<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

(MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       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 NO. 0-17909

                             Phoenix Network, Inc.
             (Exact Name of registrant as specified in its charter)

              DELAWARE                                          84-0881154
    (State or other jurisdiction of                         (I.R.S. Employer
    incorporation or organization)                          Identification No.)

                    1687 COLE BLVD., GOLDEN, COLORADO 80401
                    (Address of principal executive offices)

Registrant's telephone number, including area code: (303) 205-3500

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


      TITLE OF EACH CLASS            NAME OF EACH EXCHANGE ON WHICH REGISTERED
      -------------------            -----------------------------------------
  Common Stock $0.001 Par Value                AMERICAN STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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

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

         As of March 24, 1997, the aggregate market value of the voting stock
held by nonaffiliates of the Registrant was $44,187,299 (based on the closing
sales price as reported on the American Stock Exchange).

         The number of shares outstanding of the Registrant's Common Stock,
$0.001 par value, was 25,900,036 at March 24, 1997.


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                      DOCUMENTS INCORPORATED BY REFERENCE

         Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of stockholders
which will be filed no later than 120 days after the close of the Registrant's
fiscal year ended December 31, 1996.

         Part III also incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of stockholders
held on September 26, 1996 (the "1996 Proxy").

         Part II also incorporates certain information by reference from the
Registrant's Registration Statement on Form S-3 (file no. 333-20923), as
amended (the "Registration Statement on Form S-3"), which was filed with the
Securities and Exchange Commission (the "Commission") on January 31, 1997, and
is incorporated by reference herein.

         Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Registrant's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the sections
entitled "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the section entitled "Risk Factors"
included within the Registrant's Registration Statement on Form S-3
incorporated by reference herein.

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Phoenix Network, Inc., together with its subsidiaries ("Phoenix" or
the "Company"), is among the nation's fastest growing publicly-owned
inter-exchange carriers ("IXCs") of long distance telecommunications services.
Phoenix believes that it offers "simple, honest and straightforward" pricing
plans that are generally priced lower than many plans of larger carriers such
as AT&T, MCI and Sprint. Moreover, the Company believes that it provides more
attentive customer service than its larger competitors. In addition to "1 plus"
domestic long distance service, Phoenix offers its customers a wide range of
value-added products and services, including inbound (800) service, dedicated
access and private line service, Internet access, calling cards, international
call-back, conference calling, debit cards, broadcast facsimile transmission
and customized management reports.

          Phoenix has begun, and plans to continue, a strategy of aggressively
pursuing acquisitions designed to increase revenues and margins, augment
product and service offerings, expand distribution capabilities, and increase
scale and scope of operations. See "--Acquisitions and Mergers." Since May
1995, Phoenix has acquired 10 companies or customer bases, including one
switched reseller, two switchless resellers, one international call-back
company, and six customer bases. These acquired companies and customer bases
have added significant amounts of revenue, added new products and services,
enhanced marketing capabilities and provided technical and network
infrastructure.

         Primarily through acquisitions, Phoenix believes it has amassed
sufficient size and scope to achieve significant cost savings through
deployment of a long distance network system (the "Network") consisting of
leased switching equipment in major metropolitan areas and leased transmission
facilities between these switches. See "--Network Operations." In contrast to
many other IXCs who are investing substantial capital to build networks, the
Company is deploying its Network without substantial capital investment. This
has been made possible by the increasing availability of capacity on switching
and transmission equipment on a leased basis from other telecommunications
providers. The ability to lease rather than purchase this capacity, and to
expand capacity on an "as needed" basis, creates a significant opportunity for
Phoenix to rapidly deploy its Network, while preserving most of the Company's
capital spending budget for the acquisition of additional customer traffic that
may be shifted onto the Company's Network. By leasing capacity on switching
equipment and transmission facilities, Phoenix intends to fully-deploy and
substantially load its planned Network by the middle of 1998. Phoenix has
entered into agreements to lease switches from US ONE Communications Corp. ("US
One") and other providers and to lease fixed-cost IMTs from Comdisco Network
Services, a division of Comdisco, Inc. ("Comdisco") and WorldCom, Inc.
("LDDS/WorldCom"). The Network also includes three switches (located in Colorado
Springs,



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Minneapolis and Phoenix) which were acquired by the Company in connection with
an acquisition in January 1996. The Company expects deployment of the Network
to significantly reduce the Company's average per minute line costs and provide
an important competitive advantage compared to resellers and other IXCs without
comparable networks.

BUSINESS STRATEGY

         The Company's objective is to rapidly grow revenues and cash flow by
being a leading provider of telecommunications services. The Company's strategy
for achieving this goal is to: (i) increase margins by continued deployment and
loading of the Network, (ii) continue an aggressive acquisition program, (iii)
provide customers a full range of telecommunications products and services and
(iv) bill all of a customers' products and services on one invoice and provide
customers with a single point of customer service contact.

         Increase Margins by Continued Deployment and Loading of the Network.
Phoenix intends to deploy and load its Network in order to reduce line costs,
improve gross margins, have greater control over its customer base and offer
enhanced calling features. In addition, by utilizing the Network rather than
relying on third-party vendor carriers, the Company believes it is positioned
to quickly benefit from potential reductions in local access charges. In
contrast to many of its competitors who are investing substantial capital in
networks, the Company plans to deploy its Network without substantial capital
investment. Phoenix has entered into agreements to lease switching equipment
and transmission facilities which, together with the Company's owned switches,
have enabled the Company to place approximately 17% of its long distance
minutes On-Network (i.e., routed by at least one Company-controlled switch) as
of December 31, 1996. The Company believes its leased and owned switching
equipment and leased transmission facilities will enable it to carry
approximately 90% of its long distance minutes On-Network by December 31, 1997.
The Company believes that, when 90% of its long distance minutes are
On-Network, its average cost per minute will decline by at least 10% from its
average cost per minute in 1996 (assuming present levels of local access
charges).

         Continue an Aggressive Acquisition Program. The Company intends to
continue to pursue complementary acquisitions which will allow it to rapidly
add customers and maximize the number of minutes traveling over the Network.
Although Phoenix considers many factors when evaluating a potential
acquisition, Phoenix seeks to purchase companies with positive EBITDA (i.e.,
earnings before income taxes, depreciation and amortization), potential
synergies to rapidly increase EBITDA, substantial uncommitted minutes of
traffic which can be moved quickly to the Network, strong sales organizations
to complement Phoenix's existing marketing efforts and new products and
services. Phoenix currently anticipates that long distance resellers are most
likely to meet its acquisition criteria, although the Company may also consider
other IXCs and telecommunications-related service providers where significant
cross-marketing opportunities exist, including cellular, paging and PCS
resellers. In addition, because residential calls primarily take place during
evenings or on weekends, while business calls generally occur during the day,
residential customers' calling patterns are complementary to business
customers' calling patterns. Therefore, in order to optimize its use of the
Network, the Company may pursue acquisitions which will enhance its residential
customer base. See "--Acquisitions and Mergers." Phoenix believes that larger
IXCs rarely compete to purchase the Company's desired acquisition candidates
due to such acquisition candidates' relatively small size, and, therefore, the
Company believes it has been able and will continue to be able to complete
acquisitions at attractive valuations. Upon consummation of an acquisition, the
Company seeks to eliminate duplicative costs and integrate the target company's
customer base onto its Network and billing system as quickly as possible.

         Provide a Full Range of Products and Services. Phoenix seeks to provide
a full range of telecommunications products and services. See "--Products and
Services." As competition increases in the telecommunications industry, the
Company believes that the successful companies will be those that can offer a
wide range of products and services, acting as a "one-stop-shop" for customers
who are confronted with a proliferation of products and technologies. In
addition to providing extra sources of revenue, Phoenix believes that
cross-selling a variety of products and services to its customers builds
customer loyalty. To complement its current offerings, the Company is currently
considering diversifying into a variety of related products and services,
including reselling cellular, paging and PCS services and offering its own
voicemail. In the wake of recent regulatory changes, the Company intends to
compete in the $100 billion local telephone service market which will enhance
its offering of telecommunications products and services. Accordingly, Phoenix
intends to offer local dialtone service in select markets beginning in the
second half of 1997, and, in preparation for this rollout, the Company has filed
for and received regulatory approvals in California and New York to offer local
dialtone service, pending final tariff filings.



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         One Invoice Billing and Single Point of Customer Service Contact.
Phoenix believes that the ability to bill customers for all products and
services on a single invoice is an important value-added service. The Company
is in the process of migrating to a new, state-of-the-art billing and customer
care platform, Kenan Systems Corporation's Arbor/BP 6.0 (the "New Billing and
Customer Care Platform"), which will give the Company single-billing
capabilities. In addition, the New Billing and Customer Care Platform will
enable the Company to provide more complete and timely customer service and
improved management information reports. The Company is currently billing
certain customers on the New Billing and Customer Care Platform and running
parallel billing cycles for certain other customers. The Company presently
anticipates that all of its customers will be phased onto the New Billing and
Customer Care Platform during 1997. The Company's migration to its New Billing
and Customer Care Platform is also designed to allow the Company's customer
service department to respond to customer inquiries more quickly, efficiently
and accurately. The New Billing and Customer Care Platform will allow customer
service representatives quick and easy access to information pertaining to all
of a customer's accounts, including calling history, payment history, and
current account balances, allowing the customer to receive all customer service
from a single point of contact. See "--Billing and Information Systems."

ACQUISITIONS AND MERGERS

         Prior Acquisitions and Mergers. Since May 1995, Phoenix has acquired
10 companies or customer bases, including one switched reseller, two switchless
resellers, one international call-back company, and six customer bases. The
following acquired companies and customer bases have added significant amounts
of revenue, added new products and services, enhanced marketing capabilities
and provided technical and network infrastructure:


<TABLE>
<CAPTION>
                                     Acquisition         Monthly(1)          Purchase          Form of                Type of
          Acquisition                   Date           Revenues (000s)     Price (000s)     Consideration           Acquisition
          -----------                  ------         ----------------     ------------     -------------          -------------
<S>                                   <C>               <C>                  <C>              <C>                 <C>
AMERICOM                              July 1995              $30               $98             Cash                Customer base
Bright Telecom, LP                   August 1995             $50              $356             Cash                Company
Interstate Savings, Inc.             August 1995            $367            $1,450             Cash                Customer base
Tele-Trend                           August 1995            $725            $4,430             Cash                Company
Communications, LLC
Education Communications            December 1995           $175              $525             Cash                Customer base
Systems, Inc.
Automated                           January 1996          $1,917           $17,522             Cash, common        Company
Communications, Inc.                                                                           stock and note
King Communications                 January 1996             $54              $203             Cash                Customer base
Baldcor Capital Group               January 1996             $28              $119             Cash                Customer base
Connections                          March 1996              $20               $36             Cash                Customer base
Communications Source
AmeriConnect, Inc.                  October 1996          $1,442           $12,820(2)             Common stock        Company
</TABLE>

(1)      Monthly revenues for first month's billing following the acquisition.
(2)      Represents estimated fair market value of Common Stock issued in
         connection with this transaction, which was accounted for as a pooling
         of interests.

         Future Acquisitions. Phoenix believes that there will continue to be
suitable acquisition candidates that may be acquired at attractive valuations.
Phoenix estimates that there are more than 800 long distance companies in the
United States and that over 95% of these companies have annual revenues of less
than $100 million. The Company believes that many of these companies do not
have sufficient capital or access to reasonably-priced capital to rapidly grow
their businesses or sufficient traffic volume to become "facilities-based"
providers (thereby gaining lower line costs, better control over



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customers and enhanced calling functions), and therefore may consider selling
their businesses. Additionally, the larger IXCs rarely seek acquisitions of
such relatively small long distance companies because these smaller companies
would add only marginally to the larger IXCs' market size and economies of
scale. For these reasons, the Company believes there exists a unique
opportunity for Phoenix to pursue select acquisitions and "roll-up" a number of
smaller telecommunications companies. Phoenix currently anticipates that long
distance resellers are most likely to meet its acquisition criteria, although
the Company may also consider other IXCs and telecommunications-related service
providers, including cellular, paging and PCS resellers.

NETWORK OPERATIONS

         The Company's Network strategy is to reduce its line costs by
transitioning traffic in whole or in part to the Network. Because the switches
and transmission facilities comprising the Network are primarily being leased,
the Company will be able to deploy its Network without substantial capital
investment. Where economically feasible, the Company will supplement its use of
leased switches with use of switches currently owned or acquired in future
acquisitions. Through a combination of the Network and agreements with vendor
carriers, the Company is able to complete point-to-point long distance calls
from anywhere within the United States and various foreign countries to
anywhere in the world.

         Switching Capabilities. The Company's switches enable the Company to
lower its line costs for calls carried in whole or in part over the Network by
(i) affording the Company access to more favorable pricing schedules of vendor
carriers normally reserved for carriers who own switches and (ii) enhancing the
Company's ability to select the most advantageous transmission alternative
available from the Company's leased, fixed-cost IMTs or from the carriers with
whom Phoenix has vendor arrangements.

         Leased and owned switches allow the Company to reduce its costs for
the services of vendor carriers (where such services are required) by
unbundling switching charges from the cost of completing a call. By not
purchasing switching services from a vendor carrier, the Company is able to
avoid the vendor carrier's mark-up for providing such services, thereby
improving the Company's margin for the call.

         In most instances, the most advantageous transmission alternative
available will be the Company's leased, fixed-cost IMTs (described below).
However, in instances where a Company IMT is not the most advantageous
transmission alternative available, optimization software running on the switch
can be programmed to select the best transmission alternative available from
among the networks of vendor carriers with whom Phoenix has agreements.

         Where the Company leases or owns a switch, the Company also has the
capability of optimizing LEC access routing, thereby reducing the Company's
cost of completing the call. As an example, because local access charges in
some areas are dependent on the distance to the termination telephone, it may
be more cost effective for the Company to route a call from Denver to Aspen,
Colorado over intrastate long distance routes using a vendor carrier (such as
LDDS/WorldCom) rather than terminating the call through the Denver LEC (i.e.,
U.S. West) over the LEC's local network to Aspen. The optimization software
running on the Company's Denver switch gives the Company this flexibility and
control.

         Leased and owned switches also give the Company the capability of
quickly benefitting from reductions in local access charges. Because the
Company's agreements with vendor carriers specify rates for origination and/or
termination of long distance calls which incorporate levels of local access
charges in place at the time such agreements were negotiated, reductions in
local access charges reduce the vendor carriers' cost of completing calls
without any concomitant reduction in the rates Phoenix is required to pay to
such vendor carriers until such agreements are renegotiated. For On-Network
traffic, reductions in local access charges reduce Phoenix's costs, thereby
improving its margins for such traffic.

         The Company has entered into an agreement to lease switches from US
One. The Company may also lease switches from additional telecommunications
providers as the Network is expanded. In addition to leased switches, the
Network also includes three switches (located in Colorado Springs, Minneapolis
and Phoenix) which were acquired by the Company in connection with the
acquisition of Automated Communications, Inc. ("ACI") in January 1996 and may
include additional switching and transmission equipment acquired in the future
through acquisitions.

         The Company intends to deploy switches and connect those switches to
the Network with IMTs in those markets in which it has sufficient long distance
traffic to justify deployment. The Company evaluates calling patterns and the
amount



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of long distance traffic in a particular market in determining whether
to deploy switches and IMTs in such market. The Company believes that it can
cost justify such deployment in those markets in which it has approximately
750,000 originating or terminating long distance minutes per month. The Company
is currently utilizing switches that it owns or is leasing from US One in New
York, Chicago, Denver, Colorado Springs, Phoenix, Minneapolis and Tampa. In the
future, the Company intends to lease switches and commence switching in Los
Angeles, San Francisco, Seattle, Atlanta, Washington, D.C., Dallas, Boston,
Columbus, Kansas City and Detroit. The ability of the Company to begin
switching in a market is dependent (where the Company does not own a switch) on
a switching service provider having a switch deployed and operational in or
near that market. The Company believes that US One or another switching
provider will have switches in operation in each market in which the Company
intends to commence switching.

         Transmission Facilities. On routes where the Company has leased IMTs,
such IMTs interconnect the Company's leased and/or owned switches and transport
long distance telephone calls between such switches. Where the volume of long
distance traffic on a particular route between such switches justifies leasing
a fixed-cost IMT, access to the IMT affords the Company the opportunity to
reduce line costs by transmitting its long distance traffic over such IMT,
where available. Because fees for IMTs are fixed and do not vary with usage,
additional minutes of use may be loaded on the IMTs without incurring
additional costs for such IMTs, thereby improving the Company's margins.

         In most instances, the Company intends to secure its fixed-cost IMTs
from Comdisco. The Company has an agreement with Comdisco that allows it to
lease IMTs at rates that are no more expensive than the least expensive
alternative available from another provider on a given route. In addition, for
Comdisco IMTs, the Company has the opportunity to pay a portion of the fees for
such IMT in the Company's Common Stock, thereby reducing the Company's cash
requirements for securing such IMT. The Company believes that the total fees
paid to Comdisco for IMTs will generally be less than the fees payable to the
next best alternative provider. See "--Description of Certain Agreements."
However, on routes where IMTs are not available from Comdisco, the Company
believes it may lease IMTs from numerous other providers, including
LDDS/WorldCom and Qwest Communications Corporation. (Fixed-cost IMTs leased by
the Company, whether leased from Comdisco or others, are sometimes referred to
herein as the "Company's IMTs.")

OFF-NETWORK CALLS

         As of December 31, 1996, the Company estimates that approximately 17%
of its traffic was On-Network. The other 83% of its long distance traffic
("Off-Network" traffic) was carried entirely on the networks of vendor carriers
with whom the Company has agreements. The percentage of traffic that is
Off-Network is expected to decline substantially over the next 12 months as the
Network is more fully deployed. However, the Company estimates that
approximately 10% of its traffic will always be Off-Network.

        The Company has agreements with numerous major vendor carriers, such as
LDDS/WorldCom, Sprint, Frontier Communications, AT&T and others to carry its
Off-Network traffic and portions of its On-Network traffic. The Company
believes it is well positioned relative to many of its competitors with respect
to vendor carrier contracts because, although certain of these contracts
specify minimum volume usage, such requirements scale down quickly over time
and should not prevent the Company from shifting a substantial portion of its
traffic On-Network. In the second half of 1996, the Company signed new carrier
contracts with LDDS/WorldCom, Frontier and Sprint. During 1997, Phoenix expects
to use LDDS/WorldCom, Frontier and Sprint for most of its vendor carrier needs.

         The vendor carriers whose networks are used by Phoenix have
established customer records in their databases. The carriers send to Phoenix,
on a daily, weekly, or monthly basis, information containing the long distance
traffic of all of Phoenix's customers who have been served by that carrier.
Phoenix is obligated to pay the carrier for such traffic at its pre-established
contractual rates. The Company processes the call detail information and
provides each of its customers with a monthly invoice for its long distance
calls at rates established by Phoenix. The customer then pays Phoenix directly.
The rates charged to the customer by Phoenix are quoted, contractual rates and
are not affected by the particular transmission and switching facilities
selected for transmission of a call.

         In most cases, Phoenix, and all long distance providers that resell
long distance as some portion of their business, are in direct competition with
such vendor carriers for the right to serve the end user. The Company believes
that such carriers view the Company and other companies that resell such
carriers' services as a low cost, alternative marketing channel which gives the
carriers incremental minutes.



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PRODUCTS AND SERVICES

         The Company offers a wide variety of long distance and value-added
products and services to its customers. These products and services include: "1
plus" domestic long distance service, inbound (800) service, dedicated access
and private line services, Internet access, calling cards, international
call-back, conference calling, debit cards and broadcast facsimile
transmission. The Company also provides customized management reports to help
its customers better understand and manage their telecommunications costs. In
addition, the Company's business strategy includes adding additional
telecommunications products and services, such as local service, cellular
service, voicemail, paging and PCS services. See "--Business Strategy." In the
wake of recent regulatory changes, the Company intends to compete in the $100
billion local telephone service market. Accordingly, the Company intends to
offer local dialtone service in select markets beginning in the second half of
1997. The Company's local dialtone product will be based upon resale of the
wholesale dialtone products of switching service providers. The Company
believes the ability to offer local dialtone service will further enhance its
competitive position by improving its product offerings as well as provide
opportunities for revenue growth. Access to the local telephone service market
will be subject to availability of wholesale dialtone products from switching
service providers and/or regional bell operating companies ("RBOCs") and will
be affected by the outcome of pending litigation challenging certain FCC
regulations.

         The Company's pricing structure for its products and services is
established on the basis of cost and competition. The Company believes that its
customers generally select the Company because it offers lower cost long
distance transmission than larger IXCs, such as AT&T, MCI and Sprint, while
providing more attentive customer service. The Company offers a variety of rate
plans that it believes meet the needs of its customers. Under the Company's
most commonly subscribed long distance rate plans, customers are generally sold
flat per minute rates for interstate and intrastate long distance calls. Such
rates generally are determined based upon the customers' usage levels at the
time of the sale and do not vary based upon the time of day of a call.

CUSTOMERS

         At December 31, 1996, the Company's customer base was comprised of
over 47,000 customers, consisting primarily of small and medium-size business
customers and, to a lesser extent, residential customers. The Company targets
its marketing efforts primarily to business customers spending $10,000 or less
per month on long distance services, and, in the future, the Company will be
increasing its focus on building its residential customer base. For the year
ended December 31, 1996, the Company's 20 largest customers accounted for less
than 5% of revenue and no one customer accounted for more than 1% of revenue.

         Phoenix is presently serving customers in 49 states. Through its
international call-back service, the Company serves approximately 900 customers
in various countries worldwide.

MARKETING AND SALES

         Overview. The Company's marketing and sales efforts are designed to
differentiate the Company from its competitors through simple and low-cost
pricing, customization of products and services and person-to-person customer
service. The Company's pricing schedules typically include a flat-rate cost per
minute, with additional discounts available for higher volume use. While a
variety of rate plans are offered, the Company attempts to price its long
distance service generally below the basic rates of AT&T, MCI and Sprint.

         The Company emphasizes to its business customers that its menu of
services can be customized to meet each individual company's needs, including
monthly management reports and specially formatted invoices that help identify
and sort calling patterns and track non-business calling. The Company also
highlights the high level of regular personal contact in its approach to
customer service, including a five-person team of customer representatives that
is assigned to each business customer throughout its relationship with Phoenix.

         The Company believes that a key attraction of its marketing and sales
presentations to business customers is its invoice system, which utilizes
simple and understandable formats for conveying billing information and
presents on a single bill all services provided by Phoenix to a customer
(except international call-back service). When operational, the New



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Billing and Customer Care Platform will enhance the Company's ability to provide
single-bill invoicing, which the Company believes will be increasingly
important as a marketing tool as telecommunications companies offer a wider
range of products and services. See "--Billing and Information Systems."

         Under the Company's "clear billing" system, since January 1996,
charges for "1 plus" calls to new customers are based upon six-second
increments and the applicable per-minute rate charge. The Company believes that
this calculation method differs from that currently employed by certain of its
competitors, who use minutes as the minimum billing increment and round up
partial minutes of calling time to the next whole minute. In addition, under
the Company's most recent rate plans, per call charges are calculated out to
four decimal places while many of the Company's competitors round charges for
each call up to two decimal places. The resulting charges for the "rounded-up"
portion of calling time can be significant for business customers with a high
volume of short calls, and the Company's billing method is thus presented to
potential customers as a cost-saving feature. The Company views its clear
billing policies as a competitive advantage when compared to the billing
practices of certain of its competitors.

         The Company conducts its marketing efforts through a focused program
that combines direct sales offices located in major metropolitan areas with a
network of master sales agents and independent distributors. The Company
believes that utilizing a staff of dedicated sales employees facilitates lower
turnover, better training and more consistency in presenting the Company's
image to the marketplace. At the same time, its network of agents and
distributors serves to extend the Company's marketing reach and coverage
efficiently and economically.

         For the year ended December 31, 1996, the Company's direct sales and
independent distributor (including Master Sales Agent) systems contributed
approximately 60% and 40%, respectively, of the total number of new customers,
exclusive of customers gained through acquisitions during the period.

         Direct Sales Offices. The Company currently operates 11 sales offices
in San Francisco, Los Angeles, Orange County, Seattle, Denver, Chicago,
Minneapolis, St. Paul, Atlanta, Kansas City, and Tampa. At December 31, 1996,
the Company employed 40 direct sales representatives, 11 sales managers (one in
each sales office) that support, train and assist the direct sales
representatives and 11 supervisory and administrative personnel in its sales
offices. The Company intends to open an additional sales office in New York
City in 1997. See "--Future Marketing Initiatives."

         Distribution Network. The Company's distributor network consists
primarily of master sales agents and independent distributors. Master sales
agents are either individuals or marketing companies with their own experienced
sales forces and established networks of business customers. They typically sell
telecommunications products and services offered by other companies in addition
to Phoenix. Independent, or "standard", distributors are non-employee
contractors who generally have not developed the larger sales staffs that
characterize master sales agents. The Company estimates that the number of its
standard distributor relationships that produce sales on a regular monthly basis
is currently in the range of 30-35, although the Company has approximately 50
standard distributor relationships that occasionally produce sales.

         Future Marketing Initiatives. The Company believes that the
proliferation of services it expects to offer in the future as a
"one-stop-shop" telecommunications provider will require corresponding
refinements and enhancements to the Company's marketing and sales strategy.
Beginning in the Company's New York City direct sales office, which is expected
to open in conjunction with the commencement of local dialtone service, the
Company will focus increasingly on offering its customers "bundled" solutions
to a wide variety of telecommunications needs in addition to basic long
distance service. The Company's current marketing approach usually promotes
long distance service as the primary product offering, with other services
being offered supplementally. With the expected entry of the Company into the
local dialtone market, the marketing focus is expected, over time, to evolve
more towards offering both local dialtone and long distance service on a
bundled basis. See "--Products and Services." Also, the Company expects that
the increasing importance of Internet access to business customers will result
in additional resources being devoted to marketing Internet services,
particularly to those customers whose need for data transmission is large
enough to justify dedicated access for this service.

CUSTOMER SERVICE

         The Company places a strong emphasis on customer service and believes
that frequent contact with customers is a significant factor in customer
retention. The Company's migration to its New Billing and Customer Care
Platform is designed to allow the Company's customer service department to
respond to customer inquiries more quickly, efficiently



                                       8

<PAGE>   9



and accurately. The New Billing and Customer Care Platform will allow customer
service representatives quick and easy access to information pertaining to all
of a customer's accounts, including calling history, payment history, and
current account balances.

         The Company has recently completed a new Customer Service Call Center
(the "Center") that has state-of-the-art telephone systems, data systems and
operating maps to assist in the customer service function. The Center is
located adjacent to the Company's headquarters and houses all of the Company's
customer service representatives. The Company believes that its new Center
further enhances its ability to serve its customers.

         Customer service representatives are available from 6:00 a.m. to 7:00
p.m. Mountain Standard Time (encompassing the business day on both coasts) by
dialing a toll-free number to handle any customer inquiries regarding their
service. Additionally, the Company is presently providing 24-hour customer
service to its dedicated business customers and plans to offer 24-hour customer
service to all customers beginning in 1997. To assess satisfaction with the
services and products being provided by Phoenix, customer service
representatives call existing business customers on a routine basis. In
addition, every new customer receives a welcome call.

         The Company's customer service department is organized into four
person teams, with each having a team leader that supervises activities. Each
customer is assigned to one of the teams which is responsible for all the
service needs of that customer. The Company employed 61 customer service
representatives as of December 31, 1996.

BILLING AND INFORMATION SYSTEMS

         The Company is in the process of migrating to its New Billing and
Customer Care Platform, Kenan Systems Corporation's Arbor/BP 6.0, from seven
distinct billing systems, most of which were acquired through acquisitions. The
New Billing and Customer Care Platform is fully installed, and certain of the
Company's customers have been receiving bills from it. The Company is in the
process of running several parallel billing cycles with a presently-utilized
billing system to further verify successful operation of the New Billing and
Customer Care Platform. Following verification of successful parallel billing
cycles, the Company expects that additional customers will receive their bills
in the second quarter of 1997 from the New Billing and Customer Care Platform.
The Company's remaining customers are planned to be phased into the New Billing
and Customer Care Platform over 1997.

         The New Billing and Customer Care Platform is expected to provide four
primary benefits to the Company. First, the Company anticipates that it will
give the Company more flexibility and control in the billing process. The
Company views the ability to bill customers for all such services on a single
invoice to be critical as new products and services are offered. The New Billing
and Customer Care Platform will also allow the Company to customize bill formats
as per a customer's request. Second, the Company anticipates that the New
Billing and Customer Care Platform will make customer service more efficient,
more accurate and more meaningful to the customer. The New Billing and Customer
Care Platform will allow customer service representatives quick and easy access
to information pertaining to all of a customer's accounts, including calling
history, payment history and current account balances. Third, the Company
expects that the New Billing and Customer Care Platform will improve the
Company's order entry and provisioning system by adding an automated element to
what had previously been done manually. Finally, the Company anticipates that
the New Billing and Customer Care Platform will interface with the Company's
general accounting ledger to feed financial data directly to the accounting
software package.

         At the present time, the Company uses seven distinct billing systems
in its business, most of which came into use as a result of acquisitions. These
billing systems will be phased out over time as the New Billing and Customer
Care Platform is fully implemented. Under the current billing systems, four
different call detail formats are available so the customer can customize the
way its call detail is presented. The formats include sorting by chronological
order, originating phone number, accounting code, and terminating phone number.
Additionally, the Company has the ability to write custom reports for a large
individual user to replace existing internal reports or provide new reports to
that customer.

EMPLOYEES

         As of December 31, 1996, the Company had approximately 231 full-time
employees. Of the full-time employees, 71 are engaged in sales and marketing,
61 in customer service, and the remainder in management, development, finance
and



                                       9

<PAGE>   10



administrative capacities. None of the Company's employees are represented
by a labor union. The Company believes its relations with employees to be good.

GOVERNMENT REGULATION

         The terms and conditions under which the Company provides
telecommunications products and services are subject to government regulation.
Federal laws and FCC regulations apply to interstate and international
telecommunications, while particular state regulatory authorities have
jurisdiction over telecommunications that originate and terminate within the
same state.

         Federal. The Company is classified by the FCC as a non-dominant
carrier, and therefore is subject to significantly reduced federal regulation.
After the recent reclassification of AT&T as a non-dominant carrier in its
provision of domestic services, among domestic carriers only the LECs are
classified as dominant carriers for the provision of interstate access
services. As a consequence, the FCC regulates many of the rates, charges, and
services of the LECs to a greater degree than the Company's. The FCC has
proposed that the RBOCs offering out-of-region interstate inter-exchange
services be regulated as non-dominant carriers, as long as such services are
offered by an affiliate of the RBOC that complies with certain structural
separation requirements, which may make it easier for the RBOCs to compete
directly with the Company for long distance subscribers. These would be the
same separation requirements that currently are applicable to independent LECs
that provide interstate inter-exchange services, although the FCC on March 21,
1996 initiated a rule-making proceeding in which it is considering whether to
modify or eliminate these separation requirements.

         Because AT&T is no longer classified as a dominant carrier, certain
pricing restrictions that formerly applied to AT&T have been eliminated, which
may make it easier for AT&T to compete with the Company for low volume long
distance subscribers. International carriers may also be classified as dominant
if they exercise market power or are considered to be affiliated with foreign
carriers, as defined under the FCC's rules. Non-dominant carriers are currently
required to file international tariffs. The FCC generally does not exercise
direct oversight over cost justification and the level of charges for service
of non-dominant carriers, such as the Company, although it has the statutory
power to do so. Non-dominant carriers are required by statute to offer
interstate and international services under rates, terms, and conditions that
are just, reasonable, and not unduly discriminatory. The FCC has the
jurisdiction to act upon complaints filed by third parties or brought on the
FCC's own motion against any common carrier, including non-dominant carriers,
for failure to comply with its statutory obligations. Additionally, the 1996
Act grants explicit authority to the FCC to "forbear" from regulating any
telecommunications services provider in response to a petition and if the
agency determines that the public interest will be served. On October 31, 1996,
the FCC exercised this authority and released an order which, among other
things, requires nondominant IXCs to cancel their currently-filed tariffs for
interstate domestic services within nine months of the effective date of the
order and prohibits such filings in the future.

         The FCC imposes only minimal reporting requirements on non-dominant
resellers, although the Company is subject to certain reporting, accounting,
and record keeping obligations. A number of these requirements are imposed, at
least in part, on all carriers, and others are imposed on carriers, such as the
Company, whose annual operating revenues exceed $100 million. The Company has
been granted authority by the FCC to provide international telecommunication
services through the resale of switched services of various vendor carriers.
The FCC reserves the right to condition, modify, or revoke such international
authority for violations of the Communications Act of 1934 or its rules.

         The Company currently has two tariffs on file with the FCC, one
covering its domestic interstate services and one covering international
services. Pursuant to the FCC's October 31, 1996 order, the Company intends to
cancel its tariff for domestic interstate services. As an international
non-dominant carrier, the Company has been required to include, and has
included, detailed rate schedules in its international tariffs, which are filed
on 14-days' notice without cost support to justify rates. Resale carriers, like
all other interstate carriers, are also subject to a variety of miscellaneous
regulations that, for instance, govern the documentation and verifications
necessary to change a subscriber's long distance carrier, limit the use of
"800" numbers for pay-per-call services, require disclosure of certain
information if operator assisted services are provided, and govern interlocking
directors and management.

         The 1996 Act authorizes the RBOCs to provide inter-LATA inter-exchange
telecommunication services, upon the receipt of any necessary state and/or
federal regulatory approvals that are otherwise applicable to the provision of
intrastate or interstate long distance services and, for in-region long
distance services, upon specific FCC approval and upon satisfying



                                       10

<PAGE>   11



other conditions, including a checklist of interconnection and other
requirements. The 1996 Act also provides for certain safeguards against
anticompetitive conduct by the RBOCs in the provision of inter-LATA service
including a requirement for a separate subsidiary and certain joint marketing
limitations.

         GTE was previously prohibited from providing inter-exchange
telecommunications services by the GTE Decree. The 1996 Act vacates the GTE
Decree and authorizes GTE to provide inter-LATA inter-exchange
telecommunications services without regard to limitations by region, although
the necessary state and/or federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service must be obtained by the various operating companies of GTE prior to the
provision of long distance service, and GTE is subject to the provisions of the
1996 Act that impose interconnection and other requirements on the LECs.

         Like substantially all other long distance carriers, the Company has
been the subject of complaints before the FCC regarding the unauthorized
switching of subscribers' long distance carriers, also known in the industry as
"slamming." The Company believes that most of such complaints arose from
telemarketing efforts by the Company, a marketing practice that the Company has
discontinued. The Company has never been penalized or cited for "slamming" by
the FCC. As to all complaints pending at December 31, 1996, the Company has
filed timely responses to such complaints and believes that such complaints
will be resolved without a material adverse impact upon the Company.

         In addition, the 1996 Act adds a new provision that imposes liability
upon all telecommunications carriers to the carrier previously selected by the
subscriber for unauthorized switching of subscribers' long distance carriers.
Liability is imposed in an amount equal to all charges paid by the subscriber
after the unauthorized conversion. The FCC is required to adopt new rules to
implement this new statutory requirement. The impact that this statutory
provision will have on the Company cannot be determined at this time.

         State. The Company is subject to varying levels of regulation in the 49
states in which it is currently authorized to provide originating interstate
telecommunications services and the 47 states in which it is currently
authorized to provide intrastate telecommunications services. The vast majority
of the states require the Company to apply for certification, which entails
proof of technical, managerial and financial ability, to provide intrastate
telecommunications services, or at least to register or to be found exempt from
regulation, before commencing intrastate service. A majority of states also
require the Company to file and maintain detailed tariffs listing their rates
for intrastate service. Many states also impose various reporting requirements
and/or require prior approval or notice for transfers of control of certified
carriers, and/or for corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; and carrier securities offerings. In certain instances the
Company has sought retroactive authority in various jurisdictions for certain
acquisitions and other reportable events. While the Company expects to receive
all requested approvals with respect to such retroactive filings, the Company
had not received all of such approvals as of March 30, 1997. Certificates of
authority can generally be conditioned, modified, canceled, terminated, or
revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory authorities.
Fines and other penalties, including the return of all monies received for
intrastate traffic from residents of a state, may be imposed for such
violations. If state regulatory agencies conclude that the Company has taken
steps without obtaining the required authority, they may impose one or more of
the sanctions listed above.

         Currently, the Company can provide originating interstate and
intrastate service to customers in 47 states and the District of Columbia. Of
the states in which the Company provides originating service, 38 have public
utility commissions that actively assert regulatory oversight over the services
offered by the Company. Recently, two states (Arizona and Oklahoma) modified
their rules to require certification, and, although the applications were filed
with both commissions, the Company has not yet received written approval.
However, resale of long distance services in these states was previously
allowed without certification, and such resale is permitted to continue during
the pendency of these filings.

         Additionally, the rules for each state vary in regard to the
authorization of inter-LATA versus intra-LATA service. Upon initial
certification, the Company generally requested approval to provide resold
intrastate long distance telecommunications services, unless a state had
specific rules pertaining to LATAs. At the time, depending on the individual
state regulations, some states only allowed the Company to provide inter-LATA
services, and the LECs typically provided intra-LATA services. However, many
states have modified their rules to allow competition in the intra-LATA market.
Generally speaking, as the rules have been modified, the states have either
ordered that all certified inter-LATA carriers now have the authority to
provide intra-LATA services, or directives have been given for companies to
apply for intra-LATA



                                       11

<PAGE>   12



authority or revise existing tariffs to comply with state regulations. In those
states which issued directive for companies to apply for intra-LATA authority
or revise tariffs, the Company has complied with such orders.

         The Company continuously monitors regulatory developments in all
states in which it does business in order to ensure regulatory compliance. To
the extent that the Company converts from a switchless reseller to a switched
reseller, modification or amendment of the Company's state certifications may
be required.

         Additional complaints for unauthorized switching of subscribers' long
distance carriers and for other issues involving subscriber liability for
billed calls for which the subscriber denies responsibility and other billing
issues have been lodged against the Company before other state public utilities
commissions. Although such complaints could result in additional legal actions
or proceedings being initiated against the Company, the Company believes that
such matters would be satisfactorily resolved without a material adverse impact
upon the Company's results of operations or financial condition. A final
determination by one or more jurisdictions that the Company engaged in the
unauthorized switching of subscribers' long distance carriers or other
unauthorized conduct could have a material adverse effect upon the Company's
results of operations or financial condition as, among other things, the
Company would be subject to financial penalties and potential revocation of its
operating authority in the particular jurisdiction, as well as other possible
restrictions.

         The Company believes that it is in compliance in all material respects
with the requirements of federal and state regulatory authorities and maintains
communications regularly with the various regulatory authorities in each
jurisdiction.

DESCRIPTION OF CERTAIN AGREEMENTS

         The following is a discussion of certain material terms and provisions
of the Company's agreements with US One and Comdisco. Such discussions are
qualified in their entirety by reference to the terms of such contracts.

         US One. The Company's Agreement with US One, dated May 22, 1996 and
amended October 11, 1996, December 30, 1996, January 3, 1997 and March 26,
1997 (as amended, the "US One Agreement"), has an initial term which expires on
May 22, 2003, but it is automatically renewed for successive one year terms in
the absence of non-renewal by either party. The US One Agreement gives the
Company access to US One's switches as they are deployed and includes a Switch
Implementation Schedule which specifies target dates for deployment of the
first 14 of US One's switches in specific service areas (the "Service Areas").
Four of US One's switches had been deployed as of December 31, 1996, and the
remaining 11 switches are scheduled to be deployed by December 1997.

         US One experienced technical difficulties and delays with the
implementation of its first switch that resulted in service deficiencies for
certain of Phoenix's Denver customer base. US One has successfully deployed
three additional switches without similar technical difficulties.

         The US One Agreement provides that US One will supply, at its expense,
network design engineering assistance and consultation to facilitate the
Company's transition into utilizing US One's services and in developing systems
and procedures for management of such services until November 22, 1997 or until
nine months following the actual installation date of the last switch
identified on the Switch Implementation Schedule, whichever is later. This
engineering assistance includes the use of US One's network optimization model
that runs on the Company's switches leased from US One and which is designed to
select the least expensive transmission route available for each long distance
call by a Phoenix customer. By November 1997, the Company expects to develop
the engineering expertise to be able to bring the network design and
optimization function in-house.

         The US One Agreement does not prevent Phoenix from contracting with
other providers of Communications Services, nor does it restrict US One from
providing such services to other long distance or telecommunications services
providers.

         The US One Agreement limits the liability of each of Phoenix and US
One for defaults, breaches of representations, warranties or agreements under
the US One Agreement to amounts that were or would have been charged for the
related Communications Service. Neither party may be liable to the other for
any indirect, special, reliance, incidental or



                                       12

<PAGE>   13



consequential losses or damages. The US One Agreement further provides for
certain rights of indemnification in favor of each of the parties.

         Comdisco. The initial term of the Company's agreement with Comdisco,
dated March 25, 1996 (the "Comdisco Agreement") runs through March 25, 1999,
but it automatically renews unless either party gives notice of nonrenewal.
Pursuant to the Comdisco Agreement, Comdisco has agreed to furnish the Company
with transmission capacity on its fixed-cost IMTs. Phoenix has the option to
increase or decrease the number of IMT circuits upon 30 or 60 days prior
written notice, respectively, subject to required service intervals and
availability.

         Comdisco has agreed that, on routes where the Company has leased IMTs
from Comdisco, the monthly charges for such IMTs will not exceed the charges
from the least expensive alternative available from an alternative provider on
the same route. When the Company leases Comdisco's facilities, the monthly fees
per IMT consist of two forms of payment. The first payment is comprised of a
cash payment based upon Comdisco's incremental cost for such facility (the
"Incremental Cost Payment"). The second payment (the "Cost Savings Payment")
consists of cash or equity of the Company and is based upon the cost savings
between the total cost of next best alternative facility on the same route
available from an alternative provider and the Incremental Cost Payment. If
paid in cash, the second payment is equal to such cost savings. If paid in
equity of the Company, the second payment is in Common Stock of the Company
with a fair market value equal to one-half of such cost savings. The Cost
Savings Payment is payable in the Company's Common Stock until March 25, 1997,
and, at the Company's option, in cash or Common Stock thereafter. When the
Company's Common Stock is used to pay a portion of the fees for Comdisco IMTs,
this arrangement reduces the Company's cash requirements for securing such
IMTs.

         Comdisco has specifically disclaimed any representation or warranty
concerning the products, equipment, software, or services provided under the
Comdisco Agreement, and has not warranted that transmission service will be
uninterrupted. Other than for certain indemnification obligations, Comdisco's
liability to Phoenix for losses and damages is limited to the amount of cash
fees paid by Phoenix during the preceding 12 month period. Comdisco may not be
held liable for special, exemplary or consequential damages to Phoenix.

         Phoenix has the option to terminate the Comdisco Agreement upon 30
days' notice to Comdisco or immediately if service on an IMT is interrupted for
a period of 24 or more consecutive hours. Either party may terminate the
Comdisco Agreement upon the occurrence of material default by the other party
upon 30 days' prior written notice after the other party has been given an
opportunity to cure the default.

ITEM 2. PROPERTIES

         The Company leases its principal executive offices in Golden,
Colorado. In June 1996, the Company completed the relocation of its corporate
headquarters from San Francisco. The lease for the Golden, Colorado offices
expires on December 30, 1997, and the Company believes that the term of such
lease will be extended in the second quarter of 1997. The Company leases sales
offices in the following cities: Atlanta, Chicago, Denver, Kansas City, Los
Angeles, Minneapolis, Orange County, San Francisco, Seattle, St. Paul and
Tampa. In addition, the Company intends to open a sales office in the New York
metropolitan area during 1997. The Company also leases space for its Customer
Service Call Center in Golden, Colorado. The Company currently leases
approximately 78,802 square feet of office space for an aggregate of $115,000
per month. In addition, the Company currently leases spaces for switches in
Colorado Springs, Minneapolis and Phoenix for an aggregate of $15,000 per
month.

ITEM 3. LEGAL PROCEEDINGS

         LDDS Communications, Inc. commenced an action in the United States
District Court for the Southern District of Mississippi in July of 1993 against
ACI and the former owner of ACI asserting claims relating to alleged breaches
of Noncompete and Confidentiality Agreements the defendants had signed in
connection with two transactions in which LDDS was involved. The alleged
breaches primarily relate to ACI's hiring of sales representatives employed by
Dial-Net, Inc., a long distance company LDDS acquired in a merger transaction,
before the merger was consummated. LDDS asserted a monetary damage claim of
between $2.0 million and $3.0 million. ACI and ACI's former owner
counterclaimed, asserting a monetary damage claim in excess of $5.0 million.
Before trial, LDDS was informed that a subsidiary of Phoenix Network had
acquired ACI, but LDDS took no steps to change the pleadings to name Phoenix in
the litigation. A trial on this action was conducted in the United States
District Court in Jackson, Mississippi from October 2, 1996 through October 17,
1996,



                                       13

<PAGE>   14



and final arguments were heard on November 15, 1996. The trial court took
the matter under advisement at the close of the trial. The Company cannot
predict when the trial court will reach a decision in the case. The former
owner of ACI has actively defended and pursued the claims on behalf of herself
and ACI and has agreed to indemnify Phoenix against any liability the Company
might have as a result of this action. An escrow account, funded with 1,400,000
shares of Phoenix Common Stock has been established by the former owner of ACI
with respect to this indemnification obligation. The Company believes it
unlikely that the outcome of this action will have a material adverse affect
upon the Company's results of operations or financial condition, however, there
can be no assurance that this matter will not result in such a material adverse
affect upon the Company.

         In addition, the Company is a party, from time to time, in litigation
incident to its business. The Company is not aware of any current or pending
litigation that it believes will have a material adverse affect on the
Company's results of operations or financial condition.

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

         None.


                                    PART II

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

         The Company's Common Stock is traded on the American Stock Exchange
under the symbol "PHX". The following table reflects the range of high and low
closing sales prices for each period indicated.

<TABLE>
<CAPTION>
                                                            Low          High
                                                            ---          ----
<S>                                                       <C>          <C>
YEAR ENDED DECEMBER 31, 1995
  First quarter ended March 31, 1995 .................    $   1.88     $   3.50
  Second quarter ended June 30, 1995 .................    $   2.25     $   3.13
  Third quarter ended September 30, 1995 .............    $   2.44     $   4.63
  Fourth quarter ended December 31, 1995 .............    $   3.31     $   4.44
YEAR ENDED DECEMBER 31, 1996
  First quarter ended March 31, 1996 .................    $   3.44     $   4.00
  Second quarter ended June 30, 1996 .................    $   2.88     $   5.88
  Third quarter ended September 30, 1996 .............    $   4.50     $   5.94
  Fourth quarter ended December 31, 1996 .............    $   3.38     $   4.94

</TABLE>

         The closing sales price of the Company's Common Stock as reported by
the American Stock Exchange on March 24, 1997 was $2.563.

         As of the close of business on March 24, 1997, there were
approximately 734 stockholders of record of the Company's Common Stock,
including shares held in street name by various brokerage firms.

         The Company has not, since 1983, paid any dividends on its Common
Stock and the Company does not anticipate the payment of dividends on such
stock in the foreseeable future. In addition to any applicable state law
restrictions relating to the payment of dividends on its Common Stock, the
Company is restricted from paying dividends on Common Stock until all dividends
due on outstanding Preferred Stock have been paid. Since September 1993, the
Company is additionally restricted from paying any dividends on its Common or
Preferred Stock without the consent of its finance company under the terms of
its Credit Agreement (as hereinafter defined).

         The Company had 98,625 shares of Series A Preferred Stock and 114,500
shares of Series B Preferred Stock outstanding at December 31, 1996 with a
combined cumulative dividend requirement of $191,813 per year. Additionally,
the Company had 333,333 shares of Series D Preferred Stock outstanding at
December 31, 1996 with non-cumulative dividend preferences over Common Stock.
As of December 31, 1996, the Series A, B and D shares, with accumulated and
unpaid dividends of $736,770 were convertible into 1,908,977 shares of Common
Stock.

ITEM 6. SELECTED FINANCIAL DATA



                                       14
<PAGE>   15




         The selected consolidated financial data presented below for, and as
of the end of, the years ended December 31, 1996, 1995, 1994, 1993 and 1992
have been derived from the consolidated financial statements of the Company,
which statements have been audited by Grant Thornton LLP, independent certified
public accountants. This data should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included elsewhere herein.

<TABLE>
<CAPTION>
                                                                            Year ended December 31,
                                                                    --------------------------------------------
                                                          1992        1993        1994        1995        1996
                                                        --------    --------    --------    --------    --------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenue .............................................   $ 36,502    $ 53,905    $ 74,405    $ 75,855    $ 99,307
Cost of revenue .....................................     27,352      39,381      52,650      53,776      73,438
                                                        --------    --------    --------    --------    --------
               Gross profit .........................      9,150      14,524      21,755      22,079      25,869
Selling, general and administrative expenses ........      9,438      15,851      21,075      22,323      31,115
Depreciation and Amortization .......................        254         538         678       1,126       4,358
Relocation expenses .................................       --          --          --          --         1,133
Acquisition expenses ................................       --          --          --          --         1,309
Aborted bond offering expenses ......................       --          --          --          --           246
                                                        --------    --------    --------    --------    --------
                                                           9,692      16,389      21,753      23,449      38,161
                                                        --------    --------    --------    --------    --------
    Operating income (loss) .........................       (542)     (1,865)          2      (1,370)    (12,292)
Other income (expense):
    Interest income .................................         40          19          36         103          85
    Interest expense ................................        (42)        186        (425)       (261)       (626)
    Loss on abandonment of fixed assets .............       --          --          --        (1,020)        (15)
    Miscellaneous income (expense) ..................        (11)        (10)         43          (7)          4
                                                        --------    --------    --------    --------    --------
                                                             (13)       (177)       (346)     (1,184)       (552)
                                                        --------    --------    --------    --------    --------
Income (loss) before income taxes and
  cumulative effect of accounting  change ...........       (555)     (2,042)       (344)     (2,554)    (12,844)
Income tax benefit (expense) ........................       --           494         (16)       (500)       --
                                                        --------    --------    --------    --------    --------
Income (loss) before cumulative effect of
  accounting change .................................       (555)     (1,548)       (360)     (3,054)    (12,844)
Cumulative effect of change in amortization of
  deferred commissions ..............................       --          --           123        --          --
                                                        --------    --------    --------    --------    --------
               Net income (loss) ....................   $   (555)   $ (1,548)   $   (483)   $ (3,054)   $(12,844)
                                                        ========    ========    ========    ========    ========
Net income (loss) attributable to common shares:
   Net income (loss) ................................   $   (555)   $ (1,548)   $   (483)   $ (3,054)   $(12,844)
   Preferred dividends ..............................       (262)       (268)       (232)       (594)     (1,206)
                                                        --------    --------    --------    --------    --------
                                                        $   (817)   $ (1,816)   $   (715)   $ (3,648)   $(14,050)
                                                        ========    ========    ========    ========    ========
Loss per common share:
Loss before cumulative effect of accounting
  change ............................................   $  (0.08)   $  (0.15)   $  (0.04)   $  (0.24)   $  (0.68)
Cumulative effect of accounting change ..............       --          --         (0.01)       --          --
                                                        --------    --------    --------    --------    --------
Net loss per common share ...........................   $  (0.08)   $  (0.15)   $  (0.05)   $  (0.24)   $  (0.68)
                                                        ========    ========    ========    ========    ========
BALANCE SHEET DATA (at end of period):
Working capital (deficit) ...........................   $    370    $  1,478    $  1,409    $ 10,252    $ (7,786)
Total assets ........................................     11,340      17,317      17,568      33,028      45,794
Long term debt ......................................       --          --          --          --         2,213
Stockholders' equity (deficit) ......................     (2,825)      3,668       4,512      19,188      18,172
</TABLE>

         The Company has not, since 1983, declared or paid any dividends on its
Common Stock.

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

         In addition to the historical information contained herein, the
following discussion contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled "Business" and the section entitled "Risk Factors" included in the
Registration Statement on Form S-3 incorporated by reference herein. The
following discussion reflects the merger with AmeriConnect, Inc. (the
"AmeriConnect Merger") on a pooling of interests basis and is based upon and
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto included elsewhere in this Annual Report.

GENERAL

         The Company entered the telecommunications industry as a switchless
long distance reseller in 1985, and the Company grew internally on the efforts
of its sales and marketing force during the following decade. Additionally,
since May



                                       15

<PAGE>   16

1995, the Company has completed 10 acquisitions of companies or customer bases,
thereby strengthening the Company's customer base, product and service
offerings and sales distribution. The largest of these acquisitions iclude:
Bright Telecom L.P. ("Bright"), a San Francisco-based international call-back
company, Tele-Trend, a switchless reseller based in Denver, and a portion of
the customer base of ISI Telecommunications, Inc. ("ISI"), a switched reseller,
all of which were completed in the last half of 1995. In January 1996, the
Company acquired ACI and, in October 1996, the Company completed the
AmeriConnect Merger. See "Item 1--Business--Acquisitions and Mergers."

         Phoenix believes it has amassed sufficient size and scope to achieve
significant cost savings through deployment of its Network, consisting of
switching equipment in major metropolitan areas and transmission facilities
between these switches. In contrast to some other IXC's who are investing
substantial capital to build networks, the Company is deploying its Network
without substantial capital investment. This has been made possible by the
increasing availability of capacity on switching and transmission equipment on
a leased basis from other telecommunications providers. The ability to lease
rather than purchase this capacity, and to expand capacity on an "as needed"
basis, creates a significant opportunity for Phoenix to rapidly deploy its
Network, while preserving most of the Company's capital spending budget for the
acquisition of additional customer traffic that may be shifted onto the
Company's Network. By leasing capacity on switching equipment and transmission
facilities, Phoenix intends to fully-deploy and substantially load its planned
Network by the end of 1997. Phoenix has entered into agreements to lease
switches from US One and other vendors on an as-needed basis and to lease
fixed-cost IMTs from Comdisco and LDDS/WorldCom. The Network also includes
three switches (located in Colorado Springs, Minneapolis and Phoenix) which
were acquired by the Company in connection with the acquisition of ACI in
January 1996 and may include additional switches acquired in the future through
acquisitions. The Company expects deployment of the Network to significantly
reduce the Company's average per minute line costs and provide an important
competitive advantage compared to resellers and other IXCs without comparable
networks.

         Phoenix currently has agreements with major long distance carriers,
such as LDDS/WorldCom, Sprint, Frontier, AT&T and others, to carry the majority
of its long distance traffic. During the planned 12 month transition period as
the Network is being deployed, and afterward on a limited basis, the Company
will continue to use these vendors to carry traffic. The Company's agreements
with vendors specify minimum volume usage requirements, but, in contrast to
many of its competitors, such requirements scale down over the next 18 months,
thereby freeing traffic to be loaded on the Network. Accordingly, minimum
volume usage requirements under these agreements, where they exist, should not
limit the Company's ability to load a substantial portion of its traffic on the
Network as it is deployed.

         The Company derives revenue through sales of telecommunications
services to its customers including, (i) "1 plus" and (800) service and (ii)
dedicated service and private lines. Revenues are based upon rates set by the
Company and billed to its customers for the services utilized. The Company's
other revenues are primarily derived from calling cards, Internet access,
international call-back and conference calling.

         The Company's cost of revenues consists of amounts paid to switching
services providers and to carriers for bundled switching and transmission
services. Switching services rates are fixed on a contractual, per minute
basis. The rates the Company pays for bundled switching and transmission
service vary depending on which underlying carrier is used for service and the
volume of traffic on such carriers.

         Selling, general and administrative expenses ("SG&A") consist of
personnel costs, sales commissions and marketing costs, facilities costs,
billing costs, bad debt expense and other general expenses. Sales commissions
represent the amounts paid to employees and independent contractors for the
procurement of new customers. Commissions paid are a combination of one-time
up-front payments for new customers and residual commissions paid based upon
customers' usage. One-time up-front commissions paid to independent contractors
are amortized primarily over a four year period. All other commissions are
expensed as earned. Bad debt expense is provided for on a monthly basis as a
charge to earnings based upon estimated uncollectible accounts. Accounts are
written off against the reserve when deemed to be uncollectible.

RESULTS OF OPERATIONS

         The following table sets forth for the years and periods indicated the
respective percentages of revenues represented by certain items in the
Company's statements of operations.



                                       16

<PAGE>   17

<TABLE>
<CAPTION>
                                           Year Ended December 31,
                                        ----------------------------
                                         1994       1995       1996
                                        ------     ------     ------
<S>                                       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues ..........................      100.0%     100.0%     100.0%
Cost of revenues ..................       70.8       70.9       74.0
                                        ------     ------     ------
Gross profit ......................       29.2       29.1       26.0
Selling, general and
   administrative .................       28.3       29.4       31.3
Depreciation and
   amortization ...................        0.9        1.5        4.4
Relocation expenses ...............       --         --          1.1
Acquisition expenses ..............       --         --          1.3
Aborted bond offering expenses ....       --         --          0.2
                                        ------     ------     ------
                                          29.2       30.9       38.3
                                        ------     ------     ------
Operating income (loss) ...........       --         (1.8)     (12.3)
Interest income ...................       --          0.1       --
Interest expense ..................       (0.5)      (0.3)      (0.6)
Loss on abandonment of
   fixed assets ...................       --         (1.3)      --
Miscellaneous income ..............       --         --         --
Income tax benefit
   (expense) ......................       --         (0.7)      --
                                        ------     ------     ------
Loss before cumulative
   effect of accounting
   change .........................       (0.5)      (4.0)     (12.9)
Cumulative effect of change
   in amortization of deferred
   commissions ....................       (0.2)      --         --
                                        ------     ------     ------
Net income (loss) .................       (0.7)%     (4.0)%    (12.9)%
                                        ======     ======     ======
Preferred dividends ...............       (0.3)      (0.8)      (1.2)
                                        ------     ------     ------
Net income (loss)
   attributable to common
   shares .........................       (1.0)%     (4.8)%    (14.1)%
                                        ======     ======     ======
</TABLE>

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

         Revenues. Revenues increased by $23.4 million or 30.8%, to $99.3
million for the 1996 from $75.9 million for 1995. This increase was primarily
the result of an increase in MOU of 214,484,000 minutes, to 628,352,000 minutes
for



                                      17
<PAGE>   18



1996, from 413,868,000 minutes for 1995 which was partially offset by a
13.7% decrease in the average revenue per MOU to $.158 per MOU for 1996 from
$.183 per MOU for 1995. Revenues per MOU decreased primarily as a result of the
Company's customers utilizing more competitively priced services offered by the
Company during 1996 and the effect of acquired companies' rate structures which
generally were lower than those offered by the Company. The customers gained
from the ACI acquisition during 1996 accounted for approximately 26.8% of total
MOU in the period.

         Cost of Revenues. Cost of revenues increased by $19.6 million or
36.4%, to $73.4 million for 1996 from $53.8 million for 1995. This increase was
primarily the result of an increase in MOU resulting from acquisitions. Cost of
revenues per MOU decreased 10.0% to $.117 per MOU for 1996 from $.130 per MOU
for 1995 primarily as a result of the acquisition of ACI, which had a cost per
MOU which was lower than the Company's, and, to a lesser extent, the Company
being able to place new business on its most favorably priced vendor carrier
contracts. As a percentage of revenues, cost of revenues increased to 74.0% for
1996 from 70.9% for 1995. The increase in cost of revenues as a percentage of
revenues was primarily the result of the Company providing lower-priced
services to its customers without a corresponding decrease in the cost of
providing such services. Historically, as the Company's traffic volume with its
vendor carriers has increased, it has been able to negotiate more favorable
rates with such vendor carriers, usually in conjunction with an increased
volume commitment. However, in order to pursue its long-term strategy of
deploying and loading the Network, the Company did not renegotiate any of its
material vendor carrier contracts in the first half of 1996 in order to avoid
increased vendor carrier commitments.

         Selling, General and Administrative Expenses. SG&A increased by $8.8
million, or 39.4%, to $31.1 million for 1996 from $22.3 million for 1995. This
increase was primarily the result of incremental SG&A associated with the ACI
acquisition. SG&A as a percentage of revenue increased to 31.3% for 1996 from
29.4% of revenues for 1995. During 1996, the Company was incurring certain
duplicative operating costs in connection with the operation of ACI, such as
facilities expense and salaries of administrative personnel performing similar
functions. The Company consolidated its San Francisco operations into the
former ACI facilities in July 1996. During 1996, the Company incurred
approximately $1.0 million in duplicative operating costs which were eliminated
as of July 1996. The Company expects to realize further savings as it
integrates the AmeriConnect Merger in the first quarter of 1997.

         Depreciation and Amortization. Depreciation and amortization increased
by $3.3 million to $4.4 million for 1996 from $1.1 million for 1995. This
increase is primarily attributable to the increased amortization of goodwill
and customer bases recorded as a result of the acquisitions discussed above.

         Relocation Expenses. Relocation expenses of $1.1 million were incurred
in 1996 from the Company's relocation of its primary operations from San
Francisco to Golden, Colorado.

         Acquisition Expenses. Acquisition expenses of $1.3 million were
incurred in connection with the AmeriConnect Merger and consist primarily of
transaction fees to third parties, legal and accounting fees and a contractual
severance payment to AmeriConnect's CEO.

         Aborted Bond Offering Expenses. Aborted bond offering expenses relate
to legal and accounting fees in connection with a proposed bond offering the
Company began in the last half of 1996. The Company decided to discontinue the
offering in January 1997 due to unfavorable market conditions.

         Interest Income. Interest income decreased by $18,000 to $85,000 for
1996 from $103,000 for 1995, as a result of lower cash balances in the
Company's interest bearing bank accounts.

         Interest Expense. Interest expense increased by $364,000 to $625,000
for 1996 from $261,000 for 1995. This increase was primarily the result of
increased borrowings under the Company's credit facility. Interest expense will
increase substantially in future periods as a result of increased indebtedness
under the Company's credit facility.

         Net Loss. Net loss increased by $9.8 million to a net loss of $12.8
million for 1996 from a net loss of $3.0 million for 1995 for the reasons
discussed above.

         Preferred Dividends. Preferred dividend requirements increased by
$612,000 to $1,206,000 for 1996 from $594,000 for 1995 primarily as a result of
the issuance of 1,176,056 shares of Series F Preferred Stock in June 1995.



                                       18

<PAGE>   19



Effective in December 1996, the Company converted the Company's outstanding
Series F Preferred Stock into Common Stock of the Company in accordance with
the terms therewith. As a result of the conversion of the Series F Preferred
Stock, the Company's preferred dividend requirements have decreased.

         Net Loss Attributable to Common Shares. Net loss attributable to
common shares increased by $10.4 million to a net loss attributable to Common
Stock of $14.0 million for 1996 from a net loss attributable to Common Stock of
$3.6 million for 1995 for the reasons discussed above.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

         Revenues. Revenues increased by $1.5 million, or 1.9%, to $75.9
million for 1995 from $74.4 million for 1994. This increase was primarily the
result of an increase in MOU of 35,222,000 minutes, from 378,646,000 minutes
for 1994 to 413,868,000 minutes for 1995, which was partially offset by a 7.1%
decrease in the average revenue per MOU from $0.197 per MOU for 1994 to $0.183
for 1995. Revenues per MOU decreased primarily as a result of the Company's
customers utilizing more competitively priced services offered by the Company
during 1995 and the effect of acquired companies' rate structures which
generally were lower than those offered by the Company. In August 1995, the
Company acquired Bright, Tele-Trend and selected customers from ISI. The
customers gained from these acquisitions accounted for approximately 5.1% of
total MOU for 1995.

         Cost of Revenues. Cost of revenues increased by $1.2 million, or 2.1%,
to $53.8 million for 1995 from $52.6 million for 1994. This increase was
primarily the result of an increase in MOU resulting from acquisitions. Cost of
revenues per MOU decreased 6.5% to $0.130 per MOU for 1995 from $0.139 per MOU
for 1994 as a result of the Company being able to place new business on its
most favorably priced vendor carrier contracts. As a percentage of revenues,
cost of revenues remained comparable between periods at 70.9% for 1995 compared
to 70.8% for 1994.

         Selling, General and Administrative Expenses. SG&A increased by $1.2
million, or 5.9%, to $22.3 million for 1995 from $21.1 million for 1994. This
increase was due in part to $423,000 of incremental SG&A as a result of the
Tele-Trend acquisition. SG&A as a percentage of revenues increased to 29.4% for
1995 from 28.3% for 1994 primarily due to the acquisition.

         Depreciation and Amortization. Depreciation and amortization increased
by $448,000, or 66.1%, to $1.1 million for 1995 from $678,000 for 1994. This
increase is primarily attributable to the increased amortization of goodwill
and customer bases recorded as a result of the acquisitions of Bright and
Tele-Trend and the acquisition of selected customers from ISI, discussed above.

         Interest Income. Interest income increased by $67,000 to $103,000 for
1995 from $36,000 for 1994 due to the investment of the proceeds from certain
of the Company's equity offerings.

         Interest Expense. Interest expense decreased by $164,000 to $261,000
for 1995 from $425,000 for 1994 primarily due to a lower average outstanding
balance under the Company's credit facility.

         Loss on Abandonment of Fixed Assets. The Company recorded a loss on
abandonment of fixed assets of $1.0 million in 1995. The loss relates to a
write off of software development costs during the fourth quarter of 1995
incurred in connection with the development of a new billing system to replace
the Company's existing systems. The Company ultimately decided to license an
outside vendor's software for its billing system. Accordingly, the cost of the
in-house software development was written off during 1995.

         Income Tax Expense. Income tax expense increased by $484,000 to
$500,000 for 1995 from $16,000 for 1994. The increase relates to an increase in
the income tax valuation allowance by the Company's subsidiary, AmeriConnect,
Inc., as a result of its determination that realization of net operating losses
was doubtful due to its increasing operating losses.

         Net Income (Loss). Net loss increased by $2.6 million to $3.0 million
for 1995 from a net loss of $483,000 for 1994 for the reasons described above.



                                       19

<PAGE>   20



         Preferred Dividends. Preferred dividend requirements increased by
$363,000 to $594,000 for 1995 from $231,000 for 1994 primarily due to the
issuance of the 1,176,056 shares of Series F Preferred Stock in 1995.

         Net Income (Loss) Attributable to Common Shares. Net loss attributable
to common shares increased by $2.9 million to $3.6 million for 1995 from a net
loss of $715,000 for 1994 for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's capital expenditures were $3.6 million, $589,000 and
$991,000 in 1996, 1995 and 1994, respectively. Expenditures to complete the
migration to the New Billing and Customer Care Platform are expected to be
approximately $1.0 million in 1997. The Company has financed approximately $1.4
million of the 1996 costs associated with the New Billing and Customer Care
Platform through a financing company over a three year term. The Company
believes that its strategy for implementing and operating the Network pursuant
to various contractual arrangements will allow it to pursue its operating
strategy without the necessity of making significant additional capital
expenditures to upgrade its Network.

         During 1996, and during 1995, the Company spent $17.6 million and $6.2
million, respectively, on acquisitions, of which $4.6 million and $6.2 million,
respectively, was paid in cash. The cash for such acquisitions was raised
through equity offerings and short-term borrowings.

         The Company's principal source of cash to fund its liquidity needs is
anticipated to be net cash flows from operating activities and borrowings under
the Company's credit facility. The credit facility allows for borrowings of up
to $10 million based upon the Company's qualified accounts receivable. The loan
balance as of December 31, 1996 was $4.7 million. The components of net cash
flows from operating activities are detailed in the consolidated financial
statements and related notes and include net income or loss adjusted for (i)
depreciation and amortization; and (ii) changes in operating assets and
liabilities. Net cash used in operating activities for 1996 was $4.0 million
compared to $1.7 million for 1995, primarily as a result of the loss incurred
for the period. Net cash used in operating activities for 1995 was $1.7
million, a decrease of $3.1 million from $1.4 million of net cash provided by
operating activities for 1994. The total net cash used by operations over the
periods discussed above has generally been a result of the losses incurred by
the Company over such periods. The Company believes that implementation of its
Network strategy will result in increasingly lower line costs over the next
year which should improve the Company's gross margins and generate positive
operating cash flows.

         The Company is currently negotiating with several private investors
regarding a $3.0 to $6.0 million cash equity placement. There can be no
assurance that the Company will be able to consummate such equity placements on
terms acceptable to the Company.

SEASONALITY

         The Company's revenues, and thus its potential earnings, are affected
by holiday and seasonal variations. A substantial portion of the Company's
revenues are generated by direct dial domestic long distance business
customers, and, accordingly, the Company experiences a decrease in revenues
around holidays, particularly the quarter ending December 31, when business
customers reduce their usage. The Company's fixed operating expenses, however,
do not decrease during these quarters. Accordingly, the Company has
experienced, and may continue to experience, lower revenues and earnings in its
first and fourth fiscal quarters when compared with the other fiscal quarters.

EFFECT OF INFLATION

         Inflation is not a material factor affecting the Company's business.

TAX BENEFIT

         As of December 31, 1996, the Company had available to offset future
Federal taxable income, net operating loss carryforwards ("NOL") of
approximately $20.4 million which expire in varying amounts from 2002 through
2011. A portion of the NOLs may be subject to limitations as a result of
provisions of the Internal Revenue Code relating to changes in ownership and
utilization of losses by successor entities.



                                      20
<PAGE>   21



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following financial statements of the Company and the related
report of independent accountants are included in this report beginning at page
F-1:

         Report of Independent Certified Public Accountants

         Balance Sheets

         Statements of Operations

         Statement of Stockholders' Equity

         Statements of Cash Flows

         Notes to Financial Statements

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

         None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

IDENTIFICATION OF DIRECTORS.

         The names of the directors and certain information about them are set
forth below:

<TABLE>
<CAPTION>
                                                                                                  Director
          Name                                                                            Age       Since
          ----                                                                            ---       -----
<S>                                                                                       <C>        <C>
Thomas H. Bell(1)(3)..................................................................     49        1985
James W. Gallaway(2)..................................................................     57        1988
Merrill L. Magowan(2)(3)..............................................................     59        1990
Wallace M. Hammond....................................................................     51        1994
David Singleton(1)(3)(4)..............................................................     57        1995
Max E. Thornhill(2)(4)................................................................     64        1995
Charles C. McGettigan(1)..............................................................     52        1996
----------
</TABLE>

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

(3) Member of the Nominating Committee.

(4) Messrs. Singleton and Thornhill were elected to the Board by the holders of
the Company's Series F Preferred Stock. Effective in December, 1996, all of the
Series F Preferred Stock was converted into Common Stock of the Company.
Messrs. Singleton and Thornhill tendered their resignations from the Board, but
the Board of Directors elected not to accept such resignations. Accordingly,
Messrs. Singleton and Thornhill will continue to serve as directors until the
next Annual Meeting of Stockholders and until their successors are elected and
have duly qualified.


THOMAS H. BELL



                                       21

<PAGE>   22




         Mr. Bell is the founder of the Company.  He has served as the Chairman
of the Board of Phoenix since its inception under the name Phoenix Telcom, Inc.
in 1985, as the Company's Chief Executive Officer from 1985 to January 1992,
and as President of the Company from 1985 to September 1990. Mr. Bell is also
an independent consultant in the telecommunications industry. Mr. Bell is the
brother of J. Rex Bell, the Company's Senior Vice President of Customer
Service.

JAMES W. GALLAWAY

         Mr. Gallaway has served as a director of the Company since July 1988.
He was a founder, director from 1984 to 1988, and Vice President from 1983 to
1986, of Centex Telemanagement, Inc., a telecommunications company that resold
local telephone service. Since 1980, he has been Chairman of the Board of
Gallaway Enterprises, Inc., a telecommunications company. From February 1988
through December 1994, he served as a director and Vice President of
StellarNet, Inc., an information management company in the health care
industry. Mr. Gallaway is a U.S. Marine Corps Reserve (Retired) Colonel.

MERRILL L. MAGOWAN

         Mr. Magowan became a director of the Company in September 1990. Since
1982, Mr. Magowan has been a principal of S F Associates, a California
registered investment advisory firm (formerly known as Magowan Dirickson
Investment Company). He is also currently a director of Nordeman Grimm (since
1975), an executive search consulting firm. From 1968 to 1986, he was a
director of Safeway Stores, Inc., a retail grocery chain.

WALLACE M. HAMMOND

         Mr. Hammond joined the Company as Executive Vice President in February
1994. He was elected to the Company's Board of Directors and named President
and Chief Operating Officer of the Company in May 1994. Mr. Hammond was elected
Chief Executive Officer of the Company in December 1994. From 1992 to 1993, he
was President and Chief Executive Officer of ANSCO & Associates, a telephone
engineering and plant construction company. From 1979 to 1992, he was with
BellSouth Communication Systems, Inc., a nationwide division of BellSouth
Corporation involved in the customer premises equipment after-market, where he
was promoted to Vice President-Operations in 1989.

DAVID SINGLETON

         Mr. Singleton has served as a director of the Company since October
1995. He was a founding director of LDDS WorldCom, Inc., a long distance
telecommunications company, and served as a director of that company from 1983
to 1992. He was a founding director, and currently serves as a director of, US
One. Mr. Singleton also serves as a director of Red Fox Environmental Services.
Mr. Singleton has worked in personal and small business financial planning for
25 years and currently manages a private portfolio.

MAX E. THORNHILL

         Mr. Thornhill has served as a director of the Company since October
1995. He was a founding director of LDDS WorldCom, Inc. and served as a
director of that company from 1983 to September 1993. He was a founding
director, and currently serves as a director of, US ONE Communications Corp.
Mr. Thornhill is currently engaged in real estate development and oil and gas
exploration and production.

CHARLES C. MCGETTIGAN

         Mr. McGettigan served as a director of the Company from November 1990
through December 1991 and was re-elected as a director in September 1996. He
was a co-founder (in 1991) and presently is a general partner of Proactive
Investment Managers, L.P., which is the general partner of Proactive Partners,
L.P., a merchant banking fund. Mr. McGettigan was a co-founder (in 1988) and is
a managing director of McGettigan, Wick & Co., Inc., an investment banking
firm. From 1984 to 1988, he was a Principal, Corporate Finance, of Hambrecht &
Quist, Incorporated. Prior to that, Mr. McGettigan was a Senior Vice President
of Dillon, Read & Co. Inc. He currently serves on the Boards of Directors



                                       22

<PAGE>   23



of digital dictation, inc.; I-Flow Corporation; Modtech, Inc.; NDE
Environmental Corporation; Onsite Energy, Inc.; PMR Corporation; Sonex
Research, Inc.; and Wray-Tech Instruments, Inc.

EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS

JEFFREY L. BAILEY

         Mr. Bailey, 44, has been Senior Vice President and Chief Financial
Officer of the Company since March 1990. He is a Certified Public Accountant
and, from 1985 to 1990, was a Senior Manager with Grant Thornton LLP, an
accounting and management consulting firm. From 1975 to 1985 he was with Arthur
Young & Company (now, Ernst & Young, L.L.P.).

J. REX BELL

         Mr. Bell, 43, has been Senior Vice President of Customer Service of
the Company since May 1993. From March 1991 to May 1993, he was Vice President
of Operations. From January 1990 to March 1991, he held the position of
Director of Marketing of the Company. Prior to joining the Company, Mr. Bell
was a Senior Telecommunications Consultant from 1984 to 1990 for two California
consulting firms, COMSUL, Ltd. and Robin & Dackerman, Inc. Between 1980 and
1984, he held management positions with MCI Communications and Cable and
Wireless, Ltd. Mr.
Bell is the brother of Thomas H. Bell, a director of the Company.

JON BEIZER

         Mr. Beizer, 32, was promoted to Vice President of Corporate Development
in 1995. Since joining the Company in July 1992, he has held various positions,
the last of which was Director of Marketing. Mr. Beizer holds an M.B.A. from
Stanford University, where he attended from 1990 to 1992. Mr. Beizer worked
from 1987 through 1990 as a consultant for Braxton Associates, a management
consulting firm specializing in corporate strategy.

         Thomas H. Bell, a director of the Company, and J. Rex Bell, Senior
Vice President of Customer Service, are brothers. With the exception of that
relationship, there are no other family relationships among officers or
directors of the Company.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Commission initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Offices, directors
and greater than ten percent stockholders are required by Commission regulation
to furnish the Company with copies of all Section 16(a) forms they file.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and representations that no other reports
were required, during the fiscal year ended December 31, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater
than ten percent beneficial owners were complied with.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

         No cash fees are paid to directors for serving on the Board. The
members of the Board are, however, eligible for reimbursement for their
expenses incurred in connection with attendance at Board and Committee meetings
in accordance with Company policy. Furthermore, each non-employee director of
the Company also receives stock option grants under the 1992 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"), as described below.
Directors who are employees of the Company are not eligible to participate in
the Directors' Plan, but are eligible to participate in the Company's 1989
Stock Option Plan. See "Compensation of Executive Officers--Stock Option Grants
and Exercises."



                                       23

<PAGE>   24



         Option grants under the Directors' Plan are non-discretionary. Each
person who is elected or appointed on or after January 4, 1993 to be a
non-employee director of the Company is automatically granted under the
Directors' Plan an option to purchase 10,000 shares of Common Stock of the
Company. In addition, on the first business day of each year thereafter, each
non-employee director of the Company is automatically granted under the
Directors' Plan an option to purchase shares of Common Stock (rounded to the
nearest 100 shares) of the Company equal to the Proration Factor (as
hereinafter defined) multiplied by the sum of (i) 10,000 shares of Common Stock
of the Company and (ii) 2,500 shares of Common Stock of the Company multiplied
by the number of full years such non-employee director has served in such
capacity. The "Proration Factor" is a fraction, the numerator of which is the
number of calendar days during the preceding year on which such person served
as a non-employee director and the denominator of which is 365. No other
options may be granted at any time under the Directors' Plan. The exercise
price of options granted under the Directors' Plan is equal to the fair market
value of the Common Stock subject to the option on the date of grant. The
number of options granted under the Directors' Plan is subject to certain
anti-dilution protections in favor of the participants, and options granted
under the Directors' Plan expire ten years from the date of grant. Options
granted under the Directors' Plan vest and become exercisable at the rate of
one-sixteenth of the shares subject to such options per quarter for sixteen
quarters following the date of the grant.

COMPENSATION OF EXECUTIVE OFFICERS

Summary of Compensation

         The following table shows for the fiscal years ending December 31,
1996, 1995 and 1994, compensation awarded or paid to, or earned by the
Company's Chief Executive Officer and each other officer at December 31, 1996
who received total annual salary and bonus in excess of $100,000 for the year
ended December 31, 1996 (the "Named Executive Officers"):


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        Long Term
                                                                       Compensation
                                                                       ------------
                                                                          Awards
                                                                          ------
                                            Annual Compensation         Securities
                                         ------------------------       Underlying
     Name and Principal                  Salary(1)        Bonus         Options/(2)       All Other
          Position               Year       ($)            ($)           SARs (#)    Compensation(4)($)
     -------------------         ----    ---------        -------       -----------  ------------------
<S>                              <C>       <C>            <C>             <C>                <C>
Mr. Wallace M. Hammond(3)....    1996      252,500        60,000          400,000           25,120
President and Chief              1995      203,511        67,451          300,000            2,320
Executive Officer                1994      127,885                        300,000(2)


Mr. Jeffrey L. Bailey........    1996      137,934                         60,000           23,499
Senior Vice President and        1995      129,219        15,193           50,000            2,320
Chief Financial Officer          1994      120,573                                             500

Mr. J. Rex Bell..............    1996      127,721                         50,000           15,427
Senior Vice President            1995      117,657        15,193           50,000            2,320
of Customer Service              1994      109,585

Mr. Jon Beizer...............    1996      105,417                        125,000           10,544
Vice President                   1995       96,418                         60,000
of Corporate Development         1994       78,663
</TABLE>

----------

(1)      Includes amounts earned but deferred at the election of the
         executives. As permitted by Commission rules, no amounts are shown for
         certain perquisites, where such amounts do not exceed the lesser of
         10% of bonus plus salary or $50,000.

(2)      Repriced options treated as new grants. The Company has no stock
         appreciation rights (SARS).

(3)      Mr. Hammond was not employed by the Company before February 1994, thus
         amounts disclosed include compensation commencing in February 1994 for
         Mr. Hammond, when he joined the Company as Executive Vice



                                       24
<PAGE>   25



         President. Mr. Hammond was Elected President and Chief Operating
         Officer of the Company in May 1994 and Chief Executive Officer in
         December 1994.

(4)      In each case, all other compensation includes $500 in matching section
         401(k) plan contributions made by the Company in 1994, $1,000 in 1995
         and $1,000 in 1996. The balance in 1994 and 1995 of the amount
         reported for each officer represents a reimbursement of parking
         expenses. In addition to a parking reimbursement, the balance of the
         amount reported for each officer in 1996 represents relocation
         expenses paid for the officers' move to Colorado from California.

Employment Agreements

         See the 1996 Proxy Statement under the heading "Executive
Compensation--Compensation of Executive Officers--Employment Agreements" for a
description of Mr. Hammond's employment agreement. The Company had no other
employment agreements in effect during 1996.

Stock Option Grants and Exercises

         The Company grants options to its executive officers under its 1989
Stock Option Plan (the "1989 Plan"). As of December 31, 1996, options to
purchase a total of 2,277,506 shares had been granted and were outstanding
under the plan and 631,736 shares remained available for grant thereunder.



                                       25

<PAGE>   26



         The following tables show, for the fiscal year ended December 31,
1996, certain information regarding options granted to, exercised by, and held
at year end by the named executive officers:

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                           Individual Grants
                         -------------------
                                                                                  Potential
                                     Percentage                              Realizable Value at
                         Number of    of Total                                 Assumed Annual
                        Securities     Options                              Rates of Stock Price
                        Underlying   Granted to    Exercise                     Appreciation
                          Options     Employees     or Base      Expira-     for Option Term(2)
                          Granted     in Fiscal      Price        tion       -----------------------
        Name                (#)        1996(1)      ($/Sh)        Date         5% ($)       10% ($)
        ----             ----------    -------      ------      ----------   ----------   ----------
<S>                          <C>          <C>       <C>          <C>            <C>          <C>
Wallace M. Hammond.....     200,000      22%        3.0000       4/12/2006      377,337      956,245
                            200,000      22%        3.5625      12/16/2006      448,087    1,135,542

Jeffrey L. Bailey......      60,000       6%        3.0000       4/12/2006      113,201      286,873

J. Rex Bell............      50,000       5%        3.0000       4/12/2006       94,334      239,061

Jon Beizer.............      50,000       5%        3.5625        1/3/2006      112,022      283,885
                             75,000       8%        3.0000       4/12/2006      141,501      358,592
</TABLE>

----------

(1)      Based on options to purchase 921,600 shares of the Company's Common
         Stock granted in 1996.

(2)      The potential realizable value is based on the term of the option at
         its time of grant (10 years in each case). The potential realizable
         value is calculated by assuming that the stock price on the date of
         grant appreciates at the indicated annual rate, compounded annually
         for the entire term of the option and that the option is exercised and
         sold on the last day of its term for the appreciated stock price. No
         gain to the optionee is possible unless the stock price increases over
         the option term, which will benefit all stockholders.

              AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND
                  VALUE OF OPTIONS AT END OF FISCAL YEAR 1996

<TABLE>
<CAPTION>
                                                     Number Of
                                                     Securities         Value Of
                                                     Underlying        Unexercised
                                                     Unexercised       In-the-money
                                                    Options/SARs       Options/SARs
                          Shares                     at End of           at End of
                         Acquired      Value        Fiscal 1996 (#)  Fiscal 1996 ($)(2)
                        On Exercise   Realized      Exercisable/       Exercisable/
        Name                (#)       ($)(1)        Unexercisable      Unexercisable
        ----            -----------  ---------     ---------------   -----------------
<S>                        <C>         <C>         <C>                <C>
Jeffrey L. Bailey .....    15,000      66,562      128,748/ 91,252    274,139/ 40,861
Jon Beizer ............    24,750      67,586       21,500/154,000        468/ 35,312
J. Rex Bell ...........    14,000      66,500       93,748/ 81,252    191,014/ 37,110
Wallace M. Hammond ....    50,000     116,087      275,000/675,000    419,062/249,218
</TABLE>

----------

(1)      Value realized is based on the fair market value of the Company's
         Common Stock on the date of exercise minus the exercise price and does
         not necessarily indicate that the optionee sold such stock.

(2)      Fair market value of the Company's Common Stock at December 31, 1996
         ($3.375) Minus the exercise price of the options.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
not later than 120 days after December 31, 1996.



                                       26

<PAGE>   27




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

LINKAGES WITH US ONE

         The Company and US One share common directors and stockholders.  Mr.
David Singleton and Mr. Max E. Thornhill are directors of both the Company and
US One. As a result, certain conflicts of interest may arise in the future in
connection with the implementation of the US One Agreement and the negotiation
of any new agreements between the Company and US One. Mr. Singleton
beneficially owns Common Stock representing less than 1% of the Company's total
voting power at December 31, 1996. Mr. Thornhill beneficially owns Common Stock
representing approximately 6.8% of the Company's total voting power at December
31, 1996.

INDEMNIFICATION AGREEMENTS

         The Company has entered into indemnity agreements with certain
officers and directors which provide, among other things, that the Company will
indemnify such officer or director, under the circumstances and to the extent
provided for therein, for expenses, damages, judgments, fines and settlements
he may be required to pay in actions or proceedings to which he is or may be
made a party by reason of his position as a director, officer or other agent of
the Company, and otherwise to the fullest extent permitted under Delaware law
and the Company's By-laws.

ACQUISITION OF ACI

         In January 1996, the Company acquired from Ms. Judy Van Essen all of
the outstanding shares of ACI, a Golden, Colorado facilities-based reseller of
long distance service. Consideration for the transaction was in the form of
$4.0 million in cash, 2,800,000 shares of the Company's Common Stock valued at
$10.5 million and the issuance of a long-term note in the amount of $1.3
million. As a result of the transaction and her acquisition of 2,800,000 shares
of the Company's Common Stock, Ms. Van Essen held approximately 10.8% of the
Common Stock of the Company as of December 31, 1996.

PREFERRED STOCK CONVERSIONS

         In December 1996, the Company received all requisite consents of the
holders of the Company's Series F Preferred Stock to convert all outstanding
shares of Series F Preferred Stock into Common Stock of the Company. Messrs.
McGettigan, Thornhill and Singleton, directors of the Company, and certain of
their affiliates, were holders of such Series F Preferred Stock prior to such
conversion. Effective December 14, 1996, the Series F Preferred Stock, together
with accrued dividends thereon, was converted into 5,191,064 shares of Common
Stock.

         The Company is also seeking the agreement of the holders of the
Company's Series A, B and D Preferred Stock to convert such Preferred Stock
into Common Stock of the Company. Messrs. Magowan and McGettigan, directors of
the Company, and certain of their affiliates are holders of shares of such
Preferred Stock. If fully converted as of December 31, 1996, the Series A, B
and D Preferred Stock, together with accrued dividends thereon, would have been
converted into 1,908,977 shares of Common Stock.



                                       27

<PAGE>   28



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

         The following documents are filed as part of this Annual Report on
Form 10-K:

         (a) Financial Statements: The financial statements and schedule filed
as part of this report are set forth following page F-1 of this report.

<TABLE>
         (b) Exhibits:

         <S>       <C>
         3.1         -- Restated Certificate of Incorporation of the Company(1)

         3.2         -- Bylaws of the Company(1)

        10.1         -- 1989 Stock Option Plan(2)

        10.2         -- Forms of option grant pursuant to the 1989 Stock Option
                        Plan(3)

        10.3         -- 1992 Non-Employee Directors' Stock Option Plan, as
                        Amended(5)

        10.4         -- Form of option grant pursuant to the 1992 Non-Employee
                        Directors' Stock Option Plan(5)

        10.5         -- Series A Preferred Stock Purchase Agreement dated as of
                        August 17, 1990(4)

        10.6         -- Series B Preferred Stock Purchase Agreement dated as of
                        December 27, 1991 with List of Purchasers(6)

        10.7         -- Series D Preferred Stock Purchase Agreement dated as of
                        December 15, 1992(5)

        10.8         -- Sublease and Consent between the Company and Richard
                        Goldman & Co. relating to the premises at One Maritime
                        Plaza, San Francisco, CA(4)

        10.9         -- Amended and Restated Loan and Security Agreement, among
                        the Company, Phoenix Network Acquisition Corp.,
                        Americonnect, Inc. and Foothill Capital Corporation, dated
                        September 26, 1995 (the "Original Foothill Agreement")

        10.10        -- Amendment Number One to the Original Foothill Agreement,
                        dated October 17, 1996

        10.11        -- Amendment Number Two to the Original Foothill Agreement,
                        dated December 23, 1996

        10.12        -- Amendment Number Three to the Original Foothill
                        Agreement, dated March 12, 1997

        10.13        -- Office Lease Agreement with Itel Rail Corporation,
                        dated June 8, 1994(10)

        10.14       --  Stockholders Agreement, dated October 20, 1995(7)

        10.15       --  Series F Preferred Stock and Warrant Purchase Agreement,
                        dated October 20, 1995(7)

        10.16       --  Communications Services Agreement, between the Company
                        and US ONE Communications Corp., dated May 22, 1996 (the
                        "Original US ONE Agreement")(8)

        10.17       --  Amendment No. 1 to the Original US ONE Agreement, dated
                        October 11, 1996

        10.18       --  Amendment No. 2 to the Original US ONE Agreement, dated
                        October 11, 1996

        10.19       --  Amendment No. 3 to the Original US ONE Agreement, dated
                        January 3, 1997

        10.20       --  Amendment No. 4 to the Original US ONE Agreement, dated
                        December 30, 1996

        10.21       --  Amendment No. 5 to the Original US ONE Agreement, dated
                        March 26, 1997
</TABLE>



                                       28

<PAGE>   29


<TABLE>

        <S>      <C>

        10.22      --  Telecommunications Services Agreement, between the
                       Company and Comdisco Disaster Recovery Services, a
                       Division of Comdisco, Inc., dated March 25, 1996(8)

        10.23      --  Employment Agreement, between the Company and Wallace M.
                       Hammond, dated January 1, 1996

        11.1       --  Computation of earnings per share(11)

        18.1       --  Letter re change in accounting principles(9)

        21.1       --  Subsidiaries of Phoenix Network, Inc.

        23.1       --  Consent of Grant Thornton LLP

        27.1       --  Financial Data Schedule
</TABLE>

----------

(1)      Filed as an Exhibit to the Company's Registration Statement on Form
         S-3 (file no. 333-20923), as filed with the Commission on January 31,
         1997, and amended on Form S-3/A on February 12, 1997, and incorporated
         herein by reference.

(2)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended October 31, 1990, and incorporated herein by
         reference.

(3)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for
         the fiscal year ended April 30, 1990, and incorporated herein by
         reference.

(4)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended July 31, 1990, and incorporated herein by reference.

(5)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
         year ended December 31, 1992, and incorporated herein by reference.

(6)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for
         the transition period ended December 31, 1991, and incorporated herein
         by reference.

(7)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended September 30, 1995, and incorporated herein by
         reference.

(8)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1996, and incorporated herein by reference.

(9)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
         year ended December 31, 1994, and incorporated herein by reference.

(10)     Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1994, and incorporated herein by reference.

(11)     This data appears in the Consolidated Statement of Operations included
         in the Company's Consolidated Financial Statements.



                                       29

<PAGE>   30



                                   SIGNATURES

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


                                             PHOENIX NETWORK, INC.

                                             By:   /s/  WALLACE M. HAMMOND
                                                -------------------------------
                                                Wallace M. Hammond
                                                Chief Executive Officer

Date: March 26, 1997

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

<TABLE>
<CAPTION>
               SIGNATURE                           Title                         Date
               ---------                           -----                         ----
<S>                                   <C>                                   <C>
/s/  THOMAS H. BELL                    Chairman of the Board                March 26, 1997
--------------------------------          and Director
Thomas H. Bell

/s/  WALLACE M. HAMMOND                President, Chief Executive           March 26, 1997
--------------------------------       Officer (Principal Executive
Wallace M. Hammond                        Officer) and Director

/s/  JEFFREY L. BAILEY                 Senior Vice President, Chief         March 26, 1997
--------------------------------         Financial Officer
Jeffrey L. Bailey                        (Principal Financial and
                                         Accounting Officer)

/s/  JAMES W. GALLAWAY                 Director                             March 26, 1997
--------------------------------
James W. Gallaway

/s/  MERRILL L. MAGOWAN                Director                             March 26, 1997
--------------------------------
Merrill L. Magowan


/s/  CHARLES C. MCGETTIGAN             Director                             March 26, 1997
--------------------------------
Charles C. McGettigan

                                       Director                             March __, 1997

--------------------------------
Max E. Thornhill

/s/  DAVID SINGLETON                   Director                             March 26, 1997
--------------------------------
David Singleton
</TABLE>



                                      30

<PAGE>   31


















                     CONSOLIDATED FINANCIAL STATEMENTS AND
                     REPORT OF CERTIFIED PUBLIC ACCOUNTANTS

                             PHOENIX NETWORK, INC.
                                AND SUBSIDIARIES

                        December 31, 1994, 1995 and 1996







<PAGE>   32











                             REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS


To the Stockholders and Board of Directors
Phoenix Network, Inc.


We have audited the accompanying balance sheets of Phoenix Network, Inc. (a
Delaware Corporation) and Subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Network, Inc. and
Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.

As discussed in note C, the Company changed its method of accounting for
deferred commissions in 1994.





GRANT THORNTON LLP

/s/ GRANT THORNTON LLP

Denver, Colorado
March 12, 1997


                                      F-1

<PAGE>   33


                     Phoenix Network, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS

                                  December 31,


<TABLE>
<S>                                                               <C>          <C>
                                                                         1995         1996
                                                                  -----------  -----------
                      ASSETS

CURRENT ASSETS
 Cash and cash equivalents ($225,356 restricted in 1995)          $ 8,298,003  $ 1,548,061
 Accounts receivable, net of allowance for doubtful accounts
    of $1,649,013 in 1995 and $3,600,830 in 1996                   13,731,400   14,419,829
 Deferred commissions                                               1,648,780      969,940
 Other current assets                                                 415,163      686,271
                                                                  -----------  -----------

               Total current assets                                24,093,346   17,624,101

Furniture, equipment and data processing systems - at cost,
 less accumulated depreciation of $1,350,597 in 1995 and
 $2,495,701 in 1996                                                   886,665    5,522,771

Deferred commissions                                                1,454,483      414,873

Customer acquisition costs, less accumulated amortization of
 $1,005,262 in 1995 and $3,145,245 in 1996                          2,447,619    2,725,275

Goodwill, less accumulated amortization of $82,961 in 1995
 and $1,059,613 in 1996                                             3,903,109   18,553,332

Other assets                                                          243,048      953,831
                                                                  -----------  -----------

                                                                  $33,028,270  $45,794,183
                                                                  ===========  ===========

       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
 Current maturities of note payable to finance company            $         -  $   444,839
 Note payable to vendor                                                     -    1,161,148
 Line of credit - finance company                                      41,468    4,698,645
 Accounts payable and accrued liabilities                          13,799,153   19,105,317
                                                                  -----------  -----------
               Total current liabilities                           13,840,621   25,409,949

LONG-TERM DEBT
 Note payable to stockholder                                                -    1,388,206
 Note payable to finance company, less current maturities                   -      824,306

STOCKHOLDERS' EQUITY
 Preferred stock - $.001 par value, authorized 5,000,000 shares,
    issued and outstanding 2,737,389 in 1995 and 546,458 in
    1996, liquidation preference aggregating $15,332,780 and
    $3,368,020 at December 31, 1995 and 1996, respectively              2,737          546
 Common stock - $.001 par value, authorized 50,000,000
    shares, issued 16,952,455 in 1995 and 25,851,894 in 1996           16,952       25,851
 Additional paid-in capital                                        32,146,636   45,225,554
 Accumulated deficit                                              (12,976,154) (27,077,707)
 Treasury stock - 1,300 shares at cost                                 (2,522)      (2,522)
                                                                  -----------  -----------
                                                                   19,187,649   18,171,722
                                                                  -----------  -----------

                                                                  $33,028,270  $45,794,183
                                                                  ===========  ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-2

<PAGE>   34


                     Phoenix Network, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            Year ended December 31,



<TABLE>
<CAPTION>
                                                         1994         1995          1996
                                                     -----------  -----------  ------------
<S>                                                  <C>          <C>          <C>
Revenue                                              $74,404,808  $75,854,969  $ 99,307,277
Cost of revenue                                       52,649,359   53,775,779    73,438,757
                                                     -----------  -----------  ------------

          Gross profit                                21,755,449   22,079,190    25,868,520

Selling, general and administrative expenses          21,074,942   22,323,202    31,114,723
Depreciation and amortization                            678,038    1,125,563     4,357,720
Relocation expenses                                            -            -     1,133,158
Acquisition expenses                                           -            -     1,308,634
Aborted bond offering expenses                                 -            -       246,083
                                                     -----------  -----------  ------------
                                                      21,752,980   23,448,765    38,160,318
                                                     -----------  -----------  ------------

          Operating income (loss)                          2,469   (1,369,575)  (12,291,798)

Other income (expense)
 Interest income                                          36,121      103,125        84,627
 Interest expense                                       (425,222)    (260,639)     (625,817)
 Loss on abandonment of fixed assets                           -   (1,019,648)      (15,238)
 Miscellaneous income (expense)                           42,897       (6,767)        4,264
                                                     -----------  -----------  ------------
                                                        (346,204)  (1,183,929)     (552,164)
                                                     -----------  -----------  ------------
          Loss before income taxes and
           cumulative effect of accounting change       (343,735)  (2,553,504)  (12,843,962)

Income tax benefit (expense)                             (16,405)    (500,000)            -
                                                     -----------  -----------  ------------
          Loss before cumulative effect of
           accounting change                            (360,140)  (3,053,504)  (12,843,962)

Cumulative effect of change in amortization of
 deferred commissions                                   (123,224)           -             -
                                                     -----------  -----------  ------------


          Net loss                                   $  (483,364) $(3,053,504) $(12,843,962)
                                                     ===========  ===========  ============

Net loss attributable to common shares
 Net loss                                            $  (483,364) $(3,053,504) $(12,843,962)
 Preferred dividends                                    (231,255)    (594,381)   (1,206,042)
                                                     -----------  -----------  ------------
                                                     $  (714,619) $(3,647,885) $(14,050,004)
                                                     ===========  ===========  ============

Loss per common share
 Loss before cumulative effect of accounting change  $     (0.04) $     (0.24) $      (0.68)
 Cumulative effect of accounting change                    (0.01)           -            -
                                                     -----------  -----------  ------------

           Net loss per common share                 $     (0.05) $     (0.24) $      (0.68)
                                                     ===========  ===========  ============

Weighted average common shares                        13,576,265   15,335,268    20,673,276
                                                     ===========  ===========  ============
</TABLE>



The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>   35


                     Phoenix Network, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      Three years ended December 31, 1996



<TABLE>
<CAPTION>
                                                    Additional
                                Preferred  Common    paid-in      Accumulated   Treasury
                                  stock     stock    capital        deficit      stock
                                ---------  -------  -----------  -------------  --------

<S>                             <C>        <C>      <C>          <C>            <C>
Balance at January 1, 1994         $1,610  $12,803  $12,857,297   $(9,200,859)  $(2,522)

 Exercise of stock options
    and warrants                        -      738      763,141             -          -
 Conversion of preferred
    stock into common stock          (44)      277       43,686       (43,919)         -
 Issuance of preferred stock
    upon conversion of debt            56        -      558,874             -          -
 Issuance of common stock               -        7        4,071             -          -
 Net loss                               -        -            -      (483,364)         -
                                ---------  -------  -----------  ------------   --------

Balance at December 31, 1994        1,622   13,825   14,227,069    (9,728,142)   (2,522)

 Exercise of stock options and
    warrants                            -      418      525,914             -          -
 Conversion of preferred
    stock into common stock           (4)       24        7,200        (7,220)         -
 Issuance of common stock,
    net of expenses                     -    2,685    6,314,779             -          -
 Issuance of preferred stock,
    net of expenses, and
    conversion of Series E of
    Series F                        1,119        -   11,071,674             -          -
 Preferred dividends                    -        -            -      (187,288)         -
 Net loss                               -        -            -    (3,053,504)         -
                                ---------  -------  -----------  ------------   --------

Balance at December 31, 1995        2,737   16,952   32,146,636   (12,976,154)    (2,522)

 Exercise of stock options and
    warrants                            -      792    1,327,243             -          -
 Conversion of preferred
    stock into common stock       (2,191)    5,307    1,254,475    (1,257,591)         -
 Issuance of common stock in
    connection with a business
    acquisition                         -    2,800   10,497,200             -          -
 Net loss                               -        -            -   (12,843,962)         -
                                ---------  -------  -----------  ------------   --------

Balance at December 31, 1996         $546  $25,851  $45,225,554  $(27,077,707)  $ (2,522)
                                =========  =======  ===========  ============   ========
</TABLE>









The accompanying notes are an integral part of this statement.

                                      F-4

<PAGE>   36


                     Phoenix Network, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended December 31,



<TABLE>
<CAPTION>                                                1994               1995             1996
                                                     ------------       ------------     ------------
<S>                                                   <C>               <C>              <C>

Cash flows from operating activities                  $71,432,918       $ 72,103,864     $ 98,612,681
 Cash received from customers                               8,121             83,227           84,627
 Interest received                                    (69,551,595)       (73,638,371)    (102,047,484)
 Cash paid to suppliers and employees                    (425,137)          (259,919)        (625,817)
 Interest paid                                            (20,105)            (3,340)          (2,245)
 Cash paid for income taxes                          ------------      - -----------     ------------

            Net cash provided by (used in)              1,444,202        (1,714,539)       (3,978,238)
             operating activities

Cash flows from investing activities
 Note receivable - director/shareholder                   (11,500)          (3,000)                 -
 Purchases of furniture, equipment and
   data processing systems                               (990,934)        (589,419)        (3,620,989)
 Notes receivable - agents                               (206,995)         (23,115)                 -
 Payments on agents notes receivable                        5,838           70,900                  -
 Customer base acquisitions                                     -       (1,553,238)          (468,002)
 Business acquisitions, net of cash acquired                    -       (4,692,153)        (4,085,093)
 Acquisitions of other assets                            (123,528)               -                  -
                                                     ------------       ----------       ------------

              Net cash used in investing activities    (1,327,119)      (6,790,025)        (8,174,084)

 Cash flows from financing activities
 Proceeds from issuance of common stock,
   net of offering costs                                        -        6,317,464                  -
 Proceeds from issuance of preferred stock,
   net of offering costs                                        -       11,072,793                  -
 Proceeds from sale of stock to officer                   297,000                -                  -
 Proceeds from distribution of stock to director            4,078                -                  -
 Proceeds from notes payable to bank and
   finance company                                      3,450,000        6,143,950          6,060,358
 Payments on notes payable to bank and
   finance company                                     (4,317,828)      (8,686,625)          (134,036)
 Payments on note payable to vendor                             -                -         (1,851,977)
 Payments on capital lease obligation                     (16,584)               -                  -
 Preferred stock dividends                                      -         (187,288)                 -
 Proceeds from exercise of options and warrants           466,880          526,332          1,328,035
                                                     ------------       ----------       ------------
              Net cash provided by (used in)
                financing activities                     (116,454)      15,186,626          5,402,380
                                                     ------------       ----------       ------------
              NET INCREASE (DECREASE)
                IN CASH                                       629        6,682,062         (6,749,942)

Cash and cash equivalents at beginning of year          1,615,312        1,615,941          8,298,003
                                                     ------------       ----------   -   ------------

Cash and cash equivalents at end of year             $  1,615,941       $8,298,003       $  1,548,061
                                                     ============       ==========       ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>   37


                     Phoenix Network, Inc. and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                            Year ended December 31,


<TABLE>
<CAPTION>
                                                          1994         1995           1996
<S>                                                  <C>         <C>           <C>

Reconciliation of net loss to net cash provided by
(used in) operating activities
     Net loss                                        $ (483,364)  $ (3,053,504) $(12,843,962)

   Adjustments to reconcile net loss to net
     cash provided by (used in) operating
     activities
       Cumulative effect of change in amortization
         of deferred commissions                         123,224             -             -
       Provision for doubtful accounts                 2,440,369     2,689,250     3,147,077
       Abandonment of fixed assets                             -     1,019,648        15,238
       Depreciation and amortization                     678,038     1,125,563     4,357,720
       Deferred taxes                                          -       500,000             -
       Changes in assets and liabilities
         Accounts receivable                          (2,971,890)   (3,751,105)     (959,900)
         Deferred commissions                            713,839    (1,467,519)    1,718,450
         Other current assets                            104,449      (163,740)     (217,473)
         Other assets                                    (11,494)          511       (67,893)
         Accounts payable and accrued liabilities        851,031     1,386,357       872,505
                                                     -----------  ------------  ------------

            Net cash provided by (used in)
             operating activities                    $ 1,444,202  $ (1,714,539) $ (3,978,238)
                                                     ===========  ============  ============

Noncash financing and investing activities
---------------------------------------------------

 Conversion of preferred stock dividends
   into common stock                                 $    43,963  $      7,224  $  1,259,782
 Conversion of note payable to stockholder,
   including accrued interest, into preferred stock      558,930             -             -
 Noncash components of consideration issued
   in connection with business combination
     Common stock                                              -             -    10,500,000
     Note payable to stockholder                               -             -     1,388,206
     Assumption of net liabilities                             -             -     1,603,576
</TABLE>















The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>   38




                     Phoenix Network, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 1994, 1995 and 1996



NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES

  Phoenix Network, Inc. ("Phoenix" or the "Company") was a switchless reseller
  of long distance telecommunication services designed primarily for small to
  medium sized commercial accounts located throughout the United States.
  Effective January 1, 1996, as a result of the acquisition of Automated
  Communications, Inc. ("ACI"), the Company became a facilities based reseller.
  The Company provides its customers with long distance services utilizing the
  networks of facilities-based carriers, such as American Telephone & Telegraph
  Company, MCI Telecommunications Corporation, Sprint Communications, L.P., ALC
  Communications Corporation, WorldCom, Inc. (formerly Wiltel, Inc.), U.S. One
  Communications Corp. and others, who handle the actual transmission services.
  The carriers bill Phoenix at contractual rates for the combined usage of
  Phoenix's customers utilizing their network.  Phoenix then bills its
  customers individually at rates established by Phoenix.

  The following is a summary of the Company's significant accounting policies
  applied in the preparation of the accompanying consolidated financial
  statements.

  Principles of Consolidation

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

  Revenue Recognition

  Revenue is recognized in the month in which the Company's customers complete
  the telephone call.

  Cash and Cash Equivalents

  The Company considers demand deposits, certificates of deposit and United
  States Treasury bills purchased with a maturity of three months or less as
  cash and cash equivalents.  The carrying amount approximates fair value
  because of the short maturity of these instruments.

  Deferred Commissions

  Deferred commissions consist of direct commissions paid on a one-time basis
  to third parties upon the acquisition of new customers.  Deferred commissions
  are amortized on a four-year sum of the year's digits method.





                                      F-7

<PAGE>   39

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE A - DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
            (CONTINUED)

  Furniture, Equipment and Data Processing Systems

  Depreciation of furniture, equipment and data processing systems is provided
  utilizing the straight-line method over five years.

  Customer Acquisition Costs

  Customer acquisition costs represent the value of acquired billing bases of
  customers and are amortized using the sum-of-the-years-digits method over a
  four-year period.

  Goodwill

  Goodwill represents the excess of cost over the fair value of the net assets
  acquired and is being amortized by the straight-line method over 20 years.

  Use of Estimates

  In preparing financial statements in conformity with generally accepted
  accounting principles, management is required to make estimates and
  assumptions that affect the reported amounts of assets and liabilities and
  the disclosure of contingent assets and liabilities at the date of the
  financial statements, as well as revenue and expenses during the period.
  Significant estimates made by management include the allowance for doubtful
  accounts, estimated carrier credits, and the amortization periods related to
  acquired customers and goodwill.  Actual results could differ from those
  estimates.

  Income Taxes

  Deferred income taxes are recognized for tax consequences of temporary
  differences by applying current enacted tax rates to differences between the
  financial reporting and the tax basis of existing assets and liabilities.

  Reclassification

  Prior years' financial statements have been reclassified to conform to
  current year presentation.



                                      F-8

<PAGE>   40

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE B - POOLING-OF-INTERESTS AND ACQUISITIONS

  On October 8, 1996, Americonnect, Inc. was merged with and into Phoenix
  Network, Inc. (the Company), and 2,663,810 shares of the Company's common
  stock were issued in exchange for all of the outstanding common stock of
  Americonnect.  The merger was accounted for as a pooling-of-interests and,
  accordingly, the accompanying financial statements have been restated to
  include the accounts and operations of Americonnect for all periods prior to
  the merger.


  Separate results of the combining entities for the two years in the period
  ended December 31, 1995, are as follows (amounts in 000s):

<TABLE>
<CAPTION>
                                               December 31
                                            -----------------
                                               1994      1995
                                            -------  --------
                  <S>                       <C>      <C>
                  Net sales
                   Phoenix                  $57,420  $ 58,755
                   Americonnect              16,985    17,100
                                            -------  --------

                                            $74,405   $75,855
                                            =======  ========
                  Net income (loss)
                   Phoenix                  $  (905) $ (1,334)
                   Americonnect                 422    (1,719)
                                            -------  --------

                                            $ (483)  $ (3,053)
                                            =======  ========
</TABLE>


  In connection with the merger, approximately $1.3 million of merger costs and
  expenses were incurred and have been charged to expense in the Company's
  fourth quarter of 1996.

  In August of 1995, the Company acquired in purchase transactions the customer
  bases and substantially all of the assets and liabilities of Tele-Trend
  Communications, LLC ("Tele-Trend"), a Denver based switchless reseller, and
  Bright Telecom L.P. ("Bright"), an international call-back provider, for
  $4,369,317 and $356,388, respectively.  The operations of Tele-Trend and
  Bright are included from August 1, 1995.

  Additionally, during 1995, the Company acquired three customer bases at a
  cost of $2,078,238.  At December 31, 1995, accounts payable includes $525,000
  due for the purchase of one of the customer bases.


                                      F-9

<PAGE>   41

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE B - POOLING-OF-INTEREST AND ACQUISITIONS AND MERGERS (CONTINUED)

  In January 1996, the Company acquired, in a purchase transaction, Automated
  Communications, Inc. (ACI), a Golden, Colorado, facilities-based long
  distance phone service carrier operating state-of-the-art switching centers
  in Colorado Springs, Minneapolis, and Phoenix.  Consideration for the
  acquisition was in the form of $4,085,093 in cash, 2,800,000 shares of the
  Company's common stock valued at approximately $10,500,000, a long-term note
  of $1,388,206 bearing interest at 9%, and the assumption of net liabilities
  of $1,603,576.  The Company's consolidated results of operations include ACI
  from January 1, 1996, the effective date of the purchase transaction.  The
  excess of the purchase price over the fair market value of the assets and
  liabilities acquired has been allocated to customer acquisition costs
  ($1,950,000) and to goodwill ($15,626,875).  Customer acquisition costs are
  amortized over four years using the sum-of-the-years-digits method, and
  goodwill is amortized on a straight-line basis over 20 years.

  The following unaudited condensed pro forma information presents the results
  of operations of the Company as if the acquisition of ACI and Tele-Trend had
  occurred on January 1, 1995.



<TABLE>
<CAPTION>
                                                   Year ended December 31, 1995
                                                   ----------------------------
          <S>                                            <C>
          Revenue                                        $104,729,000
          Net loss                                       $(4,428,000)
          Net loss attributable to common shares         $(5,603,000)
          Net loss per common share                      $     (0.31)

          Weighted average number of shares outstanding    18,135,000
</TABLE>



NOTE C - ACCOUNTING CHANGES

  Effective January 1, 1994, the Company changed its method of accounting for
  deferred commissions from the straight-line basis to the sum of the years
  digits method.  Additionally, the Company changed their estimate of the
  period benefited from two years to four years.  Management believes that
  these changes more accurately match expense with the revenue generated by the
  customer base.  The cumulative effect of the change in accounting method was
  to increase accumulated amortization at January 1, 1994 by approximately
  $123,000.  The effect of both changes was to reduce the 1994 amortization
  expense and loss before cumulative effect of change in accounting by
  approximately $242,000 ($0.02 per common share).



                                      F-10

<PAGE>   42
                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE D - FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS

  Furniture, equipment and data processing systems consist of the following:


<TABLE>
<CAPTION>
                                                          December 31,
                                                 ------------------------------
                                                   1995                1996
                                                 ---------          -----------
<S>                                             <C>                 <C>
         Data processing systems                $1,404,833          $4,872,174
         Switching equipment                             -           1,898,593
         Furniture and fixtures                    331,094             710,234
         Other equipment                           501,335             537,471
                                                ----------         -----------
                                                 2,237,262           8,018,472
         Less accumulated depreciation          (1,350,597)         (2,495,701)
                                                ----------         -----------

                                                $  886,665         $ 5,522,771
                                                ==========         ===========
</TABLE>



  The loss on abandonment of assets in 1995 primarily relates to a write-off of
  billing and customer service software development costs. Management decided
  to minimize the risk of development and to have access to a new system on a
  more timely basis and, accordingly, has decided to license an existing
  billing and customer service system from a vendor at a cost of approximately
  $3,000,000, of which approximately $1,500,000 has been incurred through
  December 31, 1996.


NOTE E - LINE OF CREDIT - FINANCE COMPANY

  In September 1995, the Company renewed its Loan and Security Agreement (the
  "Agreement") with a finance company to make available to the Company a line
  of credit of up to $10,000,000. The Company may borrow up to the lesser of
  $10,000,000 or its borrowing base, which is defined as a percentage of its
  eligible receivables. The term of the Agreement is three years, expiring
  October 1998, with automatic renewal options. There are penalties for early
  termination by the Company. Borrowings bear interest at .75% over the
  "reference rate," as defined. In connection with the renewal, fees and
  transaction costs of $80,972 were incurred, which are being amortized on a
  straight-line basis over three years. The loan is collateralized by the
  Company's accounts receivable, equipment, general intangibles and other
  personal property assets. Among other provisions, the Company must maintain
  certain minimum financial covenants, is prohibited from paying dividends
  without the approval of the finance company, and is subject to limits on
  capital expenditures. As of December 31, 1996, the Company was in violation
  of certain financial covenants. The finance company has waived the covenant
  violations in connection with a restructuring of the line of credit
  agreement. At December 31, 1996, $4,698,645 was outstanding under the line
  and the interest rate was 10%.


                                      F-11

<PAGE>   43

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996




NOTE E - LINE OF CREDIT - FINANCE COMPANY (CONTINUED)

  Average daily outstanding borrowing for the year ended December 31, 1996 was
  $859,044 at a weighted average interest rate of 10%.  The highest month-end
  balance outstanding for the year ended December 31, 1996 was $4,698,645.


NOTE F - LONG-TERM DEBT

  During 1996, the Company entered into a note payable with a finance company to
  fund the cost of new billing and customer service software.  The note
  agreement requires twelve quarterly payments of $138,854 plus accrued interest
  at 10.5% commencing July, 1996 through July, 1999.

  In addition, as part of the acquisition of Automated Communications, Inc., on
  January 1, 1996, the Company issued a 9% note payable for $1,388,206 to a
  current stockholder, which is payable in annual installments through 2001.

  Future minimum payments on long-term debt at December 31, 1996 are as follows:


<TABLE>
<CAPTION>
              Year ended      Note payable      Note payable
             December 31,  to finance company  to stockholder     Total
             ------------  ------------------  --------------   ----------
                <S>          <C>                <C>             <C>
                1997         $  444,839         $        -      $  444,839
                1998            491,019            231,414         722,433
                1999            333,287            231,414         564,701
                2000                  -            231,414         231,414
                2001                  -            693,964         693,964
                             ----------         ----------      ----------

                             $1,269,145         $1,388,206      $2,657,351
                             ==========         ==========      ==========
</TABLE>



NOTE G - LEASES

  The Company has operating leases for office space and equipment which expire
  on various dates through 2000, and which require that the Company pay certain
  maintenance, insurance and other operating expenses.  Rent expense for the
  years ended December 31, 1994, 1995 and 1996 was $856,797, $1,028,462 and
  $1,331,911, respectively.


                                      F-12

<PAGE>   44

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE G - LEASES (CONTINUED)

  Future minimum lease payments for years ending December 31, are as follows:


<TABLE>
<CAPTION>
             <S>                   <C>
             1997                  $2,506,223
             1998                   1,580,685
             1999                   1,392,208
             2000                     547,812
             2001                     191,302
                                   ----------

                                   $6,218,230
                                   ==========
</TABLE>



NOTE H - COMMITMENTS AND CONTINGENCIES

  The Company has contracts with its major vendors to provide
  telecommunications services to its customers.  The agreements cover the
  pricing of the services and are for various periods.  Among other provisions,
  the agreements contain minimum usage requirements which must be met to
  receive the contractual price and to avoid shortfall penalties.  The Company
  is currently in compliance with the contractual requirements.  Total future
  minimum usage commitments at December 31, 1996 are as follows:


<TABLE>
<CAPTION>
                        Year ending
                        December 31,                     Commitment
                        ------------                     -----------
                           <S>                           <C>
                           1997                          $33,000,000
                           1998                           18,500,000
                           1999                            1,000,000
                                                         -----------
                          Total                          $52,500,000
                                                         ===========

</TABLE>




                                      F-13

<PAGE>   45

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996




NOTE I - CAPITAL STOCK

   Preferred Stock

   The Company's certificate of incorporation authorizes it to issue up to
5,000,000 shares of $.001 par value preferred stock.  At December 31, 1996, the
Company's authorized preferred stock is allocated as follows:


<TABLE>
<CAPTION>
                                                                    Authorized                      Issued and
                                                                      shares                        outstanding
                                                                    ----------                      -----------
             <S>                                                    <C>                             <C>
             Reserved shares:
               Series A                                               300,000                          98,625
               Series B                                               200,000                         114,500
               Series C                                             1,000,000                               -
               Series D                                               666,666                         333,333
               Series F                                             1,200,000                               -
             Undesignated shares                                    1,633,334                               -
                                                                    ---------                         -------

             Total                                                  5,000,000                         546,458
                                                                    =========                         =======
</TABLE>

Series A Preferred Stock ("Series A") outstanding consists of 98,625 shares.
The shares are entitled to 9% cumulative dividends, voting rights and are
convertible into common stock subject to certain anti-dilution provisions.  In
connection with the initial offering, the Company also issued a warrant for
62,200 shares of common stock with an exercise price of $2.50 per share to an
investment banking firm, controlled by an individual, who was subsequently
elected to the Company's Board of Directors.  The warrant expires in February
1997. During 1994, 16,000 shares of Series A were converted into 70,996  shares
of common stock.  During 1995, 3,000 shares of Series A were converted into
14,449 shares of common stock.  During 1996, 3,125 shares of Series A were
converted into 16,664 shares of common stock.  The conversions also include
unpaid  dividends.  At December 31, 1996, the outstanding Series A shares were
convertible into 405,864 shares Series of common stock.

Series B Preferred Stock ("Series  B") outstanding consists of 114,500 shares.
The shares are entitled to 9% cumulative dividends, voting rights and are
convertible into shares of common stock subject to certain anti-dilution
provisions.  In connection with the initial offering, the Company issued a
warrant to an investment banking firm, controlled by one of the Company's
directors, for 69,750 shares of common stock, with an exercise price of $2.00
per share.  The warrant expires in February 1997.  During 1995, 1,250 shares of
Series B were converted into 9,749 shares of common stock.  During 1996, 11,750
shares of Series B were converted into 98,717 shares of common stock.  The
conversions also include unpaid dividends.  At December 31, 1996, the
outstanding Series B shares are convertible into 763,333 shares of common stock.


                                      F-14

<PAGE>   46

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE I - CAPITAL STOCK (CONTINUED)

  In November 1992, the Company issued 1,000,000 shares of its Series C
  Preferred Stock ("Series C") to one of its major vendors as collateral for
  amounts due the vendor for services provided.  The Company was released from
  all collateral requirements during 1996 and the preferred stock reverted back
  to the Company.

  Series D Preferred Stock outstanding consists of 333,333 shares.  The shares
  are entitled to 6% non-cumulative dividends, when and if declared by the
  Board of Directors and only after payment of dividends on previously issued
  series of preferred stock.  These shares are non-voting and are convertible
  into common stock subject to certain anti-dilution provisions.  In connection
  with the initial offering, the Company issued a warrant to an investment
  banking firm, controlled by one of the Company's directors, for 22,000 shares
  of common stock, with an exercise price of $1.50 per share.  The warrant
  expires in December 1997.  At December 31, 1996, the outstanding Series D
  Preferred shares are convertible into 333,333 shares of common stock.

  In September 1994, the Company issued 55,893 shares of Series E Preferred
  Stock at $10 per share under an agreement to convert a note payable to
  stockholder, with a principal balance of $500,000 and accrued interest of
  $58,930.  In connection with the issuance of the stock, the Company issued
  the stockholder a five-year warrant for 100,000 shares of the Company's
  common stock which was canceled when the Series E shares were converted to
  Series F Preferred Stock (see below).

  During the period July 1995 through October 1995, the Company raised
  approximately $11,024,207, net of offering costs of $129,963, through a
  private placement of 1,115,417 shares of its Series F Preferred Stock at $10
  per share.  Additionally, the holder of the Company's Series E Preferred
  Stock exchanged their Series E shares, plus accumulated and unpaid dividends
  of $47,467, for 60,639 shares of Series F Preferred Stock.  The Series F
  shares are entitled to 9% cumulative dividends, voting rights, demand
  registration rights for the underlying common shares after six months and are
  convertible initially into 4,704,224 shares of common stock, subject to
  anti-dilution provisions.  The holders of the Series F also received warrants
  for the purchase of 470,422 shares of common stock with an exercise price of
  $3.00 per share which expire in October 2000.  The Series F shareholders have
  the right to place two directors on the Company's board (the "Series F
  Directors") and the Company is subject to certain covenants requiring it to
  obtain the consent of the Series F Directors for certain transactions
  including mergers, acquisitions and incurring additional indebtedness in
  excess of $20,000,000.  During December 1996, the outstanding Series F
  Preferred shares were converted into 5,191,064 shares of common stock.  This
  conversion also included unpaid dividends.

  The common shares reserved for issuance upon the conversion of Series A, B
  and D Preferred Stock have been registered with the Securities and Exchange
  Commission.

  At December 31, 1996, the Company had cumulative, unpaid dividends on Series
  A and B Preferred Stock of $340,945 ($3.45 per share) and $395,825 ($3.45 per
  share), respectively.


                                      F-15

<PAGE>   47

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE I - CAPITAL STOCK (CONTINUED)

  Common Stock

  In May 1995, the Company closed a private placement of its common stock which
  raised $727,519, net of offering costs of $119,481.  The Company sold 385,000
  units, at $2.20 per unit, in an off-shore financing pursuant to Regulation S
  under the Securities Act of 1933.  A unit consists of one share of common
  stock and a five-year warrant for one-half share of common stock.  Two
  warrants can be exercised to purchase 38,500 units at $2.42 per unit.  The
  Company closed another private placement of its common stock under Regulation
  S in September 1995.  In this transaction, the Company sold 2,300,000 shares
  of common stock for $2.75 per share.  Proceeds to the Company, net of
  offering costs of $735,055, were $5,589,945.

  Stock Options and Warrants

  The Company has various stock option plans accounted for under APB Opinion 25
  and related interpretations.  The options generally have a term of 10 years
  when issued, and generally vest over 2-4 years.  No compensation cost has
  been recognized for the plans.  Had compensation cost for the plan been
  determined based on the fair value of the options at the grant dates
  consistent with the method of Statement of Financial Accounting Standards
  123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net
  loss and loss per common share would have been increased to the pro forma
  amounts indicated below.  Pro forma results for 1995 and 1996 may not be
  indicative of pro forma results in future periods because the pro forma
  amounts do not include pro forma compensation cost for options granted prior
  to January 1, 1995.

<TABLE>
<CAPTION>
                                                     1995           1996
                                                 ------------  -------------
                  <S>                            <C>           <C>
                  Net loss
                    As reported                  $(3,647,885)  $(14,050,004)
                    Pro forma                     (3,787,774)   (14,474,477)

                  Loss per common share
                    As reported                       $(0.24)        $(0.68)
                    Pro forma                          (0.25)         (0.70)
</TABLE>



                                      F-16

<PAGE>   48

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996




NOTE I - CAPITAL STOCK (CONTINUED)

  Stock Options and Warrants (Continued)


  The fair value of each option grant is estimated on the date of grant using
  the Black-Scholes options-pricing model with the following weighted-average
  assumptions used for grants in 1995 and 1996, respectively:  no expected
  dividends; expected volatility of 55%; weighted average risk-free interest
  rate of 6%; and expected lives of five years.

  In 1987, the Company granted certain directors stock options to purchase up
  to 900,000 shares of common stock at a price of $0.10 per share, expiring no
  earlier than ten (10) years from the grant date.  At December 31, 1995,
  options for 500,000 shares remain outstanding.

  The Company's 1989 Stock Option Plan authorizes the grant of incentive stock
  options or supplemental stock options for up to 3,500,000 shares of common
  stock.  The exercise price of each incentive stock option shall be not less
  than 100% of the fair market value of the stock on the date the option is
  granted.  The exercise price of each supplemental stock option shall be not
  less than eighty-five percent (85%) of the fair market value of the stock on
  the date the option is granted.

  In November, 1992, the Board of Directors approved the 1992 Non-Employee
  Directors' Stock Option Plan.  Under the Plan, 480,000 shares of common stock
  have been reserved for issuance to non-employee directors of the Company.
  Options are granted annually based upon length of service at fair market
  value at date of grant.

  The Company's subsidiary, Americonnect, had two stock option plans.  All
  options have been converted into options for the Company common stock and are
  included in the following summary.  The options were granted at prices from
  $0.08 to $2.06 per share of Company common stock.


                                      F-17

<PAGE>   49

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE I - CAPITAL STOCK (CONTINUED)

  Stock Options and Warrants (Continued)

  A summary of the status of the Company's fixed stock option plans as of
  December 31, 1996, and changes during each of the three years in the period
  ended December 31, 1996 is presented below.

<TABLE>
<CAPTION>
                                                                   Weighted
                                                     Number      average price
                                                    of shares      per share
                                                   ----------    -------------
<S>                                                 <C>               <C>
  Outstanding at January 1, 1994                    2,453,492         $1.21
    Exercised                                        (412,876)         1.13
    Granted                                         1,125,433          3.30
    Canceled                                         (505,984)         3.08
                                                   ----------

 Outstanding at December 31, 1994                   2,660,065          1.58
   Exercised                                         (382,851)         1.16
   Granted                                            898,414          2.58
   Canceled                                          (156,458)         2.43
                                                   ----------

 Outstanding at December 31, 1995                   3,019,170          1.91
   Exercised                                         (724,567)         1.64
   Granted                                          1,017,500          3.27
   Canceled                                          (177,951)         3.23
                                                   ----------

Outstanding at December 31, 1996                    3,134,152          2.32
                                                   ==========
</TABLE>

<TABLE>
<CAPTION>
                                          Range        Options
                                      -------------  ----------
 <S>                                  <C>             <C>
  Exercisable at December 31, 1994    $0.08 - $6.88   1,244,797

  Exercisable at December 31, 1995    $0.08 - $6.38   1,797,977

</TABLE>



<TABLE>
<CAPTION>
                                                                            Weighted
                                                                             average
                                       Range          Options  Proceeds    exercise price
                                    -------------  ----------  ----------  --------------
<S>                                 <C>               <C>      <C>             <C>
Exercisable at December 31, 1996    $0.10 - $0.10     500,000  $   50,000      $0.10
                                    $0.72 - $1.90     475,367     567,341       1.19
                                    $2.08 - $4.13     617,636   1,741,067       2.82
                                    $4.88 - $6.88      40,977     258,074       6.30
                                    -------------   ---------  ----------

                                                    1,633,980  $2,616,482       1.60
</TABLE>


  Weighted average fair value of options granted during 1995 and 1996 is $1.42
  and $1.70 per share, respectively.


                                      F-18

<PAGE>   50

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE I - CAPITAL STOCK (CONTINUED)

  Stock Options and Warrants (Continued)

  The following information applies to options outstanding at December 31,
  1996:




<TABLE>
<S>                                  <C>            <C>            <C>              <C>
Range of exercise prices             $0.10 - $0.10  $0.72 - $1.90  $2.08 - $4.13    $4.88 - $6.88
  Options outstanding                      500,000        476,338      2,043,685          114,129
  Weighted average exercise
    price                            $        0.10          $1.19          $3.02    $        4.39
  Weighted average remaining
    contractual life (years)                     1              7              9                6
  Options exercisable                      500,000        475,367        617,636           40,977
  Weighted average exercise
    price                            $        0.10          $1.19          $2.82    $        6.30

</TABLE>


Common shares subject to warrants are summarized below:


<TABLE>
<CAPTION>
                                                                 Number         Price
                                                               of shares      per share
                                                             -------------  -------------
   <S>                                                       <C>            <C>     <C>
   Outstanding at January 1, 1994                              386,533      $1.50 - $7.00
   Granted                                                     125,000      $3.25
                                                             ---------

   Outstanding at December 31, 1994                            511,533      $1.50 - $7.00
   Exercised                                                   (34,675)     $2.42
   Granted                                                     720,672      $2.42 - $3.00
   Canceled                                                   (100,000)     $3.25
                                                             ---------

   Outstanding at December 31, 1995                          1,097,530      $1.50 - $7.00
        Exercised                                              (58,825)     $2.42
   Granted                                                          -             -
   Canceled                                                         -             -
                                                             ---------
   Outstanding at December 31, 1996                          1,038,705      $1.50 - $7.00
                                                             =========
</TABLE>

All warrants are exercisable at grant.


                                      F-19

<PAGE>   51

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE J - LOSS PER COMMON SHARE

  Loss per common share is based upon the weighted average number of common and
  dilutive common equivalent shares outstanding. The preferred dividend
  requirements on the preferred stock are deducted in computing loss per common
  share.  The effect of outstanding options and warrants are antidilutive for
  all periods presented.


NOTE K - INCOME TAXES

  The Company accounts for income taxes under the liability method.  Under this
  method, deferred tax assets and liabilities are determined based on
  differences between financial reporting and tax bases of assets and
  liabilities and are measured using current enacted tax rates.  A valuation
  allowance is established to reduce net deferred tax assets to their estimated
  realizable value.

  As of December 31, 1996, the Company has available to offset future Federal
  taxable income, net operating loss carryforwards (NOLs) of approximately
  $20,400,000 which expire in varying amounts from 2002 through 2011.  The NOLs
  may be subject to limitations as a result of provisions of the Internal
  Revenue Code relating to changes in ownership and utilization of losses by
  successor entities.

  The Company's effective income tax rate is different from the Federal
  statutory income tax rate because of the following factors:



<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                     ----------------------------
                                                                       1994      1995       1996
                                                                     -------    ------     ------
<S>                                                                   <C>       <C>        <C>

     Federal tax rate applied to loss before taxes                    (34.0)%   (34.0)%    (34.0)%
     State tax rate applied to allowable carry-
       forward losses                                                  (5.7)     (5.9)      (4.6)
     Valuation allowance for deferred taxes                            44.4      59.9       38.6
                                                                     ------     -----      -----

     Effective tax rate                                                 4.7%     19.6%       -  %
                                                                     ======     =====       ====
</TABLE>



                                      F-20

<PAGE>   52

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996




NOTE K - INCOME TAXES (CONTINUED)

  Deferred federal and state tax assets and valuation allowance are as follows:

<TABLE>
<CAPTION>
                                                    December 31,
                                            -------------------------
                                                1995          1996
                                            -----------  ------------
           <S>                              <C>          <C>
           Current
              Allowance for bad debts             $704,000    $1,326,000

           Noncurrent
              Noncurrent assets                    291,000     1,187,000
              Net operating loss carryforward    4,934,000     8,496,000
                                               -----------  ------------
                                                 5,225,000     9,683,000
                                               -----------  ------------
                                                 5,929,000    11,009,000
              Valuation allowance               (5,929,000)  (11,009,000)
                                               ----------   ------------
                                               $      -     $       -
                                               ==========   ============
</TABLE>


  In 1993, the Company's subsidiary, Americonnect, Inc., reduced its valuation
  allowance by $500,000 due to changes in circumstances subsequent to adoption
  of SFAS No. 109.  The changes in circumstances related to increased cash
  flows, increased profitability, and anticipated continued increases.  Due to
  operating losses in 1995, Americonnect was no longer able to determine if it
  would more likely than not realize the deferred asset.  As a result of this
  change in estimate, the valuation allowance was increased by $500,000.

  The components of income tax benefit (expense) related to loss before
  cumulative effect of accounting change are as follows:


<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                          ----------------------------------
                                            1994        1995         1996
                                          -------      -------     ---------
                <S>                       <C>          <C>          <C>

                Current                   $(16,405)   $      -      $  -
                Deferred                        -      (500,000)       -
                                          --------    ---------     ------

                                          $(16,405)   $(500,000)    $  -
                                          ========    =========     ======
</TABLE>


  The increase in the valuation allowance was approximately $548,000,
  $1,917,000 and $5,080,000 for the years ended December 31, 1994, 1995 and
  1996, respectively.



                                      F-21

<PAGE>   53

                     Phoenix Network, Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  Years ended December 31, 1994, 1995 and 1996





NOTE L - EMPLOYEE BENEFIT PLANS

  On June 1, 1993, the Company established a 401(k) tax savings plan for all
  employees.  Employer and participant contributions to the plan vest
  immediately.  The plan is a defined contribution plan covering all of its
  employees.  Under this plan, employees with a minimum of one year of
  qualified service can elect to participate by contributing a minimum of one
  percent of their gross earnings up to a maximum of 20 percent.

  For those eligible plan participants, the Company will contribute an amount
  equal to 100 percent of each participant's personal contribution up to an
  annual maximum of $1,000.  The Company's contributions to the 401(k) plan for
  the year ending December 31, 1994, 1995 and 1996 were approximately $23,000,
  $59,000 and $109,000, respectively.


NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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


    Line of credit  -  Carrying amount approximates fair value because of the
                       short maturity of this instrument.

    Long-term debt  -  Carrying amount approximates fair value because the
                       interest rate at December 31, 1996 approximates the
                       market rate.


NOTE N - RELATED PARTIES

  Two members of the Company's Board of Directors also serve on the Board of
  Directors of U.S. One Communications, with whom Phoenix has entered into an
  agreement to lease capacity on switching equipment.

NOTE O - FOURTH QUARTER ADJUSTMENTS

  During the fourth quarter of 1996, the Company recorded adjustments
  increasing their net loss by approximately $1,200,000 related to receivables,
  $500,000 related to deferred commissions and $300,000 related to Local
  Exchange Carriers' billing charges.



                                      F-22
<PAGE>   54




                        REPORT OF INDEPENDENT CERTIFIED
                         PUBLIC ACCOUNTANTS ON SCHEDULE



Board of Directors
Phoenix Network, Inc.


In connection with our audit of the consolidated financial statements of
Phoenix Network, Inc., and Subsidiaries referred to in our report dated March
12, 1997, which is included in the Company's annual report on Form 10-K, we
have also audited Schedule II for the years ended December 31, 1994, 1995 and
1996.  In our opinion, this schedule presents fairly, in all material respects,
the information to be set forth therein.


                                        Grant Thornton LLP

                                        /s/ Grant Thornton LLP

Denver, Colorado
March 12, 1997





<PAGE>   55





                     Phoenix Network, Inc. and Subsidiaries

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  Years ended December 31, 1994, 1995 and 1996




<TABLE>
<CAPTION>
          Column A                Column B    Column C      Column D       Column E
-------------------------------  ----------  ----------  --------------  -------------
                                              Additions
                                 Balance at  charged to
                                  beginning   costs and                   Balance at
        Description               of period   expenses   Deductions (1)  end of period
-------------------------------  ----------  ----------  --------------  -------------
<S>                              <C>         <C>         <C>             <C>

Allowance for doubtful accounts

  December 31, 1994              $1,117,341  $2,440,369      $2,105,010     $1,452,700
  December 31, 1995              $1,452,700  $2,689,250      $2,492,937     $1,649,013
  December 31, 1996              $1,649,013  $3,147,077      $1,195,260     $3,600,830
</TABLE>



(1) Write-offs of uncollectible accounts, net of recoveries.




<PAGE>   56



                                 EXHIBIT INDEX
                                 -------------

<TABLE>
<CAPTION>
     Exhibit
      Number         Descriptions
     -------         ------------
         <S>       <C>
         3.1         -- Restated Certificate of Incorporation of the Company(1)

         3.2         -- Bylaws of the Company(1)

        10.1         -- 1989 Stock Option Plan(2)

        10.2         -- Forms of option grant pursuant to the 1989 Stock Option
                        Plan(3)

        10.3         -- 1992 Non-Employee Directors' Stock Option Plan, as
                        Amended(5)

        10.4         -- Form of option grant pursuant to the 1992 Non-Employee
                        Directors' Stock Option Plan(5)

        10.5         -- Series A Preferred Stock Purchase Agreement dated as of
                        August 17, 1990(4)

        10.6         -- Series B Preferred Stock Purchase Agreement dated as of
                        December 27, 1991 with List of Purchasers(6)

        10.7         -- Series D Preferred Stock Purchase Agreement dated as of
                        December 15, 1992(5)

        10.8         -- Sublease and Consent between the Company and Richard
                        Goldman & Co. relating to the premises at One Maritime
                        Plaza, San Francisco, CA(4)

        10.9         -- Amended and Restated Loan and Security Agreement, among
                        the Company, Phoenix Network Acquisition Corp.,
                        Americonnect, Inc. and Foothill Capital Corporation, dated
                        September 26, 1995 (the "Original Foothill Agreement")

        10.10        -- Amendment Number One to the Original Foothill Agreement,
                        dated October 17, 1996

        10.11        -- Amendment Number Two to the Original Foothill Agreement,
                        dated December 23, 1996

        10.12        -- Amendment Number Three to the Original Foothill
                        Agreement, dated March 12, 1997

        10.13        -- Office Lease Agreement with Itel Rail Corporation,
                        dated June 8, 1994(10)

        10.14       --  Stockholders Agreement, dated October 20, 1995(7)

        10.15       --  Series F Preferred Stock and Warrant Purchase Agreement,
                        dated October 20, 1995(7)

        10.16       --  Communications Services Agreement, between the Company
                        and US ONE Communications Corp., dated May 22, 1996 (the
                        "Original US ONE Agreement")(8)

        10.17       --  Amendment No. 1 to the Original US ONE Agreement, dated
                        October 11, 1996

        10.18       --  Amendment No. 2 to the Original US ONE Agreement, dated
                        October 11, 1996

        10.19       --  Amendment No. 3 to the Original US ONE Agreement, dated
                        January 3, 1997

        10.20       --  Amendment No. 4 to the Original US ONE Agreement, dated
                        December 30, 1996

        10.21       --  Amendment No. 5 to the Original US ONE Agreement, dated
                        March ___, 1997
</TABLE>



<PAGE>   57


<TABLE>
         <S>     <C>
        10.22      --  Telecommunications Services Agreement, between the
                       Company and Comdisco Disaster Recovery Services, a
                       Division of Comdisco, Inc., dated March 25, 1996(8)

        10.23      --  Employment Agreement, between the Company and Wallace M.
                       Hammond, dated January 1, 1996

        11.1       --  Computation of earnings per share(11)

        18.1       --  Letter re change in accounting principles(9)

        21.1       --  Subsidiaries of Phoenix Network, Inc.

        23.1       --  Consent of Grant Thornton LLP

        27.1       --  Financial Data Schedule
</TABLE>

----------

(1)      Filed as an Exhibit to the Company's Registration Statement on Form
         S-3 (file no. 333-20923), as filed with the Commission on January 31,
         1997, and amended on Form S-3/A on February 12, 1997, and incorporated
         herein by reference.

(2)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended October 31, 1990, and incorporated herein by
         reference.

(3)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for
         the fiscal year ended April 30, 1990, and incorporated herein by
         reference.

(4)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended July 31, 1990, and incorporated herein by reference.

(5)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
         year ended December 31, 1992, and incorporated herein by reference.

(6)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for
         the transition period ended December 31, 1991, and incorporated herein
         by reference.

(7)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended September 30, 1995, and incorporated herein by
         reference.

(8)      Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1996, and incorporated herein by reference.

(9)      Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
         year ended December 31, 1994, and incorporated herein by reference.

(10)     Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1994, and incorporated herein by reference.

(11)     This data appears in the Consolidated Statement of Operations included
         in the Company's Consolidated Financial Statements.