UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                  FORM 10-K/A

                                AMENDMENT NO. 3
                           _________________________

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

For the fiscal year ended December 31, 1996

                                        OR

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

For the transition period from ______ to ______

                        Commission File number 0-22944

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

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

111 Presidential Boulevard
Bala Cynwyd, PA                                       19004
-----------------------------------------           ----------
(Address of principal executive officers)           (Zip Code)

Registrant's telephone number, including area code  (610) 660-0100
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:    None
                                                               ----
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 Form 10-K.  [X]

As of February 18, 1998, the aggregate market value of the Company's common
stock held by non-affiliates of the registrant, based on the average closing
sale price, was approximately $10,997,383.

As of February 18, 1998, the registrant has 16,134,600 shares of common stock
outstanding.

<PAGE>
                           DESCRIPTION OF AMENDMENTS

     The Company has amended its Form 10-K for the fiscal year ended December
31, 1996 as follows:


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

     Item 14 has been set forth in its entirety herein to amend Footnote 9 to
     the Financial Statements entitled "Stock Options and Warrants" and add
     Footnotes 12 and 13 to the Financial Statements entitled "Related Party
     Transactions" and  "Subsequent Events (unaudited)."

     All other information in the Form 10-K of the Company not set forth in
this Form 10-K/A remains the same as filed with the Securities and Exchange
Commission by the Company in its Form 10-K on March 31, 1997.


                                  SIGNATURES

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


                                   US WATS, INC.

                         By:       /s/ Michael McAnulty
                                   ----------------------
                                       Michael McAnulty
                                       Controller

January 30, 1998

<PAGE>

                            INDEX TO US WATS, INC.
                       CONSOLIDATED FINANCIAL STATEMENTS

                                                                    PAGE (S)
                                                                   --------

Independent Auditors' Report                                           F-2

AUDITED CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets
     December 31, 1996 and 1995                                        F-5

Consolidated Statements of Operations
     Years ended December 31, 1996, 1995, and 1994                     F-7

Consolidated Statements of Common Shareholders' Equity
     Years ended December 31, 1996, 1995, and 1994                     F-8

Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994                          F-11

Notes To Consolidated Financial Statements                             F-12


                                      F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania

We have audited the accompanying consolidated balance sheet of US WATS, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, common shareholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the 1996 consolidated financial statements present fairly, in
all material respects, the financial position of US WATS, Inc. and subsidiaries
as of December 31, 1996, and the results of their operations and cash flows for
the year then ended in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania

March 28, 1997, except for Notes 9 and 12 for which the date is
January 21, 1998

                                      F-2
<PAGE>


INDEPENDENT AUDITORS' REPORT

Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania

We have audited the accompanying consolidated balance sheet of US WATS, Inc.
and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, common shareholders' equity and cash flows for the
year then ended.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US WATS,
Inc. and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

RUDOLPH, PALITZ LLP
Plymouth Meeting, Pennsylvania

March 25, 1996

                                      F-3

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania

We have audited the accompanying statement of operations, shareholder's equity,
and cash flows of US WATS, Inc. and subsidiaries for the year ended December
31, 1994.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of US WATS,
Inc. and subsidiaries for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.

BARATZ & ASSOCIATES, P.A.
Marlton, New Jersey

March 8, 1995

                                      F-4



                       US WATS, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS



                                                          December 31,
                                                  --------------------------
                                                      1996           1995
-----------------------------------------------------------------------------
ASSETS

Current Assets
  Cash and cash equivalents                       $1,455,186    $   680,834
  Accounts receivable, net of allowance for
    doubtful accounts of $672,058 for 1996
    and $268,921 for 1995                          6,513,899      4,900,066
 Prepaid expenses and other                          137,325        107,191
                                                 -----------    -----------
      Total Current Assets                         8,106,410      5,688,091
                                                 -----------    -----------

Property and Equipment
  Telecommunications equipment                     3,773,459      3,046,877
  Equipment                                        1,356,609      1,231,346
  Software                                           610,286        484,199
  Office furniture and fixtures                      130,003        119,630
  Leasehold improvements                              35,226         35,226
                                                 -----------    -----------
                                                   5,905,583      4,917,278
Less accumulated depreciation and amortization     2,305,565      1,426,463
                                                 -----------    -----------

      Total Property and Equipment                 3,600,018      3,490,815
                                                 -----------    -----------

Other assets, principally deposits                   285,931        321,455
                                                 -----------    -----------
                                                 $11,992,359    $ 9,500,361
                                                 ===========    ===========

The accompanying notes are an integral part of these financial statements


                                     F-5
<PAGE>
                       US WATS, INC.  AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS


                                                            December 31,
                                                     ---------------------------
                                                        1996           1995
--------------------------------------------------------------------------------
Liabilities and Shareholders' Equity

Current Liabilities
  Note payable                                     $ 1,196,860    $ 1,175,164
  Capital lease obligations, current portion           194,472        130,664
  Accounts payable                                   6,378,296      4,581,373
  Accrued commissions                                  918,129        753,596
  Accrued expenses and other                           553,445        361,010
  State and Federal taxes payable                      963,372        475,012
  Deferred revenue                                     116,222        371,791
                                                   -----------    -----------
      Total Current Liabilities                     10,320,796      7,848,610
                                                   -----------    -----------

Long-Term Liabilities
  Capital lease obligations, net of current portion    509,224        601,037
                                                   -----------    -----------

Commitments and Contingencies - see note 8

Redeemable preferred stock, $.01 par, authorized
  150,000 shares, issued and outstanding:
  30,000 shares in 1996, 30,000 shares in 1995
  Redemption value: $11.00 per share                   300,000        300,000
                                                   -----------    -----------

Common Shareholders' Equity
  Common stock, $.001 par, authorized
    30,000,000 shares; issued:
    15,902,100 shares in 1996
    15,852,100 shares in 1995                           15,902         15,852
  Additional paid-in capital                         2,623,350      2,573,400
  Accumulated Deficit                               (1,776,663)    (1,838,288)
                                                   -----------    -----------
                                                       862,589        750,964
Common stock held in treasury
  (250,000 shares), at cost                               (250)          (250)
                                                   -----------    -----------
                                                       862,339        750,714
                                                   -----------    -----------
                                                   $11,992,359    $ 9,500,361
                                                   ===========    ===========


The accompanying notes are an integral part of these financial statements




                                      F-6
<PAGE>

                         US WATS, INC AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                               Years Ended December 31,
                                       ----------------------------------------
                                           1996          1995           1994
-------------------------------------------------------------------------------

Revenues                              $40,304,442   $27,755,388    $23,633,312
                                      -----------   -----------    -----------

Cost of sales                          26,802,398    15,918,212     14,706,549
                                      -----------   -----------    -----------

Gross profit                           13,502,044    11,837,176      8,926,763

Selling, general and administrative
  expenses                             13,196,173    12,095,991     10,199,679
                                      -----------   -----------    -----------

Income (loss) from operations             305,871      (258,815)    (1,272,916)

Other income (expense)
 Interest income                           62,732        69,859         12,975
 Interest expense                        (272,978)      (88,767)          (435)
                                      -----------   -----------    -----------

Income (loss) before income tax
  expense (benefit)                        95,625      (277,723)    (1,260,376)

Income tax expense (benefit)                7,000            --        (14,300)
                                      -----------   -----------    -----------

Net income (loss) before
  preferred dividends                      88,625      (277,723)    (1,246,076)

Preferred dividends earned                 27,000        67,255        118,500
                                      -----------   -----------    -----------

Net income (loss) available to
   common shareholders                $    61,625   $  (344,978)   $(1,364,576)
                                      ===========   ===========    ===========

Net income (loss) per share
   available to common shareholders   $        --   $      (.02)   $      (.09)
                                      ===========   ===========    ===========

Weighted average number of shares
  outstanding                          15,877,900    15,100,400     14,875,584
                                      ===========   ===========    ===========



The accompanying notes are an integral part of these financial statements



                                     F-7
<PAGE>
<TABLE>
<CAPTION>
                                              US WATS, INC. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
                                               YEAR ENDED DECEMBER 31, 1996

                                                                                                      Treasury
                                                     Common      Add'l                    Treasury     Stock        Share-
                                    Common Stock   Par Value    Paid-In                    Stock         At        holders'
Description                        Shares issued     $.001      Capital       Deficit      Shares       Cost        Equity
---------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>      <C>          <C>             <C>          <C>      <C>
Balance, December 31, 1995            15,852,100     $15,852  $2,573,400   $(1,838,288)    250,000      $(250)    $750,714

Net Income (loss) before Preferred
  Dividends for the year ended
  December 31, 1996                           --          --          --        88,625          --          --      88,625

Exercise of Employee Stock
  Options                                 50,000          50      49,950             --         --          --      50,000

Cash Dividends on Preferred
  Stock, December 1, 1996
  ($.90 per share)                                                             (27,000)                            (27,000)
                                      ----------     -------   ---------    ----------     -------       ----     --------
Balance, December 31, 1996            15,902,100     $15,902  $2,623,350   $(1,776,663)    250,000      $(250)    $862,339
                                      ==========     =======  ==========    ==========     =======       ====     ========

</TABLE>


The accompanying notes are an integral part of these financial statements



                                     F-8
<PAGE>
<TABLE>
<CAPTION>

                                              US WATS, INC. AND SUBSIDIARIES
                            CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (DEFICIENCY)
                                               YEAR ENDED DECEMBER 31, 1995

                                                                                                      Treasury      Share-
                                                     Common      Add'l                    Treasury     Stock       holders'
                                    Common Stock   Par Value    Paid-In                    Stock         At          Equity
Description                        Shares issued     $.001      Capital       Deficit      Shares       Cost   (Deficiency)
---------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>      <C>          <C>             <C>          <C>      <C>
Balance, December 31, 1994            14,691,100     $14,691  $1,395,691   $(1,493,310)    250,000      $(250)    $(83,178)

Net Income (loss) before Preferred
  Dividends for the year ended
  December 31, 1995                           --          --          --      (277,723)         --         --     (277,723)

Conversion of 100,000 shares
  of Series 9% Preferred Stock         1,000,000       1,000     999,000             --         --         --    1,000,000

Employee Stock Bonus                      50,000          50      24,950             --         --         --       25,000

Exercise of Employee Stock Options       111,000         111     153,759             --         --         --       153,870

Cash Dividends on Preferred
  Stock, December 1, 1995
  ($.90 per share)                            --          --          --       (67,255)         --         --      (67,255)
                                      ----------     -------  ----------   -----------     -------      -----     --------
Balance, December 31, 1995            15,852,100     $15,852  $2,573,400   $(1,838,288)    250,000      $(250)    $750,714
                                      ==========     =======  ==========   ===========     =======      =====     ========
</TABLE>


The accompanying notes are an integral part of these financial statements




                                     F-9
<PAGE>
<TABLE>
<CAPTION>
                                              US WATS, INC. AND SUBSIDIARIES
                            CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (DEFICIENCY)
                                               YEAR ENDED DECEMBER 31, 1994

                                                                                                      Treasury      Share-
                                                     Common      Add'l                    Treasury     Stock       holders'
                                    Common Stock   Par Value    Paid-In                    Stock         At          Equity
Description                        Shares issued     $.001      Capital       Deficit      Shares       Cost   (Deficiency)
---------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>      <C>          <C>             <C>          <C>      <C>
Balance, December 31, 1993            14,487,000     $14,487  $1,190,770   $  (127,234)    250,000      $(250)  $1,077,773

Net Income (loss) before Preferred
  Dividends for the year ended
  December 31, 1994                           --          --          --    (1,246,076)         --         --   (1,246,076)

Conversion of 20,000 shares
  of Series 9% Preferred Stock           200,000         200     199,800            --          --         --      200,000

Exercise of Employee Stock Options         4,100           4       5,121            --          --         --        5,125

Cash Dividends on Preferred
  Stock, December 1, 1994
  ($.90 per share)                            --          --          --      (120,000)         --         --     (120,000)
                                      ----------     -------  ----------   -----------     -------      -----     --------
Balance, December 31, 1994            14,691,100     $14,691  $1,395,691   $(1,493,310)    250,000      $(250)    $(83,178)
                                      ==========     =======  ==========   ===========     =======      =====     ========
</TABLE>


The accompanying notes are an integral part of these financial statements




                                     F-10
<PAGE>
<TABLE>
<CAPTION>
                                 US WATS, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF CASH FLOW

                                                                 Years Ended December 31,
                                                         ---------------------------------------
                                                             1996          1995           1994
------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>          <C>
OPERATING ACTIVITIES:
  Net income (loss) before preferred dividends           $  88,625    $ (277,723)   $(1,246,076)
  Adjustment to reconcile net income (loss) to
  net cash provided by (used-in) operating activities
    Litigation settlement                                       --    (2,882,223)            --
    Issuance of stock bonus                                     --        25,000             --
    Depreciation and amortization                          930,293       769,685        505,443
    Provision for bad debts                                479,208       842,628        953,397
    Write-off of fixed assets                                   --       305,008             --
    Changes in assets and liabilities which provided
    (used) cash:
      Accounts receivable                               (2,093,041)     (218,822)    (1,563,504)
      Prepaid expenses and other                           (30,134)      (20,822)       (47,654)
      Other assets                                          24,332       (27,501)       330,731
      Deferred revenue                                    (255,569)       79,274        292,517
      Accounts payable and accrued expenses              2,153,891     1,209,863      2,062,980
      State & Federal Taxes payable                        488,360       (72,977)       165,372
                                                        ----------     ---------     ----------

  Net cash provided by (used in) operating activities    1,785,965      (268,610)     1,453,206
                                                        ----------     ---------     ----------

INVESTING ACTIVITIES:
  Purchase of property and equipment                      (864,304)     (695,469)    (1,679,252)
  Investment in internet service provider                  (40,000)           --             --
                                                        ----------     ---------     ----------

  Net cash used in investing activities                   (904,304)     (695,469)    (1,679,252)
                                                        ----------     ---------     ----------

FINANCING ACTIVITIES:
  Proceeds from stock option exercises                      50,000       153,870          5,125
  Increase in notes payable net                             21,696     1,175,164        127,166
  Repayment of capital lease obligations                  (152,005)     (134,453)            --
  Preferred stock dividend                                 (27,000)      (67,255)      (120,000)
  Payment of loan acquisition costs                             --      (110,986)            --
                                                        ----------     ---------     ----------

  Net cash (used in) provided by financing activities     (107,309)    1,016,340         12,291
                                                        ----------     ---------     ----------

Net increase (decrease) in cash and cash equivalents       774,352        52,261       (213,755)

Beginning cash and cash equivalents                        680,834       628,573        842,328
                                                        ----------     ---------     ----------

Ending cash and cash equivalents                        $1,455,186       680,834        628,573
                                                        ==========     =========     ==========
</TABLE>

The accompanying notes are an integral part of these financial statements




                                    F-11
<PAGE>

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


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

The Company is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-size business
customers. The Company also provides inbound-800 long distance services, as
well as other telecommunications services such as travel cards (calling cards),
cellular, paging, 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.


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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its three wholly-owned subsidiaries, USW Corporation, USW Enterprises, Inc.,
and Carriers Group, Inc. after elimination of all inter-company accounts,
transactions and profits.  The Company's investment in an internet service
provider is accounted for under the Cost Method.

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.

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.

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.

Allowance for Doubtful Accounts

Write-offs of accounts receivable for 1996 and 1995 were approximately $213,000
and $1,052,000,  respectively.

                                     F-12
<PAGE>

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

Depreciation and amortization expense of property, plant and equipment for
1996, 1995, and 1994, was $930,293, $1,030,462, and $504,879, respectively.
Included in depreciation expense for 1995 was approximately $305,008 resulting
from the recognized obsolescence of telecommunications equipment.

Deferred Revenue

Deferred revenue consists primarily of prepayments of Debit Card and
International Call Back services.  Deferred revenue is recognized as income
based on monthly usage.

Deferred Financing Costs

Loan origination costs are amortized by the straight-line method over the term
of the related loan, and are included in other assets.

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 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.



                                     F-13


Earnings (Loss) Per Common Share

Earnings (loss) per common share is based upon the weighted average number of
common shares outstanding in 1996, 1995 and 1994. The assumed exercise and/or
conversion of preferred stock, options or warrants has not been included in the
calculation of earnings (loss) per share for 1996, 1995 or 1994 since the
effect is anti-dilutive or  not significant.

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 it is
probable that such estimated cash flows will be 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.

Reclassification of Accounts

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



3.  NOTE PAYABLE
----------------

On May 11, 1995, the Company entered into a Loan and Security Agreement with
Century Business Credit Corporation for a revolving credit facility of
$2,000,000. The loan is for a period of two years, and is automatically
renewable for two successive years. Interest on the loan is calculated at prime
plus 3 3/4% (effective rate is 12% at December 31, 1996) and a minimum loan
value of $750,000 must be maintained. The loan is collateralized by accounts
receivable and fixed and intangible assets of the Company.

At December 31, 1996, the Company was not in compliance with certain loan
covenants pertaining to the acquisition of property and equipment, and Board of
Director membership by specific individuals who are no longer employed by the
Company.  The Company received a waiver or amended the Loan and Security
Agreement to correct such non-compliance.



                                     F-14


4.  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 12.9% to
approximately 13.9% and are collateralized by the equipment purchased. The
future minimum lease payments for the next five years and related lease
obligation balances as of December 31, 1996 and 1995 follow:


                         1997      $277,639
                         1998       272,843
                         1999       190,483
                         2000       137,350
                                   --------
                         TOTAL     $878,315
                                   ========


                                                        1996             1995
                                                      ------------------------
Aggregate capital lease obligation
  as of the year ended December 31,                   $878,315         $987,397
Less--amounts representing interest                    174,619          255,696
                                                      --------         --------
Present value of net minimum payments
  under capital leases                                 703,696          731,701
Less--current portion of capital lease obligations     194,472          130,664
                                                      --------         --------
  Capital lease obligations, net of current portion   $509,224         $601,037
                                                      ========         ========


The following is an analysis of property under capital leases:
                                                        1996             1995
                                                    ---------------------------
Telecommunications Equipment                        $1,028,660       $1,114,260
Office Equipment                                        57,300           57,300
                                                    ----------       ----------
      TOTAL                                          1,085,960        1,171,560

Less Accumulated Amortization                          224,340          119,829
                                                    ----------       ----------
      Net Assets Under Capital Lease                  $861,620       $1,051,731
                                                    ==========       ==========

Amortization of assets under capital leases charged to operations and included
in depreciation expense was $149,523, $102,574, and $17,255 in 1996, 1995, and
1994 respectively.


                                     F-15


5.  INCOME TAXES
----------------

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


                                                      1996           1995
                                                  -------------------------
  Deferred Tax Asset                              $ 953,000      $ 942,000
  Deferred Tax Liability                           (322,000)      (301,000)
  Valuation Allowance for Deferred Tax Asset       (631,000)      (641,000)
                                                  ---------      ---------
                                                  $      --      $      --
                                                  =========      =========

The utilization of the deferred tax asset depends on the Company's estimate
of its 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:


                                                      1996           1995
                                                  ------------------------
  Net Operating Loss                              $ 609,000      $ 784,000
  Allowance for Doubtful Accounts                   344,000        158,000
  Depreciation                                     (322,000)      (301,000)
                                                  ---------      ---------
  Net Deferred Tax Asset                          $ 631,000      $ 641,000
                                                  =========      =========


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

                                       1996           1995           1994
                                     --------------------------------------
Current tax expense (benefit)
    Federal                            $7,000            $--      $(14,300)
    State                                  --             --             --
                                      -------        -------      ---------
                                        7,000                      (14,300)

Deferred tax expense
    Federal                            ______       ________       ________
    State                              ______       ________       ________
                                      -------        -------      ---------
                                       $7,000            $--      $(14,300)
                                       ======       ========      =========



                                    F-16
<PAGE>
Total income tax expense (benefit) amounted to $ 7,000 in 1996, $0 in 1995,
and $(14,300) in 1994, (effective  tax rates of  8.1%,  0%, and (1.1)%,
respectively), compared to income tax expense (benefit) of $ 29,500,
$(94,000), and $(427,500), computed by applying the statutory rate of 34% to
income (loss) before income tax (benefit). These differences are accounted
for as follows:
<TABLE>
<CAPTION>
                                   1996                     1995                          1994
                                             % 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)          $29,500      34.0       $(94,000)         (34.0)     $(427,500)         (34.0)

State income tax expense,
 net of Federal income
 tax benefit                         --        --             --             --
Utilization of NOL                   --        --                                      (14,300)          (1.1)
Valuation allowance             (30,500)    (35.1)        80,000           28.9        427,500           34.0
Other                             8,000       9.2         14,000            5.1             --             --
                               --------     -----        -------          -----       --------           ----
Actual income tax
 expense (benefit)             $  7,000       8.1        $    --             --       $(14,300)          (1.1)
                                =======     =====        =======          =====       ========           ====
</TABLE>

The Company has available approximately $ 1,497,000 and $952,000 of tax
carryforwards which may be applied against future Federal taxable income
and alternative taxable income respectively. These carryforwards expire
in 2010.



                                    F-17
<PAGE>


6.  COMMITMENTS AND CONTINGENCIES
---------------------------------

The Company has a long term contract for the purchase of 1+, 800, and Private
lines services over a 36 month period.  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 1996.

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

                         1997           $  370,345
                         1998              322,705
                         1999              151,280
                         2000              140,514
                         2001               62,019
                         thereafter         62,019
                                        ----------
                            TOTAL       $1,108,882

Rent expense incurred for operating leases was approximately $ 422,896,
$351,300, and $367,600, in 1996, 1995, and 1994, respectively.

The Company has entered into employment agreements with each of its five
Executive Officers. With respect to the officers agreements, the total minimum
commitment level over the next three years is approximately $2,499,000.

The Company entered into a consulting contract with its former Chairman for
consulting services to be rendered over the next six year period.  The total
minimum aggregate commitment level of the contract is approximately $750,000.

The Company is party, in the ordinary course of business, to litigation
involving services rendered, contract claims and other miscellaneous causes of
action arising from its business. Management does not consider that any such
matters will materially effect the Company's financial condition or results of
operations will not be materially affected by such proceedings.


7.   PENSION PLANS
------------------

The Company sponsors a 401(K) Pension and Profit Sharing Plan for all
employees. The Company has elected not to match any employee contributions or
make any profit sharing contributions to the plan.


8.   PREFERRED STOCK
--------------------

Redeemable Preferred:

The Company has outstanding cumulative, convertible, redeemable preferred stock
which is convertible at the option of respective shareholders thereof, into ten
(10) common shares at a conversion price of one dollar ($1.00) each.

                                     F-18
<PAGE>

At any time after September 1, 1996, the Company, at the option of its Board of
Directors, may redeem part or all of the preferred shares outstanding at $11.00
each plus unpaid and accumulated dividends. The maximum aggregate redemption
value at December 31, 1996 is $330,000. The preferred stock is mandatorily
redeemable in cash on January 2, 2049 at $11.00 per share. Dividends on the
preferred stock are payable in cash only at a rate of 9% per annum on
December 1, March 1, June 1, and September 1.

Preferred Stock:

In July 1994, the shareholders approved an amendment to the Company's
Certificate of Incorporation to authorize 850,000 shares of par value $.01 per
share preferred stock, no shares were issued as of December 31, 1996.

9.    STOCK  OPTIONS AND WARRANTS
---------------------------------

Subsequent to the initial filing of these financial statements for the year
ended December 31, 1996, Management determined that certain options had been
excluded from the original information below.  The information below has been
updated to reflect the changes in such option activity.

Under USW's stock option plans, options may be granted to officers and
employees of USW 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, 1996,
2,414,000 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.

A summary of USW's stock option plans activity for common shares for the three
years ended December 31, 1996 follows:

                                                             Weighted
                                                              Average
                                                              Exercise
                        Number of Shares                         Price
                        ----------------                     --------
Outstanding 1/1/94            2,037,300                        $1.125
     Granted                  2,254,700                        $1.53
     Exercised                   (4,100)                       $1.25
     Terminated              (1,179,600)                       $1.25
                             ----------                        -----
Outstanding 12/31/94          3,108,300                        $1.37
     Granted                  2,282,500                        $1.17
     Exercised                 (111,000)                       $1.48
     Terminated              (1,028,800)                       $1.66
                             ----------                        -----
Outstanding 12/31/95          4,251,000                        $1.19
     Granted                  2,045,000                        $1.52
     Exercised                  (50,000)                       $1.00
     Terminated              (1,770,000)                       $ .97
                             ----------                        -----
Outstanding 12/31/96          4,476,000                        $1.43
                             ==========                        =====

Subsequent to year end, the Company has terminated 800,000 outstanding options
with members of management at prices ranging from $1.50 to $3.00.  In 1997, the
Company has issued an additional 1,500,000 options to members of management
exercisable at prices ranging from $1.25 to $1.30.

The Company accounts for its stock option plans 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

                                     F-19
<PAGE>
stock.  The Company's options have been issued at fair market value at the time
of grant. Had compensation cost for the incentive and non-qualified options
been determined consistent with Statement of Financial 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:

                                                 1996             1995
                                                 ----            ----
Reported Net Income (Loss)                   $  61,625       $  (344,978)
Proforma Net Loss                            $(288,493)      $(1,560,848)
Reported Net Income (Loss) Per Share         $      --       $     (0.02)
Proforma Net Loss Per Share                  $   (0.02)      $     (0.10)

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 average fair value of options granted during fiscal 1996 and 1995
was $.55 and $.97, respectively.  The fair values 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 1996 and
1995; risk-free interest rates of 6.5%, expected dividend yields of 0%,
expected lives of three years from the date of grant, and expected price
volatility ranging from 69% to 200% for the options granted in 1995 and 1996.

On May 11, 1995, USW agreed to issue to each of two directors/officers of USW
600,000 Warrants to purchase Common Stock, in consideration for limited
personal guarantees to be provided in connection with the revolving credit
facility.  Each Warrant entitles the holder to purchase one share of Common
Stock of USW at a price of $1.0625 per share until May 11, 2000.


10.  CASH FLOW INFORMATION
--------------------------

Supplemental Disclosure of Cash Flow Information

The Company made cash payments for interest of $272,978, $87,189, and $0 for
the years ended December 31, 1996, 1995, and 1994, respectively. The Company
made cash payments for income taxes of $0, $75,000, and $56,640 for the years
ended December 31, 1996, 1995, and 1994 respectively.

Supplemental Disclosure of Non-Cash Financing Activities

Redeemable Preferred Stock in the amounts of $1,000,000 and $200,000 was
converted into Common Stock in the years ended December 31, 1995 and 1994,
respectively.

Non-Cash Transactions

During the years ended December 31, 1996 and 1995, the Company acquired
approximately $124,000 and $939,000, respectively of telephone communications
and other equipment with capital leases. The lease agreements were financed
over three and five year periods.

                                     F-20
<PAGE>

11.  LITIGATION SETTLEMENTS
---------------------------

During 1995, the Company's dispute with Colonial Penn Group, Inc.  and Colonial
Penn Insurance Company (collectively "CPG") was favorably resolved , resulting
in the reversal of an accounts 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.


12. RELATED PARTY TRANSACTIONS
------------------------------

Indemnification Arrangements

USW is a party to indemnification agreements with two of its directors, Aaron
R. Brown and Stephen J. Parker, dated August 1990.  In addition, USW has
entered into an indemnification agreement with Kevin O'Hare, a former executive
officer of USW, dated July, 1997.  In general, the indemnification agreements
obligate USW 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
USW to the maximum extent allowed by law.  USW, together with Messrs. Parker,
Brown and O'Hare, have been sued by USW's former president for various claims
asserted by the plaintiff in connection with his termination of employment with
USW on December 30, 1996.  USW and the individual defendants have selected
counsel to defend the action.  The Board of Directors of USW has authorized USW
to advance the expenses of the individual defendants incurred in defending ths
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, 1996, no amounts had
been advanced by USW under such agreements.

Sales Agency

Mr.Goldberg, a director of USW, acts as a sub-agent for USW and is the co-owner
of a company that acts as an agent for USW in the sale of USW's products and
services.  During 1996, USW paid Mr. Goldberg and such company a total of
$224,467 in commissions for their services as USW's sales agents.

Loans

During the first quarter of 1996, USW borrowed $100,000 from each of Aaron R.
Brown and Stephen J. Parker, directors of USW.  During 1996, USW repaid the
entire outstanding balance of the loans to Messrs. Brown and Parker with
interest.

                                     F-21
<PAGE>

13. SUBSEQUENT EVENTS (UNAUDITED)
---------------------------------

On June 13, 1997, Mark Scully, the 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.  Management
cannot presently predict the outcome of this suit, accordingly no adjustment
has been recorded in the Financial Statements.

The Company was notified in August, 1997 that it had failed to meet the Capital
and Surplus requirement for continued listing of its Common Stock on the Nasdaq
SmallCap Market as of June 30, 1997.  The Company was granted a temporary
exemption from the NASD subject to the Company meeting certain conditions.  In
order to prevent the Company's stock from being delisted, on September 19,
1997, certain members of the Company's Board of Directors exercised outstanding
warrants to purchase 62,000 shares of Common Stock for $65,720 in net proceeds
to the Company.  On November 26, 1997, the Company sold an additional 1,590,000
shares of its Common Stock for $1.50 per share, raising $2,300,000 of net
proceeds in a private placement sale to a significant former shareholder.

On October 28, 1997, the Company entered into an Agreement and Plan of Merger
with ACC Corp. and a wholly-owned subsidiary of ACC Corp., pursuant to which
ACC Corp. will issue approximately $46 million worth of its Common Stock to
holders of US WATS capital stock, and US WATS will become a wholly-owned
subsidiary of ACC Corp.  The number of shares to be issued to the holders of US
WATS capital stock will be calculated using a price of $2.48 per share of US
WATS Common Stock, subject to certain adjustments.  The merger is subject to
the satisfaction of certain conditions, including that the merger be treated as
a pooling of interests.


                                     F-22