##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION




FORM 10-Q



|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES 
	 EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 1999

or



|      |                                                                                             
|----- | --------------------------------------------------------------------------------------------
|[   ] | 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: 0-24581

CAPROCK COMMUNICATIONS CORP.



|                                                                     |  |                                                
|-------------------------------------------------------------------- |  | -----------------------------------------------
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Texas(State or other jurisdiction of
	incorporation or organization) |  | 75-2765572(I.R.S. Employer
	Identification No.)

15601 Dallas Parkway, Suite 700

Dallas, Texas 75248




Registrants telephone number, including area code: 
(972) 982-9500

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 
[   ]

The number of shares of the
registrants Common Stock outstanding as of October 31,
 1999 was 33,198,864.



---






---

TABLE OF CONTENTS



|                                                                                    |                                                                                               |                                                                             |  |  |  |  |  | 
|----------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- |  |  |  |  |  | 
|INDEX                                                                              
|                                                                                    | PART I. FINANCIAL INFORMATION                                                                
|                                                                                    | Item 1. Financial Statements                                                                 
|CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS          
|CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
|(In thousands, except per share data) (Unaudited)                                  
|CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW 
|(In thousands) (Unaudited)                                                         
|                                                                                    | (1) Summary of Significant Accounting Policies                                               
|                                                                                    |                                                                                               | (a) Basis of Presentation and Nature of Business                           
|                                                                                    | (2) Business Combination                                                                     
|                                                                                    | (3) Secondary Public Offering                                                                
|                                                                                    | (4) Senior Note Offering                                                                     
|                                                                                    | (5) Earnings per share                                                                       
|                                                                                    | (6) Segment Reporting                                                                        
|                                                                                    | (7) Fiber Build Agreement                                                                    
|                                                                                    | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                    | Forward Looking Information                                                                  
|                                                                                    | Overview                                                                                     
|                                                                                    | Results of Operations                                                                        
|                                                                                    | Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1999      
|                                                                                    | Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1999        
|                                                                                    | Liquidity and Capital Resources                                                              
|                                                                                    | New Accounting Pronouncements                                                                
|                                                                                    | Contingencies                                                                                
|                                                                                    | Year 2000                                                                                    
|                                                                                    | State of Readiness                                                                           
|                                                                                    |                                                                                               | Switching Systems:                                                         
|                                                                                    |                                                                                               | Network Operations and Fiber:                                              
|                                                                                    |                                                                                               | Satellite/Microwave Transmission Equipment and Satellite Service Providers:
|                                                                                    |                                                                                               | Billing and Call Record Collection Systems:                                
|                                                                                    |                                                                                               | Supply Chain (Vendor Provider of Switch Services):                         
|                                                                                    |                                                                                               | Non-IT Systems:                                                            
|                                                                                    | Costs                                                                                        
|                                                                                    | Risks                                                                                        
|                                                                                    | Contingency Plans                                                                            
|                                                                                    | Disclaimer                                                                                   
|                                                                                    | ITEM 3. Quantitative and Qualitative Disclosure About Market Risk                            
|PART II. OTHER INFORMATION                                                         
|                                                                                    | ITEM 1. Legal Proceedings                                                                    
|                                                                                    | ITEM 2. Changes in Securities and Use of Proceeds                                            
|                                                                                    | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|INDEX TO EXHIBITS                                                                  



---



CAPROCK COMMUNICATIONS CORP.

FORM 10-Q


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999







INDEX


|                              |          |                                                                                                                           |                                                                                        |        |    |    | 
|----------------------------- | -------- | ------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------ | -- | -- | 
|                              |          |                                                                                                                           |                                                                                        | Page  
|                              |          |                                                                                                                           |                                                                                        | Number
|                              |          |                                                                                                                           |                                                                                        |       
|                             
|                             
|                             
|                             
|PART 1. FINANCIAL INFORMATION |          |                                                                                                                           | 1                                                                                      |       
|                             
|                             
|                             
|                             
|                              | Item  1. |                                                                                                                           | Financial Statements                                                                   |        |    | 1  | 
|                             
|                             
|                             
|                             
|                              |          | Consolidated Balance Sheets at December 31, 1998 and
	September 30, 1999 (unaudited)                                      |                                                                                        |        | 1  |   
|                             
|                             
|                             
|                             
|                              |          | Consolidated Statements of Operations (unaudited) for the Three
	Months and Nine Months Ended September 30, 1998 and 1999 |                                                                                        |        | 2  |   
|                             
|                             
|                             
|                             
|                              |          | Consolidated Statements of Cash Flows (unaudited) for the Nine
	Months Ended September 30, 1998 and 1999                  |                                                                                        |        | 3  |   
|                             
|                             
|                             
|                             
|                              |          | Notes to Consolidated Financial Statements                                                                                |                                                                                        |        | 4  |   
|                             
|                             
|                             
|                             
|                              | Item  2. |                                                                                                                           | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |        |    | 9  | 
|                             
|                             
|                             
|                             
|                              | Item  3. |                                                                                                                           | Quantitative and Qualitative Disclosures About Market Risk                             |        |    | 21 | 
|                             
|                             
|                             
|                             
|PART II OTHER INFORMATION     |          |                                                                                                                           | 22                                                                                     |       
|                             
|                             
|                             
|                             
|                              | Item  1. |                                                                                                                           | Legal Proceedings                                                                      |        |    | 22 | 
|                             
|                             
|                             
|                             
|                              | Item  2. |                                                                                                                           | Changes in Securities and Use of Proceeds                                              |        |    | 22 | 
|                             
|                             
|                             
|                             
|                              | Item  6. |                                                                                                                           | Exhibits and Reports on Form 8-K                                                       |        |    | 22 | 
|                             
|                             
|                             
|                             
|                              |          | SIGNATURE PAGE                                                                                                            |                                                                                        |        | 23 |   



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##### Table of Contents






PART I.  FINANCIAL INFORMATION




Item 1. Financial Statements




CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


ASSETS

|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |         |     |         | 
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------------- | --- | ------- | ------- | ------- | --- | ------- | 
|                                                     |                                                                                                                                                                | December 31,                              |                                            | September 30,
|                                                     |                                                                                                                                                                | 1998                                      |                                            | 1999         
|                                                     |                                                                                                                                                                |                                           |                                            |              
|                                                     |                                                                                                                                                                |                                           |                                            | (Unaudited)  
|                                                    
|                                                    
|                                                    
|                                                    
|Current assets:                                      |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash and cash equivalents                                                                                                                                      |                                           | $                                          | 294           |     |         | $       | 6,217   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Marketable securities                                                                                                                                          |                                           |                                            | 97,020        |     |         |         | 245,861 |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts receivable and unbilled services, less allowance for
	doubtful accounts of $710 and $2,108 at December 31, 1998
	and September 30, 1999, respectively |                                           |                                            | 19,936        |     |         |         | 62,034  |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income tax receivable                                                                                                                                          |                                           |                                            | 1,405         |     |         |         | 1,804   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Costs and estimated earnings in excess of billings                                                                                                             |                                           |                                            | 7,238         |     |         |         | 2,901   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Inventory                                                                                                                                                      |                                           |                                            | 1,302         |     |         |         | 1,212   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Prepaid expenses and other                                                                                                                                     |                                           |                                            | 707           |     |         |         | 3,335   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Deferred income taxes                                                                                                                                          |                                           |                                            | 1,989         |     |         |         | 3,715   |    
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     |                                                                                                                                                                |                                           | Total current assets                       |               |     | 129,891 |         |         |     | 327,079 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Property, plant and equipment                        |                                                                                                                                                                |                                           | 71,968                                     |               |     |         | 165,025 |        
|                                                    
|                                                    
|                                                    
|                                                    
|Accumulated depreciation                             |                                                                                                                                                                |                                           | (12,361                                    | )             |     |         | (18,080 | )      
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     | Property, plant and equipment, net                                                                                                                             |                                           |                                            | 59,607        |     |         |         | 146,945 |    
|                                                    
|                                                    
|                                                    
|                                                    
|Other assets                                         |                                                                                                                                                                |                                           | 2,468                                      |               |     |         | 20,820  |        
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     |                                                                                                                                                                |                                           | Total assets                               |               | $   | 191,966 |         |         | $   | 494,844 | 
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Current liabilities:                                 |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accounts payable and accrued expenses                                                                                                                          |                                           | $                                          | 26,851        |     |         | $       | 47,804  |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Billings in excess of costs and earnings                                                                                                                       |                                           |                                            |              |     |         |         | 1,625   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Unearned revenue                                                                                                                                               |                                           |                                            | 551           |     |         |         | 786     |    
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     |                                                                                                                                                                |                                           | Total current liabilities                  |               |     | 27,402  |         |         |     | 50,215  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Senior notes, net of unamortized debt issuance costs |                                                                                                                                                                |                                           | 145,187                                    |               |     |         | 347,248 |        
|                                                    
|                                                    
|                                                    
|                                                    
|Deferred income taxes                                |                                                                                                                                                                |                                           | 3,315                                      |               |     |         | 2,226   |        
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     |                                                                                                                                                                |                                           | Total liabilities                          |               |     | 175,904 |         |         |     | 399,689 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Stockholders equity:                                |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Preferred stock, $.01 par value; 20,000,000 shares
	authorized; none issued                                                                                    |                                           |                                            |              |     |         |         |        |    
|                                                     | Common stock, $.01 par value; 200,000,000 shares
	authorized; issued and outstanding, 28,932,395 and
	33,055,911 shares at December 31,                        |                                           |                                            |               |     |         |         |         |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                                | 1998 and September 30, 1999, respectively |                                            |               | 289 |         |         |         | 331 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Additional paid-in capital                                                                                                                                     |                                           |                                            | 10,522        |     |         |         | 93,270  |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Retained earnings                                                                                                                                              |                                           |                                            | 5,608         |     |         |         | 2,050   |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Accumulated other comprehensive income                                                                                                                         |                                           |                                            | 9             |     |         |         | (7      | )  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Unearned compensation                                                                                                                                          |                                           |                                            | (329          | )   |         |         | (250    | )  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Treasury stock, at cost                                                                                                                                        |                                           |                                            | (37           | )   |         |         | (239    | )  
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     |                                                                                                                                                                |                                           | Total stockholders equity                 |               |     | 16,062  |         |         |     | 95,155  | 
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        
|                                                     |                                                                                                                                                                |                                           | Total liabilities and stockholders equity |               | $   | 191,966 |         |         | $   | 494,844 | 
|                                                     |                                                                                                                                                                |                                           |                                            |               |     |         |         |        

See accompanying notes to consolidated financial
statements.

1



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##### Table of Contents






CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS




(In thousands, except per share data)




|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |        |        |         |  
|------------------------------------ | ----------------------------------- | --------------------------------- | ------------------------ | ------ | ------ | ----------------- | ------ | ------ | ------ | ------ |  |  |  |  | ------ | ------ | ------ | ------ | ------- | ------ | ------ | ------- | -
|                                     |                                     |                                   |                          |        |        |                  
|                                     |                                     | Three Months Ended                |                          |        |        | Nine Months Ended
|                                     |                                     | September 30,                     |                          |        |        | September 30,    
|                                     |                                     |                                   |                          |        |        |                  
|                                     |                                     | 1998                              |                          | 1999   |        |                   |        | 1998   |        | 1999  
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |       
|Revenues:                            |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Carriers carrier                   |                                   | $                        | 21,684 |        |                   | $      | 35,063 |        |        |  |  |  |  | $      | 50,125 |        |        | $       | 84,825 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Integrated services                 |                                   |                          | 5,352  |        |                   |        | 6,190  |        |        |  |  |  |  |        | 13,477 |        |        |         | 15,338 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Systems services                    |                                   |                          | 8,248  |        |                   |        | 7,750  |        |        |  |  |  |  |        | 23,102 |        |        |         | 23,436 |       
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                     |                                     |                                   | Total revenues           |        |        | 35,284            |        |        |        | 49,003 |  |  |  |  |        |        |        | 86,704 |         |        |        | 123,599 |  
|                                    
|                                    
|                                    
|                                    
|Cost of services                     |                                     |                                   | 25,975                   |        |        |                   | 28,762 |        |        |        |  |  |  |  | 60,011 |        |        |        | 73,681  |       
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                     |                                     | Gross profit                      |                          |        | 9,309  |                   |        |        | 20,241 |        |  |  |  |  |        |        | 26,693 |        |         |        | 49,918 |        
|                                    
|                                    
|                                    
|                                    
|Operating expenses:                  |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Selling, general and administrative |                                   |                          | 5,332  |        |                   |        | 13,572 |        |        |  |  |  |  |        | 14,892 |        |        |         | 38,584 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Merger related expenses             |                                   |                          | 2,313  |        |                   |        |       |        |        |  |  |  |  |        | 2,313  |        |        |         |       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Depreciation and amortization       |                                   |                          | 1,332  |        |                   |        | 2,843  |        |        |  |  |  |  |        | 3,582  |        |        |         | 6,180  |       
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                     |                                     |                                   | Total operating expenses |        |        | 8,977             |        |        |        | 16,415 |  |  |  |  |        |        |        | 20,787 |         |        |        | 44,764  |  
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|Operating income                     |                                     |                                   | 332                      |        |        |                   | 3,826  |        |        |        |  |  |  |  | 5,906  |        |        |        | 5,154   |       
|                                    
|                                    
|                                    
|                                    
|Interest expense                     |                                     |                                   | (4,130                   | )      |        |                   | (9,080 | )      |        |        |  |  |  |  | (5,087 | )      |        |        | (19,216 | )     
|                                    
|                                    
|                                    
|                                    
|Interest income                      |                                     |                                   | 1,545                    |        |        |                   | 3,587  |        |        |        |  |  |  |  | 1,584  |        |        |        | 6,589   |       
|                                    
|                                    
|                                    
|                                    
|Other income                         |                                     |                                   | 40                       |        |        |                   | 1,748  |        |        |        |  |  |  |  | 145    |        |        |        | 1,613   |       
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                     |                                     | Income (loss) before income taxes |                          |        | (2,213 | )                 |        |        | 81     |        |  |  |  |  |        |        | 2,548  |        |         |        | (5,860 | )      
|                                    
|                                    
|                                    
|                                    
|Income tax expense (benefit)         |                                     |                                   | (563                     | )      |        |                   | 32     |        |        |        |  |  |  |  | 1,325  |        |        |        | (2,302  | )     
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                     |                                     |                                   | Net income (loss)        |        | $      | (1,650            | )      |        | $      | 49     |  |  |  |  |        |        | $      | 1,223  |         |        | $      | (3,558  | )
|                                     |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|Earnings (loss) per common share:    |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Basic                               |                                   | $                        | (0.06  | )      |                   | $      | 0.00   |        |        |  |  |  |  | $      | 0.04   |        |        | $       | (0.11  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Diluted                             |                                   | $                        | (0.06  | )      |                   | $      | 0.00   |        |        |  |  |  |  | $      | 0.04   |        |        | $       | (0.11  | )     
|                                    
|                                    
|                                    
|                                    
|Weighted average shares outstanding: |                                     |                                   |                          |        |        |                   |        |        |        |        |  |  |  |  |        |        |        |        |         |       
|                                    
|                                    
|                                    
|                                    
|                                     | Basic                               |                                   |                          | 28,914 |        |                   |        | 33,047 |        |        |  |  |  |  |        | 28,885 |        |        |         | 31,230 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Diluted                             |                                   |                          | 28,914 |        |                   |        | 34,355 |        |        |  |  |  |  |        | 29,426 |        |        |         | 31,230 |       

See accompanying notes to consolidated financial
statements.

2



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##### Table of Contents






CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW




(In thousands)




|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |          |        |         |          |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | ----- | ------ | -------- | -------- | ------ | ------- | -------- | -
|                                                     |                                                                                                     |                                                                  
|                                                     |                                                                                                     | Nine Months Ended                                                
|                                                     |                                                                                                     | September 30,                                                    
|                                                     |                                                                                                     |                                                                  
|                                                     |                                                                                                     | 1998                                                              |                                                    | 1999                                               
|                                                     |                                                                                                     |                                                                   |                                                    |                                                    
|Cash flows from operating activities:                |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                                                                   |                                                                   | $                                                  | 1,223                                               |       |        | $        | (3,558   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income (loss) to net cash
	provided by (used in) operating activities: |                                                                   |                                                    |                                                     |       |        |          |          |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     | Depreciation and amortization                                     |                                                    |                                                     | 3,582 |        |          |          | 6,180  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     | Gain on sale of assets                                            |                                                    |                                                     | (49   | )      |          |          | (13    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     | Deferred income taxes                                             |                                                    |                                                     | 1,524 |        |          |          | (2,815 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     | Equity in earnings of unconsolidated joint ventures               |                                                    |                                                     | (132  | )      |          |          | (1,586 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     | Amortization of debt issuance costs, included in interest expense |                                                    |                                                     | 92    |        |          |          | 752    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     | Changes in operating assets and liabilities:                      |                                                    |                                                     |       |        |          |          |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Accounts receivable and unbilled services          |                                                     |       | (5,587 | )        |          |        | (42,098 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Income taxes receivable                            |                                                     |       | (2,374 | )        |          |        | (399    | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Costs and earnings in excess of billings           |                                                     |       | (2,086 | )        |          |        | 4,337   |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Inventory                                          |                                                     |       | (546   | )        |          |        | 90      |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Prepaid expenses and other                         |                                                     |       | (888   | )        |          |        | (2,815  | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Accounts payable and accrued liabilities           |                                                     |       | 15,436 |          |          |        | 20,953  |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Billings in excess of costs and estimated earnings |                                                     |       | (92    | )        |          |        | 1,625   |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                     |                                                                   | Unearned revenue                                   |                                                     |       | 34     |          |          |        | 235     |         
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                     |                                                                                                     |                                                                   |                                                    | Net cash provided by (used in) operating activities |       |        | 10,137   |          |        |         | (19,112  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from investing activities:                |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property, plant and equipment                                                          |                                                                   |                                                    | (23,304                                             | )     |        |          | (103,975 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of marketable securities                                                                   |                                                                   |                                                    | (107,292                                            | )     |        |          | (283,613 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of marketable securities                                                         |                                                                   |                                                    |                                                    |       |        |          | 134,772  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from disposal of property, plant and equipment                                             |                                                                   |                                                    | 304                                                 |       |        |          | 10,641   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investment in unconsolidated subsidiary                                                             |                                                                   |                                                    |                                                    |       |        |          | (16,671  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of ICEL                                                                                    |                                                                   |                                                    | (610                                                | )     |        |          |         |       
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                     |                                                                                                     |                                                                   |                                                    | Net cash used in investing activities               |       |        | (130,902 | )        |        |         | (258,846 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from financing activities:                |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments on notes payable                                                                 |                                                                   |                                                    | (18,560                                             | )     |        |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of senior notes, net of debt issuance
	costs                                 |                                                                   |                                                    | 145,541                                             |       |        |          | 201,309  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from line of credit                                                                        |                                                                   |                                                    | 44,717                                              |       |        |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments on line of credit                                                                |                                                                   |                                                    | (45,869                                             | )     |        |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of treasury stock                                                                          |                                                                   |                                                    | (13                                                 | )     |        |          | (202     | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of common stock, net of issuance costs                                       |                                                                   |                                                    | 95                                                  |       |        |          | 82,790   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments under capital lease obligations                                                  |                                                                   |                                                    | (177                                                | )     |        |          |         |       
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                     |                                                                                                     |                                                                   |                                                    | Net cash provided by financing activities           |       |        | 125,734  |          |        |         | 283,897  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Effect of exchange rate on cash and cash equivalents |                                                                                                     |                                                                   | 19                                                 |                                                     |       |        | (16      | )       
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|Net increase in cash and cash equivalents            |                                                                                                     |                                                                   | 4,988                                              |                                                     |       |        | 5,923    |         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                     |                                                                   | 3,520                                              |                                                     |       |        | 294      |         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at end of period           |                                                                                                     | $                                                                 | 8,508                                              |                                                     |       | $      | 6,217    |         
|                                                    
|                                                    
|                                                    
|                                                    
|Supplemental disclosure of cash flow information:    |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid for interest                                                                              |                                                                   | $                                                  | 896                                                 |       |        | $        | 17,950   |       
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                     | Cash paid for income taxes                                                                          |                                                                   | $                                                  | 1,862                                               |       |        | $        |         |       
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|Non-cash investing activity:                         |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of stock for ICEL acquisition                                                              |                                                                   | $                                                  | 1,578                                               |       |        | $        |         |       
|                                                     |                                                                                                     |                                                                   |                                                    |                                                     |       |        |          |         

See accompanying notes to consolidated financial
statements.

3



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##### Table of Contents



CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(1)  Summary of Significant Accounting Policies






| |                                                 
| | ------------------------------------------------
| | (a) Basis of Presentation and Nature of Business

The consolidated financial statements include CapRock
Communications Corp. (CapRock or the
Company) and its majority owned subsidiaries. The
Company was formed on February 3, 1998, to serve as a
holding company for the operations of CapRock Telecommunications
Corp., a Texas corporation (Telecommunications),
CapRock Fiber Network Ltd., a Texas limited partnership
(CapRock Fiber), and IWL Communications,
Incorporated, a Texas corporation, doing business as CapRock
Services Corp. (CapRock Services), and its wholly
owned subsidiaries upon the consummation of the business
combination of those companies (the Combination). All
 significant inter-company transactions are eliminated in the
consolidation. The equity method is used to account for
unconsolidated investments in companies in which the Company
exercises significant influences over operating and financial
policies, but does not have a controlling interest. On
August 26, 1998, pursuant to the Agreement and Plan of
Merger and Plan of Exchange dated February 16, 1998, as
amended (the Merger Agreement), among the Company,
Telecommunications, CapRock Fiber, CapRock Services and certain
other parties, the Company completed the Combination
(note 2).

The Company is a regional facilities-based integrated
communications provider offering local, long distance, Internet,
data and private line services to small and medium-sized
businesses. The Company also provides switched and dedicated
access, regional and international long distance, private lines
and dark fiber to carrier customers. The Company is in the
process of building an advanced fiber network throughout Texas,
Louisiana, Oklahoma, Arkansas, New Mexico and Arizona.
Additionally, the Company, through its wholly owned
subsidiary  CapRock Services, provides communications
solutions to customers with operations in remote,
difficult-access regions. The Company markets its services
through its internal sales representatives and a network of
independent agents.

The accompanying unaudited consolidated financial statements,
which should be read in conjunction with the consolidated
financial statements and footnotes included in the Companys
 1998 Annual Report on Form 10-K, have been prepared in
accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
 In the opinion of management, all adjustments (consisting only
of normal recurring adjustments) considered necessary for a fair
presentation have been included. Accounting measurements at
interim dates inherently involve greater reliance on estimates
than at year-end. The results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of
the results to be expected for the entire fiscal year ending
December 31, 1999.




(2)  Business Combination

On August 26, 1998, pursuant to the Merger Agreement, the
Company completed the Combination with Telecommunications,
CapRock Fiber and CapRock Services. Accordingly, the Consolidated
 Balance Sheets as of December 31, 1998 and
September 30, 1999 and the Consolidated Statements of
Operations and Consolidated Statements of Cash Flows for the nine
 months ended September 30, 1998 and 1999 include
Telecommunications, CapRock Fiber and CapRock Services as though
these entities had always been a part of CapRock.

Upon the consummation of the Combination, all previously
outstanding shares of CapRock Services common stock ceased to
exist and each such share was converted into and became
exchangeable for one share of CapRock common stock, and all
previously outstanding shares of Telecommunications common stock
ceased to exist, and each such share was converted into and
became exchangeable for 1.789030878 shares of CapRock common
 stock and each one percent (1%) of CapRock Fiber interests
issued and

4



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##### Table of Contents



CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


outstanding was exchanged for 63,194.54 shares of CapRock
common stock. The Company issued 28,910,221 common shares in the
Combination. Additionally, outstanding employee stock options of
CapRock Services and Telecommunications were converted at the
above exchange factors into options to purchase shares of CapRock
 common stock. The Combination constituted a tax-free
reorganization and was accounted for as a pooling of interests.

In May 1998, CapRock Services changed its fiscal year end to
coincide with the fiscal years of CapRock, Telecommunications and
 CapRock Fiber. The Consolidated Statement of Operations for the
nine months ended September 30, 1998 and 1999 combine the
operating activity for all three entities for these periods.

The transactions between Telecommunications, CapRock Services and
 CapRock Fiber have been eliminated for all respective periods
presented. Certain reclassifications were made to CapRock
Services financial statements to conform to CapRocks
presentations.




(3)  Secondary Public Offering

On May 6, 1999, the Company entered into an underwriting
agreement with various underwriters to sell 4,000,000 shares
 of its common stock at a price of $22.00 per share in a
public offering. The registration statement for the equity
offering was declared effective by the SEC on May 6, 1999
and closed on May 12, 1999. The net proceeds, after
deducting underwriting discounts and the expenses associated with
 the offering, were approximately $81.9 million.




(4)  Senior Note Offering

On May 18, 1999, the Company issued $210 million
aggregate principal amount of private senior notes (the
1999 Senior Notes) due May 1, 2009. Interest on
the 1999 Senior Notes is payable semi-annually in arrears on May
1 and November 1 of each year, commencing November 1, 1999,
at the rate of 11 1/2% per year. The Company received
net proceeds from the offering, after deducting the initial
purchasers discount and expenses, of approximately
$201.3 million. The 1999 Senior Notes are senior unsecured
obligations and as such rank pari passu in right of
payment with the Companys existing senior notes issued in
July 1998 (the 1998 Senior Notes) and with all the
Companys future unsecured and unsubordinated indebtedness.
The indenture governing the 1999 Senior Notes has restrictions
similar to those which currently exist for the Companys
1998 Senior Notes. The proceeds have been, and will be, used to
fund capital expenditures for the construction of the fiber optic
 network, switching equipment and other capital expenditures and
to expand the Companys sales offices, for potential
acquisitions and for general working capital purposes. Unutilized
 funds have been invested in short-term, high-grade investment
securities classified as available for sale.

In July 1999, the Company filed an exchange offer Registration
Statement (Exchange Offer Registration Statement)
with the SEC for the registration of $210 million of
principal amount of its registered senior notes due May 1,
2009 (the Exchange Notes) to be offered in exchange
for the 1999 Senior Notes (the Exchange Offer). The
Exchange Offer Registration Statement was declared effective by
the SEC on July 30, 1999 and the Exchange Offer expired on
September 1, 1999. The terms of the Exchange Notes are
identical in all material respects to the 1999 Senior Notes
except that the Exchange Notes have been registered under the
Securities Act of 1933, as amended.

5



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##### Table of Contents



CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)







(5)  Earnings per share

The following table sets forth the computation of basic and
diluted earnings (loss) per share (in thousands, except per
share amounts):

|                               |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |        |  
|------------------------------ | -------------------------------------------------------------------------------------- | ------------------ | - | ------ | - | ----------------- | - | ------ |  | ---- |  |  |  |  | - | ------ |  |  | - | ------ | -
|                               |                                                                                        |                    |   |        |   |                  
|                               |                                                                                        | Three Months Ended |   |        |   | Nine Months Ended
|                               |                                                                                        | September 30,      |   |        |   | September 30,    
|                               |                                                                                        |                    |   |        |   |                  
|                               |                                                                                        | 1998               |   | 1999   |   |                   |   | 1998   |  | 1999
|                               |                                                                                        |                    |   |        |   |                   |   |        |  |     
|Numerator:                     |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |       
|                              
|                              
|                              
|                              
|                               | Net income (loss)                                                                      |                    | $ | (1,650 | ) |                   | $ | 49     |  |      |  |  |  |  | $ | 1,223  |  |  | $ | (3,558 | )
|                              
|                              
|                              
|                              
|Denominator:                   |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |       
|                              
|                              
|                              
|                              
|                               | Denominator for basic earnings (loss) per share-weighted average
	shares outstanding   |                    |   | 28,914 |   |                   |   | 33,047 |  |      |  |  |  |  |   | 28,885 |  |  |   | 31,230 |  
|                              
|                              
|                              
|                              
|Effect of dilutive securities: |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |       
|                              
|                              
|                              
|                              
|                               | Employee stock options and warrants                                                    |                    |   |       |   |                   |   | 1,308  |  |      |  |  |  |  |   | 541    |  |  |   |       |  
|                               |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |       
|                               | Denominator for diluted earnings (loss) per share-weighted
	average shares outstanding |                    |   | 28,914 |   |                   |   | 34,355 |  |      |  |  |  |  |   | 29,426 |  |  |   | 31,230 |  
|                               |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |       
|                               | Basic and diluted earnings (loss) per share                                            |                    | $ | (0.06  | ) |                   | $ | 0.00   |  |      |  |  |  |  | $ | 0.04   |  |  | $ | (0.11  | )
|                               |                                                                                        |                    |   |        |   |                   |   |        |  |      |  |  |  |  |   |        |  |  |   |       

6



---



##### Table of Contents



CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)







(6) Segment Reporting

In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, which the Company adopted
 in 1998. The Company identifies such segments based on
management responsibility. The Company measures segment profit as
 operating income, which is defined as income before interest
income and expense and income taxes. The service revenue from the
 Telecommunications division includes all revenues generated from
 the sale of telecommunications products to business and
residential customers. These products include local, long
distance, Internet, data and private line services. The Fiber
division includes the operating activity and the assets relating
to the fiber build out. The revenues for the Fiber division
primarily relate to the sale of dark fiber through indefeasible
rights of use agreements (IRUs). The product and
service revenue from the Services division includes the revenues
generated from the design, installation, leasing and sale of
voice and data systems and products, primarily to companies in
the oil and gas industry. The Corporate division includes certain
 general and administrative functions and operating expenses.
Information regarding operating segments is as follows (in
thousands):

|                              |  |                                       |        |  |  |       |  |   |        |          |  |  |  |           |        |  |  |              |  |   |         |   |  |  |  |   |         | 
|----------------------------- |  | ------------------------------------- | ------ |  |  | ----- |  | - | ------ | -------- |  |  |  | --------- | ------ |  |  | ------------ |  | - | ------- | - |  |  |  | - | ------- | 
|                              |  |                                      
|                              |  | Three Months Ended September 30, 1998
|                              |  |                                      
|                              |  | Telecommunications                    |        |  |  | Fiber |  |   |        | Services |  |  |  | Corporate |        |  |  | Consolidated
|                              |  |                                       |        |  |  |       |  |   |        |          |  |  |  |           |        |  |  |             
|Revenues                      |  | $                                     | 24,652 |  |  |       |  | $ | 1,330  |          |  |  |  | $         | 9,302  |  |  |              |  | $ |        |   |  |  |  | $ | 35,284  | 
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                                       | 316    |  |  |       |  |   | 189    |          |  |  |  |           | 827    |  |  |              |  |   |        |   |  |  |  |   | 1,332   | 
|                             
|                             
|                             
|                             
|Operating income              |  |                                       | 1,933  |  |  |       |  |   | 694    |          |  |  |  |           | 80     |  |  |              |  |   | (2,375  | ) |  |  |  |   | 332     | 
|                             
|                             
|                             
|                             
|Total assets                  |  |                                       | 27,776 |  |  |       |  |   | 22,161 |          |  |  |  |           | 32,017 |  |  |              |  |   | 111,732 |   |  |  |  |   | 193,686 | 

|                              |  |                                       |        |   |  |       |  |   |         |          |  |  |  |           |        |  |  |              |  |   |         |   |  |  |  |   |         | 
|----------------------------- |  | ------------------------------------- | ------ | - |  | ----- |  | - | ------- | -------- |  |  |  | --------- | ------ |  |  | ------------ |  | - | ------- | - |  |  |  | - | ------- | 
|                              |  |                                      
|                              |  | Three Months Ended September 30, 1999
|                              |  |                                      
|                              |  | Telecommunications                    |        |   |  | Fiber |  |   |         | Services |  |  |  | Corporate |        |  |  | Consolidated
|                              |  |                                       |        |   |  |       |  |   |         |          |  |  |  |           |        |  |  |             
|Revenues                      |  | $                                     | 20,185 |   |  |       |  | $ | 21,068  |          |  |  |  | $         | 7,750  |  |  |              |  | $ |        |   |  |  |  | $ | 49,003  | 
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                                       | 938    |   |  |       |  |   | 1,127   |          |  |  |  |           | 778    |  |  |              |  |   |        |   |  |  |  |   | 2,843   | 
|                             
|                             
|                             
|                             
|Operating income              |  |                                       | (8,793 | ) |  |       |  |   | 14,216  |          |  |  |  |           | 862    |  |  |              |  |   | (2,459  | ) |  |  |  |   | 3,826   | 
|                             
|                             
|                             
|                             
|Total assets                  |  |                                       | 50,721 |   |  |       |  |   | 123,502 |          |  |  |  |           | 28,818 |  |  |              |  |   | 291,803 |   |  |  |  |   | 494,844 | 

|                              |  |                                      |        |  |  |       |  |   |        |          |  |  |  |           |        |  |  |              |  |   |         |   |  |  |  |   |         | 
|----------------------------- |  | ------------------------------------ | ------ |  |  | ----- |  | - | ------ | -------- |  |  |  | --------- | ------ |  |  | ------------ |  | - | ------- | - |  |  |  | - | ------- | 
|                              |  |                                     
|                              |  | Nine Months Ended September 30, 1998
|                              |  |                                     
|                              |  | Telecommunications                   |        |  |  | Fiber |  |   |        | Services |  |  |  | Corporate |        |  |  | Consolidated
|                              |  |                                      |        |  |  |       |  |   |        |          |  |  |  |           |        |  |  |             
|Revenues                      |  | $                                    | 56,875 |  |  |       |  | $ | 3,882  |          |  |  |  | $         | 25,947 |  |  |              |  | $ |        |   |  |  |  | $ | 86,704  | 
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                                      | 801    |  |  |       |  |   | 585    |          |  |  |  |           | 2,196  |  |  |              |  |   |        |   |  |  |  |   | 3,582   | 
|                             
|                             
|                             
|                             
|Operating income              |  |                                      | 5,011  |  |  |       |  |   | 2,517  |          |  |  |  |           | 753    |  |  |              |  |   | (2,375  | ) |  |  |  |   | 5,906   | 
|                             
|                             
|                             
|                             
|Total assets                  |  |                                      | 27,776 |  |  |       |  |   | 22,161 |          |  |  |  |           | 32,017 |  |  |              |  |   | 111,732 |   |  |  |  |   | 193,686 | 

|                              |  |                                      |         |   |  |       |  |   |         |          |  |  |  |           |        |  |  |              |  |   |         |   |  |  |  |   |         | 
|----------------------------- |  | ------------------------------------ | ------- | - |  | ----- |  | - | ------- | -------- |  |  |  | --------- | ------ |  |  | ------------ |  | - | ------- | - |  |  |  | - | ------- | 
|                              |  |                                     
|                              |  | Nine Months Ended September 30, 1999
|                              |  |                                     
|                              |  | Telecommunications                   |         |   |  | Fiber |  |   |         | Services |  |  |  | Corporate |        |  |  | Consolidated
|                              |  |                                      |         |   |  |       |  |   |         |          |  |  |  |           |        |  |  |             
|Revenues                      |  | $                                    | 55,735  |   |  |       |  | $ | 44,428  |          |  |  |  | $         | 23,436 |  |  |              |  | $ |        |   |  |  |  | $ | 123,599 | 
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                                      | 2,273   |   |  |       |  |   | 1,621   |          |  |  |  |           | 2,286  |  |  |              |  |   |        |   |  |  |  |   | 6,180   | 
|                             
|                             
|                             
|                             
|Operating income              |  |                                      | (18,847 | ) |  |       |  |   | 31,181  |          |  |  |  |           | 1,234  |  |  |              |  |   | (8,414  | ) |  |  |  |   | 5,154   | 
|                             
|                             
|                             
|                             
|Total assets                  |  |                                      | 50,721  |   |  |       |  |   | 123,502 |          |  |  |  |           | 28,818 |  |  |              |  |   | 291,803 |   |  |  |  |   | 494,844 | 

All revenue was derived from unaffiliated customers.

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CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)







(7) Fiber Build Agreement

In February 1999, the Company entered into a joint build
arrangement with Enron Communications, Inc., a wholly owned
subsidiary of Enron Corp., to jointly build approximately
1,050 miles of fiber optic network within the state of
Texas. The build plan includes four conduits to be placed
throughout the 1,050 miles, with one and one-quarter
conduits to be owned and funded by CapRock and one and
one-quarter conduits to be owned and funded by Enron
Communications, Inc., and one and one-half conduits to be owned
and funded by a limited partnership formed by CapRock and Enron
Communications, Inc. The limited partnership will sell a
specified amount of fiber usage rights and CapRock will own
48 fibers.

The total required capital contributions will depend on the costs
 to construct the segment. CapRock and Enron are committed to
each contribute equally to fund the construction. The total
construction costs for the 1,050 miles are estimated at
approximately $100 million.

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##### Table of Contents






ITEM 2.  Managements Discussion and Analysis
of Financial Condition and Results of Operations

The following discussion and analysis should be read in
conjunction with CapRocks consolidated financial statements
 and notes thereto for the year ended December 31, 1998. The
 Company believes that all necessary adjustments (consisting of
normal recurring adjustments) have been included in the amounts
stated below to present fairly the following quarterly
information. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The
results for interim periods are not necessarily indicative of
results to be expected for the year. In this Form 10-Q, the
Company, CapRock, we,
us and our refer to CapRock and its
subsidiaries, including Telecommunications, CapRock Fiber and
CapRock Services, which are our three predecessor companies, as
well as CapRock Network Services, L.P., CapRock
Telecommunications Leasing Corp. and CapRock Design Services,
L.P., unless the context otherwise requires.




Forward Looking Information

This Quarterly Report on Form 10-Q includes forward-looking
statements. We have based these forward-looking statements on our
 current expectations and projections about future events. These
forward-looking statements are subject to risks, uncertainties
and assumptions about CapRock, including:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | our anticipated growth strategies,                                                                                                  
|
| |  | anticipated trends in our business, including trends in
	technology and the growth of communications network products and
	services,
|
| |  | future expenditures for capital projects, and                                                                                       
|
| |  | our ability to continue to control costs and maintain quality.                                                                      

Our actual results could differ materially from those anticipated
 in these forward-looking statements as a result of various
factors, including risks related to, among other things, building
 a fiber network (including obtaining the necessary
rights-of-way, permits and regulatory approvals), supply and
demand for data services, competition, the need for additional
capital, debt and interest payment obligations, restrictions in
our senior note indenture, rapid growth, dependence on local
telephone companies and long distance carriers, our information
systems, retention of key personnel, dependence on major
customers, year 2000 problems, the continued integration of
our predecessor companies, service interruptions, potential
liability as an internet service provider and protection of our
intellectual property.

We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise. Because of these risks,
uncertainties and assumptions, the forward-looking events
discussed in this Form 10-Q might not occur.




Overview

We own and operate a scalable long-haul fiber network which upon
completion is expected to cover approximately 6,100 route
miles throughout the Southwest region, which includes Texas,
Louisiana, Arkansas, Oklahoma, New Mexico and Arizona. This
fiber network supports the voice, data, bandwidth and dark fiber
services we provide to our carrier and retail customers.

In August 1998, we announced that we had completed a business
combination transaction in which our predecessor companies
combined to form our Company as it exists today. The combination
was accounted for as a pooling of interests. Accordingly, our
consolidated results include our three predecessor companies
(i.e., Telecommunications, CapRock Fiber and CapRock Services) as
 though these entities had always been a part of CapRock.

We intend to be the premier provider of carriers carrier
services and the leading facilities-based integrated
communications provider in the Southwest region. To measure our
progress, we classify our

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Our proximity to Mexico allows us to directly connect to the
fiber networks of multiple Mexican telecommunications carriers.
Subject to compliance with certain regulatory requirements, we
are capable of providing dark fiber to these carriers at several
border crossings enabling them to close open fiber rings in
Mexico by using CapRock fiber on the U.S. side of the
border. Additionally, our direct connect agreements with foreign
carriers position us to capture increased levels of growing
international traffic.

In addition, in February 1999, CapRock entered into a joint build
 agreement with Enron Communications, Inc. to jointly build
approximately 1,050 miles of fiber network in Texas. Through this
 joint build arrangement, we will connect Amarillo, Lubbock,
Dallas, Fort Worth, Waco, Bryan, Austin, San Marcos, San Antonio
and Houston, Texas. The build plan includes four conduits to be
placed throughout the approximately 1,050 miles, with one and
one-quarter conduits to be owned and funded directly by us, one
and one-quarter to be owned and funded by Enron Communications
and one and one-half to be owned and funded by a limited
partnership formed by us and Enron Communications. Our agreements
 with Enron Communications provide that the partnership will
install 192 fibers in the first conduit and will sell 96 of the
192 fibers to be installed. Of the remaining 96 fibers, we will
own 48 fibers and Enron Communications will own 48 fibers. The
joint build arrangement provides several benefits, including
reduction of construction costs, accelerated acquisition of right
 of way and franchise agreements, the majority of which are
essentially in place, and the freeing up of resources to
potentially accelerate the build of the remaining portion of the
network.




Results of Operations

CapRock recognizes revenue from the following sources:
carriers carrier, integrated services and systems services.

Carriers Carrier. Carriers carrier revenue
includes all carrier revenues generated from the sale of domestic
 and international switched services, from the sale of T-1 and
DS-3 broadband capacity and from the sale and lease of dark
fiber. The revenue generated from the international switched
services represent minutes of long distance traffic terminating
in foreign countries, but generated by domestic U.S.-based long
distance carriers. Such revenues are recognized when the services
 are provided. The cost of revenues associated with these
services is based primarily on the direct costs associated with
owned and leased transmission capacity and the cost of
transmitting and terminating traffic on other carriers
facilities. Commissions paid to sales representatives or agents
to acquire customer call traffic are expensed in the period when
associated call revenues are recognized.

We account for long-term construction contracts relating to the
development of telecommunications networks for customers using
the percentage-of-completion method, which would include the sale
 of fiber usage rights through IRUs and the related construction
services associated with building the fiber network specified in
the IRUs. Our revenues from IRUs are generated from the amount of
 fiber we build on our network in excess of that which we intend
to retain for our own use. As a result, we expect that revenues
from IRUs will diminish over time as our supply of excess fiber
is sold. Progress under the percentage-of-completion method is
measured based upon costs incurred to date compared with total
estimated construction costs. Customers are billed based upon
contractual milestones.

Recent accounting pronouncements have effected the recognition of
 revenue associated with IRUs entered into after June 30,
1999. See New Accounting Pronouncements. Accordingly,
 revenue from the

10



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##### Table of Contents





Integrated Services. Integrated services revenue includes
all revenues generated from the sale of telecommunications
products to business and residential customers. These products
include local, long distance, Internet, data and private line
services.

Systems Services. Systems services revenue includes
revenues generated from the design, installation, leasing and
sale of voice and data systems and products, primarily to
companies in the oil and gas industry.

The following table represents the various sources of revenues
(in thousands):

|          |                     |                    |   |        |        |                   |   |        |        |      |  |  |   |        |        |  |   |        |         | 
|--------- | ------------------- | ------------------ | - | ------ | ------ | ----------------- | - | ------ | ------ | ---- |  |  | - | ------ | ------ |  | - | ------ | ------- | 
|          |                     |                    |   |        |        |                  
|          |                     | Three Months Ended |   |        |        | Nine Months Ended
|          |                     | September 30,      |   |        |        | September 30,    
|          |                     |                    |   |        |        |                  
|          |                     | 1998               |   | 1999   |        |                   |   | 1998   |        | 1999
|          |                     |                    |   |        |        |                   |   |        |        |     
|Revenues: |                     |                    |   |        |        |                   |   |        |        |      |  |  |   |        |        |  |   |       
|         
|         
|         
|         
|          | Carriers carrier   |                    | $ | 21,684 |        |                   | $ | 35,063 |        |      |  |  | $ | 50,125 |        |  | $ | 84,825 |        
|         
|         
|         
|         
|          | Integrated services |                    |   | 5,352  |        |                   |   | 6,190  |        |      |  |  |   | 13,477 |        |  |   | 15,338 |        
|         
|         
|         
|         
|          | Systems services    |                    |   | 8,248  |        |                   |   | 7,750  |        |      |  |  |   | 23,102 |        |  |   | 23,436 |        
|          |                     |                    |   |        |        |                   |   |        |        |      |  |  |   |        |        |  |   |       
|          |                     | Total revenues     |   | $      | 35,284 |                   |   | $      | 49,003 |      |  |  |   | $      | 86,704 |  |   | $      | 123,599 | 
|          |                     |                    |   |        |        |                   |   |        |        |      |  |  |   |        |        |  |   |       

The following table sets forth, for the periods indicated,
CapRocks statement of operations as a percentage of its
operating revenues:

|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |    |  
|--------------------------------- | ----------------------------------- | ------------- | --- | ------------- | - | ---- | --- | ---- | - |  | --- | -- | - |  | --- | -- | -
|                                  |                                     |               |     |              
|                                  |                                     | Three Months  |     | Nine Months  
|                                  |                                     | Ended         |     | Ended        
|                                  |                                     | September 30, |     | September 30,
|                                  |                                     |               |     |              
|                                  |                                     | 1998          |     | 1999          |   | 1998 |     | 1999
|                                  |                                     |               |     |               |   |      |     |     
|Revenues                          |                                     |               | 100 | %             |   |      | 100 | %    |   |  | 100 | %  |   |  | 100 | % 
|                                 
|                                 
|                                 
|                                 
|Cost of services                  |                                     |               | 74  | %             |   |      | 59  | %    |   |  | 69  | %  |   |  | 60  | % 
|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   
|Gross profit                      |                                     |               | 26  | %             |   |      | 41  | %    |   |  | 31  | %  |   |  | 40  | % 
|                                 
|                                 
|                                 
|                                 
|Operating expenses:               |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   
|                                 
|                                 
|                                 
|                                 
|                                  | Selling, general and administrative |               |     | 15            | % |      |     | 27   | % |  |     | 17 | % |  |     | 31 | %
|                                 
|                                 
|                                 
|                                 
|                                  | Merger related expenses             |               |     | 6             | % |      |     |     | % |  |     | 3  | % |  |     |   | %
|                                 
|                                 
|                                 
|                                 
|                                  | Depreciation and amortization       |               |     | 4             | % |      |     | 6    | % |  |     | 4  | % |  |     | 5  | %
|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   
|Total operating expenses          |                                     |               | 25  | %             |   |      | 33  | %    |   |  | 24  | %  |   |  | 36  | % 
|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   
|Operating income                  |                                     |               | 1   | %             |   |      | 8   | %    |   |  | 7   | %  |   |  | 4   | % 
|                                 
|                                 
|                                 
|                                 
|Interest expense                  |                                     |               | (12 | )%            |   |      | (19 | )%   |   |  | (6  | )% |   |  | (15 | )%
|                                 
|                                 
|                                 
|                                 
|Interest income                   |                                     |               | 4   | %             |   |      | 7   | %    |   |  | 2   | %  |   |  | 5   | % 
|                                 
|                                 
|                                 
|                                 
|Other income (expense)            |                                     |               |    | %             |   |      | 4   | %    |   |  |    | %  |   |  | 1   | % 
|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   
|Income (loss) before income taxes |                                     |               | (7  | )%            |   |      | 0   | %    |   |  | 3   | %  |   |  | (5  | )%
|                                 
|                                 
|                                 
|                                 
|Income tax expense (benefit)      |                                     |               | (2  | )%            |   |      | 0   | %    |   |  | 2   | %  |   |  | (2  | )%
|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   
|Net income (loss)                 |                                     |               | (5  | )%            |   |      | 0   | %    |   |  | 1   | %  |   |  | (3  | )%
|                                  |                                     |               |     |               |   |      |     |      |   |  |     |    |   |  |     |   




Three Months Ended September 30, 1998 Compared to Three
Months Ended September 30, 1999

Revenues. Total revenues increased $13.7 million, or
39%, from $35.3 million during the three months ended
September 30, 1998 to $49.0 million during the three
months ended September 30, 1999. This increase was
attributable to increases of 62% in carriers carrier, 16%
in integrated services and offset by a slight decrease of 6% in
systems services revenue for the comparable periods.

Carriers carrier revenue increased $13.4 million from
$21.7 million during the three months ended
September 30, 1998 to $35.1 million during the three
months ended September 30, 1999. The 62%

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increase resulted primarily from the sale of IRUs and dark fiber
leases. Fiber related revenues, attributed to dark fiber leases
or IRUs, increased $19.8 million from $1.3 million
during the three months ended September 30, 1998 to
$21.1 million during the three months ended
September 30, 1999. The Company anticipates recurring fiber
related revenue relating to IRUs and dark fiber leases to
continue through the remainder of the year. However,
period-to-period fluctuations can be expected as this type of
revenue is affected by the negotiation and terms of these
contracts and the build out of our network. The Company derived
approximately $13.3 million and $8.2 million or 38% and
 17% of its revenue from traffic terminated to international
countries for the three months ended September 30, 1998 and
1999, respectively. Revenue per minute for a majority of the
international countries, particularly Mexico, continues to
decrease as a result of deregulation in the countries and
competition. We anticipate this pricing trend for international
traffic to continue.

Integrated services revenue increased $838,000 from
$5.4 million during the three months ended
September 30, 1998 to $6.2 million during the three
months ended September 30, 1999. The 16% increase was
attributable to growth in the number of business and residential
customers both from increased penetration in our existing markets
 and from the deployment of our network into new markets. The
Company anticipates increased revenue from integrated services as
 its sales force for this revenue segment continues to grow.

Systems services revenue decreased $498,000 from
$8.2 million during the three months ended
September 30, 1998 to $7.7 million during the three
months ended September 30, 1999. The 6% decrease was
attributable to a moderate reduction in the leasing and sale of
voice and data systems products and projects involving the
engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment.
The Company anticipates quarterly systems services revenue for
the remainder of the year to remain at comparable levels.

Costs of Services. Cost of services increased
$2.8 million, or 11%, from $26.0 million during the
three months ended September 30, 1998 to $28.8 million
during the three months ended September 30, 1999. The growth
 in cost of services was primarily attributable to the continued
growth in revenue. The 15 percentage point increase in gross
margin from 26% to 41% resulted primarily from favorable pricing
attributable to the higher traffic and the sale of dark fiber.
The increase in the gross margin during the three months ended
September 30, 1999 was partially offset by lower margins
attributable to Mexico and other international traffic, which
carry a lower gross margin percentage. Gross margins may vary in
future periods as a result of these and other factors.

Selling, General and Administrative Expenses. Selling,
general and administrative expenses (SG&A)
include salaries, benefits, occupancy costs, commissions, sales
and marketing expenses and administrative expenses. SG&A
increased $8.3 million, or 155%, from $5.3 million
during the three months ended September 30, 1998 to
$13.6 million during the three months ended
September 30, 1999. The increase resulted primarily from the
 additional personnel required to support CapRocks growth,
advertising to increase name recognition and brand awareness and
additional sales commission payments.

The Company recorded merger related expenses of $2.3 million
 during the three months ended September 30, 1998, as
compared to no such costs during the corresponding period in
1999. The merger related expenses relate to the business
combination of Telecommunications, CapRock Fiber and CapRock
Services, our predecessor companies. This combination was
consummated on August 26, 1998. The merger related expenses
consist of fees for investment bankers, attorneys, accountants,
financial printing and other related charges.

Depreciation and Amortization Expense. Depreciation and
amortization expense increased $1.5 million, or 113%, from
$1.3 million during the three months ended
September 30, 1998 to $2.8 million during the three
months ended September 30, 1999. This increase resulted
primarily from purchases of additional equipment and other fixed
assets to accommodate CapRocks growth. CapRock expects that
 depreciation and amortization expense will continue to increase
in subsequent periods as CapRock continues to expand its
facilities.

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Interest Expense. Interest expense increased
$5.0 million from $4.1 million during the three months
ended September 30, 1998 to $9.1 million during the
three months ended September 30, 1999. The increase resulted
 from interest expense related to the Companys senior
notes. See  Liquidity and Capital
Resources.

Interest Income. Interest income increased
$2.1 million from $1.5 million during the three months
ended September 30, 1998 to $3.6 million during the
three months ended September 30, 1999. The increase was
attributable to the interest and investment accretion associated
with the marketable securities purchased with the proceeds from
the Companys senior notes issued in July 1998 and May 1999.
 See  Liquidity and Capital Resources.

Income Tax Expense (Benefit).During the three months
ended September 30, 1998, the Company incurred income tax
benefit of $563,000 compared to an income tax expense of $32,000
for the three months ended September 30, 1999. The expense
or benefit resulted from the income or loss for the respective
periods. The effective tax rates for the three months ended
September 30, 1998 and September 30, 1999 were 25% and
40%, respectively. The effective tax rate used to calculate
income tax benefit for the three months ended September 30,
1998 was lower than the effective tax rate for the three months
ended September 30, 1999 due to the non-deductibility of
certain merger related costs.

Net Income (Loss).Net income increased $1.7 million
from a net loss of $1.7 million during the three months
ended September 30, 1998 to net income of $49,000 during the
 three months ended September 30, 1999 as a result of the
factors discussed above.




Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1999

Revenues. Total revenues increased $36.9 million, or
43%, from $86.7 million during the nine months ended
September 30, 1998 to $123.6 million during the nine
months ended September 30, 1999. This increase was
attributable to increases of 69% in carriers carrier, 14%
in integrated services and 1% in systems services revenue for the
 comparable periods.

Carriers carrier revenue increased $34.7 million from
$50.1 million during the nine months ended
September 30, 1998 to $84.8 million during the nine
months ended September 30, 1999. The 69% increase resulted
primarily from the sale of IRUs and dark fiber leases. Fiber
related revenues, attributed to dark fiber leases or IRUs,
increased $40.5 million from $3.9 million during the
nine months ended September 30, 1998 to $44.4 million
during the nine months ended September 30, 1999. The Company
 anticipates recurring fiber related revenue relating to IRUs and
 dark fiber leases to continue through the remainder of the year.
 However, period-to-period fluctuations can be expected as this
type of revenue is affected by the negotiation and terms of these
 contracts and the build out of our network. The Company derived
approximately $24.0 million and $20.3 million or 28%
and 16% of its revenue from traffic terminated to international
countries for the nine months ended September 30, 1998 and
1999, respectively. Revenue per minute for a majority of the
international countries, particularly Mexico, continues to
decrease as a result of deregulation in the countries and
competition. We anticipate this pricing trend for international
traffic to continue.

Integrated services revenue increased $1.8 million from
$13.5 million during the nine months ended
September 30, 1998 to $15.3 million during the nine
months ended September 30, 1999. The 14% increase was
attributable to growth in the number of business customers both
from increased penetration in our existing markets and from the
deployment of our network into new markets. The Company
anticipates increased revenue from integrated services as its
sales force for this revenue segment continues to grow.

Systems services revenue increased $334,000 from
$23.1 million during the nine months ended
September 30, 1998 to $23.4 million during the nine
months ended September 30, 1999. The 1% increase was
attributable to moderate growth associated with the leasing and
sale of voice and data systems products and projects involving
the engineering and integration of telecommunications systems and
 sales, service and maintenance of telecommunications equipment.
The Company anticipates quarterly systems services revenue for
the remainder of the year to remain at comparable levels.

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Costs of Services. Cost of services increased
$13.7 million, or 23%, from $60.0 million during the
nine months ended September 30, 1998 to $73.7 million
during the nine months ended September 30, 1999. The growth
in cost of services was primarily attributable to the continued
growth in all three revenue categories. The nine percentage point
 increase in gross margin from 31% to 40% resulted primarily from
 favorable pricing attributable to the higher traffic and the
sale of dark fiber. The increase in the gross margin during the
nine months ended September 30, 1999 was partially offset by
 lower margins attributable to Mexico and other international
traffic, which carry a lower gross margin percentage. Gross
margins may vary in future periods as a result of these and other
 factors.

Selling, General and Administrative Expenses. SG&A
increased $23.7 million, or 159%, from $14.9 million
during the nine months ended September 30, 1998 to
$38.6 million during the nine months ended
September 30, 1999. The increase resulted primarily from the
 additional personnel required to support CapRocks growth,
advertising to increase name recognition and brand awareness and
additional sales commission payments.

The Company recorded merger related expenses of $2.3 million
 during the nine months ended September 30, 1998, as
compared to no such costs during the corresponding period in
1999. The merger related expenses relate to the business
combination of Telecommunications, CapRock Fiber and CapRock
Services, our predecessor companies. This combination was
consummated on August 26, 1998. The merger related expenses
consist of fees for investment bankers, attorneys, accountants,
financial printing and other related charges.

Depreciation and Amortization Expense. Depreciation and
amortization expense increased $2.6 million, or 73%, from
$3.6 million during the nine months ended September 30,
 1998 to $6.2 million during the nine months ended
September 30, 1999. This increase resulted primarily from
purchases of additional equipment and other fixed assets to
accommodate CapRocks growth. CapRock expects that
depreciation and amortization expense will continue to increase
in subsequent periods as CapRock continues to expand its
facilities.

Interest Expense. Interest expense increased
$14.1 million from $5.1 million during the nine months
ended September 30, 1998 to $19.2 million during the
nine months ended September 30, 1999. The increase resulted
from interest expense related to the Companys senior notes
issued in July 1998 and May 1999. See
 Liquidity and Capital Resources.

Interest Income. Interest income increased
$5.0 million from $1.6 million during the nine months
ended September 30, 1998 to $6.6 million during the
nine months ended September 30, 1999. The increase was
attributable to the interest and investment accretion associated
with the marketable securities purchased with the proceeds from
the Companys senior notes issued in July 1998 and
May 1999. See  Liquidity and Capital
Resources.

Income Tax Expense (Benefit).During the nine months ended
 September 30, 1998, the Company incurred income tax expense
 of $1.3 million compared to an income tax benefit of
$2.3 million for the nine months ended September 30,
1999. The expense or benefit resulted from the income or loss for
 the respective periods. The effective tax rates for the nine
months ended September 30, 1998 and September 30, 1999
were 52% and 39%, respectively. The effective tax rate for the
nine months ended September 30, 1998 was higher than the
effective tax rate for the nine months ended September 30,
1999 due to the non-deductibility of certain merger related
costs.

Net Income (Loss).Net income decreased $4.8 million
from net income of $1.2 million during the nine months ended
 September 30, 1998 to a net loss of $3.6 million
during the nine months ended September 30, 1999 as a result
of the factors discussed above.

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Liquidity and Capital Resources

CapRock had cash and cash equivalents of $294,000 at
December 31, 1998, as compared with $6.2 million at
September 30, 1999 and marketable securities of
$97.0 million at December 31, 1998 as compared to
$245.9 million at September 30, 1999. CapRock had
working capital of $102.5 million at December 31, 1998
as compared to working capital of $277.0 million at
September 30, 1999. The increase in working capital was
attributable to an increase in accounts receivable as well as the
 Companys debt and equity offerings completed during the
second quarter of 1999, discussed in more detail later in this
section. This increase was partially offset by the utilization of
 working capital for the build out of the fiber optic network and
 increase in corporate overhead to support the Companys
growth.

CapRocks cash flow provided from operating activities for
the nine months ended September 30, 1998 was
$10.1 million as compared to $19.1 million used in
operating activities during the nine months ended
September 30, 1999. The change was primarily attributable to
 an increase in accounts receivable and unbilled services, and
the timing of certain capital expenditure payments to vendors
relating to the fiber optic network build out. IRU transactions
typically have longer payment terms than other accounts
receivable activity due to contractual milestones that must be
met before payments are made.

Cash used in investing activities during the nine months ended
September 30, 1998 was $130.9 million as compared to
cash used in investing activities during the nine months ended
September 30, 1999 of $258.8 million. Capital resources
 used for the purchase of property, plant and equipment increased
 $80.7 million from $23.3 million during the nine
months ended September 30, 1998 to $104.0 million
during the nine months ended September 30, 1999. This
increase primarily related to the purchase of telecommunications
equipment and costs incurred with the build out of the fiber
optic network. During the nine months ended September 30,
1998, the Company used $107.3 million to invest in
marketable securities as compared to $283.6 million used to
invest in marketable securities during the nine months ended
September 30, 1999. Cash received from the sale of
marketable securities was $134.8 million during the nine
months ended September 30, 1999 as compared to no such sales
 during the nine months ended September 30, 1998.

In January 1998, CapRock completed the acquisition of Integrated
Communications and Engineering, Ltd., a communications systems
integrator and maintenance provider in Aberdeen, Scotland.
CapRock paid a total purchase price of approximately
$2.2 million comprised of approximately $610,000 in cash and
 207,266 shares of CapRocks Common Stock.

In July 1998, CapRock issued $150 million aggregate
principal amount of its 1998 Senior Notes. Interest on the 1998
Senior Notes is payable semi-annually in arrears on
January 15 and July 15 of each year, which commenced
January 15, 1999, at the rate of 12% per year. A
portion of the net proceeds from the offering of the 1998 Senior
Notes was used to repay all existing debt obligations, totaling
$26.8 million. The remaining proceeds, net of transaction
costs, have been, or will be, used to fund additional capital
expenditures for the construction of the Companys fiber
optic network, switching equipment and other capital expenditures
 to expand its sales offices, for potential acquisitions and for
general working capital purposes. Unutilized funds have been
invested in short-term, high-grade investment securities
classified as available for sale. The indenture governing the
issuance of the 1998 Senior Notes contains certain restrictive
operating and financial covenants, including restrictive
covenants relating to borrowing additional money, paying
dividends or making other distributions to our shareholders,
limiting the ability of subsidiaries to make payments to us,
making certain investments, creating certain liens on our assets,
 selling certain assets and using the proceeds from those sales
for certain purposes, entering into transactions with affiliates
and engaging in certain mergers or consolidations. All of the
covenants are subject to a number of important qualifications and
 exceptions. These covenants may adversely affect CapRocks
ability to finance its future operations or capital needs or to
engage in other business activities that may be in the best
interests of CapRock.

On May 6, 1999, CapRock entered into an underwriting
agreement with various underwriters to sell 4,000,000 shares
 of its common stock at a price of $22.00 per share in a
public offering. The registration statement for the equity
offering was declared effective by the SEC on May 6, 1999
and closed on May 12,

15



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##### Table of Contents



1999. CapRock received net proceeds, after deducting underwriting
 discounts and expenses payable by CapRock, of approximately
$81.9 million from the sale of its common stock.

On May 18, 1999, the Company issued $210 million
aggregate principal amount of its 1999 Senior Notes. Interest on
the 1999 Senior Notes is payable semi-annually in arrears on
May 1 and November 1 of each year, commencing
November 1, 1999, at the rate of 11 1/2% per year.
 The Company received net proceeds from the offering, after
deducting the initial purchasers discount and estimated
expenses, of approximately $201.3 million. The 1999 Senior
Notes are senior unsecured obligations and as such rank pari
passuin right of payment with the Companys existing
1998 Senior Notes and with all the Companys future
unsecured and unsubordinated indebtedness. The proceeds have
been, and will be, used to fund capital expenditures for the
construction of the fiber optic network, switching equipment and
other capital expenditures and to expand its sales offices, for
potential acquisitions and for general working capital purposes.
Unutilized funds have been invested in short-term, high-grade
investment securities classified as available for sale. The
indenture governing the 1999 Senior Notes has restrictions and
covenants similar to those which currently exist for the
Companys 1998 Senior Notes. All of the covenants are
subject to a number of important qualifications and exceptions.
These covenants may adversely affect CapRocks ability to
finance its future operations or capital needs or to engage in
other business activities that may be in the best interests of
CapRock.

In July 1999, the Company filed an Exchange Offer Registration
Statement with the SEC for the registration of $210 million
of principal amount of its Exchange Notes to be offered in
exchange for the 1999 Senior Notes. The Exchange Offer
Registration Statement was declared effective by the SEC on
July 30, 1999 and the Exchange Offer expired on
September 1, 1999. The terms of the Exchange Notes are
identical in all material respects to the 1999 Senior Notes
except that the Exchange Notes have been registered under the
Securities Act of 1933, as amended.

CapRock is also considering various alternatives under a
revolving credit facility. CapRock anticipates that this credit
facility, if obtained, would be approximately $100 million.
The proceeds from this credit facility would be used in a similar
 manner to the uses discussed for the notes issued by CapRock.

CapRock expects to require significant financing for future
capital expenditure and working capital requirements. By the end
of the year 2000, CapRock intends to build out its fiber
optic network to approximately 6,100 route miles throughout
the Southwest region. CapRock intends to use advanced fiber
capable of supporting dense wave division multiplexing with an
OC-48 backbone scalable to OC-192, and intends to install 96
 fibers throughout most of its network and intends to retain on
average 24 fiber strands. CapRock is burying three to four
conduits throughout its network. CapRock currently estimates that
 its aggregate capital requirements will total approximately
$250 million for 1999 and approximately $205 million
for 2000, including expenditures to be made under the joint build
 arrangement with Enron Communications. Capital expenditures will
 be required to (1) fund the construction and operation of
the fiber optic network, including the portion to be constructed
through the joint build arrangement with Enron Communications,
(2) fund the installation of voice and data switches, and
(3) open sales offices and add sales support and customer
service personnel in markets throughout Texas, Louisiana,
Oklahoma, Arkansas, New Mexico and Arizona.

CapRock believes that its cash and marketable securities, cash
flow from operations and sales of dark fiber will be sufficient
to fund completion of its planned network. However, no assurances
 can be made as to whether additional sources of capital will be
needed to complete the network and if such sources are needed,
but CapRock is unable to obtain them, CapRock may have to curtail
 or delay the build out of its fiber network and its level of
capital expenditures. CapRocks earnings before interest,
income taxes, depreciation and amortization (EBITDA)
was $11.8 million (exclusive of $2.3 million in merger
related expenses) for the nine months ended September 30,
1998. EBITDA was $11.3 million for the nine months ended
September 30, 1999. EBITDA for the three months ended
September 30, 1998 was $4.0 million (exclusive of
$2.3 million in merger related expenses). For the three
months ended September 30, 1999, EBITDA was
$6.7 million.

16



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CapRock may require additional capital in the future for new
business activities related to its current and planned
businesses, or in the event it decides to make additional
acquisitions or enter into joint venture and strategic alliances.
 Sources of additional capital may include cash flow from
operations, public or private equity and debt financings, bank
debt, vendor financings and indefeasible right to use contracts.
In addition, CapRock may enter into joint construction agreements
 with carriers, thereby reducing its capital expenditure
requirements. However, we cannot assure you that CapRock will be
successful in producing sufficient cash flow or raising
sufficient debt or equity capital to meet its strategic business
objectives or that such funds, if available, will be available on
 a timely basis and on terms that are acceptable to CapRock. If
CapRock is unable to obtain such capital, the build out of
portions of its expanded network may be significantly delayed,
curtailed or abandoned. In addition, CapRock may accelerate the
rate of deployment of its network, which in turn may accelerate
CapRocks need for additional capital. CapRocks actual
 capital requirements will also be affected, possibly materially,
 by various factors, including the timing and actual cost of the
deployment of CapRocks network, the timing and cost of
expansion into new markets, the extent of competition and the
pricing of dark fiber and telecommunications services in its
markets.




New Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activity
(SFAS 133) which requires that all derivatives
be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition,
all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133.
SFAS 133 is effective for fiscal years beginning after
June 15, 2000. The adoption of SFAS 133 will not have
an impact on CapRocks results of operations, financial
position or cash flow.

In June 1999, the Financial Accounting Standards Board (the
FASB) issued Interpretation No. 43, Real
Estate Sales, an interpretation of FASB Statement
No. 66. The interpretation is effective for sales of
real estate with property improvements or integral equipment
entered into after June 30, 1999. Under this interpretation,
 dark fiber is considered integral equipment and accordingly
title must transfer to a lessee in order for a lease transaction
to be accounted for as a sales-type lease. The application of the
 provisions of FASB Interpretation No. 43 does not have an
impact on CapRocks financial condition, cash flow or
results of operations.




Contingencies

CapRock is party to ordinary litigation incidental to its
business. No currently pending litigation is expected to have a
material adverse effect on our results of operations, financial
condition or cash flow.




Year 2000

The year 2000 problem is the inability of a meaningful
portion of the worlds computers, software applications and
embedded semiconductor chips to cope with the change of the year
from 1999 to 2000. This issue can be traced to the infancy of
computing, when computer data and programs were designed to save
disk space by truncating the date field to just six digits (two
for the day, two for the month and two for the year). Therefore,
information applications automatically assumed that the two-digit
 year field represented a year within the 1900s. As a
result of this, systems could fail to operate or fail to produce
correct results when dates roll over to the year 2000.




State of Readiness

The year 2000 problem affects computers, software and other
equipment used, operated or maintained by CapRock for itself and
its customers. CapRock has substantially completed the process of
 assessing and remediating the potential impact of the
year 2000 problem for its internal systems, facilities
systems and equipment.

17



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##### Table of Contents



CapRocks business depends upon the operation of computer
systems. CapRock has established a year 2000 committee made
up of leaders from the operational areas of CapRock to assess
CapRocks year 2000 problem. The committee has the
involvement of senior management and the Board of Directors and
its objectives are a top priority. CapRock has undertaken various
 initiatives intended to provide that computer equipment and
software will function properly with respect to dates in the
year 2000 and thereafter. Computer equipment and software
include systems that are commonly thought of as Information
Technology, or IT, systems, including accounting, data
processing, telephone/ PBX systems, scanning equipment and other
miscellaneous systems, as well as systems that are not commonly
thought of as IT systems, such as alarm systems, fax machines or
other miscellaneous systems. Based upon its identification and
assessment efforts, CapRock replaced certain computer equipment
and software that was deemed to be non-compliant. In addition, in
 the ordinary course of replacing computer equipment and
software, CapRock has obtained replacements that are warranted by
 the manufacturer to be year 2000 compliant.

|                                                                       |                              |            |           |  | 
|---------------------------------------------------------------------- | ---------------------------- | ---------- | --------- |  | 
|Year 2000 Initiative                                                   |                              | Time Frame
|                                                                       |                              |           
|Identification and assessment regarding IT system issues               |                              |            | Completed | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Remediation and testing regarding critical system issues               |                              |            | Completed | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Identification, assessment, remediation and testing regarding
	desktop |                              |            | Completed | 
|                                                                       | and individual system issues |            |           |  | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Identification and assessment regarding non-IT system issues           |                              |            | Completed | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Remediation and testing regarding non-IT systems                       |                              |            | Completed | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Contingency plans regarding critical systems                           |                              |            | Completed | 

CapRock mailed questionnaires to its significant vendors, service
 providers and customers with whom CapRocks systems
electronically interface to determine the extent to which such
interfaces and system processes are vulnerable to year 2000
issues and whether the products and services of such entities are
 year 2000 compliant. Substantially all of the parties
responded to the request and no significant unresolved matters
were noted from these responses.

CapRock has evaluated its systems and has identified the
following systems and functions as mission critical:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | switching systems,                                                            
|
| |  | network operations and fiber,                                                 
|
| |  | satellite/ microwave transmission equipment and satellite service
	 providers,
|
| |  | billing and call record collection systems, and                               
|
| |  | supply chain (vendor provider of switched services).                          






| |                   
| | ------------------
| | Switching Systems:

Switching equipment is used to connect calls to their destination
 while performing other advanced features and recording call
information for future billing. The switch opens or closes
circuits or selects the paths or circuits to be used for the
transmission of information. CapRock currently owns seven
switches, three of which are physically located in Dallas, Texas
(two are calling card platforms), two in Houston, Texas, one in
Victoria, Texas and one in Phoenix, Arizona. CapRock also manages
 a switch in Jersey City, New Jersey. CapRock has completed
the assessment and test procedures relating to all switching
equipment currently in service and had identified certain
non-compliant features. These non-compliant features were
remediated through software upgrades provided by the respective
manufacturers.

18



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Switches that have not been placed in service will be subject to
integrated test procedures prior to being placed in service. The
test will incorporate the call collection processes and the
interfaces with the billing system. The test will involve
simulating date changes with the switch, such that the call
records will be processed, rated and properly captured in the
billing system as a billable transaction.

The test procedures consist of the following:



| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | process flow analysis,                                              
|
| |  | documentation of overall integrated test strategy,                  
|
| |  | documentation and test case plans at an individual component
	level,
|
| |  | committee agreement regarding the test plan,                        
|
| |  | execution of the integrated test plan, and                          
|
| |  | documentation regarding the results of test procedures.             






| |                              
| | -----------------------------
| | Network Operations and Fiber:

CapRock currently owns and operates a fiber optic network, for
which approximately 2,000 route miles were substantially
complete as of September 30, 1999. The total route miles
upon completion of the network will be 6,100 miles (which
CapRock expects to be completed by the end of the
year 2000). The fiber optic network is designed to be
scalable and will include network-advanced fiber, which is
capable of supporting dense wave division multiplexing with an
OC-48 backbone scalable to OC-192. The fiber optic network
will include electronic equipment, which regenerates and
transports the voice, data and other information. A detailed
assessment and test procedures relating to the network operations
 and fiber equipment has been performed and no significant
non-compliant issues were identified.






| |                                                                              
| | -----------------------------------------------------------------------------
| | Satellite/ Microwave Transmission Equipment and Satellite
	Service Providers:

CapRock utilizes satellite service providers to provide
communication services to certain customers in remote locations.
CapRock has received correspondence or other information from
each of the three vendors supplying the satellite services
regarding their year 2000 readiness efforts. Based upon this
 information, we believe there are no significant non-compliant
issues relating to these satellite service providers.






| |                                            
| | -------------------------------------------
| | Billing and Call Record Collection Systems:

CapRock handles its provisioning, customer care, billing and
traffic reporting functions on a proprietary software platform
developed by RiverRock Systems, Ltd. (a Texas limited partnership
 in which CapRock has a 49% ownership interest), supplemented
with various third party software applications. These operations
support systems, or OSS systems, and other back office systems
are used to enter, schedule and track a customers order
from the point of sale to the installation and testing of
service. The systems also include or interface with trouble
management, inventory, billing, collection and customer service
systems. The test procedures relating to the billing system and
call record collection processes were performed in conjunction
with the switching equipment test procedures and are complete.

CapRock believes that the hardware, database platform and
operating systems impacting the billing system function will not
be materially affected by Year 2000 issues.

19



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| |                                                   
| | --------------------------------------------------
| | Supply Chain (Vendor Provider of Switch Services):

CapRock is dependent upon a number of telecommunications carriers
 during the process of initiating and terminating calls to
end-users. CapRock has received correspondence from its
significant suppliers regarding their year 2000 status.
Based upon the diversity of the suppliers and other information
received, we believe that our ability to utilize our supply chain
 will not be materially affected by Year 2000 issues.






| |                
| | ---------------
| | Non-IT Systems:

Based on current results and other factors, CapRock does not
anticipate finding any material embedded system issues in its
non-IT systems.




Costs

CapRock has estimated costs of replacing or remediating remaining
 non-compliant systems, none of which are significant, and such
amount is less than $150,000. Costs incurred to date are
approximately $100,000.




Risks

CapRock believes that the most reasonably likely worst case
scenario would involve loss of revenues relating to traffic
terminating in certain developing third world countries, which
have not adequately prepared for the year 2000. CapRock
relies upon certain vendors to supply international services and
the possibility exists that some of the traffic in these
developing third world countries may not be able to be completed.
 The estimated loss of revenue, if any, cannot reasonably
determined, and we may not be able to identify the amount of any
loss by the year 2000. Depending on the systems affected,
the failure of any contingency plans developed by CapRock, if
implemented, could have a material adverse effect on
CapRocks financial condition, cash flow and results of
operations.




Contingency Plans

CapRocks year 2000 contingency planning effort is
designed to provide immediate response and subsequent recovery
from any unplanned business interruption due to failure of
technical infrastructure resulting from the year 2000.
Contingency planning is a process that aids in determining the
most effective actions, identifies when contingent actions should
 be taken and helps to ensure those resources necessary for
response are available.

The contingency planning process included the development of
certain mission critical functions and management
(escalation) plans. The Companys contingency plan also
 includes re-routing traffic from a vendor which experiences a
year 2000 systems failure to one or more other vendors.




Disclaimer

The discussion of CapRocks efforts, and managements
expectations, relating to year 2000 compliance are
forward-looking statements and the dates on which CapRock
believes it will complete such efforts are based upon
managements best estimates. These estimates were derived
using numerous assumptions regarding future events, including the
 continued availability of certain resources and other factors.
We cannot assure you that these estimates will prove to be
accurate, and our actual results could differ materially from
those currently anticipated. Specific factors that could cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in year 2000
issues, the ability to identify, assess, remediate and test all
relevant computer codes and embedded technology and similar
uncertainties. In addition, variability of definitions of
compliance with year 2000 relating to products
and services sold by CapRock may lead to claims whose impact on
CapRock is currently not estimable. We cannot assure you that the
 aggregate cost of defending and resolving such claims, if any,
will not materially adversely affect our results of operations.

20



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##### Table of Contents






ITEM 3.  Quantitative and Qualitative Disclosure
About Market Risk

CapRock is exposed to market risk from changes in marketable
securities (which consist of money market and commercial paper).
At September 30, 1999, marketable securities of CapRock were
 recorded at a fair value of approximately $246 million,
with an overall weighted average return of approximately 5% and
an overall weighted average life of less than 1 year. The
marketable securities held by CapRock have exposure to price
risk, which is estimated as the potential loss in fair value due
to a hypothetical change of 50 basis points (10% of
CapRocks overall average return on marketable securities)
in quoted market prices. This hypothetical change would have an
immaterial effect on the recorded value of the marketable
securities.

CapRock is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt
since 100% of its long-term debt is at a fixed rate as of
September 30, 1999. The fair value of CapRocks
long-term debt at September 30, 1999 was estimated to be
$344 million based on the overall rate of the long-term debt
 of 11.71% and an overall maturity of 9.25 years compared to
 terms and rates currently available in long-term financing
markets. Market risk is estimated as the potential decrease in
fair value of CapRocks long-term debt resulting from a
hypothetical increase of 117 basis points in interest rates (ten
percent of CapRocks overall borrowing rate). Such an
increase in interest rates would result in approximately a
$9 million decrease in fair value of CapRocks
long-term debt. To date, CapRock has not entered into any
derivative financial instruments to manage interest rate risk and
 is currently not evaluating the future use of any such financial
 instruments.

CapRock conducts business in Aberdeen, Scotland, through a wholly
 owned subsidiary. However, the business transacted by this
subsidiary is in the local functional currency. Therefore,
CapRock does not currently have any exposure to foreign currency
transaction gains or losses. All other business transactions are
in U.S. dollars. To date, CapRock has not entered into any
derivative financial instrument to manage foreign currency risk
and is currently not evaluating the future use of any such
financial instruments.

21



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##### Table of Contents






PART II.  OTHER INFORMATION




ITEM 1.  Legal Proceedings

Information pertaining to this item is incorporated herein from
Part I. Financial Information (Item 2 
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Contingencies).




ITEM 2.  Changes in Securities and Use of Proceeds

On May 6, 1999 (the Effective Date), the
Companys Registration Statement on Form S-1
(Registration No. 333-74735) relating to its public offering
 (the Offering) was declared effective and the
offering of up to 4,600,000 shares of the Companys
Common Stock covered by such Registration Statement commenced.
The Offering was managed by Merrill Lynch & Co., as the
representative (the Representative) of the several
underwriters (the Underwriters) of the Offering.
Pursuant to the Offering, 4,000,000 shares were sold on
May 12, 1999 (the Offering Date). From the
Offering Date until September 30, 1999, total expenses of
approximately $6.1 million were incurred for the
Companys account in connection with the Common Stock sold
in the Offering, which expenses consisted of:
(i) $5.3 million representing underwriters discounts
and commissions paid to the Underwriters; and (ii) other
offering expenses, including without limitation attorneys
fees, accountants fees, printing costs and filing fees, of
approximately $750,000. None of such expense payments were direct
 or indirect payments to directors or officers of the Company or
their associates or to persons owning 10 percent or more of
any class of equity securities of the Company or to affiliates of
 the Company. The net offering proceeds of the
4,000,000 shares sold by the Company in the Offering, after
deducting such expenses, was approximately $81.9 million
through September 30, 1999. As of September 30, 1999,
the Company had expended $68.5 million on infrastructure,
property, plant and equipment. The remaining $13.4 was invested
in high-grade liquid securities classified as available for sale
pending application of such proceeds by the Company.

Information pertaining to working capital restrictions and other
limitations upon the payment of dividends is incorporated herein
from Part I. Financial Information (Item 2 
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Liquidity and Capital
Resources).




ITEM 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

| |       |  |  |                                                                                                                                                                                                     
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1   |  |  | Articles of Incorporation of the Company (incorporated by
	reference to Exhibit 3.1 to the Registration Statement on
	Form S-4, as amended, SEC Registration No. 333-57365
	(the Merger Form S-4))
| | 3.2   |  |  | Bylaws of the Company (incorporated by reference to Exhibit 
	 3.2 to the Registration Statement on Form S-4, as amended,
	SEC Registration No. 333-64699 (the 1998 Exchange
	Offer Form S-4))    
| | 27.1 |  |  | Financial Data Schedule                                                                                                                                                                             



---



| |   |                
| | - | ---------------
| |  | Filed herewith.

(b)  Reports on Form 8-K

None.

22



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CAPROCK COMMUNICATIONS CORP.

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.



| |                             
| | ----------------------------
| | CAPROCK COMMUNICATIONS CORP.



| |     |                        
| | --- | -----------------------
| | By: | /s/ MATTHEW M. KINGSLEY

| |                               
| | ------------------------------
| |                               
| | Matthew M. Kingsley           
| | Corporate Controller          
| | (Principal Accounting Officer)

Date: November 2, 1999

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INDEX TO EXHIBITS

|        |       |             |  |                                                                                                                                                                                                     
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 3.1   |             |  | Articles of Incorporation of the Company (incorporated by
	reference to Exhibit 3.1 to the Registration Statement on
	Form S-4, as amended, SEC Registration No. 333-57365
	(the Merger Form S-4))
|        | 3.2   |             |  | Bylaws of the Company (incorporated by reference to Exhibit 
	 3.2 to the Registration Statement on Form S-4, as amended,
	SEC Registration No. 333-64699 (the 1998 Exchange
	Offer Form S-4))    
|        | 27.1 |             |  | Financial Data Schedule                                                                                                                                                                             



---



|  |                
|- | ---------------
| | Filed herewith.