus any declared
and unpaid dividends, after completion of distributions to the holders of
preferred stock.

The remaining assets of the Company, after satisfaction of the
stipulated distribution requirements related to the various preferred stock
and common stock liquidation preferences, will be distributed on a pro rata
basis among all of the holders of common stock and all of the holders of the
preferred stock, assuming full conversion of the preferred stock into common
stock.

STOCK OPTION/STOCK ISSUANCE PLAN

Under the Company's 1994 Stock Option/Stock Issuance Plan (the "Plan")
incentive stock options may be granted to employees and officers, and
non-qualified (supplemental) stock options may be granted to employees,
officers, directors, and consultants to purchase shares of the Company's
common stock. Accordingly, the Company, as of December 31, 1995, had reserved
a total of 1,000,000 shares of the Company's common stock for issuance upon
the exercise of options granted pursuant to the Plan. Options granted under
the Plan generally expire 10 years following the date of grant and are
subject to limitations on transfer. During 1996, the Board of Directors
approved the amendment to and restatement of the Plan, the 1996 SO/SIP, and
authorized this issuance of an additional 1,400,000 shares of common stock
thereunder. In May 1997, the stockholders of the Company approved a further
amendment to the 1996 SO/SIP increasing the aggregate number of shares of
Common Stock available for issuance over the term of the plan by 411,526
shares to a total of 2,811,526 shares.

Option grants under the 1996 SO/SIP are subject to various vesting
provisions, all of which are contingent upon the continuous service of the
optionee and may not impose vesting criterion more restrictive than 20% per
year. The exercise price of options granted under the 1996 SO/SIP must equal
or exceed the fair market value of the Company's common stock on the date of
grant. Unless otherwise terminated by the Board of Directors, the 1996 SO/SIP
automatically terminates in January 2004.

The Company has elected to use the intrinsic value-based method of APB
Opinion No. 25 to account for stock options issued to employees. Accordingly,
no compensation cost has been recognized in the accompanying consolidated
financial statements for the 1996 SO/SIP because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as
of the grant date for each option. The Company has

F-66

adopted the pro forma disclosure provisions of SFAS No. 123. Pro forma
results may not be representative of the effects on reported net loss for
future years. Had compensation cost for the Company's stock-based
compensation plans been determined in a manner consistent with the fair value
approach described in SFAS No. 123, the Company's net loss would be increased
to the pro forma amounts indicated below (in thousands):

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
--------- --------- ---------

Net loss As reported..................... $ (11,271) (35,908) (123,650)
Pro forma....................... (11,290) (36,110) (124,029)

Pro forma net loss reflects only options granted in 1995, 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts above
because compensation cost is reflected over the options' vesting period of
four to five years and compensation cost for options granted prior to January
1, 1995 is not considered.

The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for granted options in 1995, 1996 and 1997, respectively:
zero dividend yield; zero expected volatility; risk-free interest rates of
5.91%, 5.88% and 6.14%; and weighted average expected lives of 2.65 years,
2.04 years and 2.87 years.

A summary of the status of the Company's Plan as of December 31, is as
follows:

F-67

1995 1996 1997
------------------------------- -------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------------- -------------- -------------- --------------- ----------

Outstanding at
beginning of year...... 761,920 $ 0.41 881,920 $ 1.51 1,982,000 $ 5.52
Granted................ 160,000 6.41 1,142,000 8.43 936,296 10.00
Exercised.............. -- -- (41,920) 0.25 (180,000) 0.25
Canceled............... (40,000) 0.25 -- -- (237,239) 9.15
----------- -------------- ---------------
Outstanding at
end of year............ 881,920 1.51 1,982,000 5.52 2,501,057 7.23
----------- -------------- ---------------
----------- -------------- ---------------

Options exercisable at
end of year............ 433,001 568,080 950,184
Shares available for
grant..................
118,080 376,080 88,549
Weighted average fair
value of options
granted during the
year...................
$ 0.90 $ 0.93 $ 1.56

The following table summarizes information about fixed stock options
outstanding at December 31, 1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE PRICE OUTSTANDING EXERCISE
EXERCISE PRICES OPTIONS LIFE OPTIONS PRICE
---------------- --------------- ----------------- ---------------- ---------------

$0.25......................... 432,000 6.50 $ 0.25 384,998 $ 0.25
From $0.25 to $2.50........... 68,000 6.83 2.09 56,750 2.08
From $2.51 to $8.13........... 979,916 8.08 7.87 463,401 7.77
From $8.14 to $9.38 .......... 845,457 9.14 9.38 45,035 9.38
From $9.39 to $12.48.......... 175,684 9.77 12.48 -- --
---------------- ----------------
From $0.25 to $12.48.......... 2,501,057 8.25 7.23 950,184 4.46
---------------- ----------------
---------------- ----------------

(12) INCOME TAXES

The Company has incurred net losses since inception and has not recorded
any provision for income taxes. The reconciliation between the amount
computed by applying the U.S. federal statutory tax rate of 34% to net loss
before income taxes and the actual provision for income taxes as of December
31 follows (in thousands):

1995 1996 1997
---------- ------------ -----------

Income tax (benefit) at statutory rate................................ $ (3,832) (12,208) (36,244)
License amortization.................................................. 341 302 --
Other................................................................. -- 18 35
Net operating loss and temporary differences for which no tax benefit
was recognized..................................................... 3,791 11,888 36,209
---------- ------------ -----------
$ -- -- --
---------- ------------ -----------
---------- ------------ -----------

F-68

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31 are as
follows (in thousands):

1996 1997
---------------- ---------------

Deferred tax assets:
Loss carryovers and deferred start-up expenditures.................... $12,788 31,953
Equity in foreign investments......................................... 501 23,618
Debt issuance costs................................................... -- 2,497
---------------- ---------------
Total gross deferred tax assets...................................... 13,289 58,068
Less valuation allowance............................................ (9,948) (55,614)
---------------- ---------------

Total deferred tax assets.......................................... 3,341 2,454

Deferred tax liabilities:
Fixed assets.......................................................... (153) (266)
Equity in foreign investments......................................... -- --
License fees.......................................................... (3,103) (2,188)
Debt issuance costs................................................... (85) --
---------------- ---------------
Total deferred tax liabilities................................... (3,341) (2,454)
---------------- ---------------

Net deferred tax assets............................................ $ -- --
---------------- ---------------
---------------- ---------------

Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The valuation
allowances as of December 31, 1996 and 1997 were $9,948,000 and $55,614,000,
respectively. The net changes in valuation allowance during 1996 and 1997 was
an increase of $9,293,000 for 1996 and an increase of $45,666,000 for 1997.

As of December 31, 1997, the Company has cumulative U.S. federal net
operating losses of approximately $64,631,000, which can be used to offset
future income subject to federal income taxes. The federal tax loss
carryforwards will expire from 2008 through 2012. The Company has cumulative
California net operating losses of approximately $37,400,000, which can be
used to offset future income subject to California income taxes. The
California tax loss carryforwards will expire from 1998 through 2002.

The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. Most of the U.S. federal and California net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair
the Company's ability to utilize the affected carryforward items. If there
should be a subsequent ownership change, as defined, of the Company, its
ability to utilize its carryforwards could be reduced.

The Company's foreign subsidiaries have aggregate net operating
losses of approximately $22,456,768. The foreign loss carryovers expire
over periods varying from six years to indefinitely.

(13) COMMITMENTS AND CONTINGENCIES

LEASE AND OTHER COMMITMENTS

The Company and its consolidated subsidiaries lease their facilities and
certain equipment under noncancelable operating lease agreements expiring
through 2001. Future minimum lease payments due under noncancelable operating
leases total approximately $1,752,000, $1,227,000, $667,000, $406,000 and
$129,000 in 1998 through 2002, respectively.

Total rent expense was approximately $60,000, $324,000 and $1,341,000
for the years ended December 31, 1995, 1996, and 1997, respectively.

In October 1996, SRC entered into a contract with Nokia
Telecommunications Oy to acquire approximately $12.3 million of trunking
equipment and related services in six phases. It is anticipated that this
contract will be

F-69

assigned to Via 1 upon the legal formation of the joint venture, which is
anticipated to occur during 1998. In the event the Company is unable to fund
this subscription, the Company will suffer significant dilution in its
ownership interest.

CAPITAL CONTRIBUTIONS

The Company, indirectly through its wholly owned subsidiary, IWC China,
owns a 40% equity interest in Star Digitel. The Company, including the
Designated Assignee of IWC, IWC China, amended the Subscription Agreement,
dated as of September 23, 1996, among Star Digitel and STHL. The Amendment
and Waiver modified certain provisions in the Star Digitel Subscription
Agreement, including waiving the fulfillment of the conditions precedent to
its obligations to enter into and complete a second subscription of Star
Digitel shares for an aggregate subscription price of $19,000,000. Pursuant
to the Amendment and Waiver, IWC China is required to fund the second
subscription of Star Digitel shares no later than June 17, 1998. In the event
the Company is unable to fund this subscription, the Company will suffer
significant dilution in its ownership interest.

In order to protect the Company's investments in affiliates from
ownership dilution, the Company has committed to make additional capital
contributions to the LWBs as needed besides the second subscription of shares
in Star Digitel. Subject to the availability of necessary additional
financing, for the year ended December 31, 1998, the Company anticipates
making additional investments in various operating and nonoperating companies
totaling approximately $38,500,000.

NOTE PAYABLE

The Company was jointly and severally liable on a $16,000,000 note
payable to an unrelated party in connection with its RHP investment. The note
bore interest at 6.95% with principal and interest due October 10, 1996. The
Company had recorded its pro rata share of this note on the accompanying
consolidated balance sheet. In October 1996, the Company paid its $4,000,000
pro rata share of this note, plus $278,000 of accrued interest and the other
shareholders of RHP paid their pro rata share.

GUARANTEE OF DEBT OF EQUITY INVESTEE

In connection with a Malaysian Ringgit 91,000,000 (approximately
$23,393,000 as translated using effective exchange rates at December 31,
1997) senior credit facility with a Malaysian bank obtained by the Company's
22.5% cost investee, Prismanet, the Company along with other Prismanet
shareholders, executed a financial "keep well" covenant pursuant to which
they have agreed (i) to ensure that Prismanet will remain solvent and be able
to meet its financial liabilities when due and (ii) to ensure that the
project is timely completed and to make additional debt and equity
investments in Prismanet to meet cost overruns. The loan is repayable by
Prismanet in eleven semi-annual installments beginning October 8, 1997. The
Company and other Prismanet shareholders have separately executed an
agreement, whereby each shareholder has agreed to share in the liability on a
pro rata basis in relation to their interest in Prismanet. In the event that
the bank were to seek repayment from the Prismanet shareholders and the other
shareholders were unable to honor their pro rata share in the liability, the
Company might be liable for the full amount of the outstanding amount of the
loan. As of December 31, 1997, this facility has been fully drawn down. In
December 1997, the Company recorded its pro rata share of this facility
associated with the "keep well" covenant totaling $5,000,000 due to the
likelihood of the bank enforcing the "keep well". This is reflected as bank
liability on the accompanying consolidated balance sheet as of December 31,
1997.

The Company indirectly owns a 19.8% equity interest in Mobisel, a
provider of cellular services in Indonesia through its 28.3% ownership in
RHP. Mobisel has obtained a six-year $60 million credit facility from Nissho
Iwai to finance the construction of its network. Borrowings under the credit
facility bear interest at a floating rate based on LIBOR and are secured by
all of Mobisel's assets and a pledge of all the capital stock held by RHP and
Mobisel's other shareholders. RHP has also guaranteed the credit facility. As
of December 31, 1997, this facility has been fully drawn down.

The Company, through its subsidiary, IWC China, owns 40% of Star
Digitel. Star Digitel has obtained a $7 million credit facility from Bank
Bira, which it has used to continue the roll-out of its network. Borrowings
under this facility are secured by substantially all of Star Digitel's assets
and guarantees from its shareholders, including IWC China, on a pro rata
basis. The guarantee by IWC China is non-recourse to the Company. As of
December 31, 1997, this facility has been fully drawn down.

F-70

In September 1997, at the request of IWC China, Vanguard guaranteed
$8,000,000 of indebtedness to be reimbursed by Star Digitel (see Note 6). On
the occurrence of certain events, including an IPO of equity securities by
the Company or certain related entities and the receipt of a specified amount
of cash proceeds from private equity issuances or asset sales by the Company
or certain related entities, IWC China will be required to pay an additional
guarantee fee equal to 4.0% of the outstanding Star Digitel Shares as of the
date of such event unless Vanguard's obligations under the guarantee are
permanently released and discharged.

LICENSES AND INTERCONNECTION

Mobilink holds a non-exclusive nationwide license to provide cellular
services in Pakistan. The license has a term of 15 years, and expires in
2007, at which time Mobilink will be required to seek governmental approval
to renew the license. The license by its terms contains certain conditions on
construction and operation of the network. Mobilink may not be in technical
compliance with certain requirements of the license.

MOBILINK OPTION

As of December 31, 1997, the Company had expended approximately $26.1
million to acquire its 20% indirect equity interest in, and to make capital
contributions and shareholder loans to, Mobilink. Pursuant to the
Shareholder's Agreement dated August 18, 1997, among the shareholders of
Mobilink, the Company holds an option (the "Mobilink Put-Call Option") to
purchase an additional 5.71% interest in IWCPL from APC for an aggregate
purchase price of approximately $6.0 million, which amount is subject to
adjustment based upon the capital contributions and shareholder loans made by
APC in respect of such 5.71% interest and the period of time elapsed between
the date APC originally purchased such 5.71% and the date that the option is
exercised. APC has a corresponding right to put such interest to the Company
at the same purchase price at any time during the term of the option. The
Mobilink Put-Call may be exercised only once by the Company or APC and will
expire on December 31, 1998, unless sooner exercised. Upon exercise of the
Mobilink Put-Call Option in its entirety, the Company's indirect equity
interest in IWCPL would increase to 39.79%, and its corresponding indirect
equity interest in Mobilink would increase to 23.35%.

F-71

(14) GEOGRAPHIC INFORMATION

Information about the Company's consolidated operations in different
geographic areas as of and for the years ended December 31 is as follows (in
thousands):

1995 1996 1997
---------------- -------------- --------------

Revenues:
Latin America...................................... $ -- -- 26
Southeast Asia..................................... -- -- --
Pacific and Far East............................... -- 869 3,249
United States...................................... -- -- --
---------------- -------------- --------------
$ -- 869 3,275
---------------- -------------- --------------
---------------- -------------- --------------
Operating loss:
Latin America...................................... $ (154) (3,844) (7,301)
Southeast Asia..................................... -- (692) (7,090)
Pacific and Far East............................... (3,756) (13,717) (66,413)
United States...................................... (6,211) (11,667) (16,002)
---------------- -------------- --------------
$ (10,121) (29,920) (96,806)
---------------- -------------- --------------
---------------- -------------- --------------

Identifiable assets:
Latin America...................................... $ 13,017 19,712 22,937
Southeast Asia..................................... 5,658 6,541 29,316
Pacific and Far East............................... 50,017 104,966 60,026
United States...................................... 26,951 38,139 11,090
---------------- -------------- --------------
$ 95,643 169,358 123,369
---------------- -------------- --------------
---------------- -------------- --------------

The Company's consolidated operations in Latin America are in Brazil and
Peru. The Company's consolidated operations in Southeast Asia are in
Pakistan. The Company's consolidated operations in Pacific and Far East are
in New Zealand. The Company's equity method and cost investees are included
in the geographic areas in which principal operations exist or will exist
(see Note 5).

(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of the Company's cash and cash equivalents, notes
receivable from and advances to affiliates, accounts payable and accrued
expenses, notes payable to related party and note payable approximates the
fair market value due to the relatively short maturity of these instruments.
The fair value of other financial instruments is described below.

The following methods and assumptions were used to estimate the fair
value of each category of financial instruments for which it is practicable
to estimate that value:

INVESTMENT IN AFFILIATE HELD FOR SALE -- The fair value of this
instrument is determined by management to be the same as its carrying amount.

INVESTMENTS IN AFFILIATES CARRIED ON THE COST METHOD -- The fair value
of these instruments is estimated based upon recent transactions in this
portfolio (see Note 5).

LONG-TERM DEBT, NET -- The fair value of the Exchange Notes was based on
recent trading prices of the related debt. The fair value of the Pakistan
Bridge Facility was estimated by management to be the same as the carrying
amount as no significant change in prevailing interest rates had occurred
since the issuance of the debt facility.

The estimated fair values of the Company's financial assets
(liabilities) as of December 31 are summarized as follows (in thousands):

F-72

1997
-------------------------------------
CARRYING AMOUNT ESTIMATED
FAIR VALUE
------------------ ---------------

Investment in affiliate held for sale...... $ 1,873 1,873
Investment in affiliates carried on the
cost method............................. 9,369 10,383

Long-term debt, net........................ 75,466 74,754

(16) SUBSEQUENT EVENTS

In January 1998, the Board of Directors granted options to an employee
to purchase 165,000 shares of common stock at an exercise price of $9.60 per
share under the 1996 SO/SIP.

In January 1998, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), a wholly owned subsidiary of IWC merged with and into
Radio Movil Digital Americas, Inc. ("RMDA"). RMDA is a company engaged in the
acquisition and operation of ESMR wireless dispatch communications services
and the sale, lease and servicing of related equipment in certain countries
of South America, particularly Brazil, Venezuela and Argentina. The aggregate
consideration paid by IWC pursuant to the Merger Agreement, after giving
effect to various purchase price adjustments set forth in the Merger
Agreement, consisted of 5,381,009 shares of the Company's Series I redeemable
convertible preferred stock with an aggregate liquidation preference of
$73,871,000 and $4,800,000 in cash (collectively, the "Consideration"). Of
the shares of Series I redeemable convertible preferred stock issued pursuant
to the Merger Agreement, 4,652,608 shares were issued to the former security
holders of RMDA, and the remaining 728,438 shares were deposited in escrow,
pending future release to the former security holders of RMDA or to the
Company in accordance with the Merger Agreement. All outstanding capital
stock of RMDA as of January 23, 1998, was surrendered and the RMDA
shareholders received their pro rata share of the equity portion of the
Consideration paid by the Company, net of the escrowed shares. After closing
of the merger, RMDA became a wholly-owned subsidiary of IWC. In the event of
Company liquidation, the holders of Series I redeemable convertible preferred
stock will be subordinate to Series G, H, J and F shareholders and PARI PASSU
with the rights of Series B, C, D and E shareholders. Series I redeemable
convertible preferred stock is redeemable at any time on or after the later
of (i) such date as all of the Company's Exchange Notes and the Pakistan
Bridge Facility have been repaid in full and (ii) December 31, 1998.

The cash portion of the Consideration paid by the Company was financed
using funds borrowed pursuant to an Amended and Restated Senior Secured Note
and Warrant Purchase Agreement (the "RMDA Loan Agreement"), dated January 23,
1998, among the Company, RMDA and BT Foreign Investment Corporation. The RMDA
Loan Agreement, which provides up to $35.0 million, works as a three-tiered
facility, with (i) the first $15.0 million being a refinancing of existing
RMDA Subordinated Convertible Notes, (ii) the next $10.0 million issued
immediately upon closing of the Merger (the "Initial Closing", and together
with the Subordinated Convertible Notes, the "Senior Secured Note") and (iii)
another $10.0 million being available at such place and on such date in the
future as may be mutually agreeable by the parties involved. The $25.0
million Senior Secured Note has a stated interest rate of 14.5% per annum
with interest paid quarterly beginning May 23, 1998 (with the first payment
including any accrued but unpaid interest on the previously existing
Subordinated Convertible Notes) and principal due the earlier of August 23,
1999 or an Event of Default (as defined). The Senior Secured Note is
collateralized by certain Brazilian assets of the Company. A warrant to
purchase 155,840 shares of IWC's common stock at an exercise price of $0.01
per share was also issued in connection with the RMDA Loan Agreement (the
"RMDA Loan Agreement Warrant").

In January 1998, as a result of the RMDA Loan Agreement Warrant and
pursuant to the terms of the Unit Warrants, the number of shares of the
Company's common stock issuable upon exercise of the Unit Warrants increased
by 14,594 shares to an aggregate of 2,917,326 shares.

In February 1998, pursuant to the terms of the IWCH Pakistan Facility,
the number of shares of the Company's common stock issuable upon exercise of
the Initial Pakistan Warrants increased by 196,018 shares to an

F-73

aggregate of 889,594. As a result, pursuant to the terms of the Unit
Warrants, the number of shares of the Company's common stock issuable upon
exercise of the Unit Warrants increased by 18,334 shares to an aggregate of
2,935,660 shares.

In February 1998, the Company signed a binding letter of intent with an
unrelated third party to sell PeruTel and RMDA's interests in Ecuador and
Chile for total cash consideration of $3,125,000 subject to adjustments as
outlined in the letter of intent.

In March 1998, the Company signed a letter agreement with an unrelated
third party to sell RMDA's interests in Venezuela for total cash
consideration of $19,500,000, subject to adjustments as outlined in the
letter of intent.

In March 1998, the Company agreed on a repayment plan for its $500,000
note receivable to an unrelated third party that was issued in March 1997 and
received the first installment of $100,000. The Company expects to collect
the remainder of the note during 1998.

In March 1998, the Company completed the first closing (the "First
Closing") of its Series J Preferred Stock and Warrant financing (the "Series
J Financing") with a $10.0 million investment from Vanguard by issuing
789,266 shares of its Series J redeemable convertible preferred stock (the
"Vanguard Series J Preferred Stock and Warrant Purchase Agreement"). The
Company expects to raise up to a total of $18.0 million (the "Face Amount")
from the Series J Financing. Vanguard committed to and funded $10.0 million
of the facility with all existing IWC shareholders having the option to
participate at their pro rata share of the $18.0 million Face Amount to raise
up to an additional $8.0 million (the "Second Closing"). The Second Closing
is expected to close 45 days after the First Closing. In the event of Company
liquidation, the holders of Series J redeemable convertible preferred stock
will be subordinate to Series G and H shareholders and be superior to the
rights of all other shareholders. Series J redeemable convertible preferred
stock is redeemable at any time on or after the later of (i) such date as all
of the Company's Exchange Notes and the Pakistan Bridge Facility have been
repaid in full and (ii) December 31, 1998. In connection with the Series J
Financing, the Company issued a warrant to purchase shares of the Company's
common stock at an exercise price of $0.01 per share (the "Series J Financing
Warrant"). The number of shares issuable of the Company's common stock at the
First Closing upon exercise of such warrant is initially set at 173,638 and
increases upon the occurrence of certain events. Additional warrants will be
issued upon the Second Closing.

As part of the Vanguard Series J Preferred Stock and Warrant Purchase
Agreement, Vanguard shall have the right to exchange (the "Exchange Right"),
upon the closing of an IPO, its direct or indirect equity interests in Star
Digitel and Mobilink and any other of the Company's core investments (as
defined) that Vanguard may acquire an interest in (collectively, the
"Vanguard Assets"), into the Company's common stock. Such Exchange Right is
contingent upon, but shall occur prior to an IPO, to allow the Company to
include the Vanguard Assets in the offering document. The conversion of the
Vanguard Assets shall be valued on a per share basis at the midpoint of the
underwriter's valuation for the Vanguard Assets entities which form the basis
of the IPO pricing, net of any discounts applicable to the Company's
interests.

Concurrent with the Series J Financing, the Company entered into a
Support Services Agreement with Vanguard (the "Vanguard Support Services
Agreement") whereby Vanguard will assist Star Digitel for a period of up to
one year in (i) completing its proposed unit offering of notes and warrants
or alternative financing, and (ii) entering into an equipment financing
agreement with a vendor in exchange for a warrant to purchase 323,408 shares
of common stock at an exercise price of $0.01 per share (the "Vanguard
Support Services Agreement Warrant"). Such warrant will vest (i) 50% upon
Star Digitel raising $50.0 million in the proposed unit offering or
alternative financing and (ii) 50% upon Star Digitel entering into an
equipment supply agreement with a vendor with financing up to $150.0 million
for such equipment.

In March 1998, as a result of the Series J Financing Warrant and the
Vanguard Support Services Agreement Warrant pursuant to the terms of the Unit
Warrants, the number of shares of the Company's common stock issuable upon
exercise of the Unit Warrants increased by 45,339 shares to 2,980,999 shares.

In March 1998, pursuant to the terms of the Vanguard Star Digitel
Guarantee, the number of shares of the

F-74

Company's common stock issuable upon exercise of the Vanguard Star Digitel
Guarantee warrant increased by 52,080 shares to an aggregate of 172,763. As a
result, pursuant to the terms of the Unit Warrants, the number of shares of
the Company's common stock issuable upon exercise of the Unit Warrants
increased by 4,825 shares to an aggregate of 2,985,824 shares.

F-75

NOTE 17 -- ADDITIONAL SUBSEQUENT EVENTS (UNAUDITED)

On September 3, 1998, the Company and its wholly-owned subsidiaries,
International Wireless Communications, Inc., Radio Movil Digital Americas,
Inc., ("RMDA"), International Wireless Communications Latin America Holdings,
Ltd. and Pakistan Wireless Holdings Limited (collectively with the Company, the
"Debtors"), commenced voluntary cases under Chapter 11 of the U.S. Bankruptcy
Code, as amended, in the District of Delaware (Case No. 98-2007 (MFW)). Since
that date the Debtors have continued to operate as debtors-in possession,
subject to supervision of the Bankruptcy Court. Subsequently, the Debtors filed
a Second Amended Joint Chapter 11 Plan of Reorganization (the "Plan") and a
Second Amended Disclosure Statement relating thereto with the Bankruptcy Court
(the "Disclosure Statement"). On December 21, 1998, the Bankruptcy Court
determined that the Disclosure Statement contained "adequate information" in
accordance with Section 1125 of the Bankruptcy Code. The Disclosure Statement,
among other things, describes events leading to the Debtors' Chapter 11 filings
and summarizes various claims against the Debtors, including litigation (as of
the Disclosure Statement date) stayed against the Debtors by the bankruptcy
filings described above. The Plan and Disclosure Statement were submitted to
parties in the bankruptcy cases in connection with voting on the Plan.

On February 3-4, 1999, hearings were held before the Bankruptcy Court to
consider confirmation of the Plan, which has been further amended or modified
(the "Amended Plan") to reflect, among other things, settlements of the claims
of BT Foreign Investment Corporation ("BTFIC"), of Toronto Dominion
Investments, Inc. ("TDI") and Asia Pacific Cellphone Co. ("APC"). Post-hearing
briefs have been filed, and as of March 2, 1999, the matter has been submitted
to the Bankruptcy Court for a determination as to whether the Amended Plan will
be confirmed. If the Amended Plan is not confirmed, the Debtors may attempt to
file a further amended plan or, if such a plan should prove infeasible, the
Debtors may become subject to liquidation.

On or about March 15, 1999, the Debtors also moved for Court approval of
a stipulation ("Stipulation") that provides in substance, among other things,
that the Debtors agree to cooperate in connection with the collection and
issuance of certain financial information and consents required in connection
with the SEC filings in connection with a merger between the Company's largest
shareholder, Vanguard Cellular Systems, Inc. ("Vanguard") and a subsidiary of
AT&T Corp., that Vanguard will pay the Debtors $2 million plus certain
out-of-pocket expenses and indemnify the Debtors and their officers and
directors with respect to matters arising from their performance of their
obligations as described above, and that a further plan modification would be
filed deleting from the Amended Plan releases of Vanguard and its officers
and directors and certain officers and directors of the Debtors from direct
claims held by shareholders of the Company relating to the Debtors. On March
19, 1999, the Bankruptcy Court approved the Stipulation.

As a result of the Chapter 11 filings, any of the debt of the Debtors
(existing as of September 3, 1998) that was not previously in default became in
default. If the Amended Plan is confirmed, it is anticipated that all
prepetition claims will be restructured or converted into equity of the
Reorganized Debtors. All of the existing equity of the Company would be canceled
and the Company's preferred and common shareholders would be entitled to receive
certain warrants.

The Plan also incorporates a settlement between the Debtors and Vanguard
Cellular Systems, Inc. ("Vanguard"), the Debtors' largest shareholder. Under
the Amended Plan, Vanguard and the Debtors have agreed that Vanguard will:
(i) waive all distributions under the Amended Plan in respect to certain
pre-petition claims; (ii) permit the Debtors to repay and satisfy all
obligations in respect to a $4.6 million "debtor-in-possession" loan facility
via a distribution of new IWCH common stock; (iii) transfer to the Debtors
100% of its equity interests in Vanguard Pakistan, Inc. ("Vanguard Pakistan");
(iv) provide the Debtors with a 17.5% interest in a company ("New Vanguard Sub")
holding an interest in Star Digitel Limited ("Star Digitel"); (v) through
New Vanguard Sub, receive 100% of the Debtors' remaining equity interests in
Star Digitel; (vi) provide credit support for certain obligations of the
Reorganized Debtors (as such term is used in the Amended Plan) that will
provide the Debtors with approximately $7,000,000 of needed post-bankruptcy
funds for operations; (vii) re-allocate its pro rata distribution of certain
warrants; (viii) receive certain releases provided in the Amended Plan; and
(ix) receive certain warrants to purchase shares of common stock of
Reorganized IWCH and of a New Pakistan Warrant Issuing Entity.

F-76

The Disclosure Statement describes the background to the Chapter 11
filings and certain of the transactions entered into by the Debtors prior to
and during the bankruptcy and up to December 21, 1998, the date the Bankruptcy
Court approved the Disclosure Statement. Certain but not necessarily all of the
transactions that took place during the period subsequent to December 31, 1997
and prior to the date of the approval of the Disclosure Statement are the
following (certain of these transactions were also substantially superseded by
the bankruptcy proceedings):

(i) In February 1998, the Company entered into an agreement with Vanguard
Pakistan, pursuant to which Vanguard Pakistan agreed to make on behalf of the
Company the Company's pro rata share of a $3.6 million IWCPL capital call.
Vanguard Pakistan granted the Company the right to purchase this equity
interest for $1.2 million (Vanguard Pakistan Option). The Company never
effected such purchase; however, if the Amended Plan is confirmed, all of
Vanguard's interests in Vanguard Pakistan will be assigned to the Debtors
subject to a lien held by TDI and other lenders.

In June 1998 one of the Company's subsidiaries failed to meet the Mobilink
Put-Call Option. Under the terms of the Mobilink Put-Call Option, the
subsidiary was obligated on certain terms and conditions to purchase from APC
an additional 5.71% interest in IWCPL for an aggregate purchase price of
approximately $6.4 million. The subsidiary defaulted on such obligation;
however, if the Amended Plan is confirmed, APC will receive a distribution in
respect of the subsidiary's default and the Mobilink Put-Call Option will
expire unexercised.

Prior to the Chapter 11 filing, the Company had met all of its capital
call requirements under the terms of the Mobilink Side Letter.

(ii) In March 1998, the Company completed the first closing of its Series
J Preferred Stock and Warrant financing (the "Series J Financing") with a $10.0
million investment from Vanguard by issuing 789,266 shares of its Series J
redeemable convertible preferred stock. In April 1998, the Company completed
the second Closing (the "Second Closing") of its Series J Financing by issuing
102,605 shares of its Series J redeemable preferred stock and certain warrants
to certain existing shareholders in exchange for $1.3 million in cash. The
shares and warrants will be canceled if the Chapter 11 plan is confirmed, with
the holders entitled to receive certain warrants issued by the Reorganized
Debtors.

(iii) In June 1998, a subsidiary of the Company failed to fund the second
subscription for Star Digitel shares for the aggregate subscription price of
$19.0 million under the terms of the Amendment and Waiver between IWC China,
Star Digitel and STHL. This resulted in dilution of the Company's indirect
interest in Star Digitel from 40% to approximately 23%. Although a dispute
currently exists regarding the Company's indirect ownership interest and rights
with respect to Star Digitel, the Company's failure to meet a July 1998 capital
call by Star Digitel resulted in the Company's indirect ownership being further
diluted to approximately 19%, at most. Under the Chapter 11 plan, the Debtors
(and Vanguard) would transfer their interests in Star Digitel to New Vanguard
Sub, and the Debtors would receive a warrant to purchase 17.5% of that entity's
common stock on a fully diluted basis at an exercise price of one cent per
share. It is not certain, however, what, if any, value such interest will have
to the Reorganized Debtors.

(iv) The Company fully wrote-off its indirect investment in Mobisel in
fiscal 1997.

(v) A receiver was appointed for Prismanet in or about October 1998. The
Company had written off its investment in Prismanet during 1997 and had also
recorded a reserve in respect of its pro-rata share of the joint and several
Prismanet "keep-well" covenant. The Company believes that its liabilities, if
any, in respect of the "keep-well" covenant will be discharged by confirmation
of the Amended Plan.

(vi) As part of restructuring efforts in 1998 and 1999, the Company sold
certain investments in order to raise operating capital and dispose of
interests in subsidiaries or affiliates. A summary of certain of the more
significant sales and other events related to investments follows:

o In May 1998, the Company sold all of its interests in PeruTel and in
Comovec S.A., an Ecuadorian company, to an unrelated third party for $2.8
million and $0.3 million, respectively, resulting in a gain of $2.3
million.

o In May 1998, the Company disposed of all of its interests in Uniworld to
a related party for a nominal amount, resulting in a loss of $4.3 million.

o The Company expects its investment in Mobilkom Indonesia, to be
liquidated and to receive no proceeds therefrom.

o In July 1998, the Company sold 49% of the Venezuelan wireless
communications assets (including RMD Venezuela C.A., RMD Venezuela
Holdings, Digicom, Venezolana de Telecommunicaciones Venetel, C.A. and
Venezuela Trunking Services, C.A.), with the purchaser acquiring an option
to purchase the remaining 51% interest at a nominal amount.

F-77

The sale price was $15.0 million, plus up to an additional $4.25 million
to be paid incrementally as additional channel ownership is confirmed.
The Company did not record a gain or loss in respect of this sale.

o In November 1998, an action was filed to liquidate Incredible
Telecommunications Ltd. ("ITL"), a New Zealand company 100% owned by the
Company. Incredible owes its creditors approximately $0.3 million. The
Company believes that any liabilities that it may have in respect of ITL
will be settled in connection with its bankruptcy proceedings.

o In December 1998, the Company sold all of its interests in RMD Argentina,
S.A. and in Radio Servicios, S.A. to an unrelated third party for $1.7
million (net of non-cash working capital adjustment and payments to
vendors and management), with an additional $0.2 million held in escrow,
to be paid if certain outstanding issues can be resolved. The sale
resulted in a loss of $1.6 million.

o In December 1998, the Company sold all of its interests in TeamTalk to a
management-led buyout group for a nominal amount. In fiscal 1998 the
Company fully wrote off any investment or assets associated with
TeamTalk as a result of its disposition.

o In February 1999, the Company sold all of its interests in WDS to the
general manager for $0.1 million, resulting in a loss of approximately $1
million.

The Company believes that each of its Operating Companies and their
associated tangible and intangible assets may have become materially impaired,
compared to their status as of December 31, 1997, as a result inter alia of
economic conditions occurring subsequent to December 31, 1997 in the countries
in which such entities operate and the Company's liquidity constraints.

In December 1998, a group of the Company's shareholders initiated an
action in the United States District Court for the District of Delaware against
certain former and current officers and directors of the Company. LOEB PARTNERS
CORP. ET AL., V. GRIFFIN ET AL., Case No. 98-701 (D. Del.). The Company is not
named as a defendant in this action. Plaintiffs in this case are certain former
shareholders of RMDA, and claim, among other things, that they were defrauded
in connection with their purchase of the Company's Series I preferred stock and
their exchange of the shares of RMDA. The basis for the alleged fraud is
purported misrepresentations as to the financial condition of the Company and
certain of its subsidiaries. While the Company is not a defendant in this
action, certain defendants have asserted claims for indemnification against the
Company in excess of $3.5 million that such parties claim may have
administrative expense priority (an assertion that the Debtors dispute). In
addition, certain of the plaintiffs in this action have filed Proofs of Claim
against the Company asserting claims for fraud arising out of the Transaction.

During January 1999, certain other Series I preferred shareholders of the
Company initiated an action in the Supreme Court of the State of New York,
County of New York, against various parties, including Vanguard, certain
directors of Vanguard, and certain former and current officers and directors of
the Company. WARBURG DILLON REED, LLC ET AL. V. VANGUARD CELLULAR SYSTEMS,
INC., Index No. 600362/99 (Sup. Ct. N.Y. Co.). The Company is not named as a
defendant in this action although it is accused of unlawfully aiding and
abetting the alleged fraud referred to below. Plaintiffs claim, inter alia,
that they were defrauded in connection with their purchase of the Company's
Series I preferred stock and their exchange of the shares of RMDA and allege,
among other things, fraud, aiding and abetting fraud, negligent
misrepresentation and violations of the North Carolina, Delaware and California
Blue Sky Laws. While the Company is not a defendant in this action, certain
defendants have asserted claims for indemnification against the Company that
such parties claim may have administrative expense priority (an assertion that
the Debtors dispute). In addition, certain plaintiffs in this action have filed
Proofs of Claim with the Bankruptcy Court against the Company and RMDA asserting
claims, among other things, for fraud, negligent misrepresentation and violation
of securities laws arising out of the Transaction. Further, certain of such
plaintiffs have also filed Proofs of Claim against the Company asserting, among
other things, claims for breach of the Company's obligations under the Eighth
Amended and Restated Investor Rights Agreement, dated as of March 9, 1998.

In connection with the bankruptcy proceedings, the Debtors have also been
informed by certain shareholders that they have retained counsel and are
examining the possibility of further litigation against Vanguard and certain of
the officers and directors of the Debtors and Vanguard based upon allegations
that Vanguard, among other things, dominated and controlled the Debtors to its
own advantage and to the detriment of the Debtors and the Shareholders. No such
lawsuit has been commenced to date; however, certain Shareholders have made
similar allegations in the bankruptcy proceedings, particularly in opposition
to confirmation of the Amended Plan.

If the Amended Plan is confirmed by the Bankruptcy Court, Vanguard, certain
of its officers and directors and certain officers and directors of the Debtors
would be released from claims held by the Debtors and creditors of the Debtors,
while direct claims against such releasees held by shareholders of the Company
would not be released; however, there is no certainty that the Amended Plan will
be confirmed or, if confirmed, that the release provisions of the Amended Plan
will be approved by Bankruptcy Court.

On March 26, 1999, the Bankruptcy Court confirmed the IWCH plan of
reorganization as submitted, with one minor modification that the Debtors had
agreed to. The time to take an appeal from the confirmation order has not yet
elapsed, and the Amended Plan must also still become effective in accordance
with its terms.

F-78

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND STOCKHOLDERS
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY

We have audited the consolidated balance sheets of PT Rajasa Hazanah
Perkasa and Subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income and deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audit in accordance with auditing standards established by
the Indonesian Institute of Accountants, which are substantially similar to the
generally accepted auditing standards in the United States of America. 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 financial position of PT Rajasa
Hazanah Perkasa and Subsidiary as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles in the Republic of Indonesia.

Generally accepted accounting principles in Indonesia vary in certain
respects with those in the United States of America. A description of the
significant differences between those two generally accepted accounting
principles and the approximate effects of those differences on net loss and
stockholders' equity (capital deficiency) are set forth in Notes 22 and 23 to
the consolidated financial statements.

ARTHUR ANDERSEN LLP

Greensboro, North Carolina,

March 24, 1997

F-79

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996

1995
(RESTATED)
(SEE NOTE 2) 1996
NOTES RP RP U.S. $ (NOTE 3)

ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ 2,4,9,13 5,543,708,243 15,676,909,861 6,578,645
Accounts receivable
Trade -- net of allowance for doubtful accounts of Rp
568,483,998 in 1995 and Rp 7,600,569,741 in 1996.... 2,5,9,13 2,617,547,345 5,099,085,512 2,139,776
Others................................................. 79,039,898 681,504,236 285,986
Inventories -- net of allowance for obsolescence of Rp
3,858,732,612 in 1995 and Rp 2,282,225,057 in 1996..... 2,6,9 3,462,954,359 1,316,129,149 552,299
Prepaid taxes............................................ 296,370,438 2,404,474 1,008
Prepaid expenses......................................... 2 270,883,931 3,341,430,541 1,402,195
Advances................................................. 19 -- 5,704,584,928 2,393,867
Total Current Assets..................................... 12,270,504,214 31,822,048,701 13,353,776
PROPERTY AND EQUIPMENT................................... 2,7,9,13,19
Cost 51,107,776,543 109,776,610,466 46,066,559
Accumulated depreciation................................. (2,491,591,496) (7,180,710,614) (3,013,307)
Net Book Value........................................... 48,616,185,047 102,595,899,852 43,053,252
OTHER ASSETS
Advance for purchase of equipment........................ 8 -- 45,064,135,670 18,910,673
Long-term prepayments.................................... 2 410,858,052 4,390,264,725 1,842,327
Claims for tax refund.................................... -- 1,001,401,054 420,227
Refundable deposits...................................... 160,401,084 756,401,377 317,416
Preoperating expenses.................................... 2 55,000,000 29,000,000 12,170
Total Other Assets....................................... 626,259,136 51,241,202,826 21,502,813
Total Assets............................................. 61,512,948,397 185,659,151,379 77,909,841
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Short-term loans......................................... 9 9,475,366,558 15,485,200,000 6,498,196
Accounts payable
Trade.................................................. 10 564,424,841 11,585,958,918 4,861,921
Others................................................. 11 15,094,628,251 73,413,519 30,807
Taxes payable............................................ 2,12 4,923,954,854 8,716,465,563 3,657,770
Accrued expenses......................................... 1,683,945,836 17,950,552,254 7,532,754
Current maturities of long-term debts.................... 13 8,638,028,690 1,809,565,256 759,364
Total Current Liabilities................................ 40,380,349,030 55,621,155,510 23,340,812
LONG-TERM DEBTS -- NET OF CURRENT MATURITIES............. 13 2,291,291,579 143,010,194,291 60,012,671
DUE TO STOCKHOLDERS...................................... 2,14 -- 6,003,518,250 2,519,311
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY... 12,150,167,821 2,953,733,963 1,239,502
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock -- Rp 1,000,000 par value
Authorized and issued -- 25,000 shares................. 15 25,000,000,000 25,000,000,000 10,490,978
Deficit.................................................. (18,308,860,033) (46,929,450,635) (19,693,433)
Total Stockholders' Equity (Capital Deficiency).......... 6,691,139,967 (21,929,450,635) (9,202,455)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)..................................... 61,512,948,397 185,659,151,379 77,909,841

See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.

F-80

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

1995
(RESTATED)
(SEE NOTE 2) 1996
NOTES RP RP U.S. $ (NOTE 3)

REVENUES....................................................... 2,16 16,812,363,798 24,469,261,033 10,268,259
COST OF REVENUES............................................... 2,17 7,831,126,477 27,290,182,329 11,452,028
GROSS PROFIT (LOSS)............................................ 8,981,237,321 (2,820,921,296) (1,183,769)
OPERATING EXPENSES............................................. 11,777,729,953 25,209,636,409 10,578,949
LOSS FROM OPERATIONS........................................... (2,796,492,632) (28,030,557,705) (11,762,718)
OTHER INCOME (CHARGES)
Interest income................................................ 403,155,251 2,029,190,074 851,527
Interest expense............................................... (4,813,937,236) (8,750,900,607) (3,672,220)
Loss on foreign exchange -- net................................ 2 (507,805,347) (2,555,505,519) (1,072,390)
Gain (loss) on disposal of property and equipment -- net....... 2 344,054,448 (113,865,638) (47,782)
Miscellaneous -- net........................................... 2,971,641,507 (395,385,065) (165,919)
Other Charges -- Net........................................... (1,602,891,377) (9,786,466,755) (4,106,784)
LOSS BEFORE PROVISION FOR INCOME TAX........................... (4,399,384,009) (37,817,024,460) (15,869,502)
PROVISION FOR INCOME TAX....................................... 12 4,173,487,000 -- --
LOSS BEFORE MINORITY INTEREST.................................. (8,572,871,009) (37,817,024,460) (15,869,502)
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY.................... 326,750,179 9,196,433,858 3,859,183
NET LOSS....................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
DEFICIT AT BEGINNING OF YEAR................................... (10,062,739,203) (18,308,860,033) (7,683,114)
DEFICIT AT END OF YEAR......................................... (18,308,860,033) (46,929,450,635) (19,693,433)

See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.

F-81

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

1995
(RESTATED)
(SEE NOTE 2) 1996
RP RP U.S. $ (NOTE 3)

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation......................................................... 786,350,586 7,096,919,730 2,978,145
Provision for doubtful accounts...................................... 62,739,169 8,102,437,967 3,400,100
Provision for inventory obsolescence................................. 2,967,643,196 (1,576,507,555) (661,564)
Minority interest in net loss of consolidated subsidiary............. (326,750,179) (9,196,433,858) (3,859,183)
Amortization of deferred charges..................................... 4,819,331,622 -- --
Amortization of preoperating expenses................................ -- 29,000,000 12,170
Loss (gain) on disposal of property and equipment.................... (344,054,448) 113,865,638 47,782
Changes in operating assets and liabilities:
Accounts receivable............................................... 196,000,856 (11,186,440,472) (4,694,268)
Inventories....................................................... 348,812,887 3,751,126,484 1,574,119
Prepaid taxes..................................................... (232,806,380) 383,684,761 161,009
Prepaid expenses.................................................. (164,817,811) (7,139,672,080) (2,996,086)
Advances.......................................................... -- (5,704,584,928) (2,393,867)
Refundable deposits............................................... (160,401,084) (596,000,293) (250,105)
Claims for tax refund............................................. -- (1,001,401,054) (420,227)
Advance for purchase of equipment................................. -- (45,064,135,670) (18,910,674)
Accounts payable.................................................. 10,709,592,486 (3,999,680,655) (1,678,422)
Taxes payable..................................................... (3,402,494,577) 3,792,510,709 1,591,486
Accrued expenses.................................................. (5,876,403,564) 16,266,606,418 6,826,104
Net Cash Used in Operating Activities.................................. 1,136,621,929 (74,549,295,460) (31,283,800)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals of property and equipment...................... 498,794,393 209,161,024 87,772
Acquisitions of property and equipment................................. (6,259,361,352) (61,427,454,916) (25,777,362)
Addition in preoperating expenses...................................... (55,000,000) (3,000,000) (1,259)
Addition in deferred charges........................................... 38,150,067,797 -- --
Increase in minority interest.......................................... 12,476,918,000 -- --
Net Cash Provided by (Used in) Investing Activities.................... 44,811,418,838 (61,221,293,892) (25,690,849)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in long-term debts................................. (16,727,237,705) 133,890,439,278 56,185,665
Increase (decrease) in short-term loans................................ (6,347,377,490) 6,009,833,442 2,521,961
Decrease in due to stockholders........................................ (52,342,326,140) 6,003,518,250 2,519,311
Proceeds from capital stock issuance................................... 24,000,000,000 -- --
Decrease in due from stockholders...................................... 4,041,764,800 -- --
Net Cash Provided by (Used in) Financing Activities.................... (47,375,176,535) 145,903,790,970 61,226,937
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (1,427,135,768) 10,133,201,618 4,252,288
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... 6,970,844,011 5,543,708,243 2,326,357
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... 5,543,708,243 15,676,909,861 6,578,645

See accompanying Notes to Consolidated Financial Statements
which are an integral part of the consolidated financial statements.

F-82

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PT Rajasa Hazanah Perkasa (the Company) was established on December 17,
1984 based on notarial deed No. 22 of Pariwondo Soekarno SH. The deed of
establishment was approved by the Ministry of Justice (MOJ) in its decision
letter No. C2-2666-HT.01.01.TH'85 dated May 8, 1985, registered at the South
Jakarta Court of Justice under No. 503/Not/1985/PN.JKT.SEL on July 24, 1985 and
was published in the State Gazette No. 82, Supplement No. 1199 dated October 14,
1986. The Company's articles of association have been amended from time to time,
most recently by notarial deed No. 106 of Sinta Susikto SH dated January 24,
1997 (see Note 15).
According to Article No. 3 of the Company's articles of association, the
Company is engaged in supplying non-wire telecommunication services and
installing and operating domestic telephone lines.
The Company changed its status to foreign capital investment based on the
approval of Investment Coordinating Board No. 22/V/PMA/1995 dated May 26, 1995
and No. 1226/A.6/1995 dated September 28, 1995.
On November 30, 1995, as covered by notarial deed No. 210 dated November
30, 1995 of Sinta Susikto SH, the Company, PT Telekomunikasi Indonesia (Telkom)
and Yayasan Dana Pensiun Pegawai Telkom (YDPP Telkom) established a joint
venture company named PT Mobile Selular Indonesia (Mobisel). In accordance with
the joint venture agreement, the Company transferred network assets to
Subsidiary as capital contribution.
Under existing regulation, Subsidiary can only operate upon the approval of
its articles of associations by MOJ. As such, the following arrangements and
conditions are adopted with respect to the transfer and assumption of the
operations of, and recognition and sharing of revenues being generated from, the
above-mentioned assets transferred to Subsidiary:
a. The operations of the network assets will be transferred to and assumed
by Subsidiary effective on the 20th day of the month of approval of its articles
of association by MOJ, with the condition that if the approval is made exactly
on the 20th day of the said month, then the transfer shall be effective on that
date.
b. Revenues generated from the operations of the transferred assets can
only be recognized by Subsidiary starting from the effectivity date of the
transfer being referred to in point (a). Prior to the said date, all revenues
generated are recognized by the Company.
c. The revenue sharing agreement between Telkom and the Company covering
the transferred assets is still valid as long as the condition in point (a) is
not yet fulfilled.
The Company, as a joint venture company, was granted an approval in
principle to engage in providing facilities for mobile cellular phone services
by the Ministry of Tourism, Posts and Telecommunications of the Republic of
Indonesia on April 28, 1995, based on the letter No. PB.301/1/25/MPPT-95.
Government Regulation No. 8 of 1993, which governs the Provision of
Telecommunications Services, stipulates that the establishment of cooperation
which aims to provide basic telecommunications services can be in the form of
joint venture, joint operation or contract management. The said regulation
further provides that entities cooperating with the domestic and/or
international telecommunications organizing bodies must use the organizing
bodies' existing telecommunications networks. If the telecommunications networks
are not available, the government regulation requires that the cooperation shall
be in the form of a joint venture capable of constructing the necessary
networks.
According to Article 3 of Subsidiary's articles of association, the scope
of activities of Subsidiary comprises operating and providing facilities for
Mobile Cellular Phone Services (Jasa Sambungan Telepon Bergerak Selular) in
accordance with existing laws.
Subsidiary's deed of establishment was approved by MOJ in its decision
letter No. C2-1238.HT.01.01-TH'96 dated January 31, 1996. Accordingly, the
Company is still entitled to the pulse sharing revenue until February 20, 1996.

F-83

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared on the historical
cost basis of accounting, except for inventory which are valued at the lower of
cost or net realizable value (market).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 70% owned Subsidiary, PT Mobile Selular Indonesia (Mobisel). Mobisel was
legally established on January 31, 1996. In recognition of its change in legal
status as explained in Note 1 and for comparative purposes, the Company restated
the 1995 accounts previously reported as if Subsidiary was legally established
in 1995 and accordingly consolidated in 1995.
All significant intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS
Time deposits with maturities of three months or less at the time of
placement or purchase are considered as "Cash Equivalents".
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance are provided for doubtful accounts based on a review of the
status of the individual receivable accounts at the end of the year.
PREPAID EXPENSES
Prepaid expenses are amortized over the periods benefited using the
straight-line method. Prepaid expenses which benefited more than one year are
classified in "Other Assets -- Long-term Prepayments".
INVENTORIES
Inventories are stated at the lower of cost or net realizable value
(market). Cost is determined by the first-in, first-out method. The Company
provides an allowance for obsolescence on inventories based on a periodic review
of their condition.
TRANSACTIONS WITH RELATED PARTIES
The Company and its Subsidiary have transactions with entities which are
regarded as having special relationship as defined under Statement of Financial
Accounting Standards No. 7, "Related Party Disclosures".
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
The Company and its Subsidiary use double-declining balance method and
straight-line methods, respectively, for computing the depreciation, based on
the estimated useful lives of the assets as follows:

YEARS

Vehicles........................................................................... 2-4
Furniture and fixtures............................................................. 2-4
Building improvements.............................................................. 4
Computer equipment................................................................. 4
Cellular mobile telephones......................................................... 4
Machinery and equipment............................................................ 4
Maintenance and installer equipment................................................ 4
Telecommunication network.......................................................... 7

F-84

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Telecommunication network represents capitalized system costs for the
development of the Subsidiary's cellular mobile telephone systems. This includes
the costs of the construction, direct labor cost spent on the construction, and
interest on loans used to finance the construction. Capitalization of interest
ceases when the construction is completed and ready for its intended use.
The cost of maintenance and repairs is charged to income as incurred;
significant renewals and betterments are capitalized. When assets are retired or
otherwise disposed of, their costs and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income
for the period.
CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. The accumulated costs are
reclassified to the appropriate property and equipment accounts when the
construction is completed and ready for its intended use.
PREOPERATING EXPENSES
Preoperating expenses are amortized over three years up to 1998, in
accordance with the Statement of Financial Accounting Standards No. 6,
"Accounting and Reporting for a Development Stage Company".
REVENUE AND EXPENSE RECOGNITION
Revenue is recorded as earned when products are delivered to the customers
or when services are rendered. Expenses are recognized when they are incurred.
Revenue is obtained from three primary sources:
-- connecting fee for each new line sold
-- pulse-sharing
-- sales, repair, maintenance and rental of outstations and accessories
FOREIGN CURRENCY TRANSACTIONS AND BALANCES
Transactions involving foreign currencies are recorded at the rates of
exchange prevailing at the time the transactions are made. At the balance sheet
date, assets and liabilities denominated in foreign currencies are adjusted to
reflect the middle rate of Bank Indonesia prevailing at such date and the
resulting gains or losses are credited or charged to operations of the current
year.
PROVISION FOR INCOME TAX
Provision for income tax is determined on the basis of estimated taxable
income for the year. No deferred tax is provided for the timing differences in
the recognition of income and expenses in the financial statements for financial
reporting and income tax purposes.
3. TRANSLATIONS OF INDONESIAN RUPIAH AMOUNTS INTO UNITED STATES DOLLAR AMOUNTS
The financial statements are stated in Indonesian rupiah. The translations
of Indonesian rupiah amounts into United States dollars are included solely for
the convenience of the readers, using the average buying and selling rates
published by Bank Indonesia (Central Bank) on December 31, 1996 of Rp 2,383 to
U.S.$ 1. The convenience translations should not be construed as representations
that the Indonesian rupiah amounts have been, could have been, or could in the
future be, converted into United States dollars at this or any other rate of
exchange.

F-85

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:

1995
(RESTATED)
(SEE NOTE 2) 1996

Cash on hand....................................................................... Rp 22,438,597 Rp 28,161,045
Cash in banks...................................................................... 830,916,549 10,169,998,816
Cash equivalents
Time deposits, with annual interest rates ranging from 4.5% -- 6.06% for U.S.
Dollar time deposit and 17% for Rupiah time deposit.............................. 4,690,353,097 5,478,750,000
Total.............................................................................. Rp 5,543,708,243 Rp 15,676,909,861

A portion of cash and cash equivalents amounting to Rp 4,740,770,937 and Rp
3,009,678,457 as of December 31, 1995 and 1996, respectively, are used as
collateral for the short-term loans and long-term debts (see Notes 9 and 13).
5. ACCOUNTS RECEIVABLE -- TRADE
The details of this account are as follows:

1995
(RESTATED)
(SEE NOTE 2) 1996

Pulse revenue receivables.......................................................... Rp 2,579,752,929 Rp 12,093,378,485
Outstation receivables............................................................. 606,278,414 606,276,768
Total.............................................................................. 3,186,031,343 12,699,655,253
Less allowance for doubtful accounts............................................... 568,483,998 7,600,569,741
Net................................................................................ Rp 2,617,547,345 Rp 5,099,085,512

Trade receivables are used as collaterals to secure the short-term loans
and long-term debts (see Notes 9 and 13).
6. INVENTORIES
Inventories consist of the following:

1995
(RESTATED)
(SEE NOTE 2) 1996

Cellular mobile telephones........................................................ Rp 5,009,533,582 Rp 1,342,094,659
Optional equipment................................................................ 2,286,941,570 2,256,259,547
Mobile telephones in transit...................................................... 25,211,819 --
Total............................................................................. 7,321,686,971 3,598,354,206
Less allowance for obsolescence................................................... (3,858,732,612) (2,282,225,057)
Net............................................................................... Rp 3,462,954,359 Rp 1,316,129,149

Certain inventories are used as collateral to secure certain short-term
loans (see Note 9).
Allowance for inventory obsolescence is made for non-moving inventory of
old and out-modelled mobile telephone equipment.

F-86

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PROPERTY AND EQUIPMENT
The details of property and equipment are as follows:

1995 BEGINNING ENDING
(RESTATED) BALANCE ADDITIONS DEDUCTIONS BALANCE
(SEE NOTE 2) RP RP RP RP

Cost
Vehicles......................................... 2,452,282,407 739,187,868 710,052,795 2,481,417,480
Furniture and fixtures........................... 403,108,997 121,921,924 2,276,940 522,753,981
Building improvements............................ 474,708,473 -- -- 474,708,473
Computer equipment............................... 513,888,700 137,193,300 41,667,500 609,414,500
Cellular mobile telephones....................... 325,786,242 -- 146,149,131 179,637,111
Machinery and equipment.......................... 203,951,126 1,035,000 -- 204,986,126
Construction in progress......................... 41,374,835,612 5,260,023,260 -- 46,634,858,872
Total............................................ 45,748,561,557 6,259,361,352 900,146,366 51,107,776,543
Accumulated Depreciation
Vehicles......................................... 1,654,460,019 519,139,456 676,943,561 1,496,655,914
Furniture and fixtures........................... 234,032,459 62,877,847 1,759,910 295,150,396
Building improvements............................ 261,340,006 53,342,117 -- 314,682,123
Computer equipment............................... 149,419,287 96,819,502 18,620,970 227,617,819
Cellular mobile telephones....................... 68,304,517 21,353,642 48,081,980 41,576,179
Machinery and equipment.......................... 83,091,043 32,818,022 -- 115,909,065
Total............................................ 2,450,647,331 786,350,586 745,406,421 2,491,591,496
Net Book Value................................... 43,297,914,226 48,616,185,047

BEGINNING ENDING
BALANCE ADDITIONS DEDUCTIONS BALANCE
1996 RP RP RP RP

Cost
Vehicles......................................... 2,481,417,480 2,429,220,000 1,198,837,868 3,711,799,612
Furniture and fixtures........................... 522,753,981 428,694,854 300,167,427 651,281,408
Building improvements............................ 474,708,473 -- 474,708,473 --
Computer equipment............................... 609,414,500 668,892,120 423,421,488 854,885,132
Cellular mobile telephones....................... 179,637,111 -- 179,637,111 --
Machinery and equipment.......................... 204,986,126 -- 181,848,626 23,137,500
Maintenance and installer equipment.............. -- 131,800,000 -- 131,800,000
Telecommunication network........................ -- 45,916,993,858 -- 45,916,993,858
Construction in progress......................... 46,634,858,872 57,754,810,761 45,902,956,677 58,486,712,956
Total............................................ 51,107,776,543 107,330,411,593 48,661,577,670 109,776,610,466
Accumulated Depreciation
Vehicles......................................... 1,496,655,914 678,632,031 1,025,531,138 1,149,756,807
Furniture and fixtures........................... 295,150,396 209,480,847 300,167,427 204,463,816
Building improvements............................ 314,682,123 160,026,350 474,708,473 --
Computer equipment............................... 227,617,819 359,585,023 423,421,488 163,781,354
Cellular mobile telephones....................... 41,576,179 18,953,045 60,529,224 --
Machinery and equipment.......................... 115,909,065 30,671,297 123,442,862 23,137,500
Maintenance and installer equipment.............. -- 2,745,834 -- 2,745,834
Telecommunication network........................ -- 5,636,825,303 -- 5,636,825,303
Total............................................ 2,491,591,496 7,096,919,730 2,407,800,612 7,180,710,614
Net Book Value................................... 48,616,185,047 102,595,899,852

F-87

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PROPERTY AND EQUIPMENT -- Continued
Depreciation charged to operations amounted to Rp 786,350,586 and Rp
7,096,919,730 for the year ended December 31, 1995 and 1996, respectively. The
Company's property and equipment are used as collateral to the short-term loans
and long-term debts (see Notes 9 and 13).
8. ADVANCES FOR PURCHASE OF EQUIPMENT
This account represents deposits in Deutsche Bank to secure letters of
credit issued for purchase of certain equipment.
9. SHORT-TERM LOANS
This account represents loans obtained from the following:

1995
(RESTATED)
(SEE NOTE 2) 1996

Nissho Iwai........................................................................ Rp -- Rp 10,485,200,000
PT Bank Umum Servitia.............................................................. -- 5,000,000,000
PT Bank Utama...................................................................... 9,475,000,000 --
PT Lippobank....................................................................... 366,558 --
Total.............................................................................. Rp 9,475,366,558 Rp 15,485,200,000

As of December 31, 1996, the credit facility obtained from Nissho Iwai
amounted to U.S.$ 4,400,000 and bears interest at 2.5% above LIBOR. The Company
has pledged 773 of its ordinary shares as collateral for this credit. The credit
is used to pay certain liabilities which are owed by the Company to Bank Utama.
The credit facility obtained from PT Bank Utama bears annual interest
ranging from 20% to 24%. The loan is collateralized with certain cash,
receivables, inventories, property and equipment, and corporate guarantee from
PT Bina Reksa Perdana, a stockholder, and certain property and equipment of PT
Panutan Duta, affiliate.
The loan facility obtained from PT Bank Umum Servitia bears interest at an
annual rate of 23% and is collateralized on a pari passu basis with collaterals
of long-term debt obtained from Nissho Iwai International (Singapore) Pte., Ltd.
(see Note 13).
10. ACCOUNTS PAYABLE -- TRADE
This account represents liabilities to:

1995
(RESTATED)
(SEE NOTE 2) 1996

Nokia Telecommunications Oy, Finland................................................. Rp -- Rp 3,884,753,279
PT Telekomunikasi Indonesia (Telkom)................................................. -- 3,494,041,002
Ericsson Radio System AB............................................................. -- 2,093,452,328
PT Indonesian Satellite Corporation -- 962,996,540
Directorate General of Posts and Telecommunications.................................. -- 222,774,250
PT Satelit Palapa Indonesia.......................................................... -- 192,475,201
EDS Management Consulting............................................................ -- 141,875,000
Nokia Telecommunications, Jakarta.................................................... -- 131,879,987
Others (each below Rp 100 million)................................................... 564,424,841 461,711,331
Total................................................................................ Rp 564,424,841 Rp 11,585,958,918

F-88

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. ACCOUNTS PAYABLE -- OTHERS
As of December 31, 1995, this account mainly represents amounts due to a
former stockholder and PT Telekomunikasi Indonesia (Telkom) of Rp 6,145 million
and Rp 6,610 million, respectively. The amount due to Telkom represents the
difference between the agreed price of Telkom's portion on the network assets
transferred to Subsidiary and Telkom's share of the capital contribution in
Subsidiary. As of December 31, 1996, the above liabilities have been settled.
12. TAXES PAYABLE

1995
(RESTATED)
(SEE NOTE 2) 1996

Estimated income tax payable (less tax prepayment of
Rp 97,784,316 in 1995)............................................................ Rp 4,075,702,684 Rp --
Income tax
Article 21........................................................................ 268,692,322 583,665,864
Article 23........................................................................ 361,833,151 542,096,601
Article 25 and 29................................................................. 43,107,840 4,071,033,731
Article 26........................................................................ 174,618,857 2,618,090,566
Value added tax..................................................................... -- 901,578,801
Total............................................................................... Rp 4,923,954,854 Rp 8,716,465,563

No provision was made for income tax for the year ended December 31, 1996
since the Company and its Subsidiary are in a fiscal loss position.
A reconciliation between loss before provision for income tax, as shown in
the statement of income, and estimated taxable income for the year ended
December 31, 1995 is as follows:

Loss before provision for income tax per consolidated statement of income.............................. Rp (4,399,384,009)
Loss of Subsidiary before provision for income tax..................................................... 1,089,167,264
Gain on sale of telecommunication network.............................................................. 10,967,490,528
Income before provision for income tax................................................................. 7,657,273,783
Timing differences:
Amortization of deferred charges..................................................................... 4,819,331,622
Provision for inventory obsolescence................................................................. 2,967,643,196
Difference in beginning balance of property and equipment as regulated by Directorate General of
Taxes Circular Letter No. 44/1995................................................................. 1,211,445,061
Depreciation......................................................................................... 473,000,943
Provision for uncollectible trade receivables........................................................ 62,739,169
Gain on disposal of telecommunication network........................................................ (5,856,159,247)
Gain on disposal of property and equipment........................................................... (401,162,201)
Permanent differences:
Donation............................................................................................. 2,090,349,100
Employees' benefits in kind.......................................................................... 599,409,987
Entertainment........................................................................................ 461,698,721
Interest expense..................................................................................... 206,746,361
Tax penalty and interest............................................................................. 17,415,989
Non-taxable income
Interest already subjected to final income tax....................................................... (368,942,024)
Estimated taxable income............................................................................... Rp 13,940,790,460

F-89

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. TAXES PAYABLE -- Continued
The provision for income tax and computation of the estimated corporate
income tax payable for the year ended December 31, 1995 are as follows:

Estimated taxable income (rounded-off).................................................................. Rp 13,940,790,000
Provision for income tax................................................................................ 4,173,487,000
Prepayments of income tax
Article 22............................................................................................ 52,898,433
Article 23............................................................................................ 1,350,000
Article 25............................................................................................ 43,535,883
97,784,316
Estimated corporate income tax payable.................................................................. Rp 4,075,702,684

13. LONG-TERM DEBTS
This account represents long-term debts as follows:

1995
(RESTATED)
(SEE NOTE 2) 1996

Rupiah
PT Bank Indonesia Raya........................................................ Rp 1,718,555,179 Rp 1,718,555,179
PT Bank Tamara................................................................ 676,853,686 --
PT Lippobank.................................................................. 350,942,390 --
Others (each below Rp 100 million)............................................ 211,173,942 121,204,368
U.S. Dollar
Nissho Iwai International Pte. Ltd., Singapore................................ -- 142,980,000,000
Svenska Handelsbanken, Singapore.............................................. 7,971,795,072 --
10,929,320,269 144,819,759,547
Less current maturities......................................................... 8,638,028,690 1,809,565,256
Long-term portion............................................................... Rp 2,291,291,579 Rp 143,010,194,291

On March 12, 1996, Subsidiary obtained a loan from Nissho Iwai
International (Singapore) Pte. Ltd. (Nissho Iwai) with a maximum facility
amounting to U.S.$ 60,000,000 to finance the construction and implementation of
the NMT-450 Network in Bandar Lampung in Sumatra, Java, Bali and Lombok. The
loan, which term is five years and inclusive of a two years grace period on
principal payment, is repayable in six equal semi-annual installments. Proceeds
from collections of Subsidiary's receivables are deposited directly into escrow
accounts maintained with certain banks as chosen and agreed-upon by both
parties.
Based on the Joint Venture Agreement No. PKS 234/HK.810/UTA-00/95 dated
November 30,1995 between the Company, Telkom and Yayasan Dana Pensiun Pegawai
Telkom (YDPP Telkom), the Company transferred the balance of the loan from
Svenska Handelsbanken, Singapore to Subsidiary as of June 30, 1995 amounting Rp
10,752,598,140.
The above loans are collateralized with cash and cash equivalents,
receivables, and property and equipment of the Company and Subsidiary, corporate
guarantee from the Company and shares of Subsidiary. The Rupiah loans bear
interest at rates ranging from 20% to 23% per annum. The loan from Nissho Iwai
bears interest at an annual rate of 2.5% above LIBOR. The loan from Svenska
Handelsbanken, Singapore bears annual interest at 0.55% above one month SIBOR.
Certain loan agreements contain terms and conditions restricting the
Company and Subsidiary from, without prior consent from the lenders, taking
additional loans, entering into any investment, merger, consolidation,
reorganization and changing ownership. In addition, the Company has to maintain
certain financial ratios.

F-90

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. DUE TO STOCKHOLDERS
Due to stockholders represents unsecured and non-interest bearing loans
from:

1996

PT Bina Reksa Perdana.................................................................................... Rp 2,383,000,000
International Wireless Communications, Inc............................................................... 2,345,613,250
PT Deltona Satya Dinamika................................................................................ 1,274,905,000
Total.................................................................................................... Rp 6,003,518,250

15. CAPITAL STOCK
The stockholders and their respective stockholdings as of December 31, 1995
and 1996 are as follows:

STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT

PT Bina Reksa Perdana............................................... 12,500 50% Rp 12,500,000,000
International Wireless Communications, Inc.......................... 6,250 25 6,250,000,000
PT Deltona Satya Dinamika........................................... 6,250 25 6,250,000,000
Total............................................................... 25,000 100% Rp 25,000,000,000

Based on notarial deed of Sinta Susikto SH No. 106 dated January 24, 1997,
the Company changed certain parts of its Articles of Association including the
change in authorized and issued capital stock from Rp 25,000,000,000 to Rp
25,773,000,000 and the change in share ownership. The notarial deed has been
approved by MOJ in its decision letter No. C2-1331.HT.01.04.Th.97 dated February
27, 1997. Accordingly, the stockholders and their respective stockholdings after
the above mentioned transaction are as follows:

STOCKHOLDERS NUMBER OF SHARES % OF OWNERSHIP AMOUNT

PT Bina Reksa Perdana............................................... 11,450 44.43% Rp 11,450,000,000
International Wireless Communications, Inc.......................... 7,300 28.32 7,300,000,000
PT Deltona Satya Dinamika........................................... 6,250 24.25 6,250,000,000
Nissho Iwai......................................................... 773 3.00 773,000,000
Total............................................................... 25,773 100.00% Rp 25,773,000,000

The Company will receive U.S.$ 8,500,000 from Nissho Iwai for the
additional issued capital. As of December 31, 1996, the Company has received
U.S.$ 4,400,000 from Nissho Iwai as a prepayment for the issuance of the new
shares. As agreed with Nissho Iwai, the prepayment has been treated as a loan
and bears interest at 2.5% above LIBOR per annum after the MOJ approval has been
obtained (see Note 9).
16. REVENUES
Revenues are as follows:

1995
(RESTATED)
(SEE NOTE 2) 1996

Pulse sharing, monthly subscription charges and airtime.......................... Rp 12,249,170,887 Rp 23,149,038,764
Sales of outstations............................................................. 4,113,518,256 811,013,167
Connecting fee................................................................... 126,500,000 342,000,000
Repair, maintenance and others................................................... 323,174,655 167,209,102
Total............................................................................ Rp 16,812,363,798 Rp 24,469,261,033

F-91

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. COST OF REVENUES
Cost of revenues are as follows:

1995
(RESTATED)
(SEE NOTE 2) 1996

Pulse sharing and airtime.......................................................... Rp 5,465,526,989 Rp 24,884,675,582
Cost of outstations................................................................ 2,055,407,793 2,365,219,867
Repair, maintenance and others..................................................... 310,191,695 40,286,880
Total.............................................................................. Rp 7,831,126,477 Rp 27,290,182,329

18. CONTINGENT LIABILITY
The Company is in a dispute with PT Larikerindo relating to the settlement
of a loan. On August 9, 1994, the court dismissed the claim against the Company.
However, PT Larikerindo filed an appeal concerning the court decision. On
December 29, 1995, the higher court again dismissed the claim. In the event the
case is reappealed, the management believes that the Company will win the case
and incur no significant cost.
19. CONSULTANCY AGREEMENTS
Subsidiary had agreements with several parties in connection with the
installation and development of infrastructure of the STKB-C (Cellular mobile
telephone network) project. The agreements, made prior to the approval of
Subsidiary's articles of association by MOJ, were entered into by the Company on
behalf of Subsidiary. These agreements are as follows:
a. Consultancy service agreement with Telecon Ltd. (Telecon), Finland,
whereby Telecon agreed to provide an expert to work in Jakarta as a training
manager in radio network planning of NMT 450i for Subsidiary. Telecon will
charge U.S. $18,500 per month and Subsidiary provides accommodation. The work
started in September 1996 and has a duration of six months.
b. Technical support agreement with Broadcast Communications Limited (BCL),
New Zealand, whereby BCL agreed to provide technical support services concerning
the development of cellular mobile radio telecommunication and related business
in Indonesia. The agreement commenced on May 20, 1996 and has a duration of 12
months. The fee for the services amounted to U.S.$ 32,839 per month (excluding
Value Added Tax) and Subsidiary provides accommodation as defined under the
agreement.
c. Supply contract and technical support agreement with Nokia
Telecommunications Oy, Finland, in connection with NMT-470 Network Expansion and
Transmission System in order to provide new network coverage for NMT mobile
telephone system. These contracts were made on January 19, 1996. Supply contract
has a contract price of U.S.$ 20.9 million, while technical support is charged
on a fixed annual fee basis as defined and set forth in the agreement. The fee
amounted to U.S.$ 91,871 for the year 1996 and with approximate U.S.$ 1 million
per year for the years 1997-2001.
d. Service contract with Nokia Telecommunications Pte. Ltd., Singapore, for
a contract price of U.S.$ 4.54 million. This is also in connection with NMT-470
Network Expansion and Transmission System in order to provide new network
coverage for NMT mobile telephone system. This contract was made on January 19,
1996.
e. Cooperation agreement on network interconnection of Subsidiary's Mobile
Cellular Phone (STBS) with Telkom's Public Service Telephone Network (PSTN).
This agreement contains the interconnection configuration points and capacities,
operation and maintenance of interconnection equipment, other facilities and
services, joint services and financial settlement. This agreement was entered
into on August 21, 1996 and may be terminated at any time subject to the express
written approval of both parties or their respective successors and permitted
assigns.
f. Service agreement with Telkom whereby Telkom will provide billing and
collection service to the Company. As compensation, the Company will pay 1% of
its collected revenue to Telkom. The agreement will expire on March 31, 1997.

F-92

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
19. CONSULTANCY AGREEMENTS -- Continued
g. Subsidiary also has several agreements with contractors which among
others include agreements for establishing telecommunication towers in Jakarta,
Depok, Cikarang, East Java, Lampung and Bali with aggregate cost approximately
amounting to Rp 5 billion and for interior design of Subsidiary's new office
with total contract cost amounting to Rp 3.1 billion.
h. The Company appointed CV Aporindo Consultant to assist the Company in
handling the settlement of the corporate income tax for the year 1995 for a
total amount Rp 3,800,000,000, inclusive of the consultant's fee. The Company
has paid Rp 1,300,000,000 to December 31, 1996 and the fee is recorded as
"Advance" in the consolidated balance sheet.
Fees related to the installation and development of infrastructure of
STKB-C are capitalized and recorded under "Property and Equipment" in the
consolidated balance sheet.
20. COMMITMENTS
a. Subsidiary has agreed to take over service equipment, spareparts and
outstations owned by the Company amounting to Rp 1,453,000,000, as appraised by
PT Aditya Appraisal Bhakti. As of December 31, 1996, only service equipment
amounting to Rp 131,800,000 has been transferred to Subsidiary.
b. As of December 31, 1996, Subsidiary has unused credit facilities
aggregating to Rp 5,000,000,000 from PT Bank Umum Servitia.
21. SUBSEQUENT EVENTS
a. Based on notarial deed No.106 of Sinta Susikto SH dated January 24,
1997, the Company's authorized capital stock was changed from Rp 25,000,000,000
divided into 25,000 shares with a par value of Rp 1,000,000 per share to Rp
25,773,000,000 divided into 25,773 shares of the same par value and other
changes in the capital structure. The changes in the authorized capital stock
was approved by the Ministry of Justice in its decision letter No.
C2-1331.HT.01.04.Th.97 dated February 27, 1997 (see Note 14).
b. On January 29, 1997, Subsidiary entered into a syndicated short-term
notes facility agreement made with PT Bank Umum Servitia (BUS), as arranger.
Under the agreement, the syndicated banks have agreed to purchase short-term
notes amounting to Rp 60,000,000,000 and interest notes amounting to Rp
15,000,000,000 issued by the Company. Subsidiary is required to pay these loans
prior to payment for all other loans.
These short-term notes will be used to finance the working capital and
expansion of Subsidiary prior to the issuance of the convertible bonds; while
the interest notes will be used to finance any accrued interest payments on the
short-term notes or the interest notes.
c. Based on the decree No. KM.5/PR.301/MPPT-97 of Ministry of Tourism,
Posts and Telecommunications of the Republic of Indonesia dated January 1, 1997,
Subsidiary, as one of mobile cellular phone services providers, is entitled to
get:
-- 100% of long-distance interconnection fee from owned STBS to owned STBS
which use owned network.
-- 30% of long-distance call pulse from owned STBS to owned STBS which use
PSTN network.
-- 15% of long-distance call pulse from owned STBS to other STBS, and
vice-versa, which use PSTN network.
-- 40% of long-distance call pulse from owned STBS to PSTN which use owned
network.
-- 15% of long-distance call pulse from PSTN to owned STBS which use PSTN
network.

F-93

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

22. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES THE FINANCIAL
STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH INDONESIAN GAAP WHICH
DIFFER IN CERTAIN RESPECTS FROM U.S. GAAP.
THE DIFFERENCES ARE REFLECTED IN THE APPROXIMATIONS PROVIDED IN NOTE 26 AND
ARISE DUE TO THE ITEMS DISCUSSED IN THE FOLLOWING PARAGRAPHS:
A. INCOME TAXES
Under Indonesian GAAP, it is acceptable to recognize Income Tax expense
based upon the estimated current Income Tax liability on the current year's
earnings. When income and expense recognition for Income Tax purposes does not
occur in the same year as income and expense recognition for financial reporting
purposes, the resulting temporary differences are not considered in the
computation of Income Tax expense for the year.
Under U.S. GAAP, the liability method is used to calculate the Income Tax
provision. Under the liability method, deferred tax assets or liabilities are
recognized for differences between the financial reporting and tax bases of
assets and liabilities at each reporting date.
b. REGULATION
The Company provides telephone service in Indonesia and therefore is
subject to the regulatory control of the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia. Rates for services are
tariff-regulated. Although changes in rates for services are authorized and
computed based on a decree issued by the Minister of Tourism, Posts and
Telecommunications of the Republic of Indonesia, these are not based on a fixed
rate of return and are not designed to provide for the recovery of the Company's
cost of services. Accordingly, the requirements of U.S. GAAP related to a
business whose rates are regulated on the basis of its actual costs are not
applicable to the Companies' financial statements.
c. PRESENTATION OF THE STATEMENTS OF STOCKHOLDERS' EQUITY
Under Indonesian GAAP, except for public companies, it is not required to
present statements of retained earnings. Under U.S. GAAP, the Companies are
required to present statements of stockholders' equity.

F-94

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

23. RECONCILIATION BETWEEN NET INCOME AND STOCKHOLDERS' EQUITY DETERMINED UNDER
INDONESIAN AND U.S. GAAP THE FOLLOWING IS A SUMMARY OF THE SIGNIFICANT
ADJUSTMENTS TO NET INCOME FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
TO STOCKHOLDERS' EQUITY AS OF DECEMBER 31, 1995 AND 1996 WHICH WOULD BE REQUIRED
IF U.S. GAAP HAD BEEN APPLIED INSTEAD OF INDONESIAN GAAP IN THE FINANCIAL
STATEMENTS:

1995
(RESTATED)
(SEE NOTE 2) 1996

RP RP U.S. $ (NOTE 3)
Net loss according to the financial statements prepared under Indonesian
GAAP................................................................... (8,246,120,830) (28,620,590,602) (12,010,319)
Adjustments due to:
Income tax............................................................. 4,245,298,915 11,253,159,872 4,722,266
Valuation allowance.................................................... (4,245,298,915) (11,400,961,024) (4,784,289)
Approximate net loss in accordance with U.S. GAAP........................ (8,246,120,830) (28,768,391,754) (12,072,342)
Stockholders' equity (capital deficiency) according to the financial
statements prepared under Indonesian GAAP.............................. 6,691,139,967 (21,929,450,635) (9,202,455)
Adjustments due to:
Income tax............................................................. 5,127,282,969 16,380,442,841 6,873,875
Valuation allowance.................................................... (5,127,282,969) (16,528,243,993) (6,935,898)
Approximate stockholders' equity (capital deficiency) in accordance with
U.S. GAAP.............................................................. 6,691,139,967 (22,077,251,787) (9,264,478)

Regarding the consolidated balance sheets and statements of income and
deficit, the following significant captions determined under U.S. GAAP would
have been presented:

1995
(RESTATED)
(SEE NOTE 2) 1996

RP RP U.S. $ (NOTE 3)
Balance sheets:
Current assets........................................................ 12,270,504,214 31,822,048,701 13,353,776
Total assets.......................................................... 61,512,948,397 185,659,151,379 77,909,841
Current liabilities................................................... 40,380,349,030 55,621,155,510 23,340,812
Total liabilities..................................................... 54,821,808,430 207,736,403,166 87,174,319
Statements of income and deficit:
Loss from operations.................................................. 2,796,492,632 28,030,557,705 11,762,718

F-95

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
24. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S. GAAP
The following information is presented on the basis of U.S. GAAP:
INCOME TAX
The tax effect on significant temporary differences is as follows:

1995
(RESTATED)
(SEE NOTE 2) 1996

RP RP U.S. $ (NOTE 3)
Deferred tax assets -- current:
Allowance for inventory obsolescence..................................... 1,157,619,784 684,667,517 287,313
Allowance for doubtful accounts.......................................... 170,545,199 2,280,170,922 956,849
1,328,164,983 2,964,838,439 1,244,162
Valuation allowance...................................................... (1,328,164,983) (2,964,838,439) (1,244,162)
Total deferred tax assets -- current -- net.............................. -- -- --

1995
(RESTATED)
(SEE NOTE 2) 1996

RP RP U.S. $ (NOTE 3)
Deferred tax assets -- non-current:
Tax loss carryforwards................................................... 98,024,916 10,453,429,119 4,386,668
Property and equipment................................................... 3,701,093,070 3,105,626,435 1,303,242
Preoperating expenses.................................................... -- 4,350,000 1,825
3,799,117,986 13,563,405,554 5,691,735
Valuation allowance...................................................... (3,799,117,986) (13,563,405,554) (5,691,735)
Total deferred tax assets -- non-current -- net.......................... -- -- --
Deferred tax liabilities -- non-current:
Property and equipment................................................... -- 51,079,045 21,435
Prepaid long-term rent................................................... -- 96,722,107 40,588
Deferred tax liabilities -- non current.................................. -- 147,801,152 62,023
Deferred tax -- net...................................................... -- 147,801,152 62,023

The temporary differences, on which deferred tax assets have been computed
are not deductible for income tax purposes until the provision for inventory
obsolescence and provision for uncollectible trade receivable are written-off.
The differences between the book and tax bases of property and equipment,
prepaid long-term rent and preoperating expenses are due to the differing
recognition methods for Income Tax and financial reporting purposes.

F-96

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
24. ADDITIONAL FINANCIAL STATEMENT DISCLOSURES REQUIRED BY U.S.
GAAP -- Continued
The Income Tax provision recorded under U.S. GAAP differs from the expected
provision at U.S. statutory rates due to certain permanent differences detailed
below:

1995
(RESTATED)
(SEE NOTE 2) 1996

RP RP U.S. $ (NOTE 3)
Approximate loss before Income Tax in accordance
with U.S. GAAP......................................................... (4,399,384,009) (37,817,024,460) (15,869,502)
Effect of permanent differences:
Donation............................................................... 2,090,349,100 34,041,756 14,285
Expenses incurred during preoperating stage of Subsidiary.............. 762,417,085 -- --
Employees' benefits in kind............................................ 599,499,987 47,837,543 20,075
Entertainment.......................................................... 461,698,721 33,906,969 14,229
Interest expense....................................................... 206,746,361 2,114,346,227 887,262
Tax penalty and interest............................................... 17,415,989 104,353,376 43,791
Interest income which was already subjected to final tax............... (368,942,024) (2,027,994,320) (851,026)
3,769,185,219 306,491,551 128,616
Approximate loss before Income Tax in accordance
with U.S. GAAP......................................................... (630,198,790) (37,510,532,909) (15,740,886)
Provision for income tax (on tax loss) in accordance with U.S. GAAP
before adjustment...................................................... (197,809,637) (11,253,159,872) (4,722,266)
Adjustment for enacted changes in tax rates.............................. 125,997,722 -- --
Increase in valuation allowance.......................................... 4,245,298,915 11,400,961,024 4,784,289
Provision for income tax (on tax loss) in accordance with U.S. GAAP after
adjustment............................................................. 4,173,487,000 147,801,152 62,023

Donations amounting to Rp 2,079,486,000 were given to Yayasan Dana Pensiun
Pegawai (YDPP) Telkom (Pension Fund of Telkom) as YDPP Telkom's contribution in
Subsidiary.
b. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the years
ended December 31, 1995 and 1996 are as follows:

BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
FOR THE YEARS ENDED YEAR EXPENSES DEDUCTIONS YEAR

RP RP RP RP
December 31, 1995.......................................... 505,744,829 62,739,169 -- 568,483,998
December 31, 1996.......................................... 568,483,998 8,102,437,967 1,070,352,224 7,600,569,741

Activity in the Company's allowance for inventory obsolescence for the
years ended December 31, 1995 and 1996 are as follows:

BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
FOR THE YEARS ENDED YEAR EXPENSES DEDUCTIONS YEAR

RP RP RP RP
December 31, 1995........................................ 891,089,416 2,967,643,196 -- 3,858,732,612
December 31, 1996........................................ 3,858,732,612 -- 1,576,507,555 2,282,225,057

F-97

PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
25. RECLASSIFICATIONS OF ACCOUNTS
Certain accounts in the 1995 financial statements have been reclassified to
conform with the presentation of accounts in the 1996 financial statements.

F-98

26. UNAUDITED SUBSEQUENT EVENTS
a. The Subsidiary was unable to pay the interest and principal loan from
Nissho Iwai, the major creditor, which became due and payable and,
therefore, is in a default position. The Subsidiary is negotiating to
reschedule the payments of such interest and principal loan with the
creditor. Based on the last correspondence from Nissho Iwai dated March
18, 1998, Nissho Iwai is unofficially reconsidering the rescheduling of
the Subsidiary's loan, subject to certain conditions which include, among
others, the injection of fresh capital by the Company and Company's
stockholder, International Wireless Communications, Inc. (IWC) to the
Subsidiary amounting to U.S. $10 million by June 1998. Such rescheduling
arrangement, being unofficial, are still subject to the approval of the
management of Nissho Iwai.

Relative to the above, the Subsidiary has attempted to secure the
additional funding from, inter alia, IWC. If funding from IWC or some other
sources becomes available, Nissho Iwai is willing to consider the
Subsidiary's request to reschedule the payments of its interest and loan
principal obligations to the former. Through March 15, 1999, there have
been no significant developments with respect to the foregoing matters.

Based on the loan agreement, Nissho Iwai may declare all the outstanding
loan principal and related accrued interest and any and all sums of
whatsoever nature due from the Subsidiary to be immediately due and payable
(without demand, protest or notice upon the Subsidiary) in the event that
the Subsidiary fails to comply with its obligations. In the mean time,
Nissho Iwai has decided not to immediately declare an "Event of Default".
In view of this, the whole outstanding amount of the long-term loan from
Nissho Iwai has been reclassified to current liability in the Subsidiary's
financial statements as of December 31, 1997 and subsequent thereto.

On September 3, 1998, IWC and its wholly-owned subsidiaries,
International Wireless Communications, Inc., Radio Movil Digital Americas,
Inc., ("RMDA"), International Wireless Communications Latin America
Holdings, Ltd. and Pakistan Wireless Holdings Limited (collectively with
IWC, the "Debtors"), commenced voluntary cases under Chapter 11 of the U.S.
Bankruptcy Code, as amended, in the District of Delaware (Case No. 98-2007
(MFW)). Since that date, the Debtors have continued to operate as debtors-in
possession, subject to supervision of the Bankruptcy Court. Subsequently,
the Debtors filed a Second Amended Joint Chapter 11 Plan of Reorganization
(the "Plan") and a Second Amended Disclosure Statement relating thereto with
the Bankruptcy Court (the "Disclosure Statement"). On December 21, 1998, the
Bankruptcy Court determined that the Disclosure Statement contained
"adequate information" in accordance with Section 1125 of the Bankruptcy
Code. The Disclosure Statement, among other things, describes events leading
to the Debtors' Chapter 11 filings and summarizes various claims against the
Debtors, including litigation (as of the Disclosure Statement date) stayed
against the Debtors by the bankruptcy filings described above. The Plan and
Disclosure Statement were submitted to parties in the bankruptcy cases in
connection with voting on the Plan.

On February 3-4, 1999, hearings were held before the Bankruptcy Court to
consider confirmation of the Plan, which has been further amended (the
"Amended Plan") to reflect, among other things, settlements of the claims of
BT Foreign Corporation ("BTFC"), of Toronto Dominion Investments, Inc.
("TDI") and Asia Pacific Cellphone Co. ("APC"). On March 26, 1999, an
Opinion and Order confirming the Amended Plan were entered by the
Bankruptcy Court. Such Opinion and Order remain subject to appeal as of
March 29, 1999.

b. Since mid-1997, many Asia Pacific countries, including Indonesia, are
experiencing continuing adverse economic conditions mainly resulting from
currency devaluation in the region, the principal consequences of which
have been an extreme lack of liquidity and highly volatile exchange and
interest rates. The crisis has also involved declining prices in shares
listed in the Indonesian stock exchanges, tightening of available credit,
stoppage or postponement of certain construction projects, and a growing
oversupply of real property. Volatility in exchange and interest rates has
adversely affected the Subsidiary's cost of and sources of funds, as well
as its capacity to service its debts, given that the balances of the
Subsidiary's borrowings denominated in U.S. dollars have increased
significantly in Rupiah terms, and interest rates on Rupiah-denominated
loans have increased significantly. Also, since 1996 up to the present, the
Company and Subsidiary have incurred significant operating losses, foreign
exchange losses and interest charges, which resulted in a significant net
capital deficiency position. The Subsidiary has received various claims,
however, no formal litigation or legal matters have yet been filed against
the Subsidiary through March 15, 1999. The effects of the continuing adverse
economic conditions on the financial condition of the Subsidiary's customers
have reduced its revenues and increased credit risk inherent in the
collection of receivables from its customers.

In response to these economic events, the Subsidiary's management
initiated the following:

-- Renegotiating the Subsidiary's short-term loan agreements with banks,
as well as suppliers' agreements.

-- Negotiating with prospective investors for additional funding.

Resolution of the continuing adverse economic conditions is dependent on
the fiscal and monetary measures that will be undertaken by the Indonesian
government, actions which are beyond the Company and Subsidiary's control, to
achieve ecomomic recovery. It is not possible to determine the future effects a
continuation of the adverse economic conditions may have on the Company and
Subsidiary's liquidity and earnings, including the effects from their
investors, customers, and suppliers.

ATTACHMENT I
PT RAJASA HAZANAH PERKASA AND SUBSIDIARY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996

CAPITAL STOCK STOCKHOLDERS'
(ISSUED AND FULLY PAID) DEFICIT EQUITY
DESCRIPTION RP RP RP

BALANCE as of January 1, 1995............................... 1,000,000,000 (10,062,739,203) (9,062,739,203)
Approved during the Extraordinary General Meeting of the
Stockholders on November 9, 1995: Increase in the issued
and fully paid-up capital from Rp 1,000,000,000 to Rp
25,000,000,000............................................ 24,000,000,000 -- 24,000,000,000
Net loss for 1995 (restated)................................ -- (8,246,120,830) (8,246,120,830)
BALANCE as of December 31, 1995 (restated).................. 25,000,000,000 (18,308,860,033) 6,691,139,967
Net loss for 1996........................................... -- (28,620,590,602) (28,620,590,602)
BALANCE as of December 31, 1996............................. 25,000,000,000 (46,929,450,635) (21,929,450,635)

F-99

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Eastern North Carolina Cellular Joint Venture:

We have audited the accompanying consolidated balance sheets of EASTERN NORTH
CAROLINA CELLULAR JOINT VENTURE (a Delaware partnership) AND SUBSIDIARIES as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in partners' capital, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eastern North Carolina Cellular
Joint Venture and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Atlanta, Georgia
March 27, 1998

F-100

EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

(In Thousands)

ASSETS 1997 1996
- --------------------------------------------------------- ------- -------

CURRENT ASSETS:
Cash $ 2 $ 2
Accounts receivable--trade, net of allowance for
doubtful accounts of $229 and $199 in 1997 and
1996, respectively 1,842 2,424
Inventories 46 484
Deferred income tax assets 75 92
Other current assets 248 277
------- -------
Total current assets 2,213 3,279
------- -------
PROPERTY AND EQUIPMENT, at cost:
Land 393 393
Buildings and towers 6,186 5,623
Equipment 15,458 13,596
Furniture and fixtures 188 188
Assets under construction 42 771
------- -------
22,267 20,571
Less accumulated depreciation 7,913 6,052
------- -------
Net property and equipment 14,354 14,519
------- -------
OTHER ASSETS, net:
FCC license, net of accumulated amortization of $7,951
and $6,884 in 1997 and 1996, respectively 34,735 35,802
Other 4 4
------- -------
Total other assets, net 34,739 35,806
------- -------
Total assets $51,306 $53,604
======= =======

LIABILITIES AND PARTNERS' CAPITAL
-------

CURRENT LIABILITIES:
Accounts payable--construction and trade 606 439
Accounts payable--affiliates 71 314
Due to managing partner 2,199 5,119
Federal income taxes payable 341 188
Accrued software license fee 300 --
Other accrued liabilities 540 565
------- -------
Total current liabilities 4,057 6,625
------- -------

LONG-TERM OBLIGATIONS:
Postretirement benefit obligation 70 69
Deferred income tax liabilities 1,182 893
------- -------
Total long-term obligations 1,252 962
------- -------

MINORITY INTERESTS 481 435
------- -------

PARTNERS' CAPITAL 45,516 45,582
------- -------
Total liabilities and partners' capital $51,306 $53,604
======= =======

The accompanying notes are an integral part
of these consolidated balance sheets.

F-101

EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(In Thousands)

1997 1996 1995
-------- -------- --------

REVENUES:
Service $ 13,842 $ 15,023 $ 12,975
Equipment 559 605 583
Other 460 604 382
-------- -------- --------
Total revenues 14,861 16,232 13,940
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing 5,476 3,857 4,484
Cost of equipment 1,598 1,966 1,797
Operations support 1,114 1,785 1,380
Network 3,502 2,771 2,014
General and administrative 1,259 1,857 1,437
Amortization 1,067 1,067 1,067
-------- -------- --------
Total operating expenses 14,016 13,303 12,179
-------- -------- --------
OPERATING INCOME 845 2,929 1,761

INTEREST EXPENSE, NET (149) (235) (180)
-------- -------- --------

NET INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 696 2,694 1,581

MINORITY INTERESTS (46) (100) (80)
-------- -------- --------
NET INCOME BEFORE INCOME TAXES 650 2,594 1,501

PROVISION FOR INCOME TAXES (716) (1,386) (785)
-------- -------- --------
NET (LOSS) INCOME $ (66) $ 1,208 $ 716
======== ======== ========

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

F-102

EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(In Thousands)

GTE Mobilnet North Carolina
of Eastern Cellular Vanguard
North Carolina Holding Cellular
Incorporated Corp. Systems, Inc. Total
============== =============== ============= =========

BALANCE, December 31, 1994 $ 21,829 $ -- $ 21,829 $ 43,658

Net income for the year ended
December 31, 1995 358 -- 358 716
-------- -------- -------- --------
BALANCE, December 31, 1995 22,187 -- 22,187 44,374

Transfer of partnership interests -- 22,634 (22,634) --
Net income for the year ended
December 31, 1996 604 157 447 1,208
-------- -------- -------- --------
BALANCE, December 31, 1996 22,791 22,791 -- 45,582

Net loss for the year ended
December 31, 1997 (33) (33) -- (66)
-------- -------- -------- --------
BALANCE, December 31, 1997 $ 22,758 $ 22,758 $ -- $ 45,516
======== ======== ======== ========

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

F-103

EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(In Thousands)

1997 1996 1995
------- ------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (66) $ 1,208 $ 716
Adjustments to reconcile net (loss) income to net cash
provided by operating
activities:
Depreciation and amortization 2,994 2,663 2,095
Deferred income tax expenses 306 686 379
Minority interests in earnings 46 100 80
Changes in current assets and current liabilities:
Accounts receivable 582 5 (957)
Inventories 438 (319) 297
Other current assets 29 (88) (111)
Accounts payable, net of capital expenditures (34) 11 (73)
Other current liabilities 428 (50) 291
Other, net 3 (23) 41
------- ------- -------
Net cash provided by operating activities 4,726 4,193 2,758
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,806) (3,597) (4,735)
Purchase of minority interest -- -- (146)
------- ------- -------
Net cash used in investing activities (1,806) (3,597) (4,881)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to managing partner (2,920) (595) 2,123
------- ------- -------
Net cash (used in) provided by financing activities (2,920) (595) 2,123
------- ------- -------
INCREASE IN CASH -- 1 --

CASH AT BEGINNING OF YEAR 2 1 1
CASH AT END OF YEAR $ 2 $ 2 $ 1
======= ======= =======

SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Cash payments for income taxes $ 347 $ 791 $ 261
======= ======= =======

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

F-104

EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE

AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

1. ORGANIZATION AND MANAGEMENT

Eastern North Carolina Cellular Joint Venture (the "Joint Venture") was
formed on July 10, 1990 and operates in accordance with the provisions of
the Delaware Revised Uniform Limited Partnership Act. The Joint Venture
provides cellular telephone services for the Jacksonville and Wilmington,
North Carolina Metropolitan Statistical Areas ("MSAs").

The partners and their respective ownership percentages as of December 31,
1997 were as follows:

Managing General Partner:
GTE Mobilnet of Eastern North Carolina Incorporated 50%
General Partner:
North Carolina Cellular Holding Corp. 50%

Effective September 27, 1996, Vanguard Cellular Systems, Inc. assigned its
interest in the Joint Venture to a subsidiary, North Carolina Cellular
Holding Corp.

Effective January 22, 1996, W&J Metronet, Inc. changed its name to GTE
Mobilnet of Eastern North Carolina Incorporated.

The Joint Venture's ownership interest in the Wilmington, North Carolina
MSA was 95.9% as of December 31, 1997 and 1996. The Joint Venture's
ownership interest in the Jacksonville, North Carolina MSA was 95.6% as of
December 31, 1997 and 1996.

The managing partner is responsible for managing and operating the Joint
Venture. The partners make capital contributions to, share in the
operating results of and receive distributions from the Joint Venture in
accordance with their respective ownership percentage.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Joint Venture prepares its financial statements in accordance with
generally accepted accounting principles which require that management
make estimates and assumptions that affect reported amounts. Actual
results could differ from these estimates.

F-105

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

Principles of Consolidation

The accompanying financial statements include the accounts of the Joint
Venture and its majority-owned corporations and partnerships. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Revenue Recognition

The Joint Venture earns service revenues primarily by providing access to
the cellular network (access revenue) and for usage of the cellular
network (airtime and toll revenues). Access revenues are recognized when
earned. Airtime (including roaming) and toll revenues are recognized when
the services are rendered. Other service revenues are recognized after
services are performed and include activation and custom calling feature
revenues. Equipment sales are recognized upon delivery of the equipment to
the customer. Other revenues include landline call termination revenues
and paging revenues, which are recognized when services are rendered.

In 1996 and 1995, the Joint Venture also earned revenue by leasing its
switch to an affiliate. In September 1996, the affiliate discontinued its
switch sharing agreement with the Joint Venture. These revenues were based
on a charge per port and are included in other revenues in the
accompanying statements of operations. Refer to Note 4 for additional
discussion of affiliated transactions.

Operating Expenses

Operating expenses include expenses incurred directly by the Joint
Venture, as well as an allocation of area administrative expenses and
other costs incurred by the managing partner or its affiliates. Refer to
Note 4 for additional discussion of allocated and affiliated expenses.

Customer Acquisition Costs

The Joint Venture defers certain customer acquisition costs for
approximately two weeks and recognizes these costs when the associated
revenue stream begins. These deferred costs were $85 thousand and $169
thousand at December 31, 1997 and 1996, respectively, and are included in
other current assets in the accompanying balance sheets.

Advertising Costs

The Joint Venture expenses the cost of advertising as incurred.
Advertising expense was $701 thousand, $375 thousand and $413 thousand for
1997, 1996 and 1995, respectively, and is included as a component of sales
and marketing expense in the accompanying statements of operations.

F-106

Interest Expense, Net

The statements of operations reflect total interest expense, net of
interest expense capitalized during construction and interest income as
follows (in thousands):

1997 1996 1995
----- ----- -----

Interest expense $(394) $(311) $(299)
Interest capitalized 4 40 115
Interest income 241 36 4
----- ----- -----
Interest expense, net $(149) $(235) $(180)
===== ===== =====

Interest expense and income include charges to the Joint Venture and its
subsidiaries for funds advanced by the managing partner and credits to the
Joint Venture and its subsidiaries for funds advanced to the managing
partner. The interest rate on funds advanced to or from the Joint Venture
is equivalent to the managing partner's incremental borrowing rate, which
fluctuated between 5.44% and 5.80% in 1997, 5.44% and 6.07% in 1996 and
5.98% and 6.26% in 1995.

Income Taxes

A provision for income taxes is recorded on the subsidiary corporations of
the Joint Venture relating to income of these corporations. The
consolidated financial statements also include certain partnerships for
which, according to the Internal Revenue Code and applicable state
statutes, income and expenses are not separately taxable to the
partnerships, but rather accrue directly to the partners. Accordingly, no
provision for income taxes is made for such entities.

Deferred income taxes are recorded using enacted tax law and rates for the
years in which the taxes are expected to be paid. Deferred income taxes
are provided for items when there is a temporary difference in recording
such items for financial reporting and income tax reporting.

Inventories

Inventories include cellular telephones, pagers and accessories held for
sale and are valued at the lower of cost or market. Cost is determined
using the specific identification method. Inventories are net of reserves
for obsolescence.

Property and Equipment

Property and equipment are recorded at cost. The Joint Venture records
depreciation using the straight-line method over the estimated useful
lives of the assets, which are primarily twenty years for buildings and
towers, seven to ten years for cell and switching equipment and three to
five years for furniture and fixtures and other equipment. When property
is retired, the cost of the property and the related accumulated
depreciation are removed from the balance sheet and any gain or loss on
the transaction is included in income.

F-107

Assets under construction represent costs incurred for the construction of
cell sites and include, if applicable, capitalized interest. When these
assets are placed in service, the costs are recorded to the appropriate
property and equipment accounts and depreciation begins. Depreciation
expense for the years ended December 31, 1997, 1996 and 1995 was $1,927
thousand, $1,596 thousand and $1,028 thousand.

Other Assets, Net

Other assets, net, consist primarily of deferred cellular license costs,
which represent the fair value of the cellular market ownership interest
contributed to the Joint Venture by the partners, which is being amortized
over forty years.

Long-Lived Assets

The Joint Venture periodically reviews the values assigned to long-lived
assets, such as cellular license costs and property and equipment, to
determine whether any impairments exist that are other than temporary.
Management believes that the long-lived assets in the accompanying balance
sheets are appropriately valued.

Credit Risk

The Joint Venture's accounts receivable subject the Joint Venture to
credit risk, as collateral is generally not required. The Joint Venture's
risk of loss is limited due to advance billings to certain customers for
services and the ability to terminate access on delinquent accounts. The
concentration of credit risk is mitigated by the large number of customers
comprising the customer base. The carrying amount of the Joint Venture's
receivables approximates their fair value.

Sources of Supplies

The Joint Venture relies on local telephone companies and other companies
to provide certain communication services. Although management feels
alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could potentially have an adverse
effect on operating results.

Although the Joint Venture attempts to maintain multiple vendors for each
required product, its inventory and equipment, which are important
components of its operations, are each currently acquired from only a few
sources. If the suppliers are unable to meet the Joint Venture's needs as
it builds out its network infrastructure and sells service and equipment,
delays and increased costs in the expansion of the Joint Venture's network
infrastructure or losses of potential customers could result, which would
adversely affect operating results.

F-108

3. COMMITMENTS AND CONTINGENCIES

Leases

The Joint Venture leases office space and network sites under long-term
operating leases. These leases have options for renewal with provisions
for increased rent upon renewal. Rent expense for the years ended December
31, 1997, 1996 and 1995 was $355 thousand, $288 thousand and $190
thousand, respectively, and is included in sales and marketing costs,
operation support costs, network costs and general and administrative
costs in the accompanying statements of operations.

As of December 31, 1997, future minimum lease payments under noncancelable
operating leases with initial or remaining periods in excess of one year
were as follows (in thousands):

1998 $ 276
1999 270
2000 266
2001 161
2002 110
Subsequent years 272
--------
Total $ 1,355
========

Contingencies

In July 1997, a class action lawsuit was filed on behalf of all former and
present GTE cellular subscribers nationwide. The plaintiffs claim that GTE
committed fraud by its practice of charging for airtime in full minute
increments. The complaint alleges violations of federal RICO laws, fraud,
and violation of Florida's Unfair and Deceptive Trade Practices Act. The
plaintiffs seek to maintain the suit as class action and request
compensatory damages, treble damages, injunctive relief, costs and
attorneys' fees.

The ultimate outcome of the preceding litigation cannot be determined at
the present time. Accordingly, no provision for any liability that might
result from this matter has been made in the accompanying financial
statements.

The Joint Venture and managing partner face exposure from actual and
potential claims and legal proceedings arising in the normal course of
business. As of December 31, 1997, the managing partner is not aware of
any other asserted or pending litigation or claims that could potentially
have a material adverse effect on the Joint Venture's financial position
or results of operations.

4. RELATED-PARTY TRANSACTIONS

All transactions of the Joint Venture are authorized by the managing
partner. Many management and administrative services are performed by an
affiliated service corporation (the "Service Corporation") and GTE
Wireless Incorporated. Services provided to the Joint Venture include
support in major functional areas, such as accounting, information and
cash management, human resources, legal, marketing,

F-109

technology planning, billing and customer care. In accordance with a
management agreement, only certain area costs that are attributable to
these support functions are included in sales and marketing costs,
operation support costs, network costs and general and administrative
costs. Costs allocated to the Joint Venture for these services were $1,076
thousand, $1,534 thousand and $1,254 thousand in 1997, 1996 and 1995,
respectively.

Amounts paid by the Joint Venture to the Service Corporation for inventory
purchases, net of transfers, amounted to $1,160 thousand, $1,497 thousand
and $1,463 thousand in 1997, 1996 and 1995, respectively.

The managing partner either advances funds to or borrows funds from the
Joint Venture and its subsidiaries. Funds advanced to the Joint Venture
are used to cover construction and working capital requirements. The
advances and borrowings are netted and are reflected in due to managing
partner in the accompanying balance sheets. Interest is calculated on this
balance as described in Note 2.

Prior to September 1996, the Joint Venture recorded revenue from an
affiliate for use of its switch. This revenue amounted to $209 thousand
and $254 thousand in 1996 and 1995, respectively.

The Joint Venture makes payments to an affiliate of the managing partner
for construction of cell sites and other system property. The amounts
capitalized were $376 thousand and $371 thousand in 1997 and 1996,
respectively, and are included in assets under construction and other
property and equipment.

The Joint Venture purchases roamer administration, advertising and other
operating services from affiliates whose business is the provision of such
services. The managing partner believes the cost of these services to the
Joint Venture of $414 thousand, $145 thousand and $154 thousand in 1997,
1996 and 1995, respectively, was equivalent to the cost charged by the
affiliates to any of their customers.

5. INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes as well as
tax credit and loss carryforwards. The significant components of the Joint
Venture's deferred tax assets and liabilities at December 31, 1997 and
1996 were as follows (in thousands):

F-110

1997 1996
------ ------

Deferred tax assets:
Loss carryforwards $ 270 $ 414
AMT credit carryforwards 844 667
Provision for bad debts 63 85
Postretirement and other benefits 30 29
Other 176 37
------ ------
Total deferred tax assets 1,383 1,232
Deferred tax liabilities:
Accelerated depreciation 2,490 2,033
------ ------
Net deferred tax liabilities 1,107 801
Deferred tax asset--current 75 92
------ ------
Deferred tax liability--noncurrent $1,182 $ 893
====== ======

The federal net operating loss carryforwards expire from 2003 to 2009
unless utilized. All state net operating loss carryforwards were utilized
as of December 31, 1997. The alternative minimum tax ("AMT") credit
carryforwards do not expire. Based on recent operating results, no
valuation allowance has been recorded as of December 31, 1997. Although
realization is not assured, management believes it is more likely than not
that the related deferred tax assets will be realized through future
taxable earnings.

The provision for income taxes consists of the following (in thousands):

1997 1996 1995
------- ------- -------

Current taxes $ 410 $ 866 $ 771
Deferred taxes 306 686 379
Reversal of valuation allowance -- (166) (365)
------- ------- -------
Provision for income taxes $ 716 $ 1,386 $ 785
======= ======= =======

A reconciliation of the income tax provision computed at the statutory tax
rate to the Joint Venture's effective tax rate is as follows for the years
ended December 31, 1997, 1996 and 1995:

1997 1996 1995
----- ----- -----

Income tax provision at the statutory rate 35.0% 35.0% 35.0%
FCC license amortization 57.4 14.4 24.9
State income taxes, net of U.S. federal benefit 13.8 8.1 5.0
Minority interests 4.6 2.2 2.1
Other taxes -- -- 4.8
Other, net (0.6) 0.1 4.8
Reduction in valuation allowance -- (6.4) (24.3)
----- ----- -----
Provision for income tax 110.2% 53.4% 52.3%
===== ===== =====

F-111

6. SUBSEQUENT EVENT

In March 1998, North Carolina Cellular Holding Corp. entered into an
agreement with United States Cellular to sell its interest in the cellular
operations of the Wilmington and Jacksonville, North Carolina MSAs.

7. SUBSEQUENT EVENT (UNAUDITED)

Sale of Joint Venture Interest

During 1998, a subsidiary of Vanguard Cellular Systems, Inc. and GTE
Mobilnet of Eastern North Carolina Incorporated ("GTEM") sold their
respective interests in the Joint Venture to United States Cellular.

Contingencies

In October 1998, certain partners in the Wilmington Cellular Partnership
("Wilmington Partnership") filed suit alleging that the sale of GTEM's
interest in the Joint Venture by GTEM was a breach of the partnership
agreement. Plaintiffs seek, among other remedies, damages, an accounting
and dissolution of the Wilmington Partnership.

A vendor is alleging that the Joint Venture has breached certain
contracts and seeks payment of these contracts.

The ultimate outcome of the preceding litigation cannot be determined at
the present time.

F-112

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To INTER*ACT SYSTEMS, INCORPORATED:

We have audited the accompanying consolidated balance sheets of Inter*Act
Systems, Incorporated (a North Carolina corporation) and Subsidiaries as of
December 31, 1997 and December 31, 1996, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inter*Act Systems,
Incorporated and Subsidiaries as of December 31, 1997 and December 31, 1996, and
the results of their operations and their cash flows for the year ended December
31, 1997, the three month period ended December 31, 1996 and the fiscal years
ended September 28, 1996 and September 30, 1995, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

New York, New York
March 17, 1998

F-113

Inter*Act

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
DATA)

ASSETS
Current assets:
Cash and cash equivalents................................................... $ 45,211 $ 88,306
Receivables, net............................................................ 813 617
Other current assets........................................................ 3,067 807
------------ ------------
Total current assets................................................... 49,091 89,730
Property, plant and equipment, net............................................... 26,900 11,690
Bond issuance costs, net......................................................... 3,302 3,720
Patents, licenses and trademarks, net............................................ 1,687 227
Other noncurrent assets.......................................................... 43 398
------------ ------------
Total assets........................................................... $ 81,023 $105,765
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................ $ 3,204 $ 1,243
Accrued expenses............................................................ 6,870 1,778
Deferred revenue............................................................ 539 479
------------ ------------
Total current liabilities.............................................. 10,613 3,500
Long-term debt, net of discount.................................................. 91,406 76,866
Other noncurrent liabilities..................................................... -- 292
------------ ------------
Total liabilities...................................................... 102,019 80,658
------------ ------------
Common stock purchase warrants................................................... 27,436 24,464
------------ ------------
Stockholders' equity (deficit):
Preferred stock, no par value, authorized 5,000,000 shares; none
outstanding............................................................... -- --
Common stock, no par value, authorized 20,000,000 shares; 7,728,555, and
7,668,555 shares issued and outstanding at December 31, 1997 and December
31, 1996, respectively.................................................... 28,251 27,651
Additional paid-in capital................................................ 768 768
Deferred compensation....................................................... (570) (723)
Cumulative translation adjustments.......................................... (14) --
Accumulated deficit......................................................... (76,867) (27,053)
------------ ------------
Total stockholders' equity (deficit)................................... (48,432) 643
------------ ------------
Total liabilities and stockholders' equity (deficit)................... $ 81,023 $105,765
------------ ------------
------------ ------------

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

F-114

Inter*Act

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTH
PERIOD FISCAL YEAR ENDED
YEAR ENDED ENDED ------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1996 1995
------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Gross sales......................................... $ 1,672 $ 408 $ 492 $ 255
Less: Retailer reimbursements.................. (964) (240) (287) (144)
------------ ------------ ------------- -------------
Net sales................................. 708 168 205 111
------------ ------------ ------------- -------------
Operating expenses:
Direct costs................................... 5,784 939 2,298 903
Selling, general and administrative expenses... 26,352 3,077 6,911 3,391
Depreciation and amortization of intangibles... 3,934 468 821 191
------------ ------------ ------------- -------------
Total operating expenses.................. 36,070 4,484 10,030 4,485
------------ ------------ ------------- -------------
Operating loss...................................... (35,362) (4,316) (9,825) (4,374)
------------ ------------ ------------- -------------
Other income (expense)
Interest income................................ 3,892 1,249 1,009 35
Interest expense............................... (18,033) (4,263) (2,743) (187)
Other expense.................................. (301) -- -- --
------------ ------------ ------------- -------------
Total other expense....................... (14,442) (3,014) (1,734) (152)
------------ ------------ ------------- -------------
Income (loss) before income taxes................... (49,804) (7,330) (11,559) (4,526)
Income taxes........................................ (10) -- -- --
------------ ------------ ------------- -------------
Net loss....................................... $(49,814) $ (7,330) $ (11,559) $(4,526)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Per share information:
Net loss per common share:
Basic.......................................... $ (6.48) $ (0.96) $ (1.91) $ (1.27)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Diluted........................................ $ (6.48) $ (0.96) $ (1.91) $ (1.27)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Common shares used in computing per share amounts:
Basic.......................................... 7,692 7,669 6,038 3,556
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Diluted........................................ 7,692 7,669 6,038 3,556
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------

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

F-115

Inter*Act

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities:
Net loss........................................ $(49,814) $ (7,330) $ (11,559) $(4,526)
Items not affecting cash and cash equivalents:
Depreciation and amortization of intangible
assets.................................... 3,934 468 821 191
Loss on disposal of assets.................. 1,097 -- 74 10
Non-cash interest on discounted bonds....... 17,972 4,217 2,626 --
Equity in earnings of affiliate, net........ 301 -- -- --
Other items, net............................ 319 38 381 --
Changes in working capital:
Receivables, net............................ (196) (373) (169) (59)
Accounts payable and accrued expenses....... 6,416 1,038 1,208 588
Other current assets........................ (2,260) (866) (255) (45)
Deferred revenues........................... 60 250 207 22
------------ ------------ ------------- -------------
Net cash used in operating activities... (22,171) (2,558) (6,666) (3,819)
------------ ------------ ------------- -------------
Cash flows from investing activities:
Expenditures for property, plant and
equipment................................. (20,110) (2,584) (8,739) (1,702)
Proceeds from disposal of assets............ -- -- 57 --
Patent acquisition costs.................... (800) -- -- --
------------ ------------ ------------- -------------
Net cash used in investing activities... (20,910) (2,584) (8,682) (1,702)
------------ ------------ ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of 14% Senior
Notes..................................... -- -- 90,865 --
Long-term debt repayments................... -- (32) (20) --
Proceeds from common stock issuance, net.... -- -- 18,256 5,033
Net amount due to stockholders.............. -- -- -- 148
Net amount due (from) to related parties.... -- -- (339) 200
------------ ------------ ------------- -------------
Net cash (used in) provided by financing
activities............................ -- (32) 108,762 5,381
------------ ------------ ------------- -------------
Foreign exchange effects on cash and cash
equivalents....................................... (14) -- -- --
------------ ------------ ------------- -------------
Net (decrease) increase in cash and cash
equivalents....................................... (43,095) (5,174) 93,414 (140)
Cash and cash equivalents at beginning of period.... 88,306 93,480 66 206
------------ ------------ ------------- -------------
Cash and cash equivalents at end of period.......... $ 45,211 $ 88,306 $ 93,480 $ 66
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................ $ 39 $ 10 $ 94 $ 79
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental disclosures of non-cash investing and
financing activities:
Deferred compensation related to stock options
granted....................................... $ -- $ -- $ 768 $--
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Issuance of common stock in consideration of
certain obligations........................... $ 600 $ -- $ 2,141 $--
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Issuance of common stock purchase warrants in
connection with the issuance of 14% Senior
Notes......................................... $ 2,972 $ -- $ 24,464 $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------

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

F-116

Inter*Act

INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

TOTAL
COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
----------------- PAID-IN DEFERRED ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENTS (DEFICIT)
------ ------- ---------- ------------ ----------- ----------- -------------
(IN THOUSANDS)

Balance at September 30,
1994.................... 2,917 $2,222 -$- $-- $ (3,638) $-- $ (1,416)
Issuance of common
stock............... 1,032 5,172 -- -- -- 5,172
Forfeiture of common
stock............... (18) (140) -- -- -- (140)
Net loss.............. -- -- -- -- (4,526) (4,526)
------ ------- ----- ----- ----------- --- -------------
Balance at September 30,
1995.................... 3,931 7,254 -- -- (8,164) -- (910)
Issuance of common
stock............... 3,329 18,311 -- -- -- -- 18,311
Conversion of certain
obligations to
common stock........ 409 2,086 -- -- -- -- 2,086
Deferred Compensation
related to stock
options granted..... -- -- 768 (768) -- -- --
Amortization of
deferred
compensation........ -- -- -- 6 -- -- 6
Net loss.............. -- -- -- -- (11,559) -- (11,559)
------ ------- ----- ----- ----------- --- -------------
Balance at September 28,
1996.................... 7,669 27,651 768 (762) (19,723) -- 7,934
Amortization of
deferred
compensation........ -- -- -- 39 -- -- 39
Net loss.............. -- -- -- -- (7,330) -- (7,330)
------ ------- ----- ----- ----------- --- -------------
Balance at December 31,
1996.................... 7,669 27,651 768 (723) (27,053) -- 643
Issuance of common
stock............... 60 600 -- -- -- -- 600
Amortization of
deferred
compensation........ -- -- -- 153 -- -- 153
Translation
Adjustment.......... -- -- -- -- (14) (14)
Net loss.............. -- -- -- -- (49,814) -- (49,814)
------ ------- ----- ----- ----------- --- -------------
Balance at December 31,
1997.................... 7,729 $28,251 $768 $ (570) $ (76,867) $ (14) $ (48,432)
------ ------- ----- ------ ----------- ----- -------------
------ ------- ----- ------ ----------- ----- -------------

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

F-117

Inter*Act

INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

1. BUSINESS DESCRIPTION

Inter*Act Systems, Incorporated (the 'Company') is one of the nation's
largest in-store operators of customer-interactive electronic marketing systems.
The Company's patented technologies enable consumer products manufacturers
('Manufacturers') and supermarket retailers ('Retailers') to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
manufacturers hundreds of millions of dollars per year.

Certain factors could affect Inter*Act's actual future financial results.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit and expected future losses, (ii) the dependence of
the Company on its ability to establish, maintain and expand relationships with
manufacturers to promote brands on the ILN and the uncertainty of market
acceptance for the ILN, (iii) the uncertainty as to whether the Company will be
able to manage its growth effectively, (iv) the early stage of the Company's
products and services and technical and other problems that the Company has
experienced and may experience, (v) risks related to the Company's substantial
leverage and debt service obligations, (vi) the Company's dependence on third
parties such as those who manufacture ILN terminals, (vii) the intensely
competitive nature of the consumer product and promotional industry and (viii)
risks that the Company's rights related to patents, proprietary information and
trademarks may not adequately protect its business, and (ix) the possible
inability of new management to perform their respective roles and the possible
conflicts of interest of the Company's directors, officers and principal
shareholders in certain transactions with the Company.

From inception to December 31, 1997, the Company has had minimal revenues,
incurred recurring losses and experienced negative operating cash flow and there
is no assurance that the product the Company has developed will achieve success
in the marketplace. The Company intends to raise additional equity or debt
capital to fund its ongoing 1998 and 1999 expansion plans. In addition, the
Company has received several multi-year equipment leasing proposals from
equipment manufacturers for future purchases of ILN equipment. There is no
assurance that such additional capital or equipment financing can be obtained.
In the event that such additional financing is not obtained, the Company
believes that existing cash and cash equivalents, along with reduced or delayed
operating and capital expenditures, will be sufficient to meet the Company's
operating requirements into the first quarter of 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The financial statements include the consolidated accounts of the Company
and its wholly and majority-owned subsidiaries: Network Licensing, Inc. ('NLI'),
Inter*Act International Holdings, Inc. ('Inter*Act International'), Inter*Act
Holdings, Ltd., ('Inter*Act Holdings') and Inter*Act U.K. Ltd. ('Inter*Act
U.K.'). Inter*Act International, Inter*Act Holdings and Inter*Act U.K. were
incorporated during 1997. All intercompany accounts and transactions have been
eliminated in consolidation.

FISCAL YEAR

On February 13, 1997, the Company elected to change its fiscal year end
from the last Saturday in September to December 31, effective December 31, 1996.
The Company's 1996 and 1995 fiscal years

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Inter*Act

INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

ended on the Saturday closest to September 30. The financial statements for
fiscal 1996 and 1995 each contain activity for fifty-two weeks.

REVENUE RECOGNITION

The Company recognizes revenue as electronic discounts are redeemed at
store cash registers. Manufacturers pay a fee to the Company for each
redemption. The fee is composed of 1) a retailer processing fee, 2) a redemption
fee and 3) the face value of the coupon. The Company, in turn, passes through
both the retailer processing fee, which is included in direct operating
expenses, and the face value of the coupon to the Retailer, while retaining the
redemption fee. The Company records as net sales the redemption fee and the
retailer processing fee paid by the Manufacturers. Certain Manufacturers pay the
Company in advance for a portion of anticipated redemptions, and these amounts
are recorded as deferred revenue until earned through redemptions.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which at December 31, 1997 and December 31, 1996
were primarily comprised of money market funds and overnight repurchase
agreements, are stated at cost, which approximates market value. Highly liquid
investments with original maturities of three months or less are considered cash
equivalents.

RECEIVABLES, NET

Accounts receivable included in current assets are stated net of allowances
for doubtful accounts of approximately $30,000 and $10,000 at December 31, 1997
and at December 31, 1996, respectively. The Company recorded approximately
$30,000 and $10,000 for bad debt expense for the year ended December 31, 1997
and the three month period ended December 31, 1996, respectively. The Company
did not record an allowance for doubtful accounts or bad debt expense for the
fiscal years ended September 28, 1996 or September 30, 1995.

PROPERTY, PLANT AND EQUIPMENT

Depreciation is generally provided on the straight-line method for
financial reporting purposes over the estimated useful lives of the underlying
assets. Machinery and equipment are depreciated over a period ranging from 3 to
5 years and leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated useful life of the improvements,
whichever is shorter. In-store machinery and equipment are depreciated over five
years. Repairs and maintenance are charged to expense as incurred.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs incurred by the Company are included in
selling, general and administrative expenses. Such costs for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995 were $646,000, $121,000,
$800,000 and $623,000, respectively.

BOND ISSUANCE COSTS

Bond issuance costs incurred by the Company are costs associated with a
private placement offering of 14% Senior Discount Notes during fiscal 1996 (the
'Private Placement') (See Note 6) and are being amortized over seven years using
the effective interest rate method. Accumulated

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Inter*Act

amortization was $633,000 and $169,000 at December 31, 1997 and at December 31,
1996, respectively. The Company recorded amortization expense on the bond
issuance costs of $464,000, $102,000 and $67,000 for the year ended December 31,
1997, the three month period ended December 31, 1996 and the fiscal year ended
September 28, 1996, respectively.

PATENTS, LICENSES AND TRADEMARKS

Acquisition costs for patents, licenses and trademarks and legal fees
incurred for the improvement and protection of the Company's patents, licenses
and trademarks have been deferred and are being amortized over fifteen years or
the remaining life of the patent, license or trademark, whichever is less, using
the straight-line method. Accumulated amortization was $95,000 and $34,000 at
December 31, 1997 and December 31, 1996, respectively. The Company recorded
amortization expense of $131,000, $10,000, $22,000 and $2,000 for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995, respectively.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of foreign entities have been translated using the
exchange rates in effect at the balance sheet dates. Results of operations of
foreign entities are translated using the average exchange rates prevailing
throughout the period. Local currencies are considered functional currencies of
the Company's foreign operating entities. Translation effects are accumulated as
part of the cumulative foreign translation adjustment in equity. Gains and
losses from foreign currency transactions are included in net loss for the
period. The Company did not incur material foreign exchange gains or losses
during any period presented. The Company has not entered into any derivative
transactions to hedge foreign currency exposure.

LONG-LIVED ASSETS

Statement of Financial Accounting Standards ('SFAS') No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of,' requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The adoption of SFAS No. 121 in the three-month
period ended December 31, 1996 did not have a material effect on the Company's
results of operations, cash flows or financial position.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
'Accounting for Income Taxes.' SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. It also requires the company
to adjust its deferred tax balances in the period of enactment for the effect of
enacted changes in tax rates and to provide a valuation allowance against such
deferred tax assets that are not, more likely than not, to be realized.

STOCK-BASED COMPENSATION

During the three month period ended December 31, 1996, the Company adopted
the provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation,' by
continuing to apply the provisions of Accounting Principles Board ('APB')
Opinion No. 25, 'Accounting for Stock Issued to Employees,' while providing the
required pro forma disclosures as if the fair value method had been applied.
(See Note 13)

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Inter*Act

NET LOSS PER SHARE

Effective December 31, 1997, the Company adopted SFAS No. 128, 'Earnings
Per Share.' (See Note 9.) In accordance with SFAS No. 128, net loss per common
share amounts ('basic EPS') were computed by dividing net loss by the weighted
average number of common shares outstanding and contingently issuable shares
(which satisfy certain conditions) and excluded any potential dilution. Net loss
per common share amounts -- assuming dilution ('diluted EPS') were computed by
reflecting potential dilution from the exercise of stock options and warrants.
SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the
face of the income statement. Net loss per share amounts for the same prior-year
periods have been restated to conform with the provisions of SFAS No. 128;
however, the result of that restatement was not material. In all periods
presented, the impact of stock options and warrants was anti-dilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets (specifically with
respect to the lives of in-store machinery and equipment) and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior year financial statement amounts have been reclassified to
conform with the current year presentation.

3. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following (in thousands):

DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------

Land and buildings........................................... $ 77 $ 16
------------ ------------
Machinery and equipment
In-Store................................................ 28,383 11,286
Other................................................... 3,067 1,784
------------ ------------
Total machinery and equipment........................... 31,450 13,070
------------ ------------
31,527 13,086
Less: accumulated depreciation............................... (4,627) (1,396)
------------ ------------
Property, plant and equipment, net........................... $ 26,900 $ 11,690
------------ ------------
------------ ------------

Depreciation expense was approximately $3.8 million, $456,000, $786,000 and
$180,000 for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal years ended September 28, 1996 and September
30, 1995, respectively.

4. LEASES

The Company leases office facilities and equipment under various operating
lease agreements expiring through year 2002. Future minimum lease payments under
noncancelable operating leases at December 31, 1997 were as follows:

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Inter*Act

OPERATING
LEASES
--------------
(IN THOUSANDS)

1998............................. $ 911
1999............................. 932
2000............................. 330
2001............................. 99
2002............................. 11
-------
$2,283
-------
-------

Rent expense of $383,000, $57,000, $222,000 and $219,000 was recognized for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal years ended September 28, 1996 and September 30, 1995, respectively,
and is included in selling, general and administrative expenses.

5. RELATED PARTY TRANSACTIONS

On April 14, 1993, the Company entered into an agreement with Clearing
Systems, Inc. ('CSI'), a Delaware corporation, whereby approximately 817,000
shares of the Company's common stock were exchanged for certain assets,
consisting primarily of acquired technology and research and development, at the
then estimated fair market value of $612,000, and assumption of certain
liabilities of CSI. The agreement provided that CSI would consult on matters
pertaining to the Company's technology, vendor relations, customer contacts and
strategic planning and be paid a fee when, and if, the Company installed 50 ILN
terminals or achieved $1,000,000 in revenues. During December 1995, in
anticipation of the Company's limited cash resources, the parties amended the
consulting agreement to provide that CSI would receive a $375,000 note,
convertible into shares of the Company's common stock at a rate of $5.50 per
share and bearing interest at the rate of 8.5% per annum, in satisfaction of the
amounts due under the consulting agreement. The Company has paid $138,500 of the
note and the remaining portion of $236,500 is due December 28, 1998. The entire
consulting fee of $375,000 was recorded as an expense during the fiscal year
ended September 28, 1996.

The Company is party to various agreements with Vanguard Cellular Financial
Corp. (together with its subsidiaries, 'Vanguard'). As of December 31, 1997,
Vanguard has beneficial ownership of approximately 3.1 million shares of
common stock of the Company and holds 18,000 units issued in the Private
Placement (See Note 6). Stephen R. Leeolou, Chairman and Chief Executive Officer
of the Company, is also co-founder and Co-Chief Executive Officer of Vanguard.

On June 17, 1996, the Company entered into a management consulting
agreement with Vanguard for a period of two years. Under the agreement, Vanguard
will assist the Company in developing accounting, human resources, information
management, legal compliance, sales training, research and development, business
development and operations procedures, systems and programs. For services
rendered under the agreement, the Company issued 10,000 shares of its common
stock upon execution of the agreement and issued 10,000 shares in June 1997. In
addition, the Company will reimburse Vanguard for any expenses incurred in the
course of providing consulting services. This agreement terminated the previous
consulting agreements dated January 30, 1996, the Company had with Vanguard.
Under the January 30, 1996 agreement, Vanguard was to provide one of its
executive employees to serve in the role of Chief Operating Officer (the 'COO')
of the Company and to provide other consulting services as necessary. All
expenses, including related compensation expenses of such individuals based on
time rendered on the Company's activities, would be paid by the Company. This
agreement was terminated upon execution of the management consulting agreement
with Vanguard on June 17, 1996. The Company has paid Vanguard under such
consulting agreements, approximately

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Inter*Act

$218,000, $42,000 and $29,000 during the year ended December 31, 1997, the three
month period ended December 31, 1996 and the fiscal year ended September 28,
1996, respectively.

In May 1995, the Company issued 400,000 shares of common stock to Vanguard
at a Purchase price of $5.00 per share. In connection with this issuance,
Vanguard also received a warrant (the 'Vanguard Warrant') to purchase up to an
additional 400,000 shares of the Company's common stock at the agreed-upon fair
market value of such stock at the time of exercise. This warrant agreement
contains an anti-dilution clause which provides for adjustments to the number of
shares eligible to be purchased to maintain the number of shares at
approximately 10.3% of the Company's outstanding common stock. The warrant
expires on the earlier of (i) May 5, 2005 or (ii) the consummation of an initial
public offering by the Company. The terms of the Vanguard Warrant were
restructured immediately prior to the consummation of the private placement
transaction (see Note 7) to provide that Vanguard has the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share, which was, in the
opinion of management, the fair market value of the related common stock at the
date of restructuring. The restructured Vanguard Warrant also provides that
Vanguard may pay the exercise price either in cash or, if the fair market value
of the common stock at the time of exercise is greater than the exercise price,
by surrendering any unexercised portion of the Vanguard Warrant and receiving
the number of shares equal to (i) the excess of fair market value per share at
the time of exercise over the exercise price per share multiplied by (ii) the
number of shares surrendered.

On May 5, 1995, the Company entered into a Registration Rights Agreement
with Vanguard relating to certain warrants and shares of common stock of the
Company owned by Vanguard. The agreement provides that Vanguard may at any time
after six months from the date the first registration statement filed by the
Company under the Securities Act of 1933 becomes effective, request the Company
to effect the registration of certain securities held by Vanguard as
expeditiously as may be practicable. However, the Company is entitled to decline
such request, if, in the Company's judgment, such demand registration would not
be in the Company's best interest. The Company may only decline such request
once and will only be effective for a three-month period. In addition, the
agreement allows Vanguard certain piggyback registration rights on any security
offerings the Company may undertake, provided, however, the Company's
underwriter determines, in their sole discretion, such shares will not
jeopardize the success of the proposed offering by the Company. The agreement
terminates the earlier of five years from date of the Company's first
registration statement becomes effective or such time as Vanguard may sell its
securities pursuant to Rule 144 under the Securities Act.

6. LONG-TERM DEBT

Long-term debt consisted of the following:

DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------

14% Senior Discount Notes(1).................................... $ 91,406 $ 76,866
Less: Current portion of long-term debt......................... -- --
------------ ------------
Total long-term debt.................................. $ 91,406 $ 76,866
------------ ------------
------------ ------------

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

(1) In August 1996, the Company, through the Private Placement, issued 142,000
units, each consisting of a 14% senior discount note due 2003 (collectively,
the 'Notes') with a principal amount at maturity of $1,000 and a warrant to
purchase 7.334 shares (adjusting to 9.429 shares at September 30, 1997 if
the Company did not complete a qualified initial public offering of common
stock by that date) of common stock of the Company at $.01 per share. The
gross proceeds of $94.8

(footnotes continued on next page)

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Inter*Act

(footnotes continued from previous page)

million were allocated by the Company to the value of the warrants of
approximately $24.5 million and to the discounted notes of approximately
$70.2 million. Expenses of the offering of approximately $3.8 million were
capitalized as bond issuance costs and are being amortized over the
remaining term of the Notes. The Company did not complete a qualified
initial public offering of common stock by September 30, 1997; therefore,
the Company recorded additional common stock purchase warrants of $3.0
million reflecting the valuation of an additional 297,490 shares, or 2.095
shares issuable per warrant.

No cash interest will be payable on the Notes prior to February 1, 2000.
The Notes will accrue cash interest at a rate of 14% per annum, commencing on
August 1, 1999, payable semi-annually on February 1 and August 1 of each year
commencing on February 1, 2000. The debt discount related to the difference
between the face value of the notes ($142 million) and the proceeds of the
Private Placement ($94.8 million) is being accreted over the period to August 1,
1999. The debt discount related to the portion of the Private Placement
allocated to the value of the warrants ($27.4 million, $24.5 million and $24.5
million at December 31, 1997, December 31, 1996 and September 30, 1996,
respectively) is being accreted over the full term of the Notes to August 1,
2003. Interest expense on the notes, including the accretion of debt discount
and amortization of issuance costs, is being recognized at a constant rate of
interest over the life of the Notes. Discount accretion of $17.5 million, $4.1
million and $2.6 million and amortization of bond issuance costs of
approximately $464,000, $102,000 and $67,000 have been recognized as interest
expense during the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal year ended September 28, 1996, respectively. If
additional funds are raised through debt financing, such financing will increase
the financial leverage of the Company and earnings would be reduced by the
associated interest expense. There is no assurance that the Company will be able
to meet its financial obligations under the Notes or other commitments.

7. COMMON STOCK

During the year ended December 31, 1997, the Company issued 60,000 shares
of Common Stock, 50,000 shares for partial consideration in the acquisition of a
patent and 10,000 shares issued pursuant to the management service agreement the
Company has with Vanguard. (See Note 5) The issuance of such shares was recorded
at $10.00 per share, which management believes approximates the fair market
value of the shares on date of issuance.

During the fiscal year ended September 28, 1996, the Company issued
approximately 3,738,000 shares of Common Stock of which approximately 3,418,000
shares were issued at a purchase price of $5.50 per share and approximately
320,000 were issued at a purchase price of $5.00 per share. Approximately
3,319,000 shares were issued as part of a private offering of common stock at a
purchase price of $5.50 per share. In connection with this offering, purchasers
of $250,000 or more of common stock received warrants to purchase a number of
shares of common stock equal to 5% of the shares purchased in the offering and
purchasers of $1,000,000 or more of common stock received warrants to purchase a
number of shares of common stock equal to 10% of the shares purchased in the
offering. The exercise price of all warrants issued or sold in connection with
this offering will equal the sales price of the next $2 million of common stock
issued and sold by the Company. Purchasers of common stock in this offering who
were also purchasers of common stock in certain earlier offerings were also
offered warrants (at a purchase price of $.01 per warrant share) to purchase
common stock. Approximately 323,216 warrants were issued under this offering and
expire on December 31, 2000. Also during the year ended September 30, 1996,
10,000 shares of common stock were issued pursuant to the management service
agreement the Company has with Vanguard at the then estimated fair market value
of $5.50 per share. In addition, the Company converted approximately $2.1
million in debt, notes payable and related accrued interest due to stockholders
into 409,000 shares of common stock. Notes

F-124

Inter*Act

payable to stockholders of $1.6 million bearing interest at 8.5%, maturing on
February 1, 1998 were converted into approximately 320,000 shares of common
stock at a conversion price of $5.00 per share. Fifty percent of accrued
interest on such notes payable were converted into approximately 13,000 shares
at a conversion price of $5.50 per share, the remaining fifty percent of accrued
interest was paid in cash. Other notes payable to stockholders with a principal
amount of approximately $371,000 and related accrued interest of approximately
$47,000 were converted into approximately 76,000 shares of common stock at $5.50
per share.

During the fiscal year ended September 30, 1995, the Company issued
1,032,000 shares of common stock. Vanguard, through a subsidiary, purchased
400,000 shares of common stock of the Company at a purchase price of $5.00 per
share. In connection with such investment, Vanguard received a warrant to
purchase up to an additional 10.27% of the common stock of the Company at an
exercise price equal to the fair market value of the common stock at the time of
the exercise (the 'Vanguard Warrant'). The Vanguard Warrant was exercisable at
any time prior to the earlier of an underwritten initial public offering or May
5, 2005. The Vanguard Warrant was restructured immediately prior to consummation
of the Private Placement to provide that Vanguard has the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share. The restructured
Vanguard Warrant also provides that Vanguard may pay the exercise price either
in cash or, if the fair market value of the common stock at the time of exercise
is greater than the exercise price, by surrendering any unexercised portion of
the Vanguard Warrant and receiving the number of shares equal to (i) the excess
of fair market value per share at the time of exercise over the exercise price
per share multiplied by (ii) the number of shares surrendered.

Of the remaining 632,000 shares issued during the fiscal year ended
September 30, 1995, approximately 607,000 shares were issued at $5.00 per share
and approximately 25,000 shares were issued at $5.50 per share.

On September 30, 1994, a stockholder agreed to forfeit 10,000 shares of the
Company's common stock for failure to fulfill an obligation to invest additional
capital in the Company. The forfeiture did not reduce the amount of the
stockholder's financial investment in the Company at that time, but did reduce
the number of shares issued to this individual. These shares were subsequently
reissued to two other individuals at $5.00 per share. In December 1994, the same
stockholder agreed to forfeit an additional 18,000 shares of the Company's
common stock for failure to fulfill an obligation to invest additional capital
in the Company. Upon this forfeiture, the investor's equity in the Company was
reduced in the total amount of $140,000, representing the value of 28,000 shares
of common stock at $5.00 per share. The original forfeiture of 10,000 shares and
subsequent reissuance of the same 10,000 shares at $5.00 per share was recorded
during the fiscal year ended September 30, 1994. The additional forfeiture of
18,000 shares and the entire value of the September 1994 and December 1994
forfeitures of $140,000 was recorded during the fiscal year ended September 30,
1995.

8. COMMON STOCK PURCHASE WARRANTS

In addition to the Vanguard Warrant to purchase 900,113 shares and the
warrants to purchase an aggregate of 323,216 shares issued in the private
offering described in Note 7, the Company has issued and outstanding other
warrants described below. In August 1996, the Company, through the Private
Placement, issued 142,000 units, each consisting of a 14% senior discount note
due 2003 (collectively, the 'Notes') with a principal amount at maturity of
$1,000 and a warrant to purchase 7.334 shares (adjusting to 9.429 shares at
September 30, 1997 if the Company did not complete a qualified initial public
offering of common stock by that date) of common stock of the Company at $.01
per share. The Company did not complete a qualified public offering of common
stock by September 30, 1997, therefore, the Company recorded additional common
stock purchase warrants of $3.0 million reflecting the valuation of an
additional 297,490 shares, or 2.095 shares issuable per warrant. These warrants
shall be exercisable on or after the earliest to occur of (i) August 1, 2000,
(ii) a change of control, (iii) (a) 90

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Inter*Act

days after the closing of an initial public offering or (b) upon the closing of
the initial public offering but only in respect of warrants required to be
exercised to permit the holders thereof to sell shares in the initial public
offering, (iv) a consolidation, merger or purchase of assets involving the
Company or any of its subsidiaries that results in the common stock of the
Company becoming subject to registration, (v) an extraordinary cash dividend or
(vi) the voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company. The number of shares of the common stock for which a
warrant is exercisable is subject to adjustment upon the occurrence of certain
events.

Holders of warrants (or common stock issued in respect thereof) will be
entitled to include the common stock issued or issuable upon the exercise of the
warrants (the 'Underlying Common Stock') in a registration statement whenever
the Company or any shareholder proposes to effect a public equity offering with
respect to common stock of the Company (other than redeemable stock), except to
the extent the managing underwriter for such offering determines that such
registration and sale would materially adversely affect the price, timing or
distribution of the shares to be sold in such public equity offering. Following
the occurrence of an initial public offering, holders of warrants and Underlying
Common Stock representing not less than 25% of all the outstanding warrants and
Underlying Common Stock, taken together, will have the right, on one occasion,
to require the Company to register these securities pursuant to an effective
registration statement.

After August 1, 2001, the Company may be required, under certain
circumstances, to purchase, at fair market value, the outstanding warrants and
underlying common stock issued. Depending on the fair market value at that time,
there may be a charge to earnings in connection with the repurchase of warrants
and underlying common stock.

Management of the Company believes, based on independent third party
valuations, that the value of the Company's common stock at the date of the
initial issuance of these warrants was $23.50 per share and, accordingly,
allocated $24.5 million of the proceeds of the Private Placement to the value of
these warrants based on 142,000 units consisting of warrants to purchase 7.334
shares of common stock per unit with an exercise price of $.01 per share.
Effective September 30, 1997, the Company recorded additional Common Stock
Purchase Warrants of approximately $3.0 million reflecting the valuation of an
additional 297,490 shares, or 2.095 shares issuable per warrant. This aggregate
amount is classified between liabilities and stockholders' equity (deficit) in
the accompanying consolidated balance sheet as of December 31, 1997. The value
of the original warrants and the incremental value of the 2.095 (9.429 less
7.334) warrants issued per unit of the Notes effective September 30, 1997 have,
since their issuance, been accounted for as an additional debt discount subject
to accretion as described in Note 6.

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9. NET LOSS PER SHARE

A reconciliation between the net loss and common shares of the basic and
diluted EPS computations is as follows:

YEAR ENDED THREE MONTH PERIOD FISCAL YEAR ENDED
DECEMBER 31, 1997 ENDED DECEMBER 31, 1996 SEPTEMBER 28, 1996
-------------------------- -------------------------- --------------------------
PER PER PER
SHARE SHARE SHARE
NET LOSS SHARES AMOUNT NET LOSS SHARES AMOUNT NET LOSS SHARES AMOUNT
-------- ------ ------ -------- ------ ------ -------- ------ ------

Basic EPS
Net loss attributable to common
stock........................... $(49,814) 7,692 $(6.48) $(7,330) 7,669 $(0.96) $(11,559) 6,038 $(1.91)
Effect on Dilutive Securities:
Warrants........................ -- -- --
Stock Options................... -- -- --
-------- ------ ------ -------- ------ ------ -------- ------ ------
Diluted EPS
Net loss attributable to common
stock and assumed option
exercise........................ $(49,814) 7,692 $(6.48) $(7,330) 7,669 $(0.96) $(11,559) 6,038 $(1.91)
-------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------

FISCAL YEAR ENDED
SEPTEMBER 30, 1995
--------------------------
PER
SHARE
NET LOSS SHARES AMOUNT
-------- ------ ------

Basic EPS
Net loss attributable to common
stock........................... $(4,526) 3,556 $(1.27)
Effect on Dilutive Securities:
Warrants........................ --
Stock Options................... --
-------- ------ ------
Diluted EPS
Net loss attributable to common
stock and assumed option
exercise........................ $(4,526) 3,556 $(1.27)
-------- ------ ------
-------- ------ ------

There were no reconciling items to be reported by the Company in the
calculation for basic EPS and diluted EPS for the year ended December 31, 1997,
three month period ended December 31, 1996 and the fiscal years ended September
28, 1996 and September 30, 1995. Inclusion of the Company's outstanding common
stock purchase warrants and stock options (See Note 13) would have an
antidilutive effect on earnings per share and, therefore, they are not included
in the calculation of diluted EPS per SFAS No. 128.

10. DEFERRED COMPENSATION

In September 1996, the Company issued options to purchase 48,000 shares of
common stock at an exercise price of $7.50 per share under the 1996 Nonqualified
Stock Option Plan (See Note 13), which was an exercise price below the
then-estimated fair market value of the Company's common stock on the date of
grant. Accordingly, the Company has recorded a deferred compensation charge of
$768,000, which will be amortized ratably over the five year vesting period of
the related options. Accumulated amortization was $198,000, $45,000 and $6,000
at December 31, 1997, December 31, 1996 and September 28, 1996, respectively.
Amortization expense of deferred compensation was $153,000, $39,000 and $6,000
for the year ended December 31, 1997, the three month period ended December 31,
1996 and for the fiscal year ended September 28, 1996, respectively.

11. LITIGATION

During the year ended September 28, 1996, a lawsuit was filed and settled
against the Company alleging certain patent infringement. The Company expressly
denied any wrongdoing and entered into such agreement to avoid lengthy
litigation costs. Under the settlement agreement, the Company was required to
pay $400,000, and in return, received, among other things, the worldwide,
perpetual right to use such patent, dismissal with prejudice and release of all
related claims. The cost of the settlement of $400,000 was expensed during the
fiscal year ended September 28, 1996.

In February 1996, the Company filed suit against Catalina Marketing
Corporation alleging that Catalina has infringed United States Letters Patent
No. 4,554,446 (the '446 Patent') under which the Company is licensee. The
Company alleges that Catalina is infringing the patent by making, using and
offering for sale devices and systems that incorporate and employ inventions
covered by the '446 Patent. The Company is seeking an injunction against
Catalina to stop further infringement of the patent, treble damages and the
costs and expenses incurred in connection with the suit. The complaint has been
amended to add additional detail, and Catalina has answered denying the
allegations, raising certain

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affirmative defenses, and seeking declaratory judgment of non-infringement,
invalidity or unenforceability of the '446 Patent. In May 1997, Catalina
asserted a second counterclaim alleging that the Company is infringing a newly
issued Catalina Patent U.S. Patent No. 5,612,868. The Company has answered
denying the allegations, raising affirmative defenses and seeking declaratory
judgment of non-infringement, invalidity and unenforceability of U.S. Patent No.
5,612,868. Discovery on the claims and counterclaims is proceeding and various
motions are pending before the United States District Court in the District of
Connecticut. As with any litigation, the ultimate outcome of these actions
cannot be predicted. However, the Company intends to assert its claims
vigorously.

In January 1998, Catalina Marketing International, Inc. ('Catalina
International,' a subsidiary of Catalina) filed suit against the Company
alleging that the Company has infringed United States Patent No. 4,674,041 (the
'041 Patent') which Catalina International Inc. acquired by assignment in
December 1997. Catalina International alleges that the Company is infringing the
'041 Patent by making, using and offering for sale devices and systems that
incorporate and employ inventions covered by the '041 Patent. Also in February
1998, Catalina International amended its complaint to join as additional parties
defendant Thermo Information Solutions, Inc. and Coleman Research Corporation
who have manufactured kiosk pursuant to an agreement with the Company. Catalina
International seeks injunctive and declaratory relief as well as unspecified
money damages against all defendants, and has filed a motion for preliminary
injunction against the Company seeking to stop further alleged infringement of
the '041 Patent pending trial. Various other motions are pending in the United
States District Court in the District of Connecticut, including the Company's
motion for a more definite statement. The Company intends to defend against
Catalina International's claims vigorously, and to pursue available remedies
against Catalina International, which may include the filing of appropriate
counterclaims.

12. INCOME TAXES

The components of cumulative deferred tax assets and liabilities were as
follows (in thousands):

DECEMBER 31, DECEMBER 31,
1997 1996
----------------- -----------------

Cumulative Amounts:
Deferred Tax Assets:
Accrued Bonus/Deferred
Compensation/other............................. $ 174 $ 26
Amortization of Warrant Expense.................. 1,545 384
Interest Accretion............................... 4,464 1,242
Other............................................ 13 5
Bond Issuance Cost Amortization.................. 222 59
Net Operating Loss Carryforward.................. 24,294 8,720
----------------- -----------------
Total Deferred Tax Assets................... 30,712 10,436
----------------- -----------------
Deferred Tax Liabilities:
Depreciation..................................... (1157) (527)
----------------- -----------------
Total Deferred Tax Liabilities.............. (1157) (527)
----------------- -----------------
Net Deferred Tax Asset before Valuation
Allowance...................................... 29,555 9,909
----------------- -----------------
Valuation Allowance.............................. (29,555) (9,909)
----------------- -----------------
Net Deferred Tax Asset...................... $-- $--
----------------- -----------------
----------------- -----------------

In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards could be limited
in years following a change in the Company's ownership. In general, a change in
ownership occurs if a shareholder's (or the combined

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Inter*Act

group of the shareholders each owning less than 5%) ownership increases 50
percentage points over a three year period. This change could occur at the time
of an Initial Public Offering. The net operating loss limitation is computed by
applying a percentage (approximately 5%, as determined by the Internal Revenue
Code) to the value of the Company on the date of the change. The Section 382
limitation limits the use of the net operating loss carryforward as computed on
the date of the change in ownership. Net operating losses incurred after the
date of the change of ownership are not limited unless another change in
ownership occurs. At December 31, 1997 the amount of net operating loss
carryforward is approximately $54.4 million. These losses begin to expire in the
2008 tax year.

Creditable foreign taxes paid by the Company or its subsidiaries will be
subject to Internal Revenue Code Section 904, Limitation on Foreign Tax Credit,
because the Company does not have a Federal Income Tax liability. The Foreign
Tax Credit limitation may be carried back two years and forward five years. The
Company has the option of deducting these foreign taxes in lieu of the credit.
In general, since the Company does not have a federal tax liability, the
deduction method will increase the amount of net operating losses which are
available to be carried forward fifteen years. As of December 31, 1997 the
Company has not paid or accrued foreign taxes.

SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets may not be realized.
At each of the balance sheet dates, a valuation allowance for the full amount of
the net deferred tax asset was recorded. This valuation allowance is recorded
due to both the uncertainty of future income and the possible application of
Internal Revenue Code Section 382 limitations on the use of the net operating
loss carryforwards.

13. STOCK OPTION PLANS

The Company has in place the 1994 Stock Compensation Plan which provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to stock options that meet the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (incentive stock options), options
that do not meet such requirements (nonqualified stock options) and stock
bonuses. All options under the plan must be granted at an exercise price not
less than fair market value. Stock bonuses may be in the form of grants of
restricted stock. The aggregate number of shares of Common Stock that may be
issued pursuant to the plan may not exceed 330,000 shares, subject to adjustment
upon occurrence of certain events affecting the Company's capitalization. As of
December 31, 1997 an aggregate of 17,900 shares remain available for future
grants under the 1994 Stock Compensation Plan.

The Company also has in place the 1996 Nonqualified Stock Option Plan which
provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to nonqualified stock options. All options
must be granted at an exercise price not less than $5.50 per share. The
aggregate number of shares of Common Stock that may be issued pursuant to the
plan may not exceed 600,000 shares of Common Stock, subject to adjustment upon
occurrence of certain events affecting the Company's capitalization. This plan
is subject to shareholder approval. As of December 31, 1997 an aggregate of
17,000 shares remain available for future grants under the 1996 Nonqualified
Stock Option Plan.

On May 20, 1997, the Company established the 1997 Long-term Incentive Plan
('Long-term Incentive Plan') for the purpose of promoting the long-term
financial performance of the Company by providing incentive compensation
opportunities to officers, supervisory employees, directors or consultants of
the Company or any subsidiary. The plan allows for the Company to grant Stock
Options for the purchase of shares of Stock to Grantees under the Plan in such
amounts as the Compensation Committee of the Board of Directors, in its sole
discretion, determines. The Stock Options granted under the Plan will be
designated as either: (i) Incentive Stock Options or (ii) Nonqualified Stock
Options. The purchase price for shares acquired pursuant to the exercise, will
be determined at the time

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Inter*Act

of grant; however, it will not be less than the fair market value of the shares
at the time of the grant. The Long-term Incentive Plan also allows the Company
to grant Stock Appreciation Rights in any amount, at its sole discretion, either
alone or in combination with other Awards granted under the Plan. As of December
31, 1997, 367,900 of 500,000 total available options have been issued under the
Long-term Incentive Plan at an exercise price of $10.00 per share. Management
believes that these options were granted at fair market value of common stock at
the date of grant. No Stock Appreciation Rights were awarded as of December 31,
1997. The awards vest annually over five years from the date of grant with the
exception of 63,500 options, which became immediately exercisable.

The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123 (See Note 2), the Company's net
loss and net loss per share would have been changed to the following pro forma
amounts:

THREE MONTH
YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 28, 1996
----------------- ----------------- ------------------

Net Loss: As Reported $ (49,814) $(7,330) $(11,559)
Pro Forma (50,353) (7,355) (11,832)
Net Loss Per Share: Basic As Reported (6.48) (.96) (1.91)
Diluted As Reported (6.48) (.96) (1.91)
Basic Pro Forma (6.55) (.96) (1.96)
Diluted Pro Forma (6.55) (.96) (1.96)

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. A summary
of the status of the Company's stock option plans for the year ended December
31, 1997, the three month period ended December 31, 1996 and the fiscal year
ended September 28, 1996 is presented in the table and narrative below:

THREE MONTH
YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 28, 1996
-------------------- ------------------ ------------------
WTD AVG WTD AVG WTD AVG
EX EX EX
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- ------- ------- ------- -------

Outstanding at beginning of year.............. 821,100 $ 5.40 844,100 $5.40 266,600 $4.77
Granted....................................... 543,400 10.00 -- -- 617,500 5.65
Exercised..................................... -- -- -- -- -- --
Forfeited..................................... 2,200 5.23 (3,000) 5.50 (7,000) 5.00
Expired....................................... 102,400 5.91 (20,000) 5.50 (33,000) 5.08
Outstanding at end of year.................... 1,259,900 7.34 821,100 5.40 844,100 5.40
Exercisable at end of year.................... 571,250 6.16 332,400 5.15 320,200 5.16
Weighted average fair value of options
granted..................................... N/A 7.34 N/A 5.40 N/A 5.40

821,100 of the options outstanding at December 31, 1996 have exercise
prices between $1.86 and $7.50, with a weighted average exercise price of $5.40
and a weighted average remaining contractual life of 8.2 years. 332,400 of these
options are exercisable. The remaining options have exercise prices between
$1.86 and $7.50, with a weighted average exercise price of $5.56 and a weighted
average remaining contractual life of 6 years. 332,400 of these options are
exercisable; their weighted average exercise price is $5.15.

1,259,900 of the options outstanding at December 31, 1997, have exercise
prices between $1.86 and 10.00, with a weighted average exercise price of $7.34
and a weighted average remaining contractual life

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Inter*Act

of 8.7 years. 571,250 of these options are exercisable. The remaining options
have exercise prices between $1.86 and 10.00 with a weighted average price of
$8.48 and a weighted average remaining contractual life of 9.1 years. 571,250 of
these options are exercisable; their weighted average exercise price is $6.16.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes Option Pricing Model with the following weighted-average
assumptions used for grants in the year ended December 31, 1997, the three month
period ended December 31, 1996, and the fiscal year ended September 28, 1996
respectively: risk free interest rates of 6.49%, 6.45%, and 6.60%; and expected
dividend yields of 0%, expected lives of 5 years, and expected stock volatility
of 0 for each respective period.

The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the plans, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.

14. COMMITMENTS AND CONTINGENCIES

COMMITMENTS FOR TECHNOLOGY

The Company is party to several patent licensing agreements relating to its
in-store consumer product promotion and couponing business. With respect to one
license agreement under which the Company is assignee, the Company is required
to pay a royalty of 2% of the gross collected revenues of the Company, to the
extent derived from the Company's exploitation of the patent, with such royalty
decreasing to 1% of such revenues after $10 million in aggregate royalties have
been paid to the licensors. This license agreement requires that certain minimum
monthly payments be made to the licensors, and be exceeded within approximately
two years, in order to avoid triggering a termination right on the part of the
licensors. With respect to another license agreement, the Company is required to
pay the licensor a royalty of .8% of the gross collected revenues of the Company
to the extent derived from the Company's exploitation of the patent, until such
time as the licensor has received the aggregate sum of $600,000 after which no
additional royalty payments are required. Under a third agreement, the Company
is required to pay the licensor a royalty of 1% of the gross revenues related to
the Company's exploitation of the patent subject to certain minimum annual
payments, should the Company wish to maintain exclusive rights under such
patent. Under these agreements, the Company recorded royalty payments of
$398,000, $99,000, $333,000 and $274,000 for the year ended December 31, 1997,
the three month period ended December 31, 1996, and for the fiscal years ended
September 28, 1996 and September 30, 1995, respectively.

COMMITMENTS FOR FIXED ASSET PURCHASES

On September 9, 1996, the Company sold its manufacturing operations to
Coleman Research Corporation ('Coleman') for approximately $2.6 million and
entered into an exclusive supply agreement whereby Coleman is to fulfill the
Company's anticipated requirements for terminals for the next three years with
fixed pricing for the first 5,000 terminals. No material gain or loss was
realized in this transaction. As of March 24, 1998, the Company terminated its
three-year exclusive terminal supply relationship with Coleman and its
subsidiary, Thermo Information Solutions, Inc. ('Thermo') (collectively, the
'Vendors'). As part of this mutual termination agreement, the Company agreed to
pay $4.5 million in installments to pay balances on previously purchased ILN
equipment, to acquire certain inventory and to obtain early release from the
exclusivity provision of the original contract to allow the Company to pursue
relationships with new vendors. Of this amount, $4.1 million was charged to
operating expense during 1997. The Vendors have agreed to return supplies and
terminal parts to the Company, for which approximately $400,000 was reflected in
other current assets of the Company as of December 31, 1997. Further, the
Vendors will supply the Company with 350 additional kiosks.

F-131

INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION
- ------------- ----------------------------------------------------------------------------------------------------------

*2(a) Amended and Restated Agreement and Plan of Merger, dated as of October 2, 1998, by and among
AT&T Corp., Winston Inc. and the Registrant, filed as Exhibit 2(a) to the Registrant's Form 8-K dated
December 31, 1998.
*2(b) Option Agreement dated as of October 2, 1998 between the Registrant and AT&T Corp., attached as
Annex A to the Agreement and Plan of Merger, filed as Exhibit 2(b) to the Registrant's Form 8-K
dated October 13, 1998.
*2(c) Voting Agreement dated as of October 2, 1998 between Haynes G. Griffin, a stockholder of the
Registrant, and AT&T Corp., attached as Annex B to the Agreement and Plan of Merger, filed as
Exhibit 2(c) to the Registrant's Form 8-K dated October 13, 1998.
*2(d) Voting Agreement dated as of October 2, 1998 between Stephen R. Leeolou, a stockholder of the
Registrant, and AT&T Corp., attached as Annex B to the Agreement and Plan of Merger, filed as
Exhibit 2(d) to the Registrant's Form 8-K dated October 13, 1998.
*2(e) Voting Agreement dated as of October 2, 1998 between Piedmont Associates Limited, a stockholder of
the Registrant, and AT&T Corp., attached as Annex B to the Agreement and Plan of Merger, filed as
Exhibit 2(e) to the Registrant's Form 8-K dated October 13, 1998.
*2(f) Voting Agreement dated as of October 2, 1998 between L. Richardson Preyer, Jr., a stockholder of the
Registrant, and AT&T Corp., attached as Annex B to the Agreement and Plan of Merger, filed as
Exhibit 2(f) to the Registrant's Form 8-K dated October 13, 1998.
*2(g) Voting Agreement dated as of October 2, 1998 between Stuart S. Richardson, a stockholder of the
Registrant, and AT&T Corp., attached as Annex B to the Agreement and Plan of Merger, filed as
Exhibit 2(g) to the Registrant's Form 8-K dated October 13, 1998.
*2(h) Voting Agreement dated as of October 2, 1998 between Smith Richardson Foundation, a stockholder
of the Registrant, and AT&T Corp., attached as Annex B to the Agreement and Plan of Merger, filed
as Exhibit 2(h) to the Registrant's Form 8-K dated October 13, 1998.
*2(i) Form of Affiliate Letter, attached as Annex C to the Agreement and Plan of Merger, filed as Exhibit
2(i) to the Registrant's Form 8-K dated October 13, 1998.
*2(j) Asset Purchase Agreement dated March 10, 1998 by and between Triton PCS, Inc. and Vanguard
Cellular Systems of South Carolina, Inc., filed as Exhibit 2(a) to the Registrant's Form 8K dated
June 30, 1998.
*2(k) Asset Purchase Agreement dated May 22, 1998 by and among Wireless One Network, L.P., Western
Florida Cellular Telephone Corp., and Vanguard Cellular Financial Corp., filed as Exhibit 2(b) to the
Registrant's Form 10-Q dated June 30, 1998.
*3(a) Articles of Incorporation of Registrant as amended through July 25, 1995, filed as Exhibit 1 to the
Registrant's Form 8-K/A dated July 25, 1995.
*3(b) Bylaws of Registrant (compilation of July 25, 1995), filed as Exhibit 2 to the Registrant's Form 8-K/A
dated July 25, 1995.
*4(a) Specimen Common Stock Certificate, filed as Exhibit 4(a) to the Registrant's Registration Statement
on Form S-1 (File No. 33-18067).
*4(b)(1) Third Amended and Restated Facility A Loan Agreement between Vanguard Cellular Financial Corp.
and various lenders led by the Bank of New York, and The Toronto-Dominion Bank, and
NationsBank of Texas, N.A. as agents, dated February 20, 1998, filed as Exhibit 4(b)(8) to the
Registrant's Form 10-Q dated March 31, 1998.
*4(b)(2) Facility B Loan Agreement between Vanguard Cellular Financial Corp. and various lenders led by The
Bank of New York, and The Toronto-Dominion Bank, and NationsBank of Texas, N.A. as agents,
dated February 20, 1998, filed as Exhibit 4(b)(9) to the Registrant's Form 10-Q dated March 31, 1998.
*4(b)(3) Borrower Pledge Agreement between Vanguard Cellular Financial Corp. and Toronto-Dominion
(Texas), Inc. as collateral agent, dated February 20, 1998, filed as Exhibit 4(b)(10) to the Registrant's
Form 10-Q dated March 31, 1998.
*4(b)(4) VCOC Guaranty between Vanguard Cellular Operating Corp. and various lenders led by The Bank of
New York, and The Toronto-Dominion Bank, and NationsBank of Texas, N.A. as Secured Parties,
dated February 20, 1998, filed as Exhibit 4(b)(11) to the Registrant's Form 10-Q dated March 31,
1998.
*4(b)(5) Vanguard Guaranty between Vanguard Cellular Operating Corp. and various lenders led by the Bank
of New York, and the Toronto-Dominion Bank, and NationsBank of Texas, N.A. as Secured Parties,
dated February 20, 1998, filed as Exhibit 4(b)(12) to the Registrant's Form 10-Q dated March 31,
1998.

EXHIBIT NO. DESCRIPTION
- ------------------- ------------------------------------------------------------------------------------------------------

*4(b)(6) Vanguard Pledge Agreement between Registrant and Toronto-Dominion (Texas), Inc. as collateral
agent, dated February 20, 1998, filed as Exhibit 4(b)(13) to the Registrant's Form 10-Q dated
March 31, 1998.
*4(b)(7) First Amendment to Third Amended and Restated Facility A Loan Agreement dated as of November 6,
1998 between Vanguard Cellular Financial Corp. and various lenders led by The Bank of New York,
The Toronto-Dominion Bank and NationsBank, N.A. as agents, filed as Exhibit 4(b)(14) to the
Registrant's Form 10-Q dated September 30, 1998.
*4(b)(8) First Amendment to Facility B Loan Agreement dated as of November 6, 1998 between Vanguard
Cellular Financial Corp. and various lenders led by The Bank of New York, The Toronto-Dominion
Bank and NationsBank, N.A. as agents, filed as Exhibit 4(b)(15) to the Registrant's Form 10-Q dated
September 30, 1998.
*4(c)(1) Indenture dated as of April 1, 1996 between Registrant and The Bank of New York, as Trustee, filed
as Exhibit 4(e)(1) to the Registrant's Form 19-Q/A dated March 31, 1996.
*4(c)(2) First Supplemental Indenture, dated as of April 1, 1996 between Registrant and The Bank of New
York, as Trustee, filed as Exhibit 4(e)(2) to the Registrant's Form 10-Q/A dated March 31, 1996.
*4(c)(3) Second Supplemental Indenture dated as of November 18, 1998 between the Registrant and The Bank
of New York, as Trustee, filed as Exhibit 4(a) to the Registrant's Form 8-K dated December 4, 1998.
*10(a)(1) Amended and Restated Stock Compensation Plan of the Registrant approved April 22, 1987 by the
Shareholders of the Registrant, with forms of stock bonus and stock option agreements attached, filed
as Exhibit 10(a) to the Registrant's Registration Statement on Form S-1 (File No. 33-18067).
*10(a)(2) Amendment to Amended and Restated Stock Compensation Plan of the Registrant approved May 2,
1989 by the Shareholders of the Registrant, filed as Exhibit 4(h)(2) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989.
*10(a)(3) Form of Restricted Stock Bonus Agreements dated March 23, 1987 between the Registrant and Stuart
S. Richardson, Haynes G. Griffin, L. Richardson Preyer, Jr., Stephen R. Leeolou and Stephen L.
Holcombe, and form of amendments dated October 12, 1987 to agreements with Messrs. Richardson,
Griffin, Preyer and Leeolou, filed as Exhibit 10(a)(3) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.
*10(a)(4) Form of Restricted Stock Bonus Agreements dated October 12, 1987 between the Registrant and
Haynes G. Griffin, Stephen R. Leeolou and L. Richardson Preyer, Jr., filed as Exhibit 10(a)(4) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988.
*10(a)(5) Form of Amendment to Restricted Stock Bonus Plan Agreements dated as of March 1, 1990 by and
between Haynes G. Griffin, L. Richardson Preyer, Jr., Stephen R. Leeolou, and Stephen L. Holcombe
and the Registrant, amending the Restricted Stock Bonus Plan Agreements dated as March 23, 1987,
filed as Exhibit 10(a)(5) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
*10(a)(6) Form of Amendment to Restricted Stock Bonus Plan Agreements dated as of March 1, 1990 by and
between Haynes G. Griffin, L. Richardson Preyer, Jr. and Stephen R. Leeolou and the Registrant,
amending the Restricted Stock Bonus Plan Agreements dated as October 12, 1987, filed as Exhibit
10(a)(6) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
*10(a)(7) Form of Second Amendment to Restricted Stock Bonus Plan Agreements dated February 22, 1991
between the Registrant and Haynes G. Griffin, Stephen R. Leeolou, and L. Richardson Preyer, Jr.,
amending the Restricted Stock Bonus Agreements dated October 12, 1987, filed as Exhibit 10(a)(7) to
the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
*10(a)(8) Form of Third Amendment to Restricted Stock Bonus Plan Agreements dated February 22, 1991
between the Registrant and Haynes G. Griffin, Stephen R. Leeolou, L. Richardson Preyer, Jr., and
Stephen L. Holcombe, amending the Restricted Stock Bonus Agreements dated March 23, 1987, filed
as Exhibit 10(a)(8) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
*10(a)(9) Form of Third Amendment to Restricted Stock Bonus Plan Agreement dated February 22, 1991
between the Registrant and Stuart S. Richardson, amending the Restricted Stock Bonus Plan
Agreement dated March 23, 1987, filed as Exhibit 10(a)(9) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990.
10(a)(10) Form of Fourth Amendment to Restricted Stock Bonus Plan Agreements dated as of March 1, 1990 by
and between Haynes G. Griffin, L. Richardson Preyer, Jr., Stephen R. Leeolou, Stephen L. Holcombe
and Stuart S. Richardson and the Registrant, amending the Restricted Stock Bonus Plan Agreements
dated as March 23, 1987.
*10(a)(11) Employment Agreement dated March 1, 1995 by and between the Registrant and Haynes G. Griffin,
filed as Exhibit 10(a)(10) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.

EXHIBIT NO. DESCRIPTION
- ------------------ -------------------------------------------------------------------------------------------------------

*10(a)(12) Amendment To Employment Agreement dated September 21, 1998 by and between the Registrant and
Haynes G. Griffin, filed as Exhibit 10(a)(1) to the Registrant's Form 10-Q dated September 30, 1998.
*10(a)(13) Employment Agreement dated March 1, 1995 by and between the Registrant and L. Richardson
Preyer, Jr., filed as Exhibit 10(a)(11) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
*10(a)(14) Amendment To Employment Agreement dated September 21, 1998 by and between the Registrant and
L. Richardson Preyer, Jr., filed as Exhibit 10(a)(3) to the Registrant's Form 10-Q dated September 30,
1998.
*10(a)(15) Employment Agreement dated March 1, 1995 by and between the Registrant and Stephen R. Leeolou,
filed as Exhibit 10(a)(12) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
*10(a)(16) Amendment To Employment Agreement dated September 21, 1998 by and between the Registrant and
Stephen R. Leeolou, filed as Exhibit 10(a)(2) to the Registrant's Form 10-Q dated September 30,
1998.
*10(a)(17) Executive Officer Long-Term Incentive Compensation Plan adopted October 1, 1990 by the Registrant,
filed as Exhibit 10(a)(13) to the Registrant's Annual Report on Form 10-K to the fiscal year ended
December 31, 1990.
*10(a)(18) Form of First Amendment To Executive Officer Long-Term Incentive Compensation Plan dated as of
July 22, 1998 between the Registrant and Haynes G. Griffin, Stuart S. Richardson, Stephen R.
Leeolou, and L. Richardson Preyer, Jr., filed as Exhibit 10(a)(4) to the Registrant's Form 10-Q dated
September 30, 1998.
*10(a)(19) Form on Nonqualified Option Agreements dated October 12, 1987 between the Registrant and
Stephen L. Holcombe, Ralph E. Hiskey, John F. Dille, Jr., Charles T. Hagel, L. Richardson Preyer, Sr.
and Robert A. Silverberg, filed as Exhibit 10(a)(5) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.
*10(a)(20) Nonqualified Option Agreements dated October 12, 1987 between the Registrant and Robert M.
DeMichele, John F. Dille, Jr., L. Richardson Preyer, Sr., Robert A. Silverberg and Thomas I. Storrs,
filed as Exhibit 10(a)(8) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
*10(a)(21) Form of Incentive Stock Option Agreements dated March 3, 1988 between the Registrant and
Stephen L. Holcombe and Richard C. Rowlenson, filed as Exhibit 10(a)(9) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
*10(a)(22) Form of Incentive Stock Option Agreements dated June 23, 1988 between the Registrant and
Charles T. Hagel, Haynes G. Griffin, L. Richardson Preyer, Jr., and Stephen R. Leeolou, filed as
Exhibit 10(a)(10) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
*10(a)(23) Amended and Restated 1994 Long-Term Incentive Plan, approved by the Registrant's Board of
Directors on February 26, 1997, filed as Exhibit 10(a)(18) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
*10(a)(24) Senior Management Severance Plan of the Registrant adopted March 8, 1995, filed as Exhibit
10(a)(19) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
*10(a)(25) Form of Severance Agreement for Senior Management Employees of the Registrant, filed as Exhibit
10(a)(20) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
*10(a)(26) Form of Incentive Stock Agreement dated March 7, 1995 between the Registrant and Haynes G.
Griffin, Steven L. Holcombe, Richard C. Rowlenson and Stuart S. Richardson filed as Exhibit
10(a)(21) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995.
*10(a)(27) Form of Nonqualified Option Agreement dated March 7, 1995 between the Registrant and Haynes G.
Griffin, Stephen R. Leeolou, L. Richardson Preyer, Jr., Stephen L. Holcombe, Richard C. Rowlenson
and Stuart S. Richardson, filed as Exhibit 10(a)(22) to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
*10(a)(28) Form of Tax Reimbursement Agreement dated as of July 22, 1998 by and between the Registrant and
Haynes G. Griffin, Stuart S. Richardson, Stephen R. Leeolou, L. Richardson Preyer, Jr., and Stephen L.
Holcombe, filed as Exhibit 10(a)(5) to the Registrant's Form 10-Q dated September 30, 1998.
10(c)(1) Letter Agreement dated December 28, 1998 between the Registrant and AT&T Corp. regarding loans
by the Registrant to certain executives to finance the exercise of stock options and related tax
liabilities.
10(c)(2) Form of Agreement Re Netting of Payments between the Registrant and its Executive Officers.

EXHIBIT NO. DESCRIPTION
- ------------------ -----------------------------------------------------------------------------------------------------

10(c)(3) Form of Pledge Agreement between the Registrant and Haynes G. Griffin, Stephen R. Leeolou and
L. Richardson Preyer, Jr.
10(c)(4) Form of Promissory Note to the Registrant from Haynes G. Griffin, Stephen R. Leeolou and
L. Richardson Preyer, Jr. with respect to Nonqualified Option Exercise Price Loans.
10(c)(5) Form of Promissory Note to the Registrant from Haynes G. Griffin, Stephen R. Leeolou and
L. Richardson Preyer, Jr. with respect to ISO Exercise Price Loans and Tax Loans.
10(c)(6) Form of Pledge Agreement between the Registrant and its Executive Vice Presidents.
10(c)(7) Form of Promissory Note to the Registrant from Executive Vice Presidents with respect to
Nonqualified Option Exercise Price Loans.
10(c)(8) Form of Promissory Note to the Registrant from Executive Vice Presidents with respect to ISO
Exercise Price Loans and Tax Loans.
*10(d))(1) 1989 Stock Option Plan of the Registrant approved by the Board of Directors of the Registrant on
December 21, 1989, and approved by Shareholders at a meeting held on May 10, 1990, filed as
Exhibit 10(h)(1) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989.
*10(d)(2) Form of Nonqualified Stock Option Agreements dated March 1, 1990 between the Registrant and
Haynes G. Griffin, L. Richardson Preyer, Jr., Stephen R. Leeolou, Stephen L. Holcombe and Stuart S.
Richardson, filed as Exhibit 10(h)(2) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989.
*10(d)(3) Form of Incentive Stock Option Agreement dated March 1, 1990 between the Registrant and
Richard C. Rowlenson, filed as Exhibit 10(h)(3) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989.
*10(d)(4) Form of Incentive Stock Option Agreement dated July 30, 1990 between the Registrant and
Stephen L. Holcombe, Richard C. Rowlenson, Sunir Kochhar and Timothy G. Biltz, filed as Exhibit
10(f)(4) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
*10(d)(5) Stock Option Agreement dated November 28, 1990 between the Registrant and Stuart Smith
Richardson, filed as Exhibit 10(f)(5) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990.
*10(d)(6) Form of Stock Option Agreements dated November 28, 1990 between the Registrant and Haynes G.
Griffin, Stephen R. Leeolou, L. Richardson Preyer, Jr. and Stephen L. Holcombe, filed as Exhibit
10(f)(6) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
*10(d)(7) Incentive Stock Option Agreements dated November 28, 1990 between the Registrant and Richard C.
Rowlenson, filed as Exhibit 10(f)(7) to the Registrant's December 31, 1990.
*10(g)(1) Nonqualified Deferred Compensation Plan with Form of Salary Reduction Agreement filed as Exhibit
10(g)(1) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
10(h)(1) Indemnification Agreement dated as of October 1, 1998 between the Registrant and Haynes G. Griffin,
Stephen R. Leeolou, L. Richardson Preyer, Jr., Stuart Smith Richardson, Piedmont Harbor - Piedmont
Associates Limited Partnership and Smith Richardson Foundation, Inc.
11 Calculation of diluted net income per share for the years ended December 31, 1998, 1997, and 1996.
22 Subsidiaries of the Registrant.
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of Arthur Andersen & Co.
23(c) Consent of KPMG LLP.
27 Financial Data Schedule.

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* Incorporated by reference to the statement or report indicated.