<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                   FORM 10-K
                  ------------------------------------------

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

For the fiscal year ended December 31, 1999

                                      OR

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

For the transition period from _________  to ___________

                        Commission File Number: 0-22944

                                 US WATS, INC.
                                 -------------
            (Exact name of Registrant as specified in its charter)

<TABLE>
<CAPTION>

<S>                                                      <C>
           New York                                                   22-3055962
-------------------------------                                     --------------
(State or other jurisdiction of                          (I.R.S.  Employer Identification No.)
incorporation or organization)

2 Greenwood Square, 3331 Street Road
Bensalem, Pennsylvania                                                   19020
------------------------------------                                 --------------
(Address of principal executive offices)                               (Zip Code)

(Registrant's telephone number, including area code):                (215) 633-9400
                                                                     --------------

Securities registered pursuant to Section 12 (b) of the Act:             None
                                                                         ----
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act:

                        Common Stock ($0.001 par value)
                        -------------------------------
                               (Title of Class)

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

                         Yes     X              No
                             ---------             ---------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form10-K.[_]

                                       1
<PAGE>

As of March 21, 2000 the market value of the Company's Common Stock held by non-
affiliates of the Registrant, based on the average closing sale price, was
approximately $12,600,000.

As of March 21, 2000 the Registrant has 20,728,444 shares of Common Stock
outstanding.

                                       2
<PAGE>

                               TABLE OF CONTENTS



                                 PART I
                                 ======

Item 1.  Business..........................................................  4
Item 2.  Properties........................................................ 10
Item 3.  Legal Proceedings................................................. 10
Item 4.  Submission of Matters to a Vote of Security Holders............... 10


                                 PART II
                                 =======


Item 5.  Market for the Registrant's Common Equity and Related
            Stockholder Matters............................................ 11
Item 6.  Selected Financial Data........................................... 12
Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................... 13
Item 8.  Financial Statements and Supplementary Data....................... 18
Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................... 18


                                 PART III
                                 ========


Item 10. Directors and Executive Officers of the Registrant................ 19
Item 11. Executive Compensation and Options Outstanding.................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 23
Item 13. Certain Relationships and Related Transactions.................... 24


                                 PART IV
                                 =======

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 26

                                       3
<PAGE>

                                    PART 1
                                    ======

ITEM 1.   BUSINESS
------------------

DESCRIPTION OF BUSINESS

US WATS, Inc. ("the Company") is a switch-based interexchange carrier providing
long distance telephone communications services primarily to small and medium-
size businesses as well as residential customers.  The Company also provides
inbound-800 long distance services, as well as other telecommunications services
such as travel cards (calling cards), cellular, paging, internet service,
dedicated access, data services, pre-paid calling cards (debit cards),
International Callback and carrier termination services.   The Company uses its
own switches and facilities to originate, transport and terminate calls for
customers generally located between Maine and Norfolk, Virginia and California
(on-net area).   Approximately 90% of the calls billed by the Company each month
are processed through the Company's own switches as of December 31, 1999.  For
calls originating or terminating outside the Company's own network (off-net
area), the Company utilizes the services provided by other long distance
companies.

The Company's revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by the Company to end-users at specified rates.
Transport costs of these calls are billed to the Company from other carriers at
contractual rates.  These carriers supply the Company with call detail
information, which enables the Company to bill its customers depending upon the
Company's individual rates.  The combination of the efficiency of the Company's
network and facilities, and the purchase of long distance services in bulk from
other carriers allow the Company to offer competitive rates to small and medium-
sized businesses as well as residential customers.

The Company's principal executive offices are located at 2 Greenwood Square,
3331 Street Road, Suite 275, Bensalem, Pennsylvania 19020.  The Company's
telephone number at that location is (215) 633-9400.

CORPORATE STRATEGY

The Company's objective is to provide its customers with a comprehensive range
of telecommunications services with value-added features at competitive prices.
The Company markets through three channels (direct, agent and reseller) and
offers a diversified mix of products and services.  The Company employs a direct
sales force, and also markets through independent agents. The Company offers
individual value-added services to resellers depending on each reseller's
requirements.  The Company offers competitive wholesale pricing to its agents,
which it expects will lead to significant revenue growth. Net sales revenue
attributable to the Company's agents and resellers accounted for approximately
57% of the Company's non-wireless revenue during the period ended December 31,
1999. The Company also utilizes numerous carriers allowing for network
redundancy.  This allows the Company to offer both carrier specific and private
label services.  The Company has recently instituted several private internet
web sites from which its agents are generating new orders electronically.  The
Company expects to continue its efforts to expand this strategy in order to
generate new business.  The Company is focused on servicing both commercial and
residential accounts.

                                       4
<PAGE>

SERVICES

The Company provides domestic outbound long distance service to and from
anywhere in the United States, international calling services to approximately
250 countries, inbound 800 services, cellular local and long distance services,
regional and national paging services, internet service, travel/calling cards,
prepaid calling cards (debit cards), dedicated access services, private line
networks, data services, international callback, and carrier termination
services.

The Company charges its customers based upon minutes of usage, at predetermined
flat intrastate, interstate and international rates based on the termination of
the call.  In those areas which provide for equal access customers have the
ability to choose their long distance carrier for all intra-Local Access
Transport Area ("LATA") calls.  The Company is a "RESPORG" (Responsible
Organization) for the inbound 800 services it provides to its customers.  This
gives the Company direct access to the 800 number database allowing for
efficient provisioning of 800 number service.  This increases the speed at which
the Company can perform such services as blocking and routing changes for its
customers' inbound 800 services.

The Company utilizes Bell Atlantic NYNEX Mobile Systems to carry its cellular,
local calls.  The Company provides its cellular customers with competitive long
distance services provided by its own network. The Company's travel cards
provide its customers with an "easy-to-remember" 800 number access to the
Company's network from all locations in the United States and Canada, and
feature personal identification numbers ("PINs") which are selected by the
individual customer.  The Company's prepaid calling cards (debit cards) are
marketed wholesale primarily to retail distribution and specialty advertising
outlets.

SWITCH AND NETWORK FACILITIES

The Company maintains a digital network on both the East and West coasts of the
United States.  The Company's East Coast network extends from Maine to Norfolk,
Virginia and west to Pittsburgh, Pennsylvania.  The Company's west coast network
extends from California to Phoenix, Arizona and parts of Nevada.  The Company's
switching facilities are located in Philadelphia, Pennsylvania and Oakland,
California.  Calls terminating off-net are transported and terminated for the
Company on circuits operated by other carriers.  The Company's network utilizes
SS7 common channel signaling.  SS7 signaling increases network efficiency by
reducing call set-up time.

The network is supported by an Alcatel MegaHub 600E switch in Philadelphia and
an Alcatel DEX600 in Oakland which are used to process customer calls.
Intelligent call processing required by the Company's enhanced services products
(calling card and international callback) is provided by a NACT STX switching
platform.  This switching platform provides customized voice prompts and other
enhanced services required by these products.  The ability of the Company to
transport calls over its company-owned switches and leased facilities allows the
Company to maximize gross margins and control network quality of service.

The Company regularly reconfigures its call processing through the utilization
of least-cost routing software.  This software assures that the Company routes
calls, which terminate off-net, to the carrier vendor supplying the Company with
the lowest cost to that point.  The Company has contracted with numerous
domestic and international transport carriers, which allow for international
country-specific least-cost routing and the maintenance of diverse routes.

MARKETING

The Company markets its services utilizing three sales channels focused on
developing a customer base primarily within the Boston to Washington, DC
corridor.  The Company employs a direct sales force who are paid on a salary
plus commission basis.  The Company also maintains an independent agent network
of approximately 350 agents as of December 31, 1999, who receive a commission
based on monthly billings.  The Company's reseller channel is comprised of
approximately 12 switchless resellers, which contract for services at a fixed
price (buy price).  These resellers are permitted to establish their

                                       5
<PAGE>

own retail billing rates, and do not lease or own any switching equipment,
transmission facilities, or billing software. Because of this, they are
dependent on switch-based carriers for products and services. The Company offers
these resellers competitive wholesale rates, a variety of products, customer
support services, billing, credit and collection services, as well as other
value-added features such as on-line electronic access to customer account
information, back office support, automatic electronic order entry and account
profitability reporting. The Company offers its customers a comprehensive
invoice including extensive management reports to all sales channels. Included
in the Company's invoices are more than 20 management reports covering call
distribution studies, time of day analysis, call duration distribution, as well
as individual telephone number call detail records allowing them to quickly
analyze their calling patterns and costs.

As of December 31, 1999, the Company's average retail customer uses
approximately $156 in monthly long distance revenue, which is similar to the
industry average for revenue generated through an agent sales force.

Coincident to entering the Competitive Local Exchange business, initially as a
Bell Atlantic Reseller in the Mid-Atlantic states, the Company plans to develop
a direct sales force to solicit and secure larger middle market accounts, where
the combination of local and long distance revenue justifies dedicated access.
The nature of dedicated access products requires a more detailed and focused
sales approach by experienced telecommunications sales professionals who are
capable of directing their efforts to specific market segments in clearly
defined geographic territories.  As a result of the Company's initiatives in the
local area, the Company believes that its agents and certain smaller business
accounts will benefit from simple resale of Bell Atlantic local services, in
those instances where the bundling approach does not justify dedicated T1
connectivity.

COMPETITION

The Company views the long distance industry as a three-tiered industry which is
dominated by the nation's three largest long distance providers: AT&T, MCI
WorldCom and Sprint Corporation  ("Sprint").  MCI WorldCom has entered into an
agreement to acquire Sprint.  Based on industry data, the Company believes that
AT&T, MCI WorldCom and Sprint, collectively generate approximately 80% of the
nation's interexchange long distance revenue (approximately $118 billion during
1999) and comprise what is known as "Tier 1" International Long Distance
Companies.  The second tier consists of several other companies with annual
revenues of $250 million to $5 billion each.  The third tier, which includes the
Company, consists of more than 500 companies with annual revenues of less than
$250 million each, the majority below $50 million each.

The Company targets small and medium-sized commercial customers as well as
residential customers. The number of telecommunications services offered by the
Company on a consolidated, one-bill basis serves, to some extent, to distinguish
the Company from some of its competitors.  Competitive distinctions are made
based upon the number of services offered, the pricing plans, the length of
contracts, as well as the billing information provided.  The Company currently
owns switch capacity, develops and implements its own products, monitors and
deploys its transmission facilities and prepares and designs its own billing and
reporting systems.

In addition to direct competition from what the Company estimates are several
hundred switchless resellers, the Company competes with the sales organizations
and resellers of large telecommunications companies such as AT&T, MCI WorldCom
and Sprint, which at any particular time may offer more desirable services or
prices than those offered by the Company.  Also, the FCC has recently granted
approval to a Bell Operating Company ("BOC") to provide in-region long distance
service and other BOCs may be approved to enter the long distance market in
additional states in the future.

On October 29, 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate interexchange services.
The FCC's order was issued pursuant to authority granted to the FCC in the
Telecommunications Act to "forebear" from regulating any telecommunications
service provider if the FCC determines that the public interest will be served.
Pursuant to the FCC's order, after a transition

                                       6
<PAGE>

period, relationships between carriers and their customers would be set by
contract and long distance companies would no longer be permitted to file with
the FCC tariffs for interstate interexchange services. However, MCI, Sprint and
The American Carriers Telephone Association have separately appealed the FCC's
order to the United States Court of Appeals for the District of Columbia Circuit
("DC Circuit"). On February 13, 1997, the DC Circuit stayed the FCC's
detariffing rules. These rules remain subject to pending appeals. The Company
may benefit from the elimination of FCC tariffs by gaining more flexibility and
speed in dealing with marketplace changes. However, the absence of tariffs will
also require that the Company secure contractual agreements with its customers
regarding many of the terms of its existing tariffs or face possible claims
arising because of the rights of the parties are no longer clearly defined. In
addition, to the extent disputes arise over such contracts, carriers without
tariffs may no longer resort to the legal doctrine that the terms of a filed
tariff supersede individual contract language.

In spite of AT&T's additional flexibility and the expected increased
interexchange competition from the BOCs, the Company believes that it continues
to provide and sell telecommunications service to small to medium sized
businesses and individuals at competitive rates.  In addition, the Company
believes that the deregulation of the local exchange telecom market represents a
significant opportunity similar to the opportunity provided at the breakup of
AT&T in 1984.

EMPLOYEES

At the end of 1999, the Company had 70 full-time employees working at three
locations.  The majority of the employees work at the Company's principal
executive offices located at 2 Greenwood Square, 3331 Street Road, Suite 275,
Bensalem, Pennsylvania 19020.  The Company is not a party to any organized labor
contracts.  The Company considers its relationship with its employees to be
satisfactory.

REGULATORY MATTERS

REGULATORY REQUIREMENTS.  The Company is a regulated entity at the Federal level
-----------------------
with regard to international traffic and interstate traffic.  The Company has
received Section 214 authorization to resell international switched services and
has filed an FCC tariff for its domestic interstate services.

State regulatory requirements vary from state to state.  The Company has
obtained certification in all states, which require certification in order to
provide resold long distance services, with the exception of Alaska, Colorado
and Hawaii.  Additionally, the Company's application for certification in
Arizona is currently pending.  The Company is also authorized to provide
competitive local exchange telecommunications services in two (2) states and the
District of Columbia.  Some states place statutory restrictions on the
operations of telecommunications service providers, including requiring
telecommunications service providers to file and operate in accordance with
service and rate tariffs. Further, carriers are required to charge just and
reasonable rates and not discriminate among similarly situated customers.  Some
states and the FCC also require the filing of periodic reports, the payment of
various regulatory fees and surcharges, and compliance with service standards
and consumer protection rules.  Changes in existing regulations or their
interpretation in any state could subject the Company to increased regulation.
Such regulation could result in an increase in customers' usage charges and, in
some cases, could limit or eliminate the Company's ability to service customers
in that jurisdiction.  The Company would incur, among other expenses, certain
administrative costs and legal fees in contesting or complying with such
regulatory changes that would increase the Company's cost of doing business.

The providers of local exchange telecommunications services to the Company are
also heavily regulated at the Federal level and in the states in which they
operate.  Changes in existing regulations or their interpretation affecting
these providers could materially adversely affect their business or even prevent
them from offering telecommunications services to their customers, including the
Company, on favorable terms.

In addition, certain services offered by the Company which are not presently
regulated in all states may become regulated.  Such regulation could delay the
deployment of products and/or services and would increase certain administrative
costs and legal fees in contesting or complying with such regulation.  The

                                       7
<PAGE>

FCC has granted applications by companies seeking to provide international
callback (also known as "call reorigination" services) to those countries where
the practice is legal under local law. The FCC has taken the view that call
reorigination services created incentive to lower foreign accounting rates to
the benefit of U.S. ratepayers, while serving the FCC's general policies
favoring resale and increased competition in the international marketplace.
Although the FCC has consistently expressed its support for call reorigination
services enacted by foreign countries, in response to the input of certain
foreign countries in rulemaking proceedings, the FCC has acknowledged that
foreign countries face unusual difficulties in implementing prohibitions on call
reorigination, while the FCC has stated that such countries continue to bear the
principal responsibility for enforcing their domestic laws. However, as a matter
of international comity, the FCC will prohibit U.S. authorized carriers from
providing call reorigination in countries where it is expressly prohibited. The
FCC established a variety of requirements that a foreign country must meet
before the FCC will consider assisting a foreign government in enforcing its
domestic ban. To date, the FCC has taken no direct enforcement action against an
individual carrier to enforce a foreign country's ban with respect to a U.S.
provider. However, there can be no assurance that the FCC or foreign governments
will not enforce such a ban.


LEGISLATION.   On February 8, 1996, President Clinton signed into law the
-----------
Telecommunications Act of 1996 (the "1996 Act").  The bill was intended to spur
additional competition in telecommunications services particularly within the
local exchange markets, which are now dominated by incumbent local exchange
carriers.

The 1996 Act codifies a new set of interconnection principles, applicable to
interconnection for both interstate and intrastate services.  State public
utilities commissions are given a significant role in administering the
interconnection provisions of the act, and deadlines are imposed for decisions
by both the FCC and state commissions.  On August 8, 1996, the FCC released the
Interconnection Decision which established a framework of minimum, national
rules enabling state commissions and the FCC to begin implementing many of the
local competition provisions of the 1996 Act.  Among other things, the
Interconnection Decision prescribed certain minimum points of interconnection;
adopted a minimum list of unbundled network elements that ILECs must make
available to competitors; and adopted a methodology for states to use when
setting prices for unbundled elements and for wholesale resale services.  On
January 25, 1999, the Supreme Court overturned prior decisions of the United
States Court of Appeals for the Eighth Circuit that had vacated certain portions
of the Interconnection Decision.  The Supreme Court's decision confirmed the
FCC's authority to issue regulations implementing the pricing and other
provisions of the 1996 Act and reinstated most of the challenged rules.  The
Supreme Court decision, however, vacated a key FCC rule that identified the
network elements that ILECs must unbundle.  The FCC has since adopted a new
standard for analyzing unbundled network elements, as required by the Supreme
Court.  The FCC concluded that ILECs would no longer be required to provide
directory assistance and operator services as network elements, though they will
continue to be available pursuant to tariffed rates.  The FCC declined, however,
except in limited circumstances, to require ILECs to unbundle certain facilities
used to provide high-speed Internet access and other data services.  Uncertainty
remains surrounding the effect of the Eighth Circuit decisions, the decision of
the Supreme Court reversing portions of it, and subsequent proceedings.

The 1996 Act also eliminates the existing AT&T antitrust consent decree, which
barred the provision of long distance services and manufacturing by the Bell
Operating Companies (BOCs).  Under the act, BOCs may immediately offer long
distance services outside their home regions.  The BOCs may offer service within
their regions upon FCC approval based on a showing that facilities-based
competition and interconnection agreements meeting a 14-point checklist both
exist.  On December 22, 1999, the FCC granted Bell Atlantic's application to
offer in-region long distance services in New York, marking the first time since
the breakup of AT&T that a BOC is able to provide its customers with both local
and long distance service.

In 1997, the FCC released an order establishing a significantly expanded federal
universal service subsidy regime.  Specifically, the FCC established new
universal service funds to support telecommunications and information services
provided to qualifying schools, libraries and rural health

                                       8
<PAGE>

care providers, and expanded the federal subsidies for local telephone services
provided to low-income consumers. The FCC collects money to fund this expanded
regime from interstate carriers and certain other entities. Contribution factors
vary quarterly and are passed on by the Company to end users. Recently the
United States Court of Appeals for the Fifth Circuit rejected the FCC's effort
to base contributions in part on intrastate revenues. The FCC's universal
service program may be altered as a result of appeals, agency reconsiderations
of its actions, or future Congressional action.

Additional competition with incumbent local exchange carriers ("ILECs") should
provide price discipline in an area which has been monopolized by ILECs.  The
Company can also expect a substantial increase in the competition, which it
faces in interexchange markets as a result of the entry of the BOCs into long
distance services.  Not only will there be additional competition providing
services which are similar to those provided by the Company, but they can be
expected to bundle those services with other offerings such as local service,
cellular and video services.  These package offerings may be more attractive to
consumers than offerings of stand-alone services.

ACCESS CHARGES.  The cost of providing long distance and local exchange services
--------------
will be affected by changes in the access charges imposed by ILECs for
origination and termination of calls over local facilities.  The term "access
service" describes the use of local exchange facilities for the origination and
termination of interexchange communications.  On May 8, 1997, the FCC released
an order intended to reform the FCC's system of interstate access charges to
make that regime compatible with the pro-competitive deregulatory framework of
the 1996 Act.  The FCC's access reform order adopts various changes to federal
policies governing interstate access service pricing designed to move access
charges, over time, to more economically efficient levels and rate structures.
Among other things, the FCC modified rate structures for certain no-traffic
sensitive access rate elements, moving some costs from a per-minute-of-use basis
to flat-rate recovery, changed its structure for interstate transport services,
and affirmed interstate access charges do not apply to Internet service
providers.  On August 18, 1998 the Eighth Circuit affirmed the FCC's access
reform order.

In response to claims that existing access charge levels are excessive, the FCC
stated that it would rely on market forces first to drive prices for interstate
access to competitive levels but that a "prescriptive" approach might be
considered if necessary.  In the absence of competition, the FCC stated that it
might specify the nature and timing of changes to existing access rate levels.
On August 5, 1999, the FCC adopted an order granted ILECs additional pricing
flexibility, implementing certain access charge reforms, and seeking comments on
others.  The order provides a framework of "triggers" to provider those
companies with greater pricing flexibility to set interstate access rates as
competition increases.  The order also initiated a rulemaking to determine
whether the FCC should regulate the access charges of CLECs.  If this increased
pricing flexibility for price cap ILECs is not effectively monitored, or if the
FCC regulates CLEC access charges, it could have a material adverse impact on
our ability to price our own interstate access services competitively.  As of
January 1998, access charges incurred by the Company are being passed on to end
users.

On March 31, 1999, the FCC released its Collocation Order which requires ILECs
incumbent carriers to permit CLECs to collocate any equipment used for
interconnection or access to unbundled network elements even if that equipment
includes switching or enhanced service functions.  Among other things, the
Collocation Order also prohibits ILECs from placing any limits on the use of
switching or enhanced features for collocated equipment, and requires ILECs to
make cageless collocation available and permit CLECs to construct their own
cross-connect facilities.

On March 17, 2000, the United States Court of Appeals for the District of
Columbia Circuit vacated limited portions of the Collocation Order, holding
certain definitions contained in FCC rules were impermissibly broad.  The court
remanded the Collocation Order in part for further FCC consideration of these
issues.  The FCC will be instituting proceedings to comply with the court's
remand.

                                       9
<PAGE>

Also, as part of Access Reform mandated in the Telecommunications Act of 1996,
beginning in 1998 local phone companies are permitted to assess the Pre-
subscribed Interexchange Carrier Charge, also known as "PICC."  The "PICC" is a
monthly per line cost charged by the local telephone company to each long
distance carrier for every customer phone line that is pre-subscribed to that
carrier.  These charges are passed on to the end users.


TELECOMMUNICATION FRAUD

The Company is subject to attempts by outsiders to gain access to the Company's
telecommunications network.  Such attempts can take the form of the theft of
calling cards, and the cloning of cellular phones.  Breaches of security can
also involve improper use of 800 telephone numbers and customer PBX equipment.
The Company monitors the use of its network through certain fraud detection
devices and believes that its procedures are satisfactory.  Due to the highly
technical nature of the business, complete assurance that sufficient controls
are in place to prevent a material loss is not possible, however, the Company
does not believe that it has been subject to material telecommunications fraud.


ITEM 2.  PROPERTIES
-------------------

The Company currently leases approximately 27,000 square feet in four buildings
at a total monthly cost of approximately $38,000.  Its executive offices and
headquarters at 2 Greenwood Square, 3331 Street Road, Suite 275 in Bensalem,
Pennsylvania is leased for a term of three years expiring in August, 2001.  The
Company's leased switch space in Philadelphia, Pennsylvania expires in February,
2003.  The Company's second leased switch space in Philadelphia, Pennsylvania
expires in May, 2007.  The Company's leased switch space in Oakland, California
expires in September, 2002.   The Company considers its space to be adequate for
its current needs.


ITEM 3.  LEGAL PROCEEDINGS
--------------------------

On June 13, 1997, Mark Scully, a former President and Chief Operating Officer of
the Company, filed a complaint against the Company, Kevin O'Hare, Aaron Brown
and Stephen Parker, all former Company executives, in the United States District
Court for the Eastern District of Pennsylvania.  Mr. Scully asserted various
claims in connection with his termination of employment with the Company on
December 30, 1996.  In particular, he alleged, among other things, breach of
contract in connection with the termination of certain stock options, breach of
the alleged contract for employment, breach of an asserted duty of good faith
and fair dealing, fraudulent and negligent misrepresentation, and civil
conspiracy.  Mr. Scully alleged damages of at least $1.6 million, plus
attorneys' fees, costs and other disbursements and the cost of COBRA payments
and interest; $1 million of the alleged damages claimed are punitive.  The
Company contested the allegations of the complaint and intends to vigorously
defend against the action.  On June 9, 1999, the court issued its decision and
judgment was entered in favor of Mr. Scully and against the Company and two
former officers for the sum of $626,442.20.  The Court denied Mr. Scully's claim
for attorneys' fees and liquidated damages.  An additional amount of $376,000
was accrued during the quarter ended June 30, 1999 to increase the reserve to
the full judgment amount and was recorded in SG&A expenses.  The Company has
appealed the decision and maintains that the Court made a number of errors of
law and that the Court applied the wrong measure of damages.  Mr. Scully has
advised that he intends to appeal as well.


The Company is party, in the ordinary course of business, to other litigation
involving services rendered, contract claims and other miscellaneous causes of
action arising from its business.  The Company has established reserves relating
to its legal claims and believes that potential liabilities in excess of those
recorded will not have a material adverse effect on the Company's Consolidated
Financial Statements, however, there can be no assurances to this effect.


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


Reference is made to the information contained in Item 5 of the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 8, 1999 regarding the Company's 1999 Annual Meeting of Shareholders
held on November 24, 1999.

                                       10
<PAGE>

                                    PART II
                                    =======


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

The following figures represent the high and low closing price as reported by
NASDAQ during each successive quarter beginning in 1998.

                      QUARTER               HIGH      LOW
                      -------               ----      ---

                4th     Quarter 1999      $ 2.63   $ 1.53
                3rd     Quarter 1999      $ 2.06   $ 1.31
                2nd     Quarter 1999      $ 1.91   $ 1.19
                1st     Quarter 1999      $ 2.69   $ 1.63
                4th     Quarter 1998      $ 1.91   $ 1.38
                3rd     Quarter 1998      $ 2.19   $ 1.50
                2nd     Quarter 1998      $ 2.25   $ 1.91
                1st     Quarter 1998      $ 2.38   $ 1.16


Effective January 21, 1994, the Company's Common Stock was listed on the
National Association of Securities Dealers Automated System (NASDAQ) under the
symbol "USWI".

As of March 7, 2000 there were approximately 129 holders of record of the
Company's Common Stock.

The Company has not paid any dividends on its Common Stock.  However, the
Company paid quarterly dividends on its Preferred Stock at a rate of 9%
annually, or approximately $6,750 per quarter for the first two quarters of
1999.  On July 1, 1999 the only preferred shareholder converted 30,000 Preferred
Shares to 300,000 Common Shares.  The Company does not currently anticipate the
payment of dividends on its Common Stock.

On March 23, 1999, the Company issued 900,000 shares of common stock to Gold &
Appel Transfer, S.A., a majority shareholder of the Company, for an aggregate
purchase price of $1,530,000 or $1.70 per share.  The proceeds of the issuance
were used for general working capital.  The terms of such transaction were
negotiated between the Company and Gold & Appel Transfer, S.A. on an arms length
basis, with Mr. Anderson abstaining from all negotiations on the Company's
behalf.

On August 31, 1999, the Company issued 150,000 shares of Common Stock to
purchase certain assets of JMR Marketing Corporation, a company owned by James
M. Rossi, a director of the Company.  The purchased assets included a customer
base, property and equipment and sales contracts.  The terms of the acquisition
of JMR were negotiated between the Company and Mr. Rossi on an arms-length
basis, with Mr. Rossi abstaining from negotiations on the Company's behalf.

The shares issued on March 23, 1999 and August 31, 1999 were issued directly by
the Company to the holders without an underwriter or placement agent and were
issued without registration under the Securities Act of 1933 pursuant to the
private placement exemption contained in Section 4(2) of such Act.

                                       11
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

The selected financial data presented below is for the years ended December 31,
for each of the periods indicated below.  The following information should be
read in connection with the consolidated financial statements of the Company and
related notes included elsewhere in this report and with Item 7 of this report.

<TABLE>
<CAPTION>

                                                  Year Ended December 31,
                                          --------------------------------------
Operating Data               1999           1998           1997           1996          1995
-----------------------  -------------  -------------  -------------  ------------  ------------
<S>                      <C>            <C>            <C>            <C>           <C>
Net sales                 $39,777,331    $44,679,060    $56,466,698    $40,304,442  $27,755,388

Net Income (loss)/(1)/    $(2,950,899)   $(1,828,369)   $(3,699,821)   $    88,625  $  (277,723)

Net Income (loss)
  per common share/(2)/   $      (.15)   $      (.10)   $      (.23)   $        --  $      (.02)

                                                        December 31,
                                                        -----------
Balance Sheet Data           1999           1998           1997           1996          1995
-----------------------  -------------  -------------  -------------  ------------  ------------

Total assets              $10,906,213    $11,021,464    $11,813,475    $11,992,359  $ 9,500,361

Capital
  lease obligations       $   153,289    $   376,760    $   653,355    $   703,696  $   731,701

Redeemable
  preferred stock         $         0    $   330,000    $   330,000    $   300,000  $   300,000

Cash dividends            $    13,500    $    27,000    $    27,000    $    27,000  $    67,255
  on preferred stock
</TABLE>

(1)  1995 results reflect favorable resolution of the Company's dispute with
     Colonial Penn Group, Inc. and Colonial Penn Insurance, resulting in the
     reversal of an account payable in the amount of approximately $2,880,000.
     However, this benefit was substantially offset by the cost of
     unsuccessfully litigating the resultant AT&T case on the basis of anti-
     trust.  The costs of litigation with AT&T incurred during 1995 approximated
     $850,000.  These costs do not include the additional expense of
     approximately $305,000 of related expenses pertaining to the write-down of
     certain AT&T signal conversion equipment and accounts receivable written
     off, which were attributable to AT&T services provided by the Company.  In
     addition, AT&T was awarded a counter claim in the litigation in the amount
     of $669,000 pertaining to services utilized in prior years. As a result of
     settlement of these matters, the Company recognized a net favorable impact
     of approximately $1,056,000 in 1995.

     1997 results include an increase in bad debt expense of approximately
     $986,000 due to higher than anticipated carrier write-offs.  In addition,
     the Company incurred approximately $173,000 of severance expense upon the
     termination of three members of management during 1997.  Finally, costs
     associated with a proposed merger with ACC Corp. amounted to approximately
     $567,000 in 1997.

     1998 results include approximately $393,000 in additional depreciation
     expense due to the acceleration of depreciation of assets associated with
     the Philadelphia Switch, which was replaced in 1999.  In addition, the
     Company incurred approximately $300,000 of salary expense for severance
     paid to a former President.  Finally, approximately $102,000 in
     miscellaneous expenses were incurred in connection with the relocation of
     the corporate office in 1998.

                                       12
<PAGE>

     1999 results include an increase in bad debt expense of approximately
     $861,000 due to the write-off of a carrier account in the third quarter.
     Also, an additional legal accrual of approximately $376,000 was incurred
     for a lawsuit judgment (see footnote 12 of the financial statements).
     Finally, approximately $105,000 in additional depreciation expense was due
     to the acceleration of depreciation of assets associated with the old
     Philadelphia switch.

(2)  The Company has retroactively adopted Statement of Financial Accounting
     Standards No. 128, Earnings Per Share ("SFAS 128").  In accordance with
     SFAS 128, since the Company has incurred losses from continuing operations
     for the years ended December 31, 1995, 1997, 1998 and 1999 no potential
     Common Shares have been included in the computation of any diluted per
     share amount.  For the year ended December 31, 1996 the difference between
     diluted and basic earnings per share is not significant.  Accordingly, only
     basic earnings per share have been presented.


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

This annual report on Form 10-K includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended and
Section 27A of the Securities Exchange Act of 1933, as amended.  Such statements
are subject to certain risks and uncertainties, including but not limited to:
changes in general economic conditions, increasing levels of competition in the
telecommunications industry, changes in telecommunications technologies, changes
in FCC regulations, the Company's reliance on transmission facilities based
carriers, risks involved in conducting international operations, the inability
to generate sufficient revenues to meet debt service obligations and operating
expenses, unanticipated costs associated with the Company's recent and future
acquisitions and the failure of the Company to manage its growth effectively.
Should one or more of these risks or uncertainties materialize, actual results
may vary materially from those estimated, anticipated or projected.  Although
the Company believes that the expectations reflected by such forward-looking
statements are reasonable based on information currently available to the
Company, no assurance can be given that such expectations will prove to have
been correct.  All forward-looking statements included herein are expressly
qualified in their entirety by these cautionary statements.


RESULTS OF OPERATIONS
---------------------


                            -1999 COMPARED TO 1998-

OVERVIEW

US WATS, Inc. is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-size business
customers as well as residential customers.  The Company also provides inbound-
800 long distance services, as well as other telecommunications services such as
travel cards (calling cards), cellular, paging, internet service, dedicated
access, data services, pre-paid calling cards (debit cards), International
Callback and carrier termination services. The Company uses its own switches and
facilities to originate, transport and terminate calls for customers generally
located between Maine and Norfolk, Virginia and in California (on-net area).
Approximately 90% of the calls billed by the Company each month are processed
through the Company's own switches as of December 31, 1999.  For calls
originating or terminating outside the Company's own network (off-net area), the
Company utilizes the services provided by other long distance companies.

                                       13
<PAGE>

Total revenues decreased in 1999 by approximately $4,902,000 primarily due to
the decline in the average retail rate per minute and the Company's exit from
the International Callback business.

In addition, approximately $2,527,000 of the decrease in revenue was due to a
decline in retail sales through the agent and reseller channels, mostly
attributed to decreasing selling rates because of strong competition in the
marketplace.  Also, revenue through the carrier sales channel decreased by
approximately $1,338,000 for the year ended December 31, 1999.  In 1998, revenue
through the carrier channel consisted of a large amount of high credit risk
international traffic.  In 1999, the Company limited the amount of this traffic
in order to reduce bad debt exposure.

REVENUE

Revenues decreased 11% or approximately $4,902,000 to approximately $39,777,000
in 1999.  This was primarily due to a decrease in revenue through the carrier
sales channel of approximately $1,338,000.  In 1999, the Company limited the
amount of high-risk international traffic in order to reduce bad debt exposure.
Also, there was a decline in International Callback revenue of approximately
$1,037,000.  As deregulation occurs in European and Asian countries, the
International Callback business continues to diminish.  In addition, there was a
decrease in retail revenue of approximately $2,527,000.  As a result of strong
competition in the long distance marketplace, the Company's average retail rate
per minute decreased $.0194 from January, 1999 to December, 1999. This accounted
for approximately $2,360,000 of the decrease in retail revenue.


The table below shows the distribution of revenues on a percentage basis by
product line:

                            DISTRIBUTION OF REVENUES

                     Service                         % 1999   % 1998
                     ------------------------------------------------
                     Domestic 1+                         48%      45%
                     International                       22%      23%
                     Inbound                             17%      15%
                     Wireless                             3%       4%
                     Domestic Carrier Termination        10%      13%

GROSS PROFIT

Gross profit margin increased marginally from 28.8% in 1998 to 29.1% in 1999.
Gross profit decreased approximately $1,308,000 in 1999.  This was primarily due
to the decrease in revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, General and Administrative ("SG&A") expenses for 1999 were
approximately $813,000 lower than the amount incurred during 1998.  However,
SG&A expenses as a percentage of revenue increased  from 31.0% in 1998 to 32.8%
in 1999.   Depreciation expense decreased approximately $385,000 in 1999 due to
accelerating the depreciation of assets associated with one of the Company's
switches in 1998 (See footnote 2 of the financial statements).  Commission
expense decreased approximately $354,000 or 6.7% from 1998 due primarily to a
decrease in revenues on which commissions are paid. Salary compensation expense
decreased approximately $188,000 to approximately $2,857,000 primarily due to a
severance payment to a former president in 1998 of approximately $300,000.
Legal and consulting expenses increased approximately $243,000 primarily due to
fees associated with potential

                                       14
<PAGE>

strategic alternatives for the Company and the Company's pending reincorporation
merger into the state of Delaware. Also, other miscellaneous SG&A expenses
decreased approximately $129,000 in 1999.

PROVISION FOR BAD DEBT

Bad debt expense increased approximately $665,000 (from approximately 1.8% of
net sales in 1998 to approximately 3.7% of net sales in 1999).  In 1999, the
Company incurred bad debt expense of approximately $861,000 related to a large
carrier account, which contributed to bad debt expense for the year of
approximately $1,453,000.

NET LOSS FROM OPERATIONS

The Company recorded a net loss for 1999 of approximately $2,951,000 compared to
a net loss of approximately $1,828,000 for 1998.  This was primarily due to a
decrease in revenues, and an increase in bad debt expense.  A portion of the net
loss in 1999 was attributable to the following:  bad debt expense of
approximately $861,000 related to the writeoff of a large carrier account,
depreciation expense of approximately $105,000 associated with accelerating
depreciation of certain assets (See footnote 2 of the financial statements), and
a miscellaneous expense of $376,000 associated with a legal judgment (See
footnote 12 of the financial statements).


                            -1998 Compared to 1997-

Overview

The Company experienced significant changes in its business that negatively
impacted its results of operations for the year ended December 31, 1998.  In the
first quarter of 1998, the Company and ACC Corp. mutually terminated an
Agreement and Plan of Merger between the two Companies. During the first quarter
of 1998, prior to the termination of such agreement, the Company's operating and
sales initiatives were not met due to management's focus on integration plans
with ACC Corp.  As a result, the Company's revenues in the first quarter of 1998
were negatively impacted.

Also, revenues decreased in 1998 by approximately $3,023,000 due to a decline in
the International Callback revenue channel.  This was a result of management's
decision to gradually exit the International Callback business.  This decision
was based primarily on the telecommunications deregulation in European and Asian
countries.  As pricing for long distance services has decreased in these areas,
the International Callback business as a whole has diminished.

In addition, approximately $3,875,000 of the decrease in revenue was due to a
decline in the retail revenue channel, mostly attributed to decreasing selling
rates because of strong competition in the marketplace.  Also, revenue through
the carrier sales channel decreased by approximately $4,200,000 for the year
ended December 31, 1998.  In 1997, revenue through the carrier channel consisted
of a large amount of high credit risk international traffic.  In 1998, the
Company limited the amount of this traffic in order to reduce bad debt exposure.

REVENUE

Total revenues decreased 20.9% or approximately $11,788,000 to approximately
$44,679,000 in 1998,  primarily due to a decrease in carrier revenue of
approximately $4,200,000, a decrease in International Callback revenue of
approximately $3,023,000, and a decrease in retail revenue of approximately
$3,875,000.  As a result of strong competition in the long distance market, the
Company's average retail rate per minute decreased $.018 from January, 1998 to
December, 1998. This accounted for approximately $2,009,000 of the $3,875,000
decrease in retail revenue.

                                       15
<PAGE>

The table below shows the distribution of revenues on a percentage basis by
product line:

                            DISTRIBUTION OF REVENUES

                     Service                         % 1998   % 1997
                     ------------------------------------------------
                     Domestic 1+                         45%      37%
                     International                       23%      31%
                     Inbound                             15%      15%
                     Wireless                             4%       4%
                     Domestic Carrier Termination        13%      13%

GROSS PROFIT

Gross profit margin in 1998 increased 8.7% to 28.8% from 1997.  The increase in
gross profit margin is primarily attributable to the decrease in carrier
revenue, which generates a much lower margin than the Company's retail products,
but are a necessary component of fully utilizing network facilities.  As a
percentage of total revenue, carrier revenue decreased to approximately 26% for
1998 versus 28% in 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, General and Administrative ("SG&A") expenses for 1998 were
approximately $3,088,000 lower than the amount incurred during 1997.  However,
SG&A expenses as a percentage of revenue increased marginally from 30.0% in 1997
to 31.0% in 1998.  Depreciation expense increased approximately $441,000 in
1998.  Of this increase, $393,000 was due to accelerating the depreciation of
assets associated with one of the Company's switches.  Commission expense
decreased approximately $1,408,000 or 21.0% from 1997 due primarily to a
decrease in revenues on which commissions are paid. Salary compensation expense
decreased approximately $570,000 to approximately $3,045,000 due to less
headcount throughout 1998.  Also, other miscellaneous SG&A expenses decreased
approximately $1,537,000 in 1998.

PROVISION FOR BAD DEBT

Bad debt expense decreased approximately $677,000 (from approximately 2.6% of
net sales in 1997 to approximately 1.8% of net sales in 1998).  In 1997, the
Company incurred bad debts related to three large carrier accounts.  The
improvement in 1998 is mainly attributed to the Company's ability to more
effectively monitor and control exposure from revenue derived from the carrier
channel.

NET LOSS FROM OPERATIONS

The Company recorded a net loss before preferred dividends for 1998 of
approximately $1,828,000 versus a net loss before preferred dividends of
approximately $3,700,000 for 1997.  This improvement is mainly due to an
increase in gross profit margins, a decrease in bad debt expense, a decrease in
commission expense, a decrease in legal and accounting fees and a decrease in
salary expense offset by an increase in depreciation expense.  A portion of the
net loss before preferred dividends of approximately $1,828,000 in 1998 was
attributable to the following: a one time salary expense of approximately
$300,000 associated with severance paid to a former President, an increase in
miscellaneous expense of approximately $102,000 associated with moving the
corporate office, an increase in depreciation expense of approximately $393,000
(See footnote 2 under Property and

                                       16
<PAGE>

Equipment), consulting expenses of approximately $100,000 associated with the
engagement of Paine Webber to explore potential strategic alternatives for the
Company and approximately $256,000 for other consulting, legal and accounting
fees associated with potential strategic alternatives for the Company.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

At December 31, 1999, cash and cash equivalents were approximately $1,597,000.
Cash flow used in operations in 1999 was approximately $525,000.  Net cash used
in investing activities in 1999 was approximately $1,172,000, which resulted
from the purchase of property and equipment primarily related to the new switch.

Working capital deficiency at December 31, 1999 was approximately $1,549,000 as
compared to a deficiency of approximately $369,000 at December 31, 1998. The
increase in working capital deficiency was primarily due to the increase in net
loss from 1998 to 1999 as stated above.

The Company has a revolving $2,000,000 credit facility with Century Business
Credit Corporation, which was renegotiated and amended on May 11, 1999 and is
automatically renewable for three successive one year periods. Interest on the
revolving credit facility is currently calculated at the prime lending rate plus
2 3/4%, with a minimum loan value of $750,000. The loan is collateralized by
accounts receivable and fixed and intangible assets of the Company. As of
December 31, 1999, the Company's outstanding balance on its credit facility was
approximately $1,037,000, leaving approximately $963,000 available for future
borrowing under the credit facility. The Company was not in compliance with
several of its debt covenants at December 31, 1999. However, the Company
received a waiver related to such conditions of non-compliance. The Company
expects to incur approximately $2,000,000 in capital expenditures in 2000 in
order to upgrade its network and switching technology.

The Company has capital lease obligations for various equipment pursuant to
leases with terms of three to five years.  These leases expire at various times
through the year 2000.  The leases carry interest rates ranging from 9.0% to
13.9%, and are collateralized by the equipment purchased.  The aggregate lease
balance as of December 31, 1999 was approximately $153,000, which is due within
the next year.

On March 23, 1999, the Company through a private placement transaction, issued
900,000 shares of common stock to Gold & Appel Transfer, S.A., a majority
shareholder of the Company, for an aggregate purchase price of $1,530,000 or
$1.70 per share.  The proceeds of the issuance were used for general working
capital.  The terms of such transaction were negotiated between the Company and
Gold & Appel Transfer, S.A. on an arms length basis, with Mr. Anderson, the
controlling party of Gold & Appel, abstaining from all negotiations.

On March 22, 2000, the Company entered into a Loan Agreement with Gold & Appel
Transfer, S.A. ("G &A") and the Foundation for the International Non-
Governmental Development of Space, a non-profit organization ("FINDS"), of which
Mr. Anderson is the president and director.  The terms of the agreement call for
the Company to borrow up to $1,000,000 from G&A and $500,000 from FINDS at a
rate of 10% per annum and due and payable on March 1, 2001.   The agreement
includes that all parties may convert all or any portions of the loan amount to
shares of the Company's Common Stock at $2.50 per share.

The Company believes that it will require additional funds in the near future to
continue its operations.  In addition, the Company must raise additional capital
to meet the capital and surplus requirements for its Common Stock to remain
listed on The Nasdaq SmallCap Market.  Management will focus on obtaining
additional financing and raising additional equity in order to support future
growth.  The

                                       17
<PAGE>

Company's plans for growth include both substantial internal growth and the
potential acquisition of other long distance companies. Also, in order to
achieve the Company's plans for growth in the long distance business as well as
its entry into other communications services, the Company may require additional
equity and is currently seeking sources of funding. The Company cannot give
assurance as to the potential success of these efforts.


YEAR 2000
---------

The Year 2000 issue involved the fact that many computers and computer
applications define dates by the last two digits of the year, and as such would
possibly not be able to properly calculate, store, use or identify a date after
December 31, 1999.  In response to the Year 2000 issue, the Company dedicated
the time and resources it deemed necessary to address and correct any potential
Year 2000 problems.  Prior to January 1, 2000, the Company reviewed and
evaluated the possible effects of the Year 2000 issue upon its computer systems,
network elements and software applications and other office systems.

As part of the plan to identify and address the Year 2000 issue, the Company
identified an inventory of all systems, assessed the compliance of all systems,
upgraded or replaced any systems which were non-compliant and developed a
contingency plan to minimize the effects of any Year 2000 noncompliance.  The
Company also initiated inquiries from vendors that the Company interacts with
electronically regarding their compliance with the Year 2000 issue.

The Company purchased a new DSC MegaHub 600E switch in order to replace an old
noncompliant switch in Philadelphia.  The switch was installed and began
supporting operations in the third quarter of 1999.  The total cost of replacing
the switch was approximately $2.0 million.  As a result of the Company's focus
on the testing its computer systems, network elements, and software
applications, there were no disruptions from the Year 2000 issue.

The Company believes that its own network systems are Year 2000 compliant due to
the nature and extent of the testing the Company conducted and continues to
implement on such systems.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

See "Index To Consolidated Financial Statements and Notes To Consolidated
Financial Statements" on page F-i herein.


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

     1) Not applicable

                                       18
<PAGE>

                                   PART III
                                   ========

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

The following table sets forth information with respect to all of the incumbent
directors of the Company at March 3, 2000.


       NAME          AGE            POSITION            DIRECTOR SINCE
-------------------  ----  ---------------------------  --------------

James M. Rossi       (48)  Director (1)                           1999

Dominic J. Romano    (59)  Director (2)                           1999

Walt Anderson        (46)  Director (3)                           1998

Murray Goldberg      (57)  Director (4)                           1996

Arthur Regan         (36)  Director and Secretary (5)             1997

(1)  JAMES M. ROSSI has been a Director of the Company since August 1999.  Mr.
     Rossi is a co-founder of Solar Communications Group, Inc., a productivity
     service provider, and has been a Director and Chairman and Chief Executive
     Officer of Solar Communications Group, Inc. since October 1994.  Mr. Rossi
     has also served as a Director and Chairman and Chief Executive Officer of
     JMR Corporation, a telecommunication consulting firm, since 1971, as a
     Director and Chairman and Chief Executive Officer of Cam-Comm, Inc. a data
     fiber optics reseller, since 1997, and as a President and a Director of
     Comanco, Inc., a data fiber optics reseller, since 1997.

(2)  DOMINIC J. ROMANO has been a Director of the Company since September 1999.
     Mr. Romano has served as the managing partner of Romano, Hearing & Testa, a
     certified public accounting and consulting firm located in Vineland, New
     Jersey, since 1967.  His areas of specialization include valuations of
     businesses for acquisition purposes and financial, tax and estate planning.
     He currently is a board member of Solar Communications Group, Inc.  He is a
     certified public accountant, registered municipal accountant, and he holds
     a Bachelor of Science in Accounting degree from Seton Hall University.

(3)  WALT ANDERSON has been a Director of the Company since May 1998.  Since
     1992, Mr. Anderson has been the financial advisor to Gold & Appel Transfer,
     S.A., a venture capital company, which owns substantial positions in
     several public and private telecommunications companies, including the
     Company.  Pursuant to a power of attorney, Mr. Anderson has sole investment
     power over the shares of Common Stock owned by Gold & Appel Transfer, S.A.
     Mr. Anderson is a pioneer in the telecommunications industry.  He founded
     Mid Atlantic Telecom, a regional long distance carrier, in 1984 to take
     advantage of the breakup of AT&T.  He also founded Espirit Telecom in 1991
     and was Chairman of that company until 1999.  Mr. Anderson is also on the
     Board of Directors of several other companies including TotalTel USA
     Communications, Net-tel Corp., World Exchange Communications, Teleport UK
     Ltd., American Technology Labs, Inc., Galactech Corp., Rotary Rocket Co,
     Aquarius Holdings Limited, and Cis Lunar Development.

(4)  MURRAY GOLDBERG has been a Director of the Company since November 1996 and
     an independent sales agent of the Company since 1993.  Mr. Goldberg is also
     the owner and a Vise-President of Jamco, Inc., a discount shoe distributor
     in Florida, and the owner and Director of Doxs, Inc., an anesthesia
     equipment developer and distributor.  From June 1994 until May 1996, he was
     also an owner of Strathmore Bagel Franchise Company.

                                       19
<PAGE>

(5)  ARTHUR REGAN has been a Director of the Company since August 1997.  Mr.
     Regan has been President of Regan & Associates, Inc., a proxy
     solicitation/shareholder services firm in New York, New York that has been
     a vendor of the Company since 1993.  Since 1988, Mr. Regan has also been
     the Chairman, President and Chief Executive Officer of RD's Place, Inc., a
     messenger/courier company located in Jersey City, New Jersey.


Executive Officers

The Company's executive officers are appointed by the Board of Directors and,
except as described below, hold office at the pleasure of the Board until their
successors are appointed and have qualified. The Company has three executive
officers, David B. Hurwitz, Michael McAnulty and John Colarossi.

Mr. Hurwitz, age 37, became the Executive Vice President of Sales and Marketing
and General Manager of the Company in December 1996 and was elected President
and Chief Executive Officer of the Company in February 1999. From 1995 to 1996,
he served as the Vice President of Sales and Marketing of Commonwealth Long
Distance, a company engaged in the provision of local and long distance
telephone services. From 1993 to 1995, he served as Executive Vice President and
Chief Operating Officer of InterNet Communications Services, Inc., a company
engaged in the provision of pre-paid calling card services. From 1992 to 1995,
he served as General Manager of FiberNet, a company engaged in the provision of
local and private line telephone services. From 1985 to 1992 Mr. Hurwitz held
sales and sales management positions with RCI Long Distance, a subsidiary of
Rochester Telephone Corp. (now Frontier Corporation).

Michael McAnulty, age 33, joined the Company in 1996 as Controller and became
the Company's Chief Financial Officer in May 1998. From 1993 to 1996, he was the
Accounting Manager for PageNet, Inc., a company engaged in the provision of
wireless paging services. Before joining PageNet, he was employed by Crown Cork
& Seal Co., Inc., a can manufacturer, from 1990 to 1993 as a Plant Controller.

John R. Colarossi, who has an extensive background in executive and sales
management with privately held companies, has been Vice President of Sales for
the Company since October 1999. Mr. Colarossi came to the Company from DigiHut,
an upstart Internet company, where he served as Chief Operating Officer in 1999.
From 1993 to 1998, Mr. Colarossi held the successive positions of Vice President
of Operations, Senior Vice President of Sales and Operations, Chief Operating
Officer and President of Moran Industries, Inc., a Midlothian, Illinois
franchise management company. From 1984 to 1992, Mr. Colarossi held positions of
increasing responsibility with AAMCO Transmissions, Inc., a national franchisor
of automotive after-market services, culminating with the position of Executive
Vice President of Sales and Operations.


SECTION 16(A) - BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than ten percent (10%) of the
Common Stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent (10%) shareholders are required by regulations to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on review of the
copies of such forms furnished to the Company or a written representation that
no Annual Statements of Beneficial Ownership of Securities on Form 5 were
required to be filed, the Company believes that during the year ended December
31, 1999, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent (10%) shareholders were complied with
except as follows: Mr. McAnulty became an executive officer of the Company in
May, 1998 but did not file his initial Form 3 until October, 1999. Mr. Colarossi
became an executive officer of the Company in October 1999 but did not file his
initial Form 3 until February 2000. Mr. Hurwitz did not file a Form 4 reporting
his December 1997 exercise of option to acquire

                                       20
<PAGE>

50,000 shares of Common Stock until October 1999. Each of Mr. Goldberg and Mr.
Regan did not file a Form 4 reporting their 1998 award of options to acquire
25,000 shares of Common Stock until October 1999.


ITEM 11.  EXECUTIVE COMPENSATION AND OPTIONS OUTSTANDING
--------------------------------------------------------

The following table sets forth certain information concerning the compensation
paid for the years ended December 31, 1999, 1998 and 1997:  (i) to the Company's
President and Chief Executive Officer, and (ii) to the Company's former
President and Chief Executive Officer.  The combined 1999 salary and bonus of
the Company's other executive officers, Michael McAnulty and John Colarossi, was
less than $100,000.


                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                                              LONG TERM COMPENSATION
                           ANNUAL COMPENSATION                                        AWARDS
------------------------------------------------------------------------------------------------------------------------------
Name                                                                                  Common                       All
and                                                                                    Stock                      Other
Principal                                  Salary             Bonus                 Underlying                    Comp.
Position                    Year            ($)                ($)                  Options (#)                    ($)
------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>          <C>               <C>                <C>                            <C>
David B. Hurwitz                 '99          217,578                 --                        400,000                     --
President and Chief              '98          215,030                 --                         50,000                     --
 Executive Officer /(1)/         '97          150,000             69,821                             --                     --
------------------------------------------------------------------------------------------------------------------------------
Aaron R. Brown                   '99           22,547                 --                             --                112,109
Former President and             '98           64,171                 --                             --                 82,747
 Chief Executive                 '97            6,875                 --                             --                119,792
 Officer /(2)/
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Mr. Hurwitz became President and Chief Executive Officer on February 17,
    1999.

(2) Effective August 21, 1998, Mr. Brown became the interim President and Chief
    Executive Officer with a salary of $178,125 per annum.  Prior to that he was
    a consultant to the Company since January 14, 1997 at a fee of $128,125 per
    annum.  Effective February 17, 1999, Mr. Brown resigned as interim president
    and Chief Executive Officer, at which time he resumed the terms of his
    consulting contract.


OPTION GRANTS IN LAST FISCAL YEAR

The following table summarizes the number of options granted to the named
executive officers during the year ended December 31, 1999.  The Company did not
grant any stock appreciation rights in 1999.

                                       21
<PAGE>

<TABLE>
<CAPTION>

                                                                                              Potential Realizable
                  Number of Shares of       Percent of Total                                 Value of Assumed Annual
    Name             Common Stock          Options Granted in     Exercise     Expiration      Rates of Stock Price
                  Underlying Options        Fiscal Year/(1)/       Price          Date       Appreciation for Option
                       Granted                                                                      Term/(2)/
--------------------------------------------------------------------------------------------------------------------------
<S>                <C>                        <C>                  <C>         <C>             <C>          <C>
                                                                                                  5%          10%
--------------------------------------------------------------------------------------------------------------------------
David B. Hurwitz                 400,000                  38.2%    $1.5625      12/13/04       $172,676     $393,059
--------------------------------------------------------------------------------------------------------------------------
Aaron R. Brown                        --                    --          --            --             --           --
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1) Based upon options to purchase a total of 1,046,000 shares granted to all
    officers and employees of the Company in 1999 under its Amended and Restated
    Stock Option Plan or its predecessor plans.

(2) These amounts represent hypothetical gains that could be achieved for the
    respective stock options if exercised at the end of the option term.  These
    gains are based on assumed rates of stock appreciation of 5% and 10%
    compounded annually from the date the respective options were granted to
    their expiration date.


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

The following table summarizes the number and value of unexercised options held
by the named officers as of December 31, 1999.

<TABLE>
<CAPTION>

                                     Number of         Value        Number of Shares of Common              Value of Unexercised
                                      Shares         Realized                  Stock                        In-The-Money Options
                                    Acquired On                   Underlying Unexercised Options                 or Warrants
                                     Exercise                     or Warrants at Fiscal Year-End             at Fiscal Year-End/(1)/
                                                                  ==================================================================
                                                                       Exercisable     Unexercisable     Exercisable   Unexercisable
Name                                                                        #                #                $              $
====================================================================================================================================
<S>                               <C>               <C>             <C>                <C>            <C>                 <C>
David B. Hurwitz                        --              --               600,000          500,000         $819,688         $495,000
------------------------------------------------------------------------------------------------------------------------------------
Aaron R. Brown                          --              --                 --               --               --               --
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Based upon a market price of the Company's common stock on December 31, 1999
    of $2.50 per share (last trading day in December 1999).


COMPENSATION OF DIRECTORS

Directors who also serve as salaried employees of the Company do not receive any
additional compensation for their services as directors.

In 1999, non-employee directors are entitled to receive $1,000 for each Board
meeting attended in person, and $500 for participation in each Board meeting
conducted by telephone conference call


EMPLOYMENT AGREEMENTS

Mr. Hurwitz has renewed a one year Employment Agreement terminating January 3,
2001.  The contract provides for an annual base salary of $225,000.

                                       22
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

The following table sets forth, as of March 14, 2000, information concerning the
shares of the Company's Common Stock beneficially owned by: (a) each person or
group known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock; (b) each director and named executive
officer; and (c) all directors and executive officers as a group.  Except as
otherwise indicated below, to the Company's knowledge, each person named or
included in a group has sole voting and investment power with respect to his or
its shares of Common Stock.

<TABLE>
<CAPTION>

Name And Address of Beneficial          Amount and Nature
Owner or Identity of Group           of Beneficial Ownership    Percent of Class
---------------------------------  ---------------------------  -----------------
<S>                                <C>                          <C>
James M. Rossi                          1,162,000/(1)/              5.6%
21 East Main Street
Suite 201
Millville, NJ 08332

Dominic J. Romano                           5,000                     *
150 South Main Road
Vineland, NJ 08360

Murray Goldberg                           285,183/(2)/              1.4%
26 Anthony Drive
Malvern, Pa 19355

Arthur Regan                               57,000/(3)/                *
15 Park Row
New York, NY  10038

Walter Anderson
c/o Gold & Appel Transfer, S.A.        12,927,034/(4)(5)/          70.8%
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands

Gold & Appel Transfer, S.A.            12,927,034/(5)/             70.8%
Omar Hodge Building
Wickhams Cay
Road Town
Tortula, British Virgin Islands

David B. Hurwitz                          761,000/(6)/              3.6%
2 Greenwood Square
3331 Street Road
Suite 275
Bensalem, PA 19020

Michael Mcanulty                           68,000/(7)/                *
2 Greenwood Square

3331 Street Road
Suite 275
Bensalem, PA 19020

All Directors and Executive Officers   15,265,217                  70.8%
as a group (8  persons)

</TABLE>

                                       23
<PAGE>

---------------------
*  Less than 1%

(1)  Based on a Schedule 13D dated August 31, 1999 filed with the Securities and
     Exchange Commission.  Includes 1,162,000 shares of Common Stock owned by
     JMR Marketing Corporation and Solar Investment Group, LLC, entities
     controlled by Mr. Rossi.

(2)  Consists of 260,183 shares of Common Stock owned by Mr. Goldberg as well as
     options to purchase 25,000 shares of Common Stock at $1.1875 per share.

(3)  Consists of 12,000 shares of Common Stock owned by Mr. Regan, options to
     purchase 25,000 shares of Common Stock at $1.1875 per share and options to
     purchase 20,000 shares of Common Stock at $1.69 per share.

(4)  All of such shares are held of record by Gold & Appel Transfer, S.A.
     Pursuant to a power of attorney, Mr. Anderson has sole investment power
     over such shares and as a result may be deemed to be the beneficial owner
     of such shares.  Mr. Anderson, however, has disclaimed such beneficial
     ownership.  Excludes 1,744,200 shares of Common Stock held by the
     Foundation for the International Non-Governmental Development of Space, a
     non-profit organization ("FINDS"), of which Mr. Anderson is the president
     and director.  Mr. Anderson has no pecuniary interest in the shares held by
     FINDS and has no power to control the voting or disposition of the shares
     held by FINDS.  Mr. Anderson has disclaimed beneficial ownership of such
     shares.  The information in this note (4) is based on a joint Schedule
     13D/A dated September 30, 1999 filed ny Gold & Appel Transfer, S.A. and Mr.
     Anderson with the Securities and Exchange Commission.

(5)  Based on a joint Schedule 13D/A dated September 30, 1999 filed Gold & Appel
     Transfer, S.A. and Mr. Anderson with the Securities and Exchange
     Commission.

(6)  Consists of 61,000 shares of Common Stock owned by Mr. Hurwitz as well as
     options to purchase 350,000 shares of Common Stock at $1.03125 per share,
     options to purchase 300,000 shares of Common Stock at $1.30 per share and
     options to purchase 50,000 shares of Common Stock at $1.1875 per share.
     Does not include options to purchase 400,000 shares of Common Stock at
     $1.5625 per share, which options do not first become exercisable until
     December 13, 2000.

(7)  Consists of 3,000 shares of Common Stock owned by Mr. McAnulty as well as
     options to purchase 15,000 shares of Common Stock at $1.40 per share and
     options to purchase 50,000 shares of Common Stock at $1.50 per share.  Does
     not include options to purchase 50,000 shares of Common Stock at $1.5625
     per share, which options do not first become exercisable until December 13,
     2000.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------


INDEMNIFICATION ARRANGEMENTS

The Company is a party to indemnification agreements with two of its former
directors, Aaron R. Brown and Stephen J. Parker, dated August 1990.  In
addition, the Company has entered into an indemnification agreement with Kevin
O'Hare, a former executive officer of the Company, dated July 1997.  In general,
the indemnification agreements obligate the Company to indemnify each of Messrs.
Brown, Parker and O'Hare against the liabilities and expenses incurred by them
in acting as a director or officer of the Company to the maximum extent allowed
by law.  The Company, together with Messrs. Parker, Brown and O'Hare, have been
sued by the Company's former president for various claims asserted by the
plaintiff in connection with his termination of employment with the Company on
December 30, 1996. The Board of Directors of the Company has authorized the
Company to advance the expenses of the

                                       24
<PAGE>

individual defendants incurred in defending this action. Reference is made to
Part I of Item 3 of this Annual Report.


SALES AGENCY

Mr. Goldberg acts as a sub-agent for the Company and is the co-owner of Goldberg
& Associates, a company that acts as an agent for the Company in the sale of the
Company's products and services.  During 1999, the Company paid Mr. Goldberg and
such company a total of $89,960 in commissions for their services as the
Company's sales agents.  Commissions paid to Mr. Goldberg and such company were
at competitive rates.


PRIVATE PLACEMENT

On March 23, 1999, the Company through a private placement transaction, issued
900,000 shares of common stock to Gold & Appel Transfer, S.A., a majority
shareholder of the Company, for an aggregate purchase price of $1,530,000 or
$1.70 per share.  The proceeds of the issuance were used for general working
capital.  The terms of such transaction were negotiated between the Company and
Gold & Appel Transfer, S.A. on an arms length basis, with Mr. Anderson
abstaining from all negotiations.


ACQUISITIONS

On March 17, 2000, the Company purchased certain assets of the business of Cam-
Comm, Inc.  The Company acquired the customer base and accounts receivable of
approximately 70 private line customers from Cam-Comm, Inc. in exchange for a
cash payment of $150,000 and an agreement to pay an additional amount not to
exceed an additional $159,000 for an outstanding liability of Cam-Comm, Inc.,
with Mr. Rossi being responsible to reimburse the Company one half of any amount
paid by the Company in excess of a total of $200,000.  The Company's Chairman,
James M. Rossi, is also the Chairman of Cam-Comm.  The terms of the acquisition
of Cam-Comm, Inc. were negotiated between the Company and Mr. Rossi on an arms-
length basis, with Mr. Rossi abstaining from negotiations on the Company's
behalf.

On August 31, 1999, the Company purchased certain assets of JMR Marketing
Corporation including a customer base, property and equipment and sales
contracts associated with certain Affinity Groups in exchange for 150,000 shares
of common stock.  The shares of common stock were issued to James M. Rossi (the
sole shareholder of JMR Marketing Corporation).


Consulting Agreement

As compensation for a two year consulting agreement, during 1999 the Company
issued 100,000 options to purchase Common Stock at fair market value to an
independent director.  The options entitle the director to purchase 100,000
shares at $1.5625 per share.

                                       25
<PAGE>

                                    PART IV
                                    =======


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

(a)  Documents filed as part of this Annual Report on Form 10-K:

     (1) Financial Statements
         --------------------

         See "Index To Consolidated Financial Statements and Financial
         Statement Schedules" on page F-i herein.


     (2) Financial Statement Schedules required to be filed by Item 8 on this
         --------------------------------------------------------------------
         form.
         -----

         See "Index To Consolidated Financial Statements and Financial
         Statement Schedules" on page F-i herein.


(b)  Reports on Form 8-K:

     (1) On December 8, 1999, the Company filed Form 8-K, which reported under
         Item 5 as to the annual meeting of shareholders held on November 24,
         1999 and the voting results of the elected Board of Directors, an
         amendment to the Certificate of Incorporation, the adoption of the 1999
         Stock Option Plan, and the reincorporation of the Company.

                                       26
<PAGE>

(c)   Exhibits

Exhibit No.  Description
-----------  -----------

        2.1  Agreement and Plan of Merger with Capsule Communications, Inc.(1)
        2.2  Certificate of Incorporation with Capsule Communications, Inc.(1)
        2.3  By-Laws of Capsule Communications, Inc.(1)
        3.1  Certificate of Incorporation of Registrant(2)
        3.2  Amendment to Certificate of Incorporation(2)
        3.3  By-Laws of Registrant(2)
        3.4  Amended and Restated By-Laws of the Company********
        4.1  Specimen Common Share Certificate(2)
       10.1  DSC Marketing Services Supply Agreement(3)
       10.2  Key Employees Incentive Stock Option Plan(3)
       10.3  Employee Compensation Stock Option Plan(3)
       10.4  Agreement of Lease for 3 Parkway, Philadelphia, PA(3)
       10.5  Loan and Security Agreement between US Wats, Inc. and Century
             Business Credit Corporation dated May 11, 1995(4)
       10.6  Severance, General Release, and Cooperation Agreement dated August
             21, 1999, between US Wats, Inc. and Stephen Parker(5)
       10.7  Stock Repurchase Agreement dated August 21, 1999, between US Wats,
             Inc. and Stephen Parker(5)
       10.8  Employment Agreement dated December 13, 1999, between US Wats, Inc.
             and David B. Hurwitz*
       10.9  Employment Agreement dated January 15, 2000, between US Wats, Inc.
             and Michael McAnulty*
       10.10 Employment Agreement dated January 15, 2000, between US Wats, Inc.
             and John Colarossi*
       10.11 Stock Option Agreement dated December 13, 1999, between US Wats,
             Inc. and David B. Hurwitz*
       10.12 Stock Option Agreement dated December 13, 1999, between US Wats,
             Inc. and Michael McAnulty*
       10.13 Stock Option Agreement dated December 13, 1999, between US Wats,
             Inc. and John Colarossi*
       10.14 Stock Option and Consulting Agreement dated December 13, 1999,
             between US Wats, Inc. and Dominic Romano*
       10.15 Amendment and extension of the Loan and Security Agreement between
             US Wats, Inc. and Century Business Credit Corporation dated April
             9, 1999(6)
       10.16 Purchase Agreement dated August 31, 1999, between US Wats, Inc. and
             JMR Marketing Corporation
       10.17 Purchase Agreement dated March 17, 2000, between US Wats, Inc. and
             Cam-Comm, Inc.
       10.18 Loan Agreement dated March 22, 2000, between US Wats, Inc. and Gold
             Appel Transfer, S.A.
       10.19 Loan Agreement dated March 22, 2000 between US Wats, Inc. and
             Foundation for the International Non-governmental Development of
             Space

(1)          Incorporated by reference to the October 25, 1999 Form DEF 14A
(2)          Filed as an exhibit with corresponding Exhibit No. to Registrant's
             post effective amendment No. 1 to Registration Statement on Form S-
             18, or previous Annual Report Form 10-K.
(3)          Incorporated by reference to the December 31, 1992 Form 10-K
(4)          Incorporated by reference to the June 30, 1995 Form 10-Q
(5)          Incorporated by reference to the September 1, 1998 Form 8-K
(6)          Incorporated by reference to the September 16, 1999 Form 8-K

*            Compensatory arrangement

                                       27
<PAGE>

                                  SIGNATURES


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



                                    US WATS, INC.
                                    (Registrant)

                                    By:    /s/  Michael McAnulty
                                           ----------------------
                                           Michael McAnulty
                                           Chief Financial Officer and Treasurer


                                    Date:  March 30, 2000



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


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

/s/  David B. Hurwitz     President and Chief Executive Officer  March 30, 2000
------------------------
David B. Hurwitz

/s/  Michael McAnulty     Chief Financial Officer and Treasurer  March 30, 2000
------------------------
Michael McAnulty

/s/  James M. Rossi       Chairman of the Board                  March 30, 2000
------------------------
James M. Rossi

/s/  Walt Anderson        Director                               March 30, 2000
------------------------
Walt Anderson

/s/  Dominic J. Romano    Director                               March 30, 2000
------------------------
Dominic J. Romano

                                       28
<PAGE>

                        US WATS, INC.  AND SUBSIDIARIES
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997


                                                                      Page (s)
                                                                      --------

CONSOLIDATED FINANCIAL STATEMENTS:

Independent Auditors' Report                                             F-1


Consolidated Balance Sheets
     December 31, 1999 and 1998                                      F-2 to F-3

Consolidated Statements of Operations
     Years ended December 31, 1999, 1998, and 1997                       F-4

Consolidated Statements of Common Shareholders' Equity (Deficiency)
     Years ended December 31, 1999, 1998, and 1997                   F-5 to F-7

Consolidated Statements of Cash Flows
     Years ended December 31, 1999, 1998, and 1997                       F-8

Notes to Consolidated Financial Statements                           F-9 to F-20

Financial Statement Schedule
- Schedule II - - Valuation and Qualifying Accounts                      F-21

                                      F-i
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
US Wats, Inc.
Bensalem, Pennsylvania

We have audited the accompanying consolidated balance sheets of US Wats, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, common shareholders' equity (deficiency), and cash
flows for each of the three years in the period ended December 31, 1999.  Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)(2).  These financial statements and financial statement schedule are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of US Wats, Inc. and subsidiaries as
of December 31, 1999 and 1998, and the results of their operations and cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.  Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Note 3 to
the consolidated financial statements, the Company's net loss, negative working
capital and negative cash flows from operations raise substantial doubt about
its ability to continue as a going concern.  Management's plans concerning these
matters are also described in Note 3.  The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.



DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania

March 27, 2000

                                      F-1
<PAGE>

                         US WATS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS


                                                           December 31,
                                                      -----------------------
                                                         1999         1998
                                                      -----------  ----------

ASSETS
------

Current Assets
      Cash and cash equivalents                        $  827,048  $1,665,485
      Restricted cash                                     770,363          --
      Accounts receivable, net of allowance for
      doubtful accounts of $1,711,853 for 1999 and
    $934,624 for 1998                                   5,772,799   6,165,896
      Prepaid expenses and other                          201,724     166,977
                                                       ----------  ----------

         Total Current Assets                           7,571,934   7,998,358
                                                       ----------  ----------

Property and Equipment
      Telecommunications equipment                      4,120,775   5,031,047
      Equipment                                         1,863,177   1,690,490
      Software                                            655,422     652,422
      Office furniture and fixtures                       161,282     157,006
      Leasehold improvements                              668,820      46,671
                                                       ----------  ----------
                                                        7,469,476   7,577,636
Less accumulated depreciation and amortization          4,459,111   4,708,113
                                                       ----------  ----------

    Total Property and Equipment, net                   3,010,365   2,869,523
                                                       ----------  ----------

Other assets, net                                         323,914     153,583
                                                       ----------  ----------


        Total                                         $10,906,213 $11,021,464
                                                     ============ ===========


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

                                      F-2
<PAGE>

                        US WATS, INC.  AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                               December 31,
                                                       ----------------------------
                                                           1999           1998
                                                       -------------  -------------
<S>                                                    <C>            <C>
Liabilities and Shareholders' Equity
------------------------------------

Current Liabilities
  Note payable                                         $  1,036,507    $ 1,121,341
  Capital lease obligations, current portion                153,289        226,968
  Accounts payable and accrued carrier cost               5,085,368      4,372,548
  Accrued commissions                                       643,321        891,318
  Accrued expenses and other                              1,162,975        790,699
  State and Federal taxes payable                         1,039,966        961,731
  Deferred revenue                                               --          2,887
                                                       ------------    -----------

   Total Current Liabilities                              9,121,426      8,367,492
                                                       ------------    -----------

Long-Term Liabilities
  Capital lease obligations, net of current portion              --        149,792
                                                       ------------    -----------

Commitments and Contingencies - see note 7

Redeemable preferred stock, $.01 par, authorized
  150,000 shares; 0 shares issued and
  outstanding in 1999 and 30,000 1998
  Redemption value: $11.00 per share                             --        330,000
                                                       ------------    -----------

Common Shareholders' Equity
  Common stock, $.001 par, authorized
    100,000,000 shares; issued:
    20,925,944 shares in 1999 and
    20,077,144 shares in 1998                                20,926         20,077
  Additional paid-in capital                             12,087,332      9,514,075
  Accumulated deficit                                   (10,323,252)    (7,358,853)
                                                       ------------    -----------
                                                          1,785,006      2,175,299
  Common stock held in treasury
  (219,000 shares in 1999 and 1,119,000 shares
  in 1998), at par value                                       (219)        (1,119)
                                                       ------------    -----------

                                                          1,784,787      2,174,180
                                                       ------------    -----------

     Total                                             $ 10,906,213    $11,021,464
                                                       ============    ===========
</TABLE>



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

                                      F-3
<PAGE>

                         US WATS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                            -----------------------
                                                     1999           1998           1997
                                                     ----           ----           ----
<S>                                              <C>            <C>            <C>
Revenues                                          $39,777,331    $44,679,060    $56,466,698

Cost of sales                                      28,195,547     31,789,200     41,511,542
                                                  -----------    -----------    -----------

Gross profit                                       11,581,784     12,889,860     14,955,156

Selling, general and administrative expenses       13,038,455     13,851,001     16,939,142

Provision for bad debts                             1,453,496        788,493      1,465,248
                                                  -----------    -----------    -----------

Loss from operations                               (2,910,167)    (1,749,634)    (3,449,234)

Other income (expense)
      Interest income                                 135,646        164,180         71,921
      Interest expense                               (181,197)      (232,915)      (322,508)
                                                  -----------    -----------    -----------
Loss before income taxes                           (2,955,718)    (1,818,369)    (3,699,821)

Income tax benefits (expense)                           4,819        (10,000)            --
                                                  -----------    -----------    -----------

Net loss                                           (2,950,899)    (1,828,369)    (3,699,821)

Preferred dividends and accretion                      13,500         27,000         57,000
                                                  -----------    -----------    -----------

Net loss attributable to
      common shareholders                         $(2,964,399)   $(1,855,369)   $(3,756,821)
                                                  ===========    ===========    ===========

Net loss per share
      attributable to common shareholders               $(.15)         $(.10)         $(.23)
                                                  ===========    ===========    ===========

Weighted average number of shares outstanding      20,009,728     18,785,656     16,084,971
                                                  ===========    ===========    ===========
</TABLE>

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

                                      F-4
<PAGE>

                         US WATS, INC. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
                          YEAR ENDED DECEMBER 31, 1999

<TABLE>


                                           Common     Common   Additional                    Treasury    Treasury
                            Common Stock   Par Value  Stock    Paid-In                       Stock       Stock At    Shareholders'
Description                 Shares Issued    $  .001  Payable  Capital       Deficit         Shares      Par Value   Equity
--------------------------  -------------    -------  -------  ------------  -------------   ---------   ---------   -------------
<S>                         <C>            <C>        <C>      <C>           <C>             <C>         <C>         <C>
Balance, December 31, 1998     20,077,144    $20,077            $ 9,514,075   $ (7,358,853)  1,119,000     $(1,119)    $ 2,174,180

Net Loss                                                                        (2,950,899)                             (2,950,899)

Shares Issued in
 Acquisition                      150,000        150                262,350                                                262,500

Exercise of Employee Stock
 Options                          398,800        399                420,896                                                421,295

Conversion of Preferred
 Stock                            300,000        300                329,700                                                330,000

Private Placement                                                 1,529,100                   (900,000)        900       1,530,000

Options Issued to
 Employees at
 Below Market Value                                                  31,211                                                 31,211
Cash Dividends on
 Preferred
 Stock ($.90 per share)                                                            (13,500)                                (13,500)
                               ----------   --------  -------   -----------   ------------   ---------     -------     -----------
Balance, December 31, 1999     20,925,944    $20,926       $0   $12,087,332   $(10,323,252)    219,000     $  (219)    $ 1,784,787
                               ==========    =======  =======   ===========   ============   =========     =======     ===========

The accompanying notes are an integral part of the consolidated financial statements
</TABLE>

                                      F-5
<PAGE>

                        US WATS, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY (DEFICIENCY)
                         YEAR ENDED DECEMBER 31, 1998

<TABLE>


                                           Common     Common    Additional                   Treasury   Treasury    Shareholders'
                            Common Stock   Par Value  Stock     Paid-In                      Stock      Stock At    Equity
Description                 Shares Issued    $  .001  Payable   Capital       Deficit        Shares     Par Value   (Deficiency)
--------------------------  -------------    -------  -------   -----------   ------------   ---------  ---------   -------------
<S>                         <C>            <C>        <C>       <C>           <C>            <C>        <C>         <C>
Balance, December 31, 1997     17,654,100    $17,654    $ 166   $ 5,328,982    $(5,503,484)    250,000    $  (250)    $  (156,932)

Net Loss                               --         --       --            --     (1,828,369)         --         --      (1,828,369)

Short-Swing Profit
 Proceeds                                                  --     2,430,979             --          --         --       2,430,979

Exercise of Employee Stock
 Options                        1,068,984      1,069              1,403,422             --          --         --       1,404,491

Exercise of Warrants            1,188,000      1,188              1,259,419                                             1,260,607

Common Stock Issued               166,060        166    $(166)                          --          --         --

Options Issued for
 Consulting Services                                                133,204                                               133,204

Repurchase of Common Stock                                       (1,041,931)                   869,000    $  (869)     (1,042,800)

Cash Dividends on
 Preferred
 Stock ($.90 per share)                                                            (27,000)                               (27,000)
                               ----------   --------  -------   -----------   ------------   ---------    -------     -----------
Balance, December 31, 1998     20,077,144    $20,077    $   0   $ 9,514,075    $(7,358,853)  1,119,000    $(1,119)    $ 2,174,180
                               ==========    =======    =====   ===========    ===========   =========    =======     ===========


                      The accompanying notes are an integral part of these consolidated financial statements
</TABLE>

                                      F-6
<PAGE>

                        US WATS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
                         YEAR ENDED DECEMBER 31, 1997

<TABLE>

                                           Common     Common    Additional                   Treasury   Treasury    Shareholders'
                            Common Stock   Par Value  Stock     Paid-In                      Stock      Stock At    Equity
Description                 Shares Issued    $  .001  Payable   Capital       Deficit        Shares     Par Value   (Deficiency)
--------------------------  -------------    -------  -------   -----------   ------------   ---------  ---------   -------------
<S>                         <C>            <C>        <C>       <C>           <C>            <C>        <C>         <C>
Balance, December 31, 1996     15,902,100    $15,902       --   $2,623,350    $(1,776,663)   250,000      $(250)    $   862,339

Net Loss                               --         --       --           --     (3,699,821)        --         --      (3,699,821)

Private Placement               1,590,000      1,590       --    2,298,410             --         --         --       2,300,000

Exercise of Employee Stock
 Options                          100,000        100       --      110,575             --         --         --         110,675

Exercise of Warrants               62,000         62       --       65,813             --         --         --          65,875

Common Stock to be Issued              --         --     $166      209,834             --         --         --         210,000

Options Issued for
 Consulting Services                   --         --       --       51,000             --         --         --          51,000

Accretion in Value of
 Preferred Stock                       --         --       --      (30,000)            --         --         --         (30,000)

Cash Dividends on
 Preferred
 Stock ($.90 per share)                                                           (27,000)                              (27,000)
                               ----------    -------  -------   ----------    -----------   --------  ---------     -----------
Balance, December 31, 1997     17,654,100    $17,654     $166   $5,328,982    $(5,503,484)   250,000      $(250)    $  (156,932)
                               ==========    =======  =======   ==========    ===========   ========  =========     ===========

                      The accompanying notes are an integral part of these consolidated financial statements
</TABLE>

                                      F-7
<PAGE>

                        US WATS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                                               -------------------------
                                                                             1999           1998          1997
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
OPERATING ACTIVITIES:
      Net loss before preferred dividends                                 $(2,950,899)  $(1,828,369)  $(3,699,821)
      Adjustment to reconcile net loss to
      net cash provided by (used-in) operating activities
          Stock and stock options issued for services                          31,211       133,204       201,000
              Depreciation and amortization                                 1,069,329     1,439,171     1,010,186
              Provision for bad debts                                       1,453,496       788,493     1,465,248
      Changes in assets and liabilities which provided
       (used) cash:
               Accounts receivable                                         (1,060,399)      (55,307)   (1,850,431)
                    Prepaid expenses and other                                (34,747)      (58,294)       28,642
                    Other assets                                               54,356        (8,272)       94,554
                    Deferred revenue                                           (2,887)      (72,607)      (40,728)
                    Accounts payable and accrued expenses                     837,099    (2,872,750)    1,077,445
                    State & Federal Taxes payable                              78,235      (331,686)      330,045
                                                                          -----------   -----------   -----------

      Net cash used in operating activities                                  (525,206)   (2,866,417)   (1,383,860)
                                                                          -----------   -----------   -----------

INVESTING ACTIVITIES:
      Purchase of property and equipment                                   (1,172,358)   (1,276,562)     (395,491)
      Investment in internet service provider                                      --        40,000            --
      Increase in restricted cash                                            (770,363)           --            --
                                                                          -----------   -----------   -----------

     Net cash used in investing activities                                 (1,942,721)   (1,236,562)     (395,491)
                                                                          -----------   -----------   -----------

FINANCING ACTIVITIES:
      Proceeds from private placement                                       1,530,000            --     2,300,000
      Proceeds from stock option and warrant exercises                        421,295     2,665,098       236,550
      Short swing profit proceeds                                                  --     2,430,979            --
      Buyback of common stock                                                      --    (1,042,800)           --
     (Decrease) increase in notes payable net                                 (84,834)      430,515      (506,034)
      Repayment of capital lease obligations                                 (223,471)     (276,595)      (50,341)
      Preferred stock dividends                                               (13,500)      (27,000)      (27,000)
      Payment of loan acquisition costs                                            --            --       (40,743)
                                                                          -----------   -----------   -----------

      Net cash provided by financing activities                             1,629,490     4,180,197     1,912,432
                                                                          -----------   -----------   -----------

Net increase (decrease) in cash                                              (838,437)       77,218       133,081

Beginning cash and cash equivalents                                         1,665,485     1,588,267     1,455,186
                                                                          -----------   -----------   -----------

Ending cash and cash equivalents                                          $   827,048   $ 1,665,485   $ 1,588,267
                                                                          ===========   ===========   ===========
</TABLE>

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

                                      F-8
<PAGE>

                        US WATS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  BACKGROUND
--------------

US WATS, Inc. (the "Company" or "USW") is a switch-based interexchange carrier
providing long distance telephone communications services primarily to small and
medium-size business customers as well as residents. The Company also provides
inbound-800 long distance services, as well as other telecommunications services
such as travel cards (calling cards), cellular, paging, internet service,
dedicated access, data services, pre-paid calling cards (debit cards),
international callback, and carrier termination services. The Company uses its
own switches and facilities to originate, transport and terminate calls for
customers generally located in the Mid-Atlantic region and California (on-net
areas). For calls originating or terminating outside the Company's own network
(off-net area), the Company utilizes the services provided by other long
distance companies. Substantially all of the Company's revenues are earned from
its customers located on the East Coast.

The Company has formed a new subsidiary in the state of Delaware under the name
of Capsule Communications, Inc.  The shareholders have approved to reincorporate
in Delaware by merging the Company into the new subsidiary.  Upon approval from
the Public Utility Commissions, the Company will operate as a Delaware
Corporation under the name Capsule Communications, Inc.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING  POLICIES
-----------------------------------------------

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its five wholly-owned subsidiaries, USW Corporation, USW Enterprises, Inc.,
Carriers Group, Inc., US Wats of Virginia Inc. and Capsule Communications, Inc.
after elimination of all inter-company accounts, transactions and profits.

BUSINESS SEGMENTS

The Company's operations have been aggregated into a single reportable segment,
based on the similarity of its customers, products and methods of distribution,
as permitted under SFAS NO. 131.

REVENUE RECOGNITION

The Company recognizes revenue based upon the customer's usage of services. The
Company bills its customers for service on a monthly basis.  However, in some
instances, it bills certain customers on a more frequent basis.

CASH AND CASH EQUIVALENTS

The Company considers cash in bank and repurchase agreements with a maturity of
three months or less when purchased as cash and cash equivalents.

                                      F-9
<PAGE>

At certain times during the year, the Company has balances in its operating
accounts that in the aggregate exceed the $100,000 Federal Deposit Insurance
Corporation insurance limit.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is calculated for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets:

          Telecommunications equipment .....................7 years
          Furniture fixtures and other...........................5 years

The Company acquired a new MegaHub 600E switch to replace its Dex 400 switch in
Philadelphia in 1998.  The cost of the replacement switch was approximately
$1,062,000, which is included in telecommunications equipment.  The Company
began depreciating the new switch in 1998 and the switch was fully installed in
1999.

Depreciation and amortization expense of property, plant and equipment, loan
origination costs and goodwill for 1999, 1998, and 1997, was $1,069,329,
$1,439,171, and $1,010,186, respectively.

DEFERRED FINANCING COSTS

Loan origination costs are amortized over the term of the related loan, and are
included in other assets.

GOODWILL

The Company records the excess of purchase price over the fair market value of
net assets acquired as goodwill.  Goodwill is amortized using the straight line
method over 3 years.

ACCOUNTS PAYABLE

Accounts payable includes the cost of access charges due local telephone
companies and long distance transport purchased from long distance carriers.

MARKETING

All costs related to marketing and advertising the Company's products and
services are expensed in the period incurred.

USE OF ESTIMATES

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


INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." (See Note 6)

                                      F-10
<PAGE>

LOSS PER COMMON SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS

Loss per common share attributable to common shareholders is computed by
dividing net loss after deduction of preferred stock dividends, by the
weighted average number of common shares outstanding during the period.

For the years ended December 31, 1999, 1998, and 1997, the Company's potential
common stock equivalents have either an antidilutive or have no effect on loss
per share attributable to common shareholders and, therefore, diluted loss per
common share attributable to common shareholders has not been presented.

The following table summarizes those securities that could potentially dilute
loss per common share attributable to common shareholders in the future that
were not included in determining the fully diluted loss per common share
attributable to common shareholders as there is either no effect or the effect
is antidilutive.

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
Potential Common Shares resulting from:                     1999           1998           1997
                                                        -------------  -------------  -------------

<S>                                                     <C>            <C>            <C>
Stock Options  (see Note 10)                                  427,620        589,785      1,206,691

Stock Warrants  (see Note 10)                                       0              0        624,822

Cumulative, Convertible, Redeemable Preferred Stock
(see Note 9)                                                        0        300,000        300,000
                                                              -------        -------      ---------

                                                              427,620        889,785      2,131,513
                                                              =======        =======      =========
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's financial instruments such as accounts
receivable, accounts payable, and note payable approximate their carrying
amounts.

CARRYING VALUE OF LONG-TERM ASSETS

The Company evaluates the carrying value of long-term assets, including
property, plant and equipment, and other intangibles, based upon current and
anticipated undiscounted cash flows, and recognizes an impairment when such
estimated cash flows are less than the carrying value of the asset.  Measurement
of the amount of impairment, if any, is based upon the difference between
carrying value and fair value.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities.  This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and hedging activities.  It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  The Company adopted this standard in January, 1999, which had no
impact on the Company's financial statements.

                                      F-11
<PAGE>

RECLASSIFICATION OF ACCOUNTS

Certain reclassifications have been made to conform prior years' balances to the
current year presentation.


3. LIQUIDITY AND CONTINUATION OF BUSINESS
-----------------------------------------

The consolidated financial statements of the Company have been prepared on a
going-concern basis, which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. The Company incurred a net loss applicable to common shareholders of
approximately $2,964,000 during the year ended December 31, 1999 and had
negative cash flow from operating activities of $525,000.  At December 31, 1999
the Company had a net working capital deficit of $1,549,000 and an accumulated
deficit of $10,323,000.  In addition, the Company was not in compliance with
several of its covenants in its Loan and Security Agreement with Century
Business Credit Corporation, however, the Company received a waiver related to
such non-compliance.  Such conditions raise substantial doubt about the
Company's ability to continue as a going concern.  The accompanying financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.

The Company plans to focus on growing its revenue base through the addition of
profitable customers and decreasing its network costs. The Company intends to
reduce its network costs by obtaining more favorable pricing from suppliers, by
forming strategic alliances with certain similarly situated companies and by
upgrading its switching technology to an Asynchronous Transfer Mode (ATM) based
backbone. This ATM packet switching technology transforms circuit switched voice
and data to packet switched voice and data allowing calls to be compressed,
therefore increasing capacity while decreasing the cost per minute to carry the
call. The Company has recently instituted several private internet web sites
from which its agents are generating new orders electronically. The Company
expects to continue its efforts to expand this strategy in order to generate new
business. Additionally, the Company intends to resell local access services
where available to its current and prospective customers in six Bell Atlantic
states under its favorable interconnection agreements. Finally, in an effort to
increase product lines, the Company has recently implemented a marketing plan to
resell Digital Subscriber Line (DSL) services where available to its current and
prospective customers, which provides dedicated internet access at much greater
speeds than existing dial-up service.

On March 23, 1999, the Company through a private placement transaction, issued
900,000 shares of common stock to Gold & Appel Transfer, S.A., a majority
shareholder of the Company, for an aggregate purchase price of $1,530,000 or
$1.70 per share.  The proceeds of the issuance are being used for general
working capital.  The terms of such transaction were negotiated between the
Company and Gold & Appel Transfer, S.A. on an arms length basis, with Mr.
Anderson abstaining from all negotiations and approvals.

On March 22, 2000, the Company entered into a Loan Agreement with Gold & Appel
Transfer, S.A. ("G &A") and the Foundation for the International Non-
Governmental Development of Space, a non-profit organization ("FINDS"), of which
Mr. Anderson is the president and director.  The terms of the agreement call for
the Company to borrow up to $1,000,000 from G&A and $500,000 from FINDS at a
rate of 10% per annum and due and payable on March 1, 2001.   The agreement
includes that all parties may convert all or any portions of the loan amount to
shares of the Company's Common Stock at $2.50 per share.

The Company believes that it will require additional funds in the near future to
continue its operations.  In addition, the Company must raise additional capital
to meet the capital and surplus requirements for its Common Stock to remain
listed on The Nasdaq SmallCap Market.  Management will focus on obtaining
additional financing and raising additional equity through private placement, in
order to support future growth.  The Company's plans for growth include both
substantial internal growth and the potential acquisition of other long distance
companies.  Also, in order to achieve the Company's plans for growth in the long
distance business as well as its entry into other communications services, the
Company may require

                                      F-12
<PAGE>

additional equity and is currently seeking sources of funding. The Company
cannot give assurance as to the potential success of these efforts.


4.  NOTE PAYABLE
----------------

The Company has a revolving $2,000,000 credit facility with Century Business
Credit Corporation, which is renewable for three successive one year periods
beginning on May 11, 1999.  Interest on the revolving credit facility is
currently calculated at the prime lending rate plus 2 3/4%, on a minimum loan
balance of $750,000.  The loan is collateralized by accounts receivable and
fixed and intangible assets of the Company.  As of December 31, 1999, the
Company's outstanding balance on its credit facility was approximately
$1,037,000 leaving approximately $963,000 available based on collateral, for
future borrowing under the credit facility.

The loan agreement contains covenants and restrictions which, among other
things, require maintenance of certain subjective financial performance criteria
and restrict encumbrance of assets, creation of indebtedness and places
limitations on annual capital expenditures.  The Company was not in compliance
with several of its covenants in the Loan and Security Agreement, including
covenants pertaining to certain subjective financial performance criteria,
however, the Company received a waiver related to such conditions of non-
compliance at December 31, 1999.

During 1999, the Company obtained a letter of credit in the amount of $752,000
for the potential settlement of litigation related to Mr. Scully (See footnote
12).


5.  OBLIGATIONS UNDER CAPITAL LEASES
------------------------------------

Property under capital leases is recorded at the lesser of the present value of
the minimum lease payments or its fair value at inception. The Company leases
various equipment under three-to-five-year noncancellable leases which expire at
various dates through 2000.

The leases carry interest rates ranging from approximately 9.0% to approximately
13.5% and are collateralized by the equipment purchased. The balance outstanding
on such leases was approximately $153,000, which is due in full in the next
year.
<TABLE>
<CAPTION>


                                                                  1999       1998
                                                                ---------  ---------
<S>                                                             <C>        <C>

  Aggregate capital lease obligation
   as of the year ended December 31                              $162,251   $427,407
  Less--amounts representing interest                               8,962     50,647
                                                                 --------   --------
  Present value of net minimum payments under capital leases      153,289    376,760
  Less--current portion of capital lease obligations              153,289    226,968
                                                                 --------   --------
   Capital lease obligations, net of current portion             $      0   $149,792
                                                                 ========   ========

</TABLE>

The following is an analysis of property under capital leases:

                                          1999        1998
                                       ----------  ----------

Telecommunications Equipment           $1,300,951  $1,405,151
Office Equipment                           22,512      57,300
                                       ----------  ----------
     TOTAL                              1,323,463   1,462,451

Less Accumulated Amortization             855,669     645,226
                                       ----------  ----------
     Net Assets Under Capital Lease    $  467,794  $  817,225
                                       ==========  ==========

                                      F-13
<PAGE>

Amortization of assets under capital leases charged to operations and included
in depreciation expense was $210,443 per year in 1999, 1998, and 1997.

6.  INCOME TAXES
----------------

The net deferred tax asset at December 31 includes the following:

                                                     1999               1998
                                                     ----               ----

   Deferred Tax Asset                          $   3,470,000      $   3,323,000
   Deferred Tax Liability                           (138,000)          (168,000)
   Valuation Allowance for Deferred Tax Asset     (3,332,000)        (3,155,000)
                                                -------------      -------------
                                                $          --      $          --
                                                =============      =============

The utilization of the deferred tax asset depends on the Company's ability to
earn taxable income in the future. Although estimates are subject to change,
management was not able to determine that utilization of the deferred tax asset
is likely. Accordingly, a valuation allowance has been provided for the entire
deferred tax asset. The tax effect of major temporary differences that gave rise
to the Company's deferred tax assets and liabilities at December 31 are as
follows:


                                                  1999           1998
                                                  ----           ----

      Net Operating Loss and Carryforwards   $ 2,412,000    $ 2,270,000
      Allowance for Doubtful Accounts            716,000        893,000
      Legal and Commission Reserves              334,000        157,000
      Charitable Contributions                        --          3,000
      Depreciation                              (138,000)      (168,000)
      AMT Credit                                   8,000             --
                                             -----------    -----------
      Net Deferred Tax Asset                   3,332,000      3,155,000
                                             -----------    -----------
      Valuation Allowance                     (3,332,000)    (3,155,000)
                                             -----------    -----------
   Total                                     $        --    $        --
                                             -----------    -----------


The provision for income tax expense (benefit) for the years ended December 31,
consisted of the following amounts:


                                  1999              1998               1997
                                  ----              ----               ----

Current tax expense (benefit)
   Federal                       $    --           $10,000          $    --
   State                              --                --               --
                                 -------           -------          -------


Deferred tax expense
   Federal                            --                --               --
   State                              --                --               --
                                 -------           -------          -------
                                 $    --           $10,000          $    --
                                 =======           =======          =======

                                      F-14
<PAGE>


The differences between the Company's income tax expense (benefit) and income
tax expense (benefit) computed using the U.S. Federal Income Tax rate were as
follows:
<TABLE>
<CAPTION>


                                     1999                            1998                              1997
                                                   % of                               % of                          % of
                                                   pretax                             pretax                        pretax
                                   Amount          income          Amount             income         Amount         income
<S>                                <C>             <C>             <C>                <C>            <C>            <C>
Computed "expected" income
    tax expense (benefit)         $(989,000)       (34.0)     $(1,209,000)         (34.0)        $(1,257,900)      (34.0)
Valuation allowance                 989,000         34.0        1,219,000           34.5           1,250,600        33.8
Other                                     0            0                 0              0              7,300          .2
                                  ---------         ----       -----------          -----        -----------       -----
Actual income tax
    expense (benefit)                    --           --      $    10,000             .5         $        --          --
                                  =========         ====      ===========          =====         ===========       =====
</TABLE>

The Company has available approximately $5,482,000 of net operating loss carry
forwards which may be applied against future federal taxable income. These carry
forwards begin to expire in 2005.


7.  COMMITMENTS AND CONTINGENCIES
---------------------------------

The Company has extended a long term contract for the purchase of 1+, 800, and
Private lines services over a 42 month period, expiring in November 2002.  The
contract provides for a minimum monthly commitment of $250,000 and an aggregate
commitment of $9,000,000 over the contract life.  The Company has met its
monthly commitments through December 1999.

The Company leases certain offices and equipment under operating leases. Future
annual minimum lease payments under the significant agreements are as follows
for the years ended December 31:

<TABLE>
<CAPTION>

<S>                                <C>
                     2000             449,511
                     2001             379,369
                     2002             197,313
                     2003              71,301
                     2004              64,680
                     thereafter       156,310
                                   ----------
                      TOTAL        $1,318,484
                                   ==========
</TABLE>

Rent expense incurred for operating leases was approximately $482,771, $492,789,
and $488,436 in 1999, 1998, and 1997, respectively.

The Company entered into employment agreements with certain of its key
management personnel. At December 31, 1999, the total minimum commitment level
over the next year is approximately $640,000.

The Company entered into a contract in December 1996 with its former Chairman
for consulting services.  The total minimum aggregate commitment level over the
remaining three years of the contract as of December 31, 1999 is approximately
$400,000.

                                      F-15
<PAGE>

The Company entered into an agreement with a long distance carrier effective
August 25, 1995 for that carrier to provide network design, network operation
and network management of the Company's switch in Oakland, CA.  The agreement
specified certain incentive bonuses, payable in common stock, for the carrier
based on traffic levels of the Oakland switch.  Based on levels reached during
the two year term of the agreement which ended August 25, 1997, the Company
issued the carrier 106,060 shares of common stock in 1999.  The fair value of
the shares was charged to Selling, General and Administrative Expense in 1997.
The agreement also specified performance incentives payable in the form of stock
option grants. In 1998, 100,000 options were awarded at a purchase price of
$2.375 per share. (See note 10)


8.   PENSION PLANS
------------------

The Company sponsors a 401(K) Pension and Profit Sharing Plan for all employees.
Effective January 1, 2000, the Company has elected to match 25% of the first 8%
of an employee's contribution to the plan.


9.   PREFERRED STOCK
--------------------

REDEEMABLE PREFERRED:

On July 1, 1999, the only preferred shareholder converted 30,000 shares of
preferred stock to 300,000 shares of common stock.  The Company paid $13,500 in
dividends to the preferred shareholder in 1999. The Company has no outstanding
cumulative, convertible, redeemable preferred stock as of December 31, 1999.


PREFERRED STOCK:

In November 1999, the shareholders approved an amendment to the Company's
Certificate of Incorporation to authorize 3,000,000 shares of par value $.01 per
share preferred stock.  No shares were issued as of December 31, 1999.


10.  COMMON STOCK, STOCK OPTIONS AND WARRANTS
---------------------------------------------

Under the Company's stock option plans, options may be granted to officers and
employees of the Company and its subsidiaries.  No option may be granted for a
term in excess of ten years from the date of grant.  As of December 31, 1999,
1,289,500 of the outstanding stock options were exercisable under the plans.
The exercise prices of the outstanding options represented the fair market value
at dates of grant.  In November 1999, the shareholders approved an amendment to
the Company's Certificate of Incorporation to adopt a new stock option plan by
the Company that would permit the grant of options with respect to 3,000,000
shares of common stock.

                                      F-16
<PAGE>

A summary of the Company's stock option plans activity for common shares for the
three years ended December 31, 1999 follows:
<TABLE>
<CAPTION>

                                                                                          Stock                     Weighted
                                                                                          Options                   Average
                                                                                          Price Range               Exercise
                                                      Number of Shares                    Per Share                 Price
                                                      ----------------                    ---------                 -----
<S>                                                   <C>                              <C>                         <C>

Outstanding 12/31/96                                         4,476,000                 $1.00 to $2.25              $1.43
     Granted                                                 1,610,000                 $1.00 to $1.91              $1.27
     Exercised                                                (160,000)                $1.00 to $1.44              $1.07
     Terminated                                             (3,483,166)                $1.00 to $2.25              $1.48
                                                            ----------                 --------------              -----
Outstanding 12/31/97                                         2,442,834                 $1.00 to $2.25              $1.28
     Granted                                                   516,750                 $1.19 to $2.38              $1.20
     Exercised                                              (1,068,984)                $1.00 to $1.53              $1.31
     Terminated                                                (37,300)                $1.00 to $2.00              $1.33
                                                            ----------                 --------------              -----
Outstanding 12/31/98                                         1,853,300                 $1.00 to $2.38              $1.28
     Granted                                                 1,046,000                 $1.38 to $2.22              $1.55
     Exercised                                                (398,800)                $1.00 to $1.53              $1.05
     Terminated                                               (101,250)                $1.00 to $2.22              $1.35
                                                            ----------                 --------------              -----
Outstanding 12/31/99                                         2,399,250                 $1.00 to $2.38              $1.43
                                                            ==========                 ==============              =====

</TABLE>

<TABLE>
<CAPTION>


                                       Options Outstanding                            Options Exercisable
                    --------------------------------------------------------          -------------------
                                         Weighted        Weighted Average                           Weighted
                                         Average            Remaining                                Average
     Range of                            Exercise          Contractual                              Exercise
 Exercised Prices     Outstanding         Price           Life in Years          Exercisable          Price
 ----------------     -----------         -----           -------------          -----------          -----
<S>                 <C>               <C>             <C>                     <C>                 <C>

  $1.00 - $1.03           354,000         $1.03               2.01                 354,000            $1.03
  $1.19 - $1.30           770,750         $1.24               1.91                 670,750            $1.23
  $1.38 - $1.75         1,047,500         $1.55               4.21                  38,500            $1.58
  $2.00 - $2.38           227,000         $2.17                .60                 226,250            $2.17
                        ---------         -----               ----               ---------            -----
                        2,399,250         $1.43               2.81               1,289,500            $1.35
                        =========         =====               ====               =========            =====
</TABLE>

EMPLOYEE STOCK OPTIONS

The Company accounts for stock options issued to employees in accordance with
Accounting Principles Board Opinion No. 25, under which compensation cost is
recognized based on the difference, if any, between the fair value of the
Company's stock at the time of option grant and the amount the employee must pay
to acquire the stock. The Company's options have been issued at fair market
value at the time of grant. Had compensation cost for the incentive and
nonqualifed options been determined consistent with Statement of

                                      F-17
<PAGE>

Financial Accounting Standards No. 123, Accounting for Stock - Based
Compensation (SFAS 123), the Company's pro forma net loss and net loss per share
for the years ended December 31 are as follows:

<TABLE>
<CAPTION>


                                            1999           1998           1997
                                        -------------  -------------  -------------
<S>                                     <C>            <C>            <C>
Reported Net Loss                        $(2,964,399)   $(1,855,369)   $(3,756,821)
Proforma Net Loss                        $(3,194,796)   $(2,040,115)   $(4,454,993)
Reported Net Loss Per Share              $      (.15)   $     (0.10)   $     (0.23)
Proforma Net Loss Per Share                     (.16)   $     (0.11)   $     (0.28)
</TABLE>

In accordance with the requirements of SFAS 123, this method of accounting has
not been applied to options granted prior to the fiscal year beginning January
1, 1995.  The resulting pro forma compensation cost may not be representative of
that to be expected in future years.

The weighted fair value of options granted during Fiscal 1999, 1998 and 1997 was
$.84, $.69 and $.75 respectively.  The fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1999, 1998 and
1997: risk-free interest rates of 5.7%, 4.5% and 6.5% respectfully, expected
dividend yields of 0%, expected lives ranging from two to five years from the
date of grant, and expected price volatility between 60% and 80% for the options
granted in 1999, 1998 and 1997.

During 1999, the Company issued stock options to employees to purchase Common
Stock at below fair market value. The Company recorded $31,000 in selling,
general and administrative expense associated with these options.

THIRD PARTY STOCK OPTIONS

The Company accounts for stock options issued to outside consultants in
accordance with SFAS 123, under which compensation expense is recognized based
on the difference, if any, between the fair value of the award or the goods or
services received, whichever is more reliably measurable.  The Company has
measured the options based on the fair value of the award and the amount that
the outside consultant must pay to acquire the stock at the date of grant due to
its inability to reliably measure the fair value of the goods or services. (See
footnote 7).

In May 1997, the Company agreed to issue to an independent contractor, 50,000
warrants to purchase Common Stock. Each warrant entitles the holder to purchase
one share of Common Stock of the Company at a price of $1.03 per share until May
2002. In 1997, the Company recorded the related consulting fees as an expense in
the amount of $51,000 representing the estimated fair value of the options in
accordance with SFAS 123. In May 1998, the independent contractor exercised all
50,000 warrants resulting in an additional amount of $50 and $51,450 added to
Common Stock and paid in capital, respectively. There are no outstanding
warrants remaining as of December 31, 1998.

During 1998, the Company issued 143,750 options to purchase Common Stock to
three independent contractors. The options entitle one contractor to purchase
100,000 shares at $2.375 per share, another contractor to purchase 25,000 shares
at $1.1875 per share and the last contractor to purchase 18,750 shares at
$1.1875 per share. In 1998, the Company recorded approximately $133,000 in
selling, general and administrative expenses associated with these options.

There are no outstanding warrants remaining as of December 31, 1999.


11.  CASH FLOW INFORMATION
--------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The Company made cash payments for interest of $181,197, $232,915 and $322,508,
for the years ended December 31, 1999, 1998, and 1997, respectively. The Company
made cash payments for income taxes of $0, $10,000, and $0, for the years ended
December 31, 1999, 1998, and 1997, respectively.

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Redeemable Preferred Stock accreted in value by $30,000 in the year ended
December 31, 1997.

                                      F-18
<PAGE>

During the years ended December 31, 1999, 1998, and 1997, the Company acquired
approximately $0, $0, and $176,000, respectively of telephone communications and
other equipment with capital leases. The lease agreements were financed over
three and five year periods.

On August 31, 1999, the Company purchased certain assets of JMR Marketing
Corporation including a customer base, property and equipment and sales
contracts associated with certain Affinity Groups in exchange for 150,000 shares
of common stock, with a fair market value of $262,000.

On July 1, 1999, the only preferred shareholder converted 30,000 shares of
preferred stock to 300,000 shares of common stock.


12.  LITIGATION
---------------

On June 13, 1997, Mark Scully, a former President and Chief Operating Officer of
the Company, filed a complaint against the Company, Kevin O'Hare, Aaron Brown
and Stephen Parker in the United States District Court for the Eastern District
of Pennsylvania.  Mr. Scully asserts various claims in connection with his
termination of employment with the Company on December 30, 1996.  In particular,
he alleges, among other things, breach of contract in connection with the
termination of certain stock options, breach of the alleged contract for
employment, breach of an asserted duty of good faith and fair dealing,
fraudulent and negligent misrepresentation, and civil conspiracy.  Mr. Scully
alleges damages of at least $1.6 million, plus attorneys' fees, costs and other
disbursements and the cost of COBRA payments and interest; $1 million of the
alleged damages claimed are punitive.  The Company contests the allegations of
the complaint and intends to vigorously defend against the action.  On June 9,
1999, the Court issued its decision and judgment was entered in favor of Mr.
Scully and against the Company and two former officers for the sum of
approximately $626,000 and required the Company to establish an escrow account
equal to 120% of the judgment. The Court denied Mr. Scully's claim for
attorneys' fees and liquidated damages. An additional amount of $376,000 was
accrued during the quarter ended June 30, 1999 to increase the reserve to the
full judgment amount and was recorded in SG&A expenses. The balance in the
escrow account at December 31, 1999 was $770,363, and is recorded as Restricted
Cash. The Company has appealed the decision and maintains that the Court made a
number of errors of law and that the Court applied the wrong measure of damages.
Mr. Scully has appealed the judgment as well.

The Company is party, in the ordinary course of business, to other litigation
involving services rendered, contract claims and other miscellaneous causes of
action arising from its business.  The Company has established reserves relating
to its legal claims and believes that potential liabilities in excess of those
recorded will not have a material adverse effect on the Company's Consolidated
Financial Statements, however, there can be no assurances to this effect.


13.  RELATED PARTY TRANSACTIONS
-------------------------------

INDEMNIFICATION ARRANGEMENTS

The Company is party to indemnification agreements with two of its directors,
Aaron R. Brown and Stephen J. Parker, dated August 1990.  In addition, the
Company has entered into an indemnification agreement with Kevin O'Hare, a
former executive officer of the Company, dated July, 1997.  In general, the
indemnification agreements obligate the Company to indemnify each of Messrs.
Brown, Parker and O'Hare against the liabilities and expenses incurred by them
in acting as a director or officer of the Company to the maximum extent allowed
by law.  As stated above, the Company, together with Messrs. Parker, Brown and
O'Hare, have been sued by a former president for various claims asserted by the
plaintiff in connection with his termination of employment with the Company on
December 30, 1996.  The Company and the individual defendants have selected
counsel to defend the action.  The Board of Directors has authorized the Company
to advance the expenses of the individual defendants incurred in defending this
action upon the receipt of an undertaking from each of them to repay the amounts
so advanced in the event it is determined that they are

not entitled to indemnification under applicable law. As of December 31, 1999,
no amounts had been advanced by the Company under such agreements. (See Note 12)

SALES AGENCY

Mr.Goldberg, a director of the Company, acts as a sub-agent for the Company and
is the co-owner of Goldberg & Associates, a company that acts as an agent for
the Company in the sale of products and services.  During 1999, the Company paid
Mr. Goldberg and such company a total of $89,960 in commissions for their
services as sales agents.  Commissions paid to Mr. Goldberg and such company
were at competitive rates.

PRIVATE PLACEMENT

On March 23, 1999, the Company through a private placement transaction, issued
900,000 shares of common stock to Gold & Appel Transfer, S.A., a majority
shareholder of the Company, for an aggregate purchase price of $1,530,000 or
$1.70 per share.  The proceeds of the issuance are being used for general
working capital.  The terms of such transaction were negotiated between the
Company and Gold & Appel Transfer, S.A. on an arms length basis, with Mr.
Anderson abstaining from all negotiations and approvals.

CHANGES IN MANAGEMENT

Effective February 19, 1999, Aaron Brown, Chairman, President and Chief
Executive Officer, terminated his employment with the Company.  Mr. Brown was
immediately replaced by David Hurwitz as President and Chief Executive Officer.

ACQUISITION

On August 31, 1999, the Company purchased certain assets of JMR Marketing
Corporation including a customer base, property and equipment and sales
contracts associated with certain Affinity Groups in exchange for 150,000 shares
of common stock.  The shares of common stock were issued to James M. Rossi (the
sole shareholder of JMR Marketing Corporation).


14.  SUBSEQUENT EVENTS
----------------------

On March 17, 2000, the Company purchased certain assets of the business of Cam-
Comm, Inc.  The Company acquired the customer base and accounts receivable of
approximately 70 private line customers from Cam-Comm, Inc. in exchange for a
cash payment of $150,000 and an agreement to pay an amount not to exceed an
additional $159,000 for an outstanding liability of Cam-Comm, Inc. The Company's
Chairman, James M. Rossi, is also the Chairman of Cam-Comm, Inc. Mr.
Rossi has agreed to reimburse the Company one half of any amount paid by
the Company in excess of a total of $200,000.

On March 22, 2000, the Company entered into a Loan Agreement with two
significant shareholders. The terms of the agreement call for the Company to
borrow up to $1,500,000 at a rate of 10% per annum and due and payable on March
1, 2001. The agreement includes that all parties may convert all or any portions
of the loan amount to shares of the Company's Common Stock at $2.50 per share.

                                      F-19
<PAGE>

15. OTHER SALES INFORMATION
---------------------------

Net sales information by the Company's product groups for the years ended
December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                       1999                          1998                          1997
                                 -----------------             -----------------             -----------------
                                      Amount            %           Amount            %           Amount            %
                                 -----------------             -----------------             -----------------
<S>                              <C>                <C>        <C>                <C>        <C>                <C>
Domestic 1+                            $19,093,119        48         $20,105,578        45         $20,892,678        37
International                            8,751,013        22          10,276,183        23          17,504,676        31
Inbound                                  6,762,146        17           6,701,859        15           8,470,005        15
Wireless                                 1,193,320         3           1,787,162         4           2,258,668         4
Domestic Carrier Termination             3,977,733        10           5,808,278        13           7,340,671        13
                                       -----------       ---         -----------       ---         -----------       ---
    Total                              $39,777,331       100%        $44,679,060       100%        $56,466,698       100%
                                       ===========       ===         ===========       ===         ===========       ===
</TABLE>
All of the Company's operations are conducted in the United States of America.


                                      F-20
<PAGE>

                                 US WATS, INC.
                Schedule II - Valuation and Qualifying Accounts


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
COL. A                                     COL. B       COL. C                    COL. D       COL. E        COL. F
----------------------------------------------------------------------------------------------------------------------
DESCRIPTION                              BALANCE AT                         CHARGED TO       DEDUCTIONS-   BALANCE AT
                                          BEGINNING      CHARGED TO       OTHER ACCOUNTS-     ACCOUNTS       END OF
                                          OF PERIOD       EXPENSE           RECOVERIES       WRITTEN OFF     PERIOD
<S>                                      <C>             <C>              <C>                <C>           <C>

Period ended 12/31/99
---------------------

ALLOWANCE FOR DOUBTFUL
  ACCOUNTS-
  ACCOUNTS RECEIVABLE                    $  934,624          $1,453,496         $ 67,797    $  (744,064)   $1,711,853
                                        ------------------------------------------------------------------------------
Period ended 12/31/98
---------------------

ALLOWANCE FOR DOUBTFUL
  ACCOUNTS-
  ACCOUNTS RECEIVABLE                    $1,498,749          $  788,493         $(18,763)   $(1,333,855)   $  934,624
                                        ------------------------------------------------------------------------------
Period ended 12/31/97
---------------------

ALLOWANCE FOR DOUBTFUL
  ACCOUNTS-
  ACCOUNTS RECEIVABLE                     $  672,058          $1,465,248         $ 93,343    $  (731,900)   $1,498,749
                                        -------------------------------------------------------------------------------
</TABLE>

                                      F-21